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January 22, 2015

Obama’s Climate Agreement with China: Is It Achievable?

January 22, 2015
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Last November, President Obama reached a climate agreement with China where he agreed to reduce U.S. carbon dioxide emissions by 26 to 28 percent below the 2005 level in 2025 and China agreed to “make best efforts to” have its carbon dioxide emissions peak around 2030 and to increase the share of non-fossil fuels in primary energy consumption to around 20 percent by 2030.[i] To achieve the goals of this agreement, China needs to increase its natural gas use in lieu of coal and to increase its renewable share of generation. But, it faces obstacles to achieving both needs.

China’s Natural Gas Landscape

According to the Energy Information Administration, China has the largest shale gas resources in the world—two-thirds more than that of the United States.[ii] To meet its 2030 commitment to cap carbon dioxide emissions, China must tap these resources as well as other domestic and imported natural gas supplies. China’s State Council set a target for natural gas to supply over 10 percent of the country’s primary energy consumption by 2020—up from its current share of 6 percent.[iii]

While domestic conventional resources of gas are the major suppliers of natural gas today, China expects increasing contributions from unconventional and imported natural gas in the future as the graph below shows. Imported natural gas by pipeline from Central Asia, Myanmar, Russia, and liquefied natural gas primarily from Qatar and Australia are expected to supply about 102 billion cubic meters (3.6 trillion cubic feet) of gas in 2015 and at least 169 billion cubic meters (6 trillion cubic feet) in 2020. Unconventional natural gas resources (tight gas, shale gas, coalbed methane, and synthetic natural gas) will become major contributors to supply, producing 105 billion cubic meters (3.7 trillion cubic feet) in 2015 and 240 billion cubic meters (8.5 trillion cubic feet) in 2020 to satisfy 45 percent and 60 percent of the country’s demand, respectively.

Source: http://www.newsecuritybeat.org/2015/01/clearing-air-natural-gas-game-changer-china/

To encourage domestic producers to drill for natural gas, China increased its domestic gas rates to equal much higher LNG prices. China expects to keep its electricity prices from escalating by balancing the higher natural gas prices with falling coal prices driven by lower demand due to China’s slower growing economy and cheaper imports of coal. Over the past two years, coal prices fell by 40 percent. Coal prices are now at a 6-year low.[iv] IHS, a consulting firm, estimates that between 2011 and 2013, the lower coal prices saved utilities more than RMB 500 billion ($83 billion) while the cost of the premium paid to add new gas-fired power is estimated at RMB 10 billion ($1.6 billion).

But, for China to achieve these supply goals, it will require technical breakthroughs, including being able to extract its shale gas resources, which have a very different geology from those of the United States. Beyond the technical needs, successful commercialization of China’s shale gas resources includes the development of a production sharing contract system, more transparent market pricing, and access to technical data. Also, China lacks sufficient water, which is problematic since current drilling techniques for shale gas require it.[v]

Renewable Energy

China’s plans include large increases in renewable energy, but hydroelectric generation dwarfs other renewables in China’s mix. China is by far the world’s largest generator of hydroelectricity. It is also adding solar and wind capacity, but some of its wind capacity lies idle.

Despite China having more installed wind capacity than the United States—in fact, the most in the world– it generated 20 percent less electricity from wind than the United States in 2013. In 2013, China had almost 50 percent more wind capacity than in the United States, 91 gigawatts in China to 61 gigawatts in the United States.[vi]

Since 2010, China has been the world’s fastest growing market for wind power, but poor planning has resulted in many wind farms being disconnected from its power grids. Because wind resources are generally best in remote areas, many wind farms are located far from major electric grids and require extra transmission capacity to bring the wind power to consumers.  In 2010, Chinese energy analysts used the term “garbage wind” to reflect the 30 percent of the country’s wind farms that were not connected to the electric grid.[vii]

Chinese grid operators have had to curtail wind output, particularly in northern China, where cold and windy winters require stable base-load demand for heating. To meet this demand, coal-fired generation is used, which caps the amount of energy wind farms can contribute, regardless of grid connectivity. For example, in Inner Mongolia, Jilin, and Gansu provinces, wind curtailment has been as high as 20 percent.

