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China’s solar industry is at a crossroads

This article is republished from chinadialogue.

Generous subsidies have been slashed or removed to rein in rampant growth. Liu Bin examines the changes

Solar powered photovoltaic cells are assembled by workers at a factory in Dezhou, Shandong province (Image: ​Greenpeace/Alex Hofford)

China’s solar manufacturers are unhappy with recent government policy changes that have put a brake on the sector.

“We’ve already halted work on 11 megawatts of industrial and commercial distributed solar PV projects,” says the marketing director for one solar photovoltaic (PV) module manufacturer in Guangdong province.

“Without subsidies there’s no return on investment for over a decade, so investors and property owners aren’t interested in distributed solar. With subsidies it only takes seven years to recoup the investment,” he adds.

This is one consequence of China’s “531” policy that was announced by the National Development and Reform Commission, the Ministry of Finance, and the National Energy Administration without warning on May 31(hence the “531” name). The policy is designed to control breakneck growth in the solar sector, principally by accelerating the phase-out of subsidies.

China has led the world in new solar installations in each of the past five years, helped by guaranteed electricity prices. But the cost of subsidies has been growing unsustainably, and as manufacturers have expanded rapidly to meet demand the risk of overcapacity has grown.

The new policy brings the industry to a crossroads. During the 12thFive Year Plan period (2011-2015) subsidies were paid late and there was significant wastage of both solar and wind power. Those lessons should have been learned by now, says Meng Xiangan, deputy director of the China Renewable Energy Society. To avoid a repeat, the sector can either lobby for an extension of subsidies and continue its rapid and unsustainable expansion, or accept that new capacity will face a tougher challenge on costs.

Source: IRENA

A sudden change

Under the current system, the National Energy Administration (NEA) sets annual targets for installed solar capacity, which is eligible for government subsidies. At the local level, development and reform commissions are responsible for approving projects. In theory, subsidies are limited to projects that fall within the NEA (central government) targets, although local governments may also provide subsidies.

The new policy, which came into effect immediately, has no target for the construction of solar farms, and orders local governments not to approve solar farms that need subsidising.

However, it is distributed solar projects, such as small-scale commercial and consumer rooftop installations that will see the biggest change. Previously, there was no target for distributed solar capacity, leading to strong growth in the distributed solar market.

In 2017, 19.44 gigawatts (GW) of new distributed solar was added – as much as the total for the previous three years. A further 7.68GW was added in the first quarter of this year, an increase of 217% year-on-year and 79.6% of all new installations in China. The new policy has put in place a target of 10GW of new distributed solar capacity (as oppose to solar farms), which means that the entire 2018 target was almost reached in the first three months of the year.

Alongside limiting the amount of new solar installations eligible for subsidy, the 531 policy also reduces the level of subsidy for solar farms and distributed solar, which were set through regional pricing policies in 2013.

These policies provided a huge stimulus for corporate investment in solar PV. They divided the country into three regions according to their suitability for solar generation, with prices paid per kilowatt hour set at 0.90, 0.95 and 1.00 yuan accordingly. Distributed solar installations were subsidised at 0.42 yuan per kilowatt hour.

The new policy has dropped those subsidies to 0.50, 0.60 and 0.70 yuan per kilowatt hour across the three regions, with the distributed solar subsidy falling to 0.32 yuan per kilowatt hour.

This is the second cut in subsidies in less than a year. In December 2017 the distributed solar subsidy fell from 0.42 yuan per kilowatt hour to 0.37 yuan.

“We were expecting subsidies to be cut back but this was too sudden and too sweeping, with no buffer period,” says a source at the Guangdong Solar Energy Association.

The cuts are a clear signal from government that the sector needs to become less dependent on subsidies and shift its focus from rapid scaling toward technological improvements to further bring costs down.

“The subsidy has been a major driver of new projects,” says Lin Boqiang, head of Xiamen University’s China Institute for Studies in Energy Policy.

“The idea of a subsidy is that eventually it goes away. China’s been slow to do that, it would have been better if this had happened earlier,” he adds.

A difficult transition

Many investors and project owners are waiting to see how the new policy plays out.

“Some customers immediately cancelled orders and demanded cheaper prices,” says Sun Yunlin, head of Winone Solar, which provides services such as consulting, feasibility studies and handover inspections to solar farms.

The market has dropped significantly. Wang Bohua, secretary general of the China Photovoltaic Industry Association, expects to see 30-35 gigawatts of new capacity in 2018, a drop of 43% on last year.

That drop in new installations in China means there is a risk of overcapacity in the supply chain, which has been expanding rapidly. The silicon subcommittee of the China Nonferrous Metals Industry Association calculates that China’s production capacity of polycrystalline silicon – a raw material for the solar industry – will reach 433,000 tonnes a year in 2018, growth of 57% year-on-year. Most of that new capacity will come on stream in the third quarter.

