The second of four reports focusing on how the electricity to charge electric vehicles is generated in China, comparing their overall efficiency and carbon footprint with internal combustion engine vehicles.
The EV Market
With rapid economic and population growth, China's vehicle market has been increasing dramatically over the past decade. The country produces and sells more passenger vehicles than any other nation; and in 2019, 335% and 40% more cars were sold in China than in the US and Europe, respectively. However, China's rise to economic power has come at the expense of its environment and public health. Negative health impacts from local air pollution, anxiety over the country's reliance on imported fossil fuel sources, and national energy security have urged the government to address the mounting environmental crisis. As a result, the nation has pledged to reduce its carbon intensity of GDP by 60% to 65%, and reach peak CO2 emissions by 2030 as part of the Paris Agreement.
According to IEA, CO2 emissions from the transportation sector have risen from 575Mt in 2010 to 889Mt in 2017, accounting for 9.5% of total CO2 emissions, while emissions from the industry sector, including mining, manufacturing, construction, and power, have fallen 3%. There has been a widespread movement to reduce emissions, and the use of new energy vehicles (NEV) as a means of transitioning China's growing transportation sector away from a conventional internal combustion engine is one way to do that. The government has spent nearly $60bn since the 2010s creating an industry that manufactures electric cars, while also diminishing the number of gasoline-powered ones.
China's Passenger and EV Annual Sales
In 2019, China's electric vehicle (EV) market share increased from 4.5% in 2018 to 4.7%, despite a significant reduction of incentives in July. Globally, 249m electric two- and three-wheelers and 516,000 electric buses were in service by the end of 2019 – and China accounted for 99% of this. The EV market share increase comes amid an 8.2% fall in total car sales, with EVs remaining relatively unchanged at 1.21m in 2019. In 2020, government officials forecast internal combustion vehicle (ICE) sales to decline, while EV growth should be supported by a stable regulatory environment. IEA forecasts global EV sales to nearly double to 250m by 2030, as China maintains its lead at 57% of total EVs worldwide. By then, 70% of all new vehicle sales in China will be attributed to EVs.
In a bid to become a leader in NEVs, China has implemented an array of policies and projects to promote the industry. Energy-saving and NEV development plans, subsidies for consumers and manufacturers, along with stringent fuel economy and emission standards have boosted the industry that generated more than 400 domestic brands, with BYD accounting for 47% of global EV sales. Through large subsidies, we saw electric vehicle sales grow at 6,100% between 2011 and 2016. However, cutbacks that took effect in 2017, and later in 2019, triggered the first downturn in the country's EV industry, and the COVID-19 pandemic has only worsened the slump. Now, China is considering a reduction in rebates given to buyers and imposing limits on a number of the discount-qualifying models even as it commits to extending its subsidy programme until 2022. Therefore, 2020 will present challenges as the Chinese government will have to strike a balance between helping EVs, and bolstering producers of traditional vehicles to spur the growth in sales. While we expect subsidies to be further extended past 2022, the introduction of other regulations, such as Corporate Average Fuel Consumption (CAFC), NEV credits, and improved infrastructure for electric changing should urge consumers to switch to drive electric versions. Indeed, according to this year's National People Congress (NPC) meeting, the Chinese government is likely to continue its long-term efforts to support the NEV industry.
Most of the EVs sold in China today are low-cost Ao- and A-class vehicles, as manufacturers prefer to concentrate on small EVs that have historically been more marketable. Due to stringent emission rules, manufacturers opt to produce electric models with a battery intensity that is barely compliant with the regulations to gain the credits. In 2020, especially, personal vehicles will have a new appeal as consumers hold fears about the safety of public commute. Indeed, according to Ipsos, the number of respondents wishing to use private car for their journeys increased from 34% to 66% after the coronavirus outbreak. In the long-run, growth in light-duty vehicle sales slows in the next decade, as population peaks around 2030, according to EIA.