In 2014, China’s expects to get 11 percent of the country’s energy consumption from renewable resources. Since 2010, it has connected more wind farms to its power grids, with 19 percent not being connected in 2012 and just 15 percent not connected in 2013. It has also initiated a number of wind-powered electric heating projects in northern China, which has reduced wind curtailments and coal usage. In 2013, the national average for wind curtailments was 11 percent.

 

Source: http://www.newsecuritybeat.org/2014/05/infographic-waste-poor-planning-blunt-chinas-wind-energy-ambitions/

Conclusion

China has made a commitment to President Obama to try to peak its carbon dioxide emissions by 2030 and to increase its non-fossil fuel consumption, but to achieve these goals, it will not be easy. The country’s rising middle class and rapid economic growth are placing tremendous pressure on its existing energy supplies. China is the world’s largest energy consumer and the world’s largest emitter of carbon dioxide. It produces and consumes four times the coal that the United States produces and consumes. It is also ranks second to the United States in terms of oil consumption with huge growth in oil imports expected in the future. The International Energy Agency predicts that China’s oil imports in 2030 could increase up to 1.6 times compared to 2011 levels. All of these statistics make it nearly impossible to meet its commitment in 15 years.

However, China is a country of contradictions when it comes to energy. China is not only the world’s largest producer and consumer of coal, but it is also the world’s largest investor in renewable energy.[viii] Public concerns over air pollution and other environmental issues are pushing the government to rely less on coal, which currently supplies 70 percent of the country’s electricity, and more on natural gas, renewable energy, and nuclear power.

But to make the transition from coal to natural gas that the government wants will require an open and competitive environment so that natural gas prices can reflect market dynamics. It will need to import gas as well as producing it domestically. It has already making headway into obtaining gas imports from Russia and elsewhere. But, to capitalize on its shale gas resources will require outside ingenuity and changes in its mode of operation. Will China be able to make the change and meet its commitment to President Obama?

[i] White House, U.S.-China Joint Announcement on Climate Change, November 12, 2014, http://www.whitehouse.gov/the-press-office/2014/11/11/us-china-joint-announcement-climate-change

[ii] Energy Information Administration, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States, June 10, 2013, http://www.eia.gov/analysis/studies/worldshalegas/

[iii] New Security Beat, Clearing the Air: Is Natural Gas a Game Changer for Coal in China?, January 15, 2015, http://www.newsecuritybeat.org/2015/01/clearing-air-natural-gas-game-changer-china/

[iv] Reuters, Chinese coal firms creek under heavy debt, tumbling prices, April 1, 2014, http://www.reuters.com/article/2014/04/01/china-coal-idUSL4N0MM1K720140401

[v] New Security Beat, While China Waits on Shale Gas, Soaring Energy Demands Create Regional Tensions, October 15, 2014, http://www.newsecuritybeat.org/2014/10/china-waits-shale-gas-soaring-energy-demands-create-regional-tensions/

[vi] Global Wind Energy Council, Global Wind Statistics 2013, May 2, 2014, http://www.gwec.net/wp-content/uploads/2014/02/GWEC-PRstats-2013_EN.pdf

[vii] New Security Beat, Waste, Poor Planning Blunt China’s Wind Energy Ambitions, May 27, 2014, http://www.newsecuritybeat.org/2014/05/infographic-waste-poor-planning-blunt-chinas-wind-energy-ambitions/

[viii] Climate Central, U.S. Lags Behind China in Renewables Investment, April 3, 2014, http://www.climatecentral.org/news/u.s.-lags-behind-china-in-renewables-investments-17257

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