China’s percentage share of the solar PV industry in 2017 (Source: China Photovoltaic Industry Association)

report from the China Centre for Information Industry Development (CCIDWise) predicts that growth in the solar PV market will fall off or even reverse, with further price drops to come across the industry and firms facing significant pressure on costs.

Wang Bohua, secretary general of the China Photovoltaic Industry Association, said at this year’s 3rd Century Photovoltaic Conference that expansion of manufacturing capacity was still rapid, but the warnings of overcapacity caused by excessive expansion back in 2011 should be heeded.

Mind the gap 

China’s 13th Five-Year Plan (2016-2020) set a 105GW target for new solar PV capacity by 2020. This was hit two years and three months early. As of April 2018, capacity was 140GW.

One of the reasons for this runaway growth is because plans for the solar sector differ between central and local governments – particularly since the power to approve solar farms was devolved to the local level in 2013, which made it harder for central energy authorities to control the scale or rate of solar PV installations. That loss of control is why the subsidy funding gap has steadily widened.

“During the 12th Five-Year Plan the target for solar generation grew from 5GW to 10GW, then to 15GW, then ultimately from 21GW to 35GW. That was a bigger change than planned for any other industry. There was effectively no cap on total capacity,” explains Meng Xiangan.

The expansion started in 2013. The EU and US placed anti-dumping measures on imports of Chinese solar PV products, causing the overseas market to shrink. With no outlet for domestic capacity a meeting of the State Council in June that year took six measures to support the industry through the crisis: policy assistance, guaranteed purchase of solar power, improved electricity pricing policy, funding support, funding for research and design, and support for mergers and restructuring.

With guaranteed prices, solar power manufacturers and other companies started building solar farms. In December 2013 Deloitte published a report on clean energy in China that found 130GW of “queued” solar projects – three times the entire 12th Five-Year Plan target.

But the Renewable Energy Development Fund, from which subsidies are paid, had only one source of income – a renewable energy surcharge on electricity bills, which is collected by energy suppliers from customers. That surcharge has been adjusted five times and currently stands at 0.019 yuan per kilowatt hour.

Electricity prices were fixed while solar PV development costs fell

A key reason for the exponential growth in distributed solar PV installations in recent years is that electricity prices were fixed while solar PV development costs fell. This created enormous potential for profit, further encouraging investment in the sector.

This was particularly the case for distributed solar installations. The first adjustment was made in 2017 – a reduction of 11.9%, from 0.42 to 0.37 yuan per kilowatt hour. But during that same period the price of polycrystalline silicon panels (which make up 60% of the cost of solar installations) plummeted from 3.9 yuan per watt in 2013 to 2.4 yuan in 2018 – a drop of 38.5%. The cost of monocrystalline silicon panels fell to 2.5 yuan, dropping 37.8%.

That out-of-control growth left a huge funding gap in the subsidy scheme, which is now limiting the sector. Figures from the National Energy Administration show that as of the end of 2017 the accumulated shortfall in renewable subsidies stood at 112.7 billion yuan, with 45.5 billion yuan due to the solar PV sector. An extra 10 gigawatts in distributed solar means a further four billion yuan in subsidies has to be found – or 80 billion yuan over a 20-year period.

Hard to control

The National Energy Authority started trying to manage the expansion of the solar sector in 2014, but its goals didn’t align with the interests of local governments, so policies were not properly implemented.

To encourage investment, some local governments had a “first-built, first-served” policy – the first distributed solar installations to be finished were included in annual quotas, and thus eligible for subsidies.

Growth in solar has ‘been driven by business and local government’

Anhui made this explicit in a notice published in 2016, which stated that projects would be included in annual quotas in the order of their connection to the grid. This resulted in far more capacity being constructed than annual quotas allowed for – 2.55GW of new capacity was built in Anhui in 2016, compared to a quota of 0.5GW.

Wang Liguo and Ju Lei at Dongbei University of Finance and Economics have studied the roots of overcapacity in the solar sector.

They say: “it has been driven by business and local government, with the energy authorities forced to respond rather than guide and control the sector’s sustainable development.”

Better solar integration

Solar PV is still a key part of China’s low-carbon strategy, which is itself important for realising China’s commitment to reducing emissions and increasing the proportion of non-fossil fuel energy in the overall mix to 15% by 2020. But too much focus on installed capacity can come at the cost of coordinated planning across central and local government, and with the grid. This can add to the challenge of absorbing new solar capacity effectively into the power system.

This is evident in China’s north-west where 40% of the country’s total PV capacity is concentrated in five provinces (Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang). It is also where the most solar power is wasted.

Because solar installations were not coordinated with power grid construction, there grid has limited ability to absorb the extra power and connection to the grid has been difficult. National Energy Administration figures show that curtailment of solar PV was 19.81% across those five provinces – that is, one fifth of solar power capacity is being wasted.

The National Energy Administration wants to reduce curtailment to just 5% nationwide. But this will be no easy task.