Impact of COVID-19 on Vehicle Use
Compared to the traditional vehicles, NEVs have an advantage in energy conservation and environmental protection, as they emit little to no emissions when driven. This, however, cannot be applied to the lifetime of NEVs, as they require charging from a grid, which heavily depends on fossil fuels combustion. As China transforms itself from an industry-reliant to a predominately service-sector economy, required levels of electricity will be higher than ever. Therefore, it will be key for China to address the energy mix of the electricity sector before conducting the switch to electric vehicles.
China's Net Electricity Generation Mix
China is the world's largest electricity producer, exceeding the US after economic expansion accelerated dramatically in the 1990s. Most of the Chinese electricity comes from coal, however, its share in electricity generation declined to 64% in 2018 from 78% in 2008, coinciding with a major boom in renewable energy, and lower GDP growth. The second-biggest contributor to the grid is hydroelectric resources, at 17%. Hydropower plays a crucial part in the energy policy of the country. Indeed, China is the largest producer of hydroelectricity, and abundant hydraulic resources offer unparalleled advantages to the economy. There is, however, a geographical mismatch between the location of the coalfields in the north-east and north and hydropower in the south-west. While major ultra-grid projects are underway, the Chinese grid remains underdeveloped in its connectivity.
In 2018, we saw rapid growth in nation's energy demand as it picked up by 4.3% y/y, the highest since 2012, primarily driven by other sources such as natural gas, oil, solar and wind which grew faster than coal. At the same time, energy intensity fell by 2.7%, suggesting that economic output outpaced growth in carbon emissions. According to the EIA, China's energy sector emissions hit a record high of 9,467Mt CO2 in 2018, accounting for more than 50% of the global increase in energy-related CO2 emissions. Thus, while we do see a shift away from coal to cleaner sources, overall growth in energy demand remains high.
China's Emissions by Sector
Today's coal sector is overcapacity; most of the plants in mainland China operate, on average, at 52% of their capacity, and more than 50% of coal-power firms are loss-making. China is the largest producer and consumer of coal in the world and is the largest user of coal-derived electricity, 4,202TWh vs 966TWh in the US, and, according to EIA, and has enough coal plants to sustain total energy demand. In 2016, under State-owned Assets Supervision and Administration Commission of the State Council (SASAC), companies were ordered to cut their coal mining capacity by 10% in 2 years and by 15% in 5 years. In 2019, however, reports showed that operating capacity for new coal mines had increased by 32GW in comparison to 2018, adding to its existing 1,000GW coal fleet, while the rest of the world collectively reduced coal capacity by 6GW.
So what was driving these decisions? Provincial leaders were eager for local development and were trying to satisfy local industries as Beijing sought to stimulate an economy that was growing at its slowest pace since the early 1990s. In 2018-2019, in particular, an avid outcry over citizens being left freezing in winter, indicated the nation's unpreparedness to abandon coal-powered electricity. We see this trend continuing in the long term, especially as the Belt and Road Initiative (BRI) ramps up, driven by active recovery from COVID-19. Indeed, from 2014 to 2017, 18% of national loans in the energy sector for BRI have gone to coal, but only 3.4% and 2.9% have been directed at solar and wind respectively.
At the same time, China has led the world solar and wind installations. In 2018, China installed 44.1GW of solar generation capacity, surpassing the cumulative installation 2020 goal of 105GW by the end of 2018. Solar tenders have been used to incentivise solar photovoltaic (PV) installations as well as help to lessen the burden from subsidies. In 2019, the PV industry began to struggle as domestic investors held off purchases anticipating lower PV prices on the back of the transition away from feed-in-tariff (FIT) to an auction-based system. In 2019, only 30.22GW of solar energy was installed in China, down from 44.26GW in 2018. However, due to booming overseas markets, and the termination of trade sanctions on PV module exports from China to the EU, China's module exports have grown, exporting about 70% of the total production by October 2019. We expect further support from government to dwindle in an effort to ease the strain on the central government's budget. Indeed, in 2020, China has revealed additional solar power subsidy cuts, with residential and distributed projects facing reductions of 50% or more. This, coupled with impacts of COVID-19 along with recent tariffs imposed on solar panels by India, will pose additional challenges for solar in 2020.
