China Time
Monday 25 January 2021
China deployed a titanic volume of new wind and new solar last year, most likely as part of a national industrial push to kickstart the economy. Much of the growth came in the second half, with solar power capacity growing 60% from 2019’s 30 GW to 42.2 GW for the full year, and wind power capacity growing a head-spinning 71.7 GW. There are some accounting issues apparently in the wind power total, as some of the capacity may have been first constructed in late 2019, and then connected in 2020. Regardless, China has clearly discovered that aggressive capacity growth in renewables can very much be part of an overall industrial policy that seeks, when necessary, to shore up its labor market. China also in late 2020 produced a surplus of steel, and some expert observers of China’s economy were not exactly impressed with the quality of its full year 2020 GDP. But overall, given the pandemic year, none of this is a surprise. China takes forceful actions, and cares little whether GDP quality or production meets current demand, or, future demand.
In 2018’s Oil Fall, for example, I warned that China observers needed to fully absorb that the same nation which single handedly resurrected coal starting in the late 20th century could just as easily turn tail, and use its top-down policy directives to start adopting wind and solar not merely at a fast rate, but at unthinkable rates. And here we are.
Built on a massive, installed base of coal-fired capacity, China’s powergrid is currently undergoing a revolutionary transition towards wind and solar power. The shift––a response to the public’s anger over extreme levels of air pollution––largely began its trajectory as a policy response, but now, as in the rest of the world, is gaining momentum as favorable costs and construction timelines to erect new wind and solar begin to crowd out all other forms of new power generation. China’s ability to effect policy-driven change in its industrial economy, even when constrained by global economic forces, is a capability that’s been put into action several times now. And yet, the world keeps missing this particular China lesson.
China’s titanic year in wind and solar, combined with a slower growth year overall in its economy, has also produced a notable outcome. Not one that can be relied on sustainably (just yet) but is perhaps a preview of what’s to come: power generation growth ex wind+solar did not grow last year. This inflection point has already happened in the world’s two other key domains: Europe, and the United States. In the chart below we see that 2020’s growth of capacity allows us to make an estimate of generation, as combined wind+solar took control of marginal growth last year in China’s electricity system. Again, that’s a big deal. But will it be sustained?
China created so much new power from wind and solar last year that the country could have supplied clean electricity to 50 million new EV, far in excess of the 1.367 new EV that actually hit the road. Based on a generation estimate exclusively from new wind and solar capacity growth, China roughly brought online 186 new TWh of power last year. Because I use 3500 KWh to estimate the average annual power demand for an on-road EV in China (plug-ins, which include both full electrics and PHEVs), China needs to create 3.5 TWh of new power to meet the demand of every million EVs that hit the road. In last week’s free post, Ice Melt, I mistakenly underestimated China’s wind and solar growth last year, by calling upon BP’s 2019 data set. The following day, I updated the post with a data correction. The point I was making (and which I undersold) is that the common intuition—we won’t have enough power to supply all the new EVs!—is wrong. Wrong on both an absolute level, and also on the assumption that lots of new coal and natural gas will be needed to produce power for EV.
Here are some easy, conversational descriptions of EV adoption and combined wind and solar growth in the world’s three largest domains:
Europe: the world’s first domain to go heavy into these new energy technologies; continues to grow wind and solar power moderately from a higher base. However, is now seeing EV adoption rates soar so quickly that it may need to increase the pace.
United States: after the first big wave of utility scale solar and wind rolled out last decade, deployment has now slowed down. But, EV adoption rates are so poor it doesn’t matter. Not yet.
China: adoption rate of EV is back on the boil, and the country may very well see 2 million units sold this year. But its ability to deploy new wind and solar is gargantuan, partly due to its local supply chain, and is currently swamping marginal power demand from new EV with a tidal wave of supply.
In short, while we wait for India to burst on the scene with EV and new energy adoption rates appropriate to its size, the US desperately needs to catch up, and that will only happen when EV model choice truly expands.
Parametric architecture has really taken off in China, and because this computer-aided design so closely resembles nature, it’s a trend worth noting. Readers might want to consider the secondary outcomes that are likely to flow this decade as the world more aggressively decarbonizes. Clean energy, architecture, material science, and the electrification supertrend increase the prospect that our cities, heavily industrialized in the 19th century, become re-forested and emerge as city-countryside hybrids in the 21st century. LA Metro for example regularly puts out attractive images of trains and nature in its Instagram account, and as a major landholder in Los Angeles is playing a key role in the restoration of the LA River. Cities around the world are moving in the same direction and the message is clear: nature, walking, and bicycles—long relegated to the urban margins or the exclusive neighborhoods—are being brought back into the center. And parametric architecture seems like one more factor that is both responding to these trends, but also is likely to amplify them. This is how urban evolution works: giving the populace a taste of better things, which then converts those improvements into broader expectations. All images from the excellent site: PA.com.