Fan Bi, former head of the General Economy Department at the State Council’s Research Office, has written that the intermittent nature of solar power causes problems if large scale, concentrated generation needs to be connected to the grid. Ultra-high voltage lines can be used to carry the power 1,000 and more kilometres to eastern and central China, but energy loss through transmission and transformation makes this a hugely uneconomical option for the State Grid.

And the provinces which would receive that renewable energy aren’t keen either, as they view it as against the interests of their own utility companies.

Dafeng power station in Yancheng, Jiangsu province combines wind power and solar PV (Image: Greenpeace/Zhiyong Fu​)

Lack of a quota system

Guaranteed electricity prices incentivised the development and roll-out of renewable energy, but they didn’t create demand for that power. There needs to be a better balance between the varying interests on the grid, power generators, and consumers to ensure a atable market.

One approach to rectify this was detailed in March this year by the National Energy Administration, which plans to establish a renewable energy quota system. This would require each province to source a certain percentage of electricity from renewables, passing the cost of the quota obligation onto market actors (such as power networks, electricity suppliers and major electricity consumers).

But there is uncertainty over the quota system already. The government’s work report at this year’s Lianghui called for large reductions in the non-taxation burdens on companies, and specifically for “reductions in power distribution and transmission network charges, with ordinary industrial and commercial electricity costs falling 10%”.

Lin Boqiang says a renewable energy quota system could prevent the waste of solar power, but it would mean higher prices. With the government hoping to boost business competitiveness, it may be reluctant to implement the proposed changes.

Back to the market

Responding to questions on the new 531 policy, the National Energy Administration said that it will encourage firms to shift their reliance from government policy to the market. This is expected to help eliminate excess capacity, encourage technological improvements, end the sector’s irrational expansion, and concentrate resources in stronger firms.

After an initial panic, the industry is now calmer about the future. “At Guangdong electricity prices, solar PV is a viable investment if solar cells drop in price to 1.8 to 2 yuan per watt. We expect to see 2 yuan per watt at the end of the year,” says Sun Yunlin from Winone Solar.

Li Chuangjun, deputy head of the new and renewable energy department at the National Energy Administration agrees that the cost of solar is reaching parity with conventional technologies. He says that technological advances have seen costs fall by about 90% from 2007 to 2017, and power from solar PV may be sold to the grid at standard rates within two or three years.

Some industry insiders are even more optimistic. Four days prior to the release of the 531 policy Liu Hanyuan, chair of the Tongwei Group, said at the 12th International Solar and Smart Energy Exhibition that innovation and further economies of scale could help solar match coal-fired power on a cost basis across most of China.

Meng Xiangan says it is now time for the sector to “find its place in the overall market”.

The article was produced jointly by chinadialogue and Energy Observer. This version has been edited from the Chinese original. This article is republished from chinadialogue.

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A stop light for Lao hydropower is a chance to make a right turn towards renewables

Image: ADB Flickr account

On August 7, the government of Laos officially suspended consideration of all new dams in order to review its hydropower strategy in response to the safety vulnerabilities exposed by the tragic collapse of the Xepian Xe Namnoy Dam in Laos on July 23. This is a turning point for the Lao leadership, who have long pinned hopes for Laos’s development on being the “Battery of Southeast Asia” by exporting hydroelectricity to markets in neighboring markets in Thailand and Vietnam.

This pause creates a window of opportunity for Laos to reconsider the dominant role of hydropower in the country’s energy mix at the same time as alternative and less risky energy sources such as solar, wind, and biomass are becoming economically competitive options. Transitioning to a more diverse mix of energy would provide put Laos on the path towards being a greener “battery” and would ultimately greatly reduce food security, environmental, and natural disaster risks to the Mekong region as a whole.

The dam breach happened at a point where the government of Laos still has an opportunity to choose a different and more sustainable path: only approximately 6,000 MW of a potential 18,000 MW of technically feasible hydropower dams have been constructed inside the country. An additional 5,000 MW of dams are now facing a construction pause for safety examinations, and some—like the Pak Beng Dam—are paused due to uncertainty on the part of the power purchaser. Ultimately, this is still only a portion of the Lao government’s goal planned full buildout and opens the door to meeting export goals through a more diverse mix of alternative options. Laos has approximately 8,800 MW of solar potential, and another 2,200 MW of high quality wind potential. There is significant scope for Laos to take advantage of the dropping prices in reconsidering the makeup of its future energy mix.

Solar (left) and wind (right) endowments for Laos, Cambodia, and Vietnam.

Non-hydropower renewable options are gaining traction globally. The prices of utility-scale solar and wind have dropped approximately 85% and 65% respectively since 2009, and this drop is continuing. Utility-scale solar price in the United States dropped 30% from 2016 to 2017, and bids on solar and wind plants around the world regularly set new records: since 2017, we’ve seen solar lows in the United States of 2.3 c/kWh, in India of 3.6 c/kWh, and the UAE at 2.94 c/kWh while Mexico signed a contract for wind at 1.77 c/kWh and Saudi Arabia saw bids as low as 2.1 c/kWh for its first onshore wind project. In many cases, these records are not only for new low solar prices but for low overall electricity price.