The Road Ahead
Looking ahead in the long term, the Chinese energy market is changing. In 2040, China remains the largest producer and user of coal, however, consuming 9% less of coal-generated electricity in 2040 than in 2018. China will continue to implement policies driving coal consumption down, however, it remains integral to its consumption needs. Coal's share of the electricity generation decreases from 64% in 2018 to 34% in 2040, while renewables grow from 27% to 48% at the same time. While we see natural gas and hydropower picking up, renewable energy adoption will slow on the back of reduced subsidies until they reach grid parity.
China's Installed Generating Capacity Forecast
China will be the main driver for natural gas demand growth, though slower than in recent years, as economic growth decelerates, but still making China second-largest natural gas market globally. The share of gas in China's electricity generation rises from 2% to over 7% by 2040. Natural gas, indeed, might lead the way, as China starts to import high levels from Russia for favourable prices, especially, as demand outstrips supply. According to IEA, 231bcm will be imported and 150bcm will be produced domestically in 2040. Indeed, as stated by BT, China's natural gas import dependency is to increase up to 40% by 2040, and 50% of these additional imports are to be fulfilled by Russia.
Overall, the Chinese government remains the biggest driver in national and provincial energy decisions. Without a unified reform encouraging renewable use, provinces tend to stick with coal which drives the industrial sector, contributing 40% to the country's GDP and 27.6% to employment. That is what we have seen happening in the last decade; provincial leaders were encouraged to use coal to drive regional growth. Recognising the disparities in provincial energy decisions, in May 2019, the Chinese government finalised an energy policy that stimulated renewable energy use to coal. The proposal urged provinces to prioritise the consumption of renewable energy in line with an updated national target. Overall, distorted pricing mechanisms, lack of national wholesale market, as well as regional protectionism, resulted in regional power curtailment. Until the country's power system becomes more coordinated, grid and renewable laws will lag behind and continue to be a bottleneck in the sector.
China's total electricity consumption continued to increase in 2018, as it reached 6,846TWh, an 8.5% y/y increase. While we saw electricity demand growing in China for the past ten years, at an average of 7.5%, the next decade will attribute to slower annual growth in electricity demand, mainly attributed to slowing population and GDP growth. Nevertheless, in the next three decades, electricity demand is forecast to increase up to 11,000TWh, up 72% from 2018. In the meantime, power plant constructions continue at a rapid pace. While we see substantial increases in coal and solar installations, up to 1,150GW and 1,004GW by 2040 respectively, coal contributes nearly twice as much to electricity generation than solar does. Indeed, while there are more non-fossil installations in China, most of the energy generation still comes from fossil fuels. That begs the question: How is China planning to address current grid flexibility and capacity issues?
The Electricity Grid
Decades of economic growth facilitated by cheap lending by state-owned banks led to massive financial injections into the energy sector. Since the global Financial Crisis of 2009, China has invested heavily in infrastructure projects, facilitating both renewable and fossil fuel-powered capacity installations. This has led to the country's electricity self-sufficiency; however, lack of an interconnected and flexible grid between provinces has resulted in significant networks congestion and subsequent curtailment (restriction of energy delivery from a generator to the electrical grid) of renewable energy. Indeed, the curtailment in China has become the new norm. Despite the wind and solar expanding across the country, 150.4TWh, or 16% of overall wind generation was curtailed in 2010-2016. In 2018, we saw a similar picture, with 27.7TWh of wind power and 5.49TWh of solar curbed. While curtailment rates go down y/y, high proportion of renewable energy plants remains inactive, as competition with large scale thermal power plants for operation hours continues.
