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| Kevin Frayer/Getty Images |
BEIJING – At the start of 2017, China announced
that it would invest $360 billion in renewable energy by 2020 and scrap
plans to build 85 coal-fired power plants. In March, Chinese
authorities reported that the country was already exceeding official
targets for energy efficiency, carbon intensity, and the share of clean
energy sources. And just last month, China’s energy regulator, the
National Energy Administration, rolled out new measures to reduce the
country’s dependence on coal.
These are just the
latest indicators that China is at the center of a global energy
transformation, which is being driven by technological change and the
falling cost of renewables. But China is not just investing in
renewables and phasing out coal. It also accounts for a growing share of
global energy demand, meaning that its economy’s continuing shift
toward service- and consumption-led growth will reshape the resource
sector worldwide.
At the same time,
various other factors are reducing global resource consumption,
including increased energy efficiency in residential, industrial, and
commercial buildings, and lower demand for energy in transportation,
owing to the proliferation of autonomous vehicles and ride sharing.
According to Beyond the Supercycle: How Technology Is Reshaping Resources,
a new report from the McKinsey Global Institute (MGI), these trends are
slowing the growth of primary energy demand. If rapid adoption of new
technologies continues, that demand could peak in 2025. And with less
intensive energy use and increased efficiency, energy productivity in
the global economy could increase by 40-70% over the next two decades.
While global growth
in energy demand is slowing, China’s share of that demand is increasing.
By 2035, China may account for 28% of the world’s primary energy
demand, up from 23% today, whereas the United States could account for
just 12% by 2035, down from 16% today.
China has already
made significant progress in reducing its resource intensity: between
1980 and 2010, its economy grew 18-fold, but its energy consumption grew
only fivefold. According to World Bank data, that reflects a 70% decline in energy intensity per unit of GDP.
In its 13th Five-Year
Plan, the Chinese government aims to reduce energy intensity by a total
of 15% between 2016 and 2020. It is already well on its way toward
achieving that goal. At China's National People’s Congress earlier this
year, Chinese Premier Li Keqiang reported that China’s energy intensity
fell by 5% last year alone.
Renewables are one
reason for China’s declining resource intensity. Hoping to become a
world leader in the field, China is already investing more than $100
billion in domestic renewables every year. That is twice the level of US
investment in domestic renewable energy and more than the combined
annual investment of the US and the European Union.
In addition, China is
investing $32 billion – more than any other country – in renewables
overseas, with top-tier Chinese companies increasingly taking the lead
in global renewable-energy value chains. China’s State Grid Corporation
has plans to develop an energy grid that draws on wind turbines and
solar panels from around the world. Chinese solar-panel manufacturers
are estimated
to have a 20% cost advantage over their US peers, owing to economies of
scale and more advanced supply-chain development. And Chinese
wind-turbine manufacturers, having gradually closed technology gaps, now
account for more than 90% of the Chinese domestic market, up from just
25% in 2002.
These trends suggest
that China will be a major source of both energy demand and cutting-edge
technology, implying that it will have a unique opportunity to provide
global leadership. Its experience in reducing energy intensity can serve
as a roadmap for developing countries. And its investments in
renewables at home and abroad can lead to additional technological
breakthroughs that drive down costs for consumers everywhere.
But China will also
face challenges as it moves from fossil fuels to renewables within a
changing global resource sector. Its economy is still highly dependent
on coal, implying sizeable costs as it shifts capacity to other
resources such as natural gas and renewables.
Moreover, the
construction of solar panels and wind farms in China has outpaced
upgrades to its electrical grid, creating a great deal of waste. And
Chinese producers, like most others, are feeling increasing pressure to
reduce costs and improve efficiency to make up for slower demand growth
worldwide.
Despite these
hurdles, technological innovation should help Chinese producers realize
productivity gains and deliver savings to consumers. According to MGI,
by 2035, changes in the supply and demand for major commodities could
result in total cost savings of $900 billion to $1.6 trillion worldwide.
The scale of these
savings will depend not only on how quickly new technology is adopted,
but also on how policymakers and companies adapt to their new
environment. But, above all, it will depend on China.
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