The rise of renewables is already impacting Laos’s neighborhood: Thailand’s solar capacity has more than doubled since 2014 to more than 3,300 MW, and Thailand’s wind capacity is just over 600 MW as of late 2017. This puts Thailand more than halfway towards its 2036 solar target of 6,000 MW, a fifth of the way towards its wind target of 3,000 MW, and squarely establishes it in the leading position for new renewables in all of ASEAN. Thailand’s Ministry of Energy has already raised the 2036 non-hydro renewable energy target from an original target of 20% to 30 and has dropped a Feed-in-Tariff that stimulated growth in the sector to only 7.2 c/kWh, which is close to grid parity pricing. Thailand’s adoption of clear policy has made a clear business case for investment, which is why Thai companies plan to invest $3.9 billion in non-hydro renewables in 2018.

The policy and financing environment in Laos and Cambodia is not yet as welcoming or conducive to these record prices, and the local low prices for pilot solar projects currently stand around 8 – 9 c/kWh. However, significant price drops in these less mature markets is only a matter of time and depends largely on the timeframe for regulators clarifying the policy framework and opening bids for competitive tender. As the investment environment improves and perceived risk of these projects drops, financiers will begin offering better loan terms. On average, open auctions drop selling the price of electricity by 35 – 50% just in the first year by increasing competition for the tenders and pushing companies to cut costs. It is not unlikely to expect that prices in Laos would follow this trend if supportive policies were adopted.

Internationally and on a levelized cost of electricity, unsubsidized solar and wind are both already outcompeting coal. New commercially-viable hydropower projects in Laos, which are often more technically difficult and remote than earlier and cheaper projects, are coming online upwards of 7 c/kWh. Even a conservative price drop of one third in the solar price in Laos would put solar in a competitive position vis-à-vis new hydropower. A power expansion study led by experts at UC Berkeley’s Energy and Resources Group indicates that the least-cost development scenario for Laos’s power grid through 2030 would start replacing hydropower with a mix of wind, solar, and biomass by 2021. This more diverse scenario would avoid most planned dams and coal plants and would need $2.6 billion less investment than the business-as-usual scenario under the current government inventory of projects.

The price drops both make solar and wind more financially attractive and raise questions about the long-term competitiveness of planned hydropower and coal projects in a rapidly changing regional energy market. Laos’s development plans depend on the sale of electricity to markets abroad, and a shift in the way that buyers in Thailand and Vietnam think about their power mix is may have long-term implications for Laos. Thailand’s success with renewable energy is spurring a re-think of the national power development plan, and planners may consider replacing imports from comparatively expensive and controversial hydropower from Laos with domestically available renewable energy. Some experts have indicated privately that Thailand may significantly reduce its plan to purchase 10,000 MW of power from Laos.

If Thailand is out of the buying market, Vietnam is the only other neighbor with the capacity to buy from Laos’s battery—and Vietnamese stakeholders are understandably reluctant to purchase from hydropower which will have devastating impacts on the agriculturally productive and economically important Mekong Delta. At the same time, Vietnam’s energy demand is still high even in a region facing skyrocketing energy demand due to urbanization and industrialization.

Therein lies a contradiction as well as an opportunity: there is no reason that Vietnam cannot increase its power purchase from Laos as long as it is purchasing from a diverse and sustainably developed portfolio of power projects. The pause on new hydropower development in Laos provides an opportunity not only to the government of Laos to diversify its electricity supply, but also for policymakers in Vietnam to protect the Mekong Delta without infringing on the sovereignty of its neighbor. If Vietnam were to support investment and sign power purchase agreements for a mix of strategically sited dams and non-hydropower renewables, it could provide Laos with much-needed revenue and meet its own energy needs in southern Vietnam by negotiating to replace the worst-performing dams with wind and solar projects.

Taking the off-ramp from the business as usual, hydropower-heavy scenario is very possible for Laos because investor interest in this alternate portfolio already exists even though Laos has not yet adopted policies that lay out a clear pathway for non-hydropower renewable investments. Thai company Impact Energy Asia is pursuing a 600 MW wind farm in southern Laos, American company Convalt Energy is moving ahead with 300 MW of solar and is in talks for up to 700 MW more, and many investors are expressing interest in “floatovoltaic” solar plants that would sit on reservoirs in central and southern Laos.

The pause on hydropower construction provides the time for Lao officials to work with neighbors in Vietnam to hammer out what an alternative future would look like and lay out directions and a map to get there. Doing so would avoid risks, position Laos to be a greener and more sustainable long-term “battery” for regional development, and would ultimately mitigate long-term food, water, and security risks for the Mekong region as a whole.