Regional Power Grid Fossil vs Renewables Breakdown, 1995-2014
To address this issue, China's State Grid and China Southern Power Grid emerged in 2002 to improve grid network and energy transmission losses and began the construction of the ultra-high voltage (UHV) lines across the country. Indeed, China's State Grid has energised its biggest project, an ultra-high voltage link, which produces a 1.1mV of direct current (DC) voltage, connecting northern and western regions (where the solar and wind is produced) to eastern regions of big cities, where more than 60% of China's manufacturing takes place. The line can transmit up to 12GW of power, and in 2017, it helped to move 161.5TWh of hydro, wind and solar across the country. However, the state-owned grid company intentionally limits the lines' output throughout to no more than 4.5GW to prevent major fluctuations, thus forcing the grid to operate to 25% of its available capacity.
According to IEA, at least 7,000km of Chinese-built transmission lines should come online in Asia between 2013-2020. In the long run, the Belt and Road initiative is expected to gather $27trn of investment by 2050, with $7trn alone to power grid construction. Its potential to support Chinese influence highlights the role of interconnected infrastructure to distribute political power to its neighbours. The control of advanced grid connections could act as strong leverage against others in need of the electricity, especially those not compliant with Chinese rules. Additionally, despite promoting the image of 'cleaner' BRI, current international transmissions mostly include coal and hydro, according to the National Development and Reform Commission. While grid expansion can promote stability in the presence of intermittent sources like renewables, UHV lines are optimal to connect large projects like coal and hydropower. Additional congestion and curtailment issues further strengthen China's need for improved infrastructure to relieve excess production to other economies.
Therefore, as policymakers shift their focus to subsidy-free renewable energy, they need to improve their approach to grid development to lower installation costs, emissions, as well as improve integration of renewables into the grid. Current problems, including regional overcapacity, as well as struggles with regulation during peak hours, and lack of a flexible system prevail. While there is a strong northern transmission corridor, which transmits coal and hydropower to the big eastern cities, gridlines connecting the renewable regions to other provinces are behind. Low renewable capacity factors and unsatisfactory peak load supply planning will continue to drive coal power plant installations in the future. More renewable benefit form larger, varied, and more flexible grids, and unfortunately, this has not been the case in China.
Cost reductions in renewables and advancements in grid connectivity are opening huge opportunities for energy transitions. Technologies, such as energy storage and smart grid, coupled with renewables, all have the potential to add flexibility to the energy system and lower emissions from the grid. On a global scale, there are limited mature energy storage technologies. Flow and lithium-ion batteries are developing technologies and are not fully commercialised yet, and we expect the market to continue to develop. The most common types of energy storage are those projects that are paired with renewable projects, or standalone systems for peak shifting.
According to IEA, the need for flexibility in power systems grows even faster than electricity demand, due to the growing generation from variable renewables. Power plants and networks remain the core of power system flexibility, and the demand-side response has huge potential. As the fastest growing flexibility option, battery storage capacity rises 40-fold by 2040, due to its falling costs, short construction periods, and widespread availability. A combination of renewable energy and storage could help stabilise the intermittency and fluctuation of renewable generation during normal operation of the power grid. In the event of a grid accident, these systems can help restore grid operations within a certain range. And during peak hours, most of the additional energy could come in from stored renewable energy.
Energy Storage Additions
According to CNESA, by the end of 2019, accumulated operational electrical energy storage project capacity in China totalled 32.3GW, where new operational capacity exceeded 1GW. In China, domestic demand for storage increased significantly in 2018 as a range of projects supporting network operations were backed up by the government; the state grid was responsible for the majority of storage installations and has approximately 400MW of capacity under construction. As a result, China became a global market leader in 2018, with nearly 0.5 GW of new battery storage installed (12% of the global total), we expect to see consolidation across the value-chain in the coming years. However, regulation from the NDRC has restricted rate-based transmission and distribution storage applications. These regulations have hindered the development of energy storage in China, and, as of May 2019, the NRDC ruled that organisations cannot categorise hydro and battery storage as networks and declassified these investments from tariffs. There are a large number of these projects which remain under construction.