There’s an ETF for everything these days, so I recently took notice of the KraneShares MSCI China Environment offering. The investment theme makes sense. China replicated a typical 100 year industrial revolution with all its associated waste, dislocation, and environmental degradation in the span of about 30 years. When great problems need to be solved, there you will find long term investment opportunities. While the OECD has a post-industrial stagnation problem, which mostly affects labor and wages, China has a massive environmental mess to clean up that’s analogous, say, to the 1970’s juncture in the United States. The next step is for China to formally, and not just ceremoniously, create an EPA. Or, perhaps it believes it can accomplish the same goals through its normal course of state run capitalism. While the KraneShares ETF understandably is weighted towards EV, solar, power companies, battery manufacturers, and even e-bikes and other micromobility, what appears to be less represented are straight environmental clean-up companies. You know, a big slug of names like Clean Harbors, Waste Management, or Veolia. Alas, in the 15th position among the holdings with a 2.97% weighting is Everbright Environment. While China’s air pollution will improve quickly as coal and oil consumption eventually enter decline, its environment (particularly the country’s water and land) will need a lot of attention after the great wave of electrification reaches its apex.
Incumbent automakers are finally seeing their share prices move higher as the market sees both the beginnings of a new auto cycle, and the certainty these OEMs will indeed participate in the EV rollout. Shares of Ford Motors, and General Motors in particular, are on the move these days. Volkswagen also reported a much better than expected full year result, largely due to strength in its largest market: China. GM stock is currently responding to the company’s EV truck plans, and VW stock is higher on the prospect it will now grab EV market share quickly. One analyst forecasts that VW will outsell Tesla this year, to become the top seller of EV globally. More broadly, the market may be sending a signal that Tesla’s dominant role, both as a producer of EV and also as a stock, is about to be challenged. That was inevitable of course, and the only question was timing. Perhaps that timing is now. With a market cap of $800 billion, it’s quite possible the enormous capital now stored up in Tesla will, at the margin, become a funding source to a fuller array of opportunities in the sector.
A parting thought: There are three megatrends which have so thoroughly dominated the past few centuries that they not only control the historical record, but our theories of how the world works. They are 1. High fertility rates. 2. The fossil fuel intensity of production. 3. Scarcity, and inflation. Demographers, for example, have discussed how difficult it can be, professionally, to begin to plug in lower fertility rates to population projections, because trailing behind us is several hundred years of data adamantly saying: don’t do that. And this has occurred in an era when high fertility rates are indeed falling—in some domains quite dramatically! The same intellectual minefield presents itself to those who dare say we remain in a low inflation era. Although we have lots of recent data suggesting that technology, global trade, material science, and labor flexibility is far more responsive now to upticks in demand (thus snuffing out inflation before it can gain traction) the historical record indicates that monetary and fiscal policy are still the real governors of inflation, and inflation fears continue to stalk the economics profession and its policymaking role.
Obviously, this brings us to the fossil fuel question. For example, global oil consumption growth has been a decent proxy for global emissions growth historically. And this year, coming off a low base, global oil demand is likely to rise by about 5%, if not a bit more. So as the year comes to an end, no matter how much solar and wind was deployed, no matter how many EV were sold, the global economic recovery is mostly going to lift off from the installed base of infrastructure, and emissions are going to rise. Perhaps not as much as 5%. But coming off that lower base, they will rise alot. This will strengthen the hand of those who say there is no such thing as decoupling.
But there is indeed decoupling. It’s reflected in the portion of the record that’s more challenging to explain: lower growth of fossil fuel demand. Or, just as challenging: flat demand growth at a high level. Coal reached that point 8 years ago. Oil, most likely in 2019. But these are less convincing trends, and they lack the dramatic clarity of the past 250 years.
If you take the view, however, as I do that this decade is when transition takes off very quickly to the upside, then you probably only have to suffer another 4-5 years before the data resoundingly makes a different case. Assuming we are not handed another crisis, the global economy is probably going to roar into the year 2024 on the back of new energy technologies and infrastructure—not only from the activity required to deploy them, but the efficiency gains distributed daily from their operation. And at that point you will no longer have to make the case yourself, because a new and emerging historical record will make the case for you.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.