Courtney Weatherby is a Research Analyst with the Southeast Asia program at the Stimson Center. Her research focuses on infrastructure development, climate change, and energy issues in Southeast Asia, particularly the food-water-energy nexus in the Mekong River basin and China’s investment in regional energy infrastructure. 

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Moratorium on new Mekong dams in Laos provides window of opportunity

Lower Mekong Dams 2018. Map credit: Allison Carr/Brian Eyler

The July 23 dam collapse in southern Laos marks a turning point that squarely exposed the vulnerabilities of Laos’s current plans to become the “Battery of Southeast Asia” to the Lao government’s upper leadership. At least 34 people died in floods unleashed by the man-made disaster at the XePien-XeNamnoy dam in Attapeu province, and more than a hundred local villagers are still missing. Waters from dam breach rushed in the Sekong river and sent floods downstream to Cambodia where thousands were evacuated. The flooding reportedly also caused damage to agricultural fields in Vietnam’s Mekong Delta.

The loss of life, economic damage, and transboundary implications of this tragedy hit too close to home for senior Lao officials. On August 7, the Government of Laos announced a decision to suspend the consideration of new investments in hydropower projects in order to review its hydropower development strategy and plans. The decision came after a cabinet meeting chaired by Lao Prime Minister Thongloun Sisoulith. The prime minister also set up a task force to inspect all completed dams and dams under construction in Laos for engineering flaws. If inspections are to be thorough, this process should take longer than one year given the need to inspect all 100 dams that Laos’s Ministry of Energy and Mines claims will be up and running by 2020.

Lao government ministries connected to the inspection process are woefully understaffed and lack experience lending to constraints that spell out a lengthy period of inspection. To conduct a more impactful assessment, the Lao government should employ the expertise of international development partners with particular experience in building resilience for climate change impacts and severe weather events like the tropical storm that triggered the dam breach in southern Laos. The list of potential candidates is long and includes Australia, Germany, Japan, and the US, whose Army Corps of Engineers and USAID projects in Laos have long assisted with dam safety capacity building.

The moratorium on new dams creates a window of opportunity for international development partners and investors to promote smart planning and non-hydropower renewables such as solar, wind, and biomass. Neighboring Thailand and Laos also have a direct interest in reducing the risks to Lao dams upstream by contributing to development assistance and investments in non-hydropower renewables. Laos has an abundance in these alternative energy sources that to date mostly untapped due to the longstanding preferenc, for building dams.

Recent media reports have stated that Laos plans to complete more than 100 dams by 2020 which will produce 28,000 mega-watts (MW) of electricity, most of which will be exported to neighbors like Thailand, Vietnam, and Cambodia. According to my review of Lao language databases posted on the website of Laos’s Ministry and Energy and Mines, Laos has completed less than 6,000 MW hydropower projects. Even without the pause, less than 10,000 MW of dams were scheduled for completion by 2020. With political, financial, and environmental risks on the rise, it is doubtful that Laos will reach 18,000 MW of hydropower, a previous target set several years ago by the Lao government.

Solar (left) and wind (right) endowments for Laos, Cambodia, and Vietnam.

Laos has potential for 8,800 GW of solar development, and 2,200 GW of high quality wind development. Much of this potential is located in Sekong river sub-basin which flows through the southern provinces of Champasak, Sekong, Attapeu, and Salavan. The Sekong, which originates in Vietnam and flows 520 kilometers through southern Laos and northwest Cambodia, is the longest remaining free-flowing tributary of the Mekong river. The Sekong’s tributaries, in aggregate, total to 1390 kilometers.  More than sixty dams are in listed in Laos’s current dam inventory (four are completed) for the Sekong sub-basin, although more than forty are still under feasibility study. Minimizing the number of the dams in the Sekong basin is critical for the promotion of important environmental flows, such as sediment and migratory fish to the Mekong floodplain. Dams in the Sekong basin like the failed XePian-XeNamnoy dam are also close to Cambodia and Vietnam and pose relatively higher risks to downstream countries than dams located farther upstream on the Mekong. These risks were clearly demonstrated by the cross-border flooding caused by the July 23 disaster.

The aforementioned southern Lao provinces in the Sekong sub-basin could serve as a zone for diversified renewable energy development purposed to reduce the environmental and social risks of dams all the while keeping Laos on track to becoming a better “Battery of Southeast Asia”. These provinces are advantageously positioned to export power to southern Vietnam and Cambodia where power is needed most.

To be sure, some research has already been done on the potential for diversified energy production in the Sekong basin. For instance, the Natural Heritage Institute, a San Francisco based research group, produced a Master Plan for the Sekong Basin which proposes alternate sites for some dams based on minimized environmental impacts and substitutes other dams with solar and wind projects. Some of NHI’s solar plans are built on top of dam reservoirs. This floating solar technology is currently being piloted in China, India, Thailand, and Indonesia and assists with both the day-to-day and seasonal intermittency of solar and hydropower generation. NHI found such an approach would be cheaper and quicker to deploy than the business as usual scenario and would achieve a minimized level of environmental impacts.