As mentioned above, slowing growth of power demand is a headwind for new energy storage, especially as revenue streams are not clear cut. Peak-shifting and frequency regulation are the main markets, however, there are sub-markets, such as standalone systems, storage co-located with renewable and fossil fuel plants, and end-user markets. Renewable integration into the grid is key for China as a country, and once storage systems are installed, they can make the most of arbitrage opportunities in power pricing. Storage systems and companies with more than one revenue stream are likely to prosper.
Recognising this possibility for momentum, Chinese local governments have been awarding extra power interconnections to existing solar assets, and projects have been limited to regions where renewable curtailment rate is high. Additionally, in 2019, the World Bank approved $750m to fund the China Renewable Energy and Battery Storage Promotion Project. According to WoodMac, installed energy storage in China could rise to 12.5GW/32.1 GWh in 2024, thanks to government help. However, the increased competition that is narrowing revenue support from the government will keep companies afloat in the near term. However, similarly to the solar and electric vehicle industries, as these incentives are phased in, there will be significant consolidation with state-owned enterprises. There continues to be significant development in short-term storage opportunities for electric vehicles, but the long-term storage market remains complicated.
EV Charging Infrastructure
The installation of charging facilities in China has attracted attention from both the government and manufacturers. According to the plan published by the Chinese State Council, 12,000 charging stations and 4.8m charging points are to be available by the end of 2020. As a result, areas with higher EV sales, such as Beijing, Tianjin, Shanghai, and Guangdong, are expected to install more charging stations, attributing to around 60% of all national installations, according to NRDC. 'Second-tier' areas, such as Jilin, Henan, Hunan, Chongqing, and Sichuan, are expected to account for around 30%. The rest is distributed across the provinces that are not included in the national EV development plan. Nationally, an array of proposals introduced at this year's NPC meeting regarding the EV infrastructure, such as "Promoting Smart City Construction with Automobiles as New Infrastructure" further indicates government and industry commitment to support advanced charging infrastructure network and reduce the country's CO2 emissions.
Top 10 Countries by Cumulative Public Charging Connector Installations, 2019
In Beijing, Qingdao, and Guangzhou, 100% of the parking lots linked to new residential buildings are expected to have charging piles by the end of 2020, with offices, schools, and hospitals at 25%, 20%, and 15%, accordingly. In Beijing, EV owners should be able to charge their car at every 0.9km in busy neighbourhoods, and 5km in more remote areas of Beijing. Both third-party companies and manufacturers are responsible for the installations and have government support through subsidies. Yet, until the end of 2017, 90% of the charging facilities were built by third-party companies on the back of provincial governments committing to providing a subsidy for public charging service suppliers before 2020. Indeed, a year from February 2019, China installed 189,553 public EV charging stations and 5,556GWh of energy was consumed through charging.
The price of charging depends both on the variable price of electricity in a given province as well as the fixed price of the charging services. Both prices are regulated by the provincial government, which are currently being subsidised. We believe that, while this practice is great for encouraging EV purchases, in the long-term, investment and the building of charging stations will subside as the financial burden of financing these subsidies will eventually force the public sector to reduce them, the same way it did with EV and renewable subsidies. At the beginning of 2020, these restrictions have been relaxed; suggesting charging prices are likely to increase. A similar regulation applied to the cost of installation and equipment of residential and commercial charges.
GHG Emission Comparison
Regarding the impact of battery electric vehicle (BEV) deployment on greenhouse gas (GHG) emissions in China, extensive studies have been conducted. For example, Harvard and Tsinghua Workshop has found that private EVs in China have a positive effect on CO2 reductions if owners can be incentivised to charge their vehicles slowly during off-peak hours, allowing for more effective use of renewable power. It is, therefore, important that EV charging and energy storage systems are managed properly to maximise the benefits.
