The Future of Asia: Forces of Change and Potential Surprises – Supplementary Report

Policy Horizons | Horizons de politiques May 1, 2014

Image of yellow arrows going from left to right against a white background for The Future of Asia Forces of Change and Potential Surprises Supplementary Report blog post

Energy Starts to Become more of a Technology Race

What is it?

The emergence, or re-emergence, of fusion, hydrogen and thorium-fueled reactors, and other energy generation alternatives in convergence with renewable technologies, smart grids and energy storage is rebalancing the energy story in Asia. Globally, it is gradually shifting from a story that is mostly about natural resource extraction to one that is increasingly about the pace of technological development and adoption.

This shift is most obvious in the turnover or additions to capital stocks for electricity generation. While the overall contributions of renewable energies to stocks are currently small, their input to turnover/additions are large and still on the rise. In 2012, China and Japan were the world’s first and fourth largest renewable energy investors.¹ That same year, China’s wind power generation increased more than its power generation from coal, and in 2013 the country doubled its total renewable energy output (including hydroelectricity). ²³ This means that around 57% of new capacity in China was renewables in 2013, compared to 34%-37% in the three previous years.⁴ The growth of this sector is likely to remain strong. Global forecasts project that around 57% (IEA) to 70% (Bloomberg New Energy Finance) of new power generation capacity added between 2012 and 2030 could be from renewable technologies, including the large-scale use of hydroelectricity.⁵ This could be true for China as well. Renewables there might account for more than half of new additions, eroding coal’s dominant share and attracting investments of US$1.4 trillion, such that China’s power sector carbon emissions could be in decline by 2027.⁶ Indeed, the IEA is now projecting that by 2035 China will add more electricity generating capacity from renewable sources than the U.S., Europe, and Japan combined.⁷

The success of renewable energy today is still largely dependent upon government intervention. Striking the right balance between investment and demand is an ongoing challenge. In late September 2013, China’s National Development and Reform Commission raised the renewable-energy surcharge from 0.008 Yuan per kilowatt-hour to 0.015 Yuan (US$0.25) per kilowatt-hour to help make up a shortfall in subsidies to developers of renewable energy projects.⁸ The Chinese government is also not averse to intervening in the energy market. In 2011, the Chinese government stepped in to curb the oversupply of wind farm projects and again in 2013 to boost domestic demand for solar in response to increasing international competition. However, while the issue of subsidies remains important in the short to medium term, a number of these electricity sources may reach prices that allow them to grow without government support.⁹ ¹⁰

The shift in character of energy provision towards a technology race involves more than renewable energy. Technological advances in energy storage (especially batteries and hydrogen fuel cells), “smart” grid management, traffic management, building energy management, end-use efficiency, materials as well as other forms of power generation, are all evolving steadily.

While energy companies such as BP, Exxon, and Shell do not see the emergence of the hydrogen economy occuring until mid to late century, there is evidence that a structural shift may already be underway. Though less aggressive than past policies, Chinese policies are seeking to promote the adoption of fuel cell vehicles. BP and China’s Ministry of Science and Technology have been working to build the world’s largest hydrogen fuelling station in Beijing. BP estimates that the world is 10 to 20 years away from seeing the mass production of vehicles.¹¹ China already waives the sales taxes on domestically made fuel cell vehicles, while Toyota and Honda believe that the cost of producing fuel cell vehicles will fall substantially by 2015.¹² A report produced by Pike Research in the U.K. predicts that there will be 1 million fuel cell vehicles on the road by 2020, with over half of these in the Shanghai area.¹³

China and India are also at the forefront of thorium research. China’s National Academy of Sciences has invested a start-up budget of $350 million into thorium power. The institute has already recruited 140 PhD scientists, and by 2015 will have 750 PhD scientists on staff working full-time on thorium power.¹⁴ Likewise, India is seeking to scale up thorium power throughout the 2020s. India plans to produce 30% of electricity needs from thorium-based reactors by 2050.¹⁵Thorium and fourth generation reactors offer an abundant and independent source of energy with the benefit of reduced waste and a lower carbon footprint.

Why is it important?

As the shift towards technology-based energy occurs, there will be a corresponding shift in the character of energy competitiveness. Technology races emphasize the need for a highly knowledgeable, collaborative and innovative workforce, as well as strong management and governance capacities. National energy and innovation policies raise the prominence of some trade issues, including intellectual property and component tracking, and test the ability of countries to overcome barriers to the rapid uptake of new technologies (policy/institutional, infrastructural, informational, financing, etc.). Early-adopters are rewarded, but constant vigilance is required to maintain a competitive position. The extent to which new technologies make in-roads will be determined by a broad-based policy mix that encourages innovation, commercialization, and/or incentives and levies to promote adoption. The size of the Chinese market is such that wholesale adoption of a particular energy technology can reduce the cost of that product globally.

For large exporters of fossil fuels, these energy technology developments pose a risk in the form of “stranded assets.” That is, existing investments are “stranded” by changing demand, lower prices, and failure to adapt.¹⁶ For example, China’s prodigious investments in alternative energy may emerge as a risk to Australia’s coal assets or conversely act as driver to accelerate gasification projects.¹⁷