Moving from analytical studies to actual projects, Convalt Energy, a US based renewable energy company from New York, is collaborating with Viet-Lao Power Joint Stock Company to build up to 1,000 MW of floating solar built on Viet-Lao Power’s dams in southern Laos. Further, Impact Energy Asia, an affiliate of Thai owned Impact Electrons Siam, signed a project development agreement for a 600 MW windfarm (the largest in Asia) to be located in Sekong and Attapeu province. To date, this project has been stalled because of the lack of an interested power purchaser.

Clearly investors are interested in participating in a smarter and more diversified plan for energy development in southern Laos. Now that the government of Laos is rethinking its power sector strategy, system-scale planning could be applied to produce a blueprint for energy development in southern Laos that demonstrates the costs, timeline, benefits, and impacts of a development plan. A better process would produce various scenarios of development options so that decision makers could better negotiate the environmental, social, and economic tradeoffs. A successful pilot project in southern Laos could then inform development processes for other parts of Laos and the Mekong region at large.

The governments of Australia, Japan, Germany, US, and the EU as well as the World Bank and Asian Development Bank are already uniquely positioned to assist with this transition by expanding existing support to Laos’s power sector development. Of course, a leaner and less risky “Battery of Asia” can be built by showing Laos the benefits of alternative economic development pathways unrelated to the power sector such as those related to eco-tourism or light manufacturing. Once approaches are identified, regional development frameworks such as the US-led Lower Mekong Initiative, Thailand’s ACMECS, the Japan Mekong Connectivity Initiative, or the ADB’s Greater Mekong Subregion program.

Specifically, the United States now has an opportunity to target efforts emerging from its now-materializing Free and Open Indo-Pacific Strategy toward the power sector in Laos as a form of strategic and pragmatic engagement and delivers broader benefits to the entirety of the Mekong region. Importantly, this kind of strategic investment, if packaged correctly, could provide a high-quality alternative to China’s Belt and Road Initiative, the projects of which have placed Laos, to its detriment, as one of the highest debt risk countries in the world.

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Hydropower in Laos: An Alternative Approach

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It’s time to take another look at the future of energy in Southeast Asia.

A report published in September by the Stimson Center, a D.C.-based think tank, challenges prevailing notions about the future of hydropower in the Mekong subregion, an area including Vietnam, Cambodia, Laos, Thailand, Myanmar, and southwestern China.

The report focuses on Laos, which in years past has proclaimed itself the future “Battery of Southeast Asia,” by aggressively developing hydropower dams on the Mekong. Laos has already built 29 large dams along the river’s mainstream and tributaries, with plans for over 100 in total. The land-locked country remains the poorest in Southeast Asia, and has planned to raise cash by exporting electricity to consumers in neighboring countries.

But project developers of these dams – who are typically Thai and Chinese companies – have faced criticism from civil society groups and international observers for the myriad social and environmental consequences brought on by dam construction. The Mekong is home to an estimated 1,000 species of fish, many of which migrate along the river and replenish the region’s fisheries. By changing the hydrology of the river, these dams threaten the biodiversity of the Mekong and the livelihoods of fishermen and farmers throughout the region. In times of drought – as has been experienced this year – the dams can cause regional insecurity by contributing to water scarcity problems downriver.

While dam construction has continued apace despite these dangers, the Stimson report argues that new markets and technologies are creating an opportunity to change course.

Challenges for Lao Hydro

The report highlights new developments that could steer Laos away from further damming on the Mekong. First, following a period of economic and political liberalization, Myanmar is emerging as a competitor for energy infrastructure finance. Myanmar boasts nearly 100 gigawatts of potential hydropower capacity, far exceeding what is possible in Laos. Such a glut of potential projects in the region is likely to siphon away financing that might otherwise go towards hydropower development in Laos.

At the same time, China’s economic slowdown could signal the end for cheap and easy hydropower finance in the region. In previous years, Chinese state planners encouraged outbound investment in strategic sectors such as hydropower projects in Southeast Asia. However, the report notes that government concerns about non-performing loans on the books of Chinese banks seem to have reduced the funding available for some projects in Laos. Rising local awareness about the social and environmental costs of these dams also adds a layer of risk that financiers may find discouraging.

Perhaps most critically, it appears as if planned generation in Southeast Asia is outpacing the region’s appetite for energy. China, once envisioned as a potential market for Laos power, is already experiencing serious overcapacity in its domestic power market. Thailand, while still a major investor in Laos hydro projects, has consistently overestimated its own consumption levels – and has lots of room to cut demand through energy efficiency measures. Both Cambodia and Vietnam have planned to reduce their reliance on imported energy, with the latter investing heavily in coal-fired power plants.