GHG Emissions Intensity during Vehicle Use
BEVs have the potential to reduce GHG emissions under cleaner electricity generation. Factors such as the coal power share, coal power efficiency, grid intensity, and grid flexibility all influence the level of emissions produced during the Well-to-Wheel (WTW) cycle of a car. The study by H. Hao et al. focuses on the emission intensities, preferred models to drive, annual mileage travelled, and the lifespan of a vehicle. As of 2015, the mild hybrid EVs (MHV) reduce emissions slightly in comparison to gasoline models, with heavy hybrid EVs (HHV) having a greater degree at GHG emission reduction. As for BEVs, emissions increase with the increase of range capacities. Nevertheless, thanks to the fuel consumption regulations, the emissions of an ICE vehicle are predicted to decline considerably in the coming decade, from 200gCO2 in 2015 to 170gCO2 in 2025. A similar trend is seen in both MHVs and HHVs. In the next decade, BEV emissions are expected to decrease as a result of the improvement of power generation structure and coal power efficiency. Therefore, the effect of reducing emissions by switching from an ICEV to BEV will be amplified in the future, from a 36% reduction in 2015 to 72% in 2025.
Comparison of GHG emissions between EV and ICEV
The study conducted by Qiao and Lee shows similar results, where the GHG emissions per 100km of driving an EV will decrease by 28% from driving an ICEV. A similar fall occurs when total GHG emissions are taken over the use cycle of a vehicle considered. Overall, the discrepancy between the answers depends heavily on the assumptions about the size of the vehicle and the coal intensity of the electric grid. When compared to the US, the impacts of the vehicle transition could be more beneficial in mainland China, as drivers in China prefer smaller vehicles to larger SUV models. Additionally, when taking the whole country into consideration, despite the sheer size of China's electric fleet, the average vehicle in China travels considerably fewer miles than in the US thanks to China's compact cities, further adding to the benefits of EV expansion. As of 2015, gasoline vehicles in China produce less GHG emissions per km driven than in the US, thanks to more compact models. This, however, is not the case for hybrid and pure electric models. Higher contribution of fossil fuels to the electric grid makes Chinese EVs more polluting than their counterparts in the US, where natural gas contribution to the grid dominates the one of coal.
Comparison of GHG emissions between Electric, Hybrid, and ICE vehicles in China and the US, 2015
Transportation is at the core of modern development, and the way people move impacts many aspects of life, highlighted by the recent pandemic. So far in 2020, we also saw the environmental benefit of fewer emissions from the transport industry. The next 20 years will bring significant changes as electrification, battery intensity improvements, and autonomous vehicles reshape automotive markets around the world. The long-term outlook for EVs remains bright, and China continues to pave the way as the world's leader in electric vehicle sales. In the immediate term, high levels of unemployment may cap this expansion. However, as the country transitions from a heavy industry economy to mostly a service sector, higher levels of electricity will be required than ever before. Issues like global warming have been increasingly concerning, and China has been taking various measures to mitigate this issue. Since the electric vehicle produces close to zero emissions when driven, it is the charging and manufacturing of both vehicles and battery, as well as recycling that will drive the emissions per vehicles lifetime. Further proposals by the China National Democratic Construction Association to accelerate the recycling of used NEV batteries would promote EV's emission efficiency and popularity in the future. According to SMM, China has a target EV battery recycling rate of 70% by 2025; this is an increase from 8% in 2018.
In this report, we focused on the energy side of things and how the charging process impacts the total emissions during its use-cycle. As a result of high coal contribution to the Chinese grid, the country produces most carbon dioxide globally and consequently contributes to high levels of emissions when charging comparing to other countries. The government has taken various acts to reduce emissions and set goals to lower the level of fossil fuel contribution to the grid. However, issues like grid connectivity, inability to switch to renewables and a lack of intermittent and supporting grid technology will stall the smooth transition.
Overall, the regional performance varies, as China lacks a unified regulatory structure addressing the use of renewables in its grid. Consequently, vehicle performance varies according to where it is driven. Just like in the case of the US, electric vehicles are 'cleaner' when driven anywhere in China, however, there is some variation between provinces. Fortunately, long-term use of fossil fuels tends to head downwards uniformly, however, coal remains a bedrock to Chinese electricity generation. Therefore, a unified electricity grid, higher integration of renewables, and availability of storage facilities to manage peak load planning will be the biggest drivers to China's transition to reducing its CO2 emissions from the transportation sector.