A New Vision for Laos

Taken together, these signals make a compelling case for a new energy strategy in Laos and in the region as a whole.

First, the report suggests that Lao planners should invest in a backbone transmission network to connect its patchwork regional grids. This is a good idea for a variety of reasons. A nationwide transmission system would help open up markets for Lao electricity both domestically and internationally by creating a more flexible grid. It would help planners integrate renewable energy resources like solar and wind. It would also be a great step towards electrifying the remaining 20% of the country still without power.

Secondly, planners should consider ways to diversify the country’s energy mix with wind and solar. With too much reliance on hydro, the region risks facing shortages during drought conditions, which will become increasingly likely due to the effects of climate change.

It also makes good economic sense. Utility-scale solar is now nearly cost-competitive with hydro in Laos. Solar avoids the social and environmental challenges associated with hydro that have led to disruptive public protests and cost overruns, making it a safer bet.

In fact, solar already plays an important role in electrifying Laos’ rural communities. Companies like Sunlabob have pioneered low-cost solar home systems to provide basic electricity services like lighting and device charging to remote communities. A new energy outlook from Lao energy planners would also be a great opportunity to optimize plans to fully electrify the country, whether by grid connection, solar home systems, or village-level microgrids.

Lastly, greater international cooperation in energy planning is needed. The construction of a national power grid will require technical assistance from international experts. The Asian Development Bank is leading this effort, and plans to invest $400 million in a national transmission network by 2020. The US has already begun providing power planning and optimization assistance through the Department of Energy and its national laboratories.

The US is also supporting renewables in Laos. In advance of President Obama’s visit to Laos in September 2016, the US Trade and Development Agency committed to funding a feasibility study for a 20 megawatt solar farm in the country.

China, as a regional power with an abiding interest in Laos’ energy sector, can also benefit from this shift. The world’s largest solar module manufacturers are Chinese, and government support for emerging solar markets is one way to bolster domestic manufacturers while also rebranding China as a responsible stakeholder in the region.

Laos’ energy future is still uncertain. Energy planners remain convinced that prioritizing dam construction is Laos’ ticket to prosperity, despite the risks. But as the challenges for Lao hydro become ever more apparent, a new way forward could be in the making.

Read the Stimson Center’s full report here.

This article was first published here on the Pacific Observer website.

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China’s Impressive Clean Energy Progress Confronted by Emerging Challenges

Severe pollution levels in China are complemented by the rapidly growing presence of renewable energy infrastructure

Severe pollution levels in China are complemented by the rapidly growing presence of renewable energy infrastructure

The energy landscape in China is evolving rapidly. Dire environmental conditions throughout the country are complemented by the growing presence of renewable and efficient energy systems. This trend offers the vivid juxtaposition of a nation desperate to overcome its troubling present development stage through forward-thinking sustainable planning. The world’s second largest economy has also earned the status of the world’s worst polluter. Facing surmounting challenges, China seeks to revise its environmental trajectory, determined to smoothly and successfully transition from an overdependence on fossil fuels—particularly coal—to an embrace of clean energy.

Ambitious energy production and carbon reduction targetsoutlined in the recently released 13th Five-Year Plan indicate China’s serious desire to achieve a practical path to sustainability. With these goals in mind, the PRC government seeks to incorporate energy efficient technologies and investments into forthcoming urban development—an effort to withstand a slowing economy through innovative and sustainable systems that provide power for the masses at a reduced cost.

Beijing’s evolving reform of the Chinese economy intends for energy demands to sharply decline over the coming 20 years. This includes a concerted effort to significantly reduce dependence on coal—curtailing coal consumption to 0.2 percent annually during that period, following two decades of 12 percent annual demand growth. These plans vary by locality, as Eastern Chinese economic zones such as Beijing-Tianjin-Hebei (JingJinJi), Yangtze River Delta, and Pearl River Delta target major cuts, while lesser-developed regions in Central and Western China seek to control demand and accommodate gradual urban growth.

China’s NDRC and NEA recently announced the government has postponed construction of new coal-fired plants, while halting approval for new plants

China’s NDRC and NEA recently announced the government has postponed construction of new coal-fired plants, while halting approval for new plants

The government has demonstrated its commitment to these goals, as the National Development and Reform Commission (NDRC) and National Energy Administration (NEA) announced recently that China has halted plans for new coal-fired plants and postponed the construction of about 200 planned generatorsthroughout the country—forgoing roughly 105 gigawatts of environmentally unfriendly power production. This type of trend, though increasingly common in the US as a result of the Obama Administration Clean Power Program, is very new for China. The measures would suggest that Beijing has begun to take more thoughtful action around addressing the country’s egregious environmental situation—degradation that has had far-reaching global climate implications.

Meanwhile, China’s surging emphasis on clean energy offers accelerated natural gas production and imports, and will increase hydropower capacity by 60 million kilowatts. Nuclear power plants are under construction up and down China’s coasts, which will provide 30 million kilowatts in total capacity. China’s total wind power generation is expected to triple to 495 gigawatts of installed power capacity by 2030, compared to only 149 gigawatts in 2015. Already the world leader in solar capacity production, China added 15 gigawatts of new photovoltaic capacity in 2015.

China has also risen as a world leader in new energy vehicles, accounting for 40 percent of global sales in 2015

China has also risen as a world leader in new energy vehicles, accounting for 40 percent of global sales in 2015

Renewables, however, are only part of China’s growing efforts to incorporate efficient technologies into the broader national energy landscape. China has recently established itself as a world leader in new energy vehicles, as 2015 electric car sales reached 330,000—40 percent of the global total. Sales figures for the first quarter of 2016 are already double that of the year before, suggesting a continued surge in this trend. Seeking to reach five million electric vehicles by 2020, China’s local brands have invested nearly $6 billion over the past five years. During this period, manufacturers will strive to improve car battery durability and affordability, while increasing the number of charging stations, in a push to make new energy vehicles more accessible and desirable to the masses.

In addition to new electric vehicles, China is making strides in a variety of other clean energy technologies. A recent United Nations Environment Program (UNEP) report noted that China had built 10.5 billion square meters of energy saving buildings in urban areas through 2014. Last year, China began to require that at least 50 percent of new real estate projects comply with energy efficiency standards. Beijing, Shanghai, Tianjin, and Chongqing and other east coast provinces are promoting newly introduced green building standards, which focus on lighting, air conditioning, water heating, and other appliances—part of China’s broader eco-cities initiative.

China has shown strong interest in CCS technology development, as it tackles its vast pollution problems

China has shown strong interest in CCS technology development, as it tackles its vast pollution problems

Preparing for a 70 percent rate of urbanization by 2030, which will add 350 million people to the nationwide urban population, China outlined a wide range of infrastructure upgrades to public utilities, smart grids, smart transport, smart water supplies, smart land administration, and smart logistics in the 13th Five-Year Plan. This includes smart city-focused investments that exceed the $260 billion offered for these initiatives by the 12th Five-Year Plan. The Chinese smart grid market is expected to grow at a rate of 20 percent between now and 2020, the result of significant government investment. This includes plans announced in 2015 for $31 billion-worth of smart grid infrastructure in Xinjiang.

China has also shown leadership with carbon capture and storage (CCS) technology, which acquires carbon dioxide emissions from sources such as fossil fuel power plants and other large industrial plants, and stores this carbon underground. In many cases, these carbon dioxide emissions can be converted and then used to enhance production of oil and natural gas. With a wide range of projects underway, China has risen to number two in the world for CCS technologies. Many believe that China will be the location for the major CCS projects of the future.

China’s impressive efforts to assimilate renewables and other cutting edge efficient technologies into its broader energy expansion plans has demonstrated the ability for economically developing countries to play a prominent role in the global movement to combat climate change. Yet, while these trends are important and should be duly recognized, China’s prospects for accomplishing its lofty energy objectives depend on a number of uncertain factors—including potential obstacles.

Excess coal production in China, enabled by industrial overcapacity, has caused grid system operators to curtail renewables in order to satisfy coal generation quotas

Excess coal production in China, enabled by industrial overcapacity, has caused grid system operators to curtail renewables in order to satisfy coal generation quotas

Though China has risen to become the preeminent world leader in renewable energy investment—having committed $110.5 billion during 2015—limitations to energy infrastructure throughout the country are preventing proper integration of these systems into the larger national grid. Industrial overcapacity challenges continue to favor state-owned factories, as China’s official annual planning process is designed to ensure a minimum number of operating hours throughout the year for coal-fired generators. Seeking to meet this quota, system operators at grid companies most often curtail renewables to offset these coal-fired generation figures. Because generators are paid only when providing energy to the grid—guaranteed through a set price per kWh—there is no capacity payment for these generators. Making up more than 60 percent of total installed capacity and represented by longstanding influencers, the coal industry is resistant to concerted efforts to reform the current operating hour quota system.

These grid inefficiencies are disproportionately impacting the renewable energy sector—exemplified by a 15 percent curtailment in wind energy during 2015. Present challenges toward properly integrating wind, solar, and other renewables into the greater energy grid are illustrating the growing need for more effective energy storage mechanisms and technologies that ensure stronger short- and long-term efficiency.

Despite world-leading renewable investment and installed capacity figures, grid inefficiencies are allowing a large portion of China’s wind and other renewable energy generation to go to waste

Despite world-leading renewable investment and installed capacity figures, grid inefficiencies are allowing a large portion of China’s wind and other renewable energy generation to go to waste

Proving to be a major barrier to seamless grid integration for renewables following years of aggressive expansion, overcapacity has left the Chinese energy sector in more than $16 billion of outstanding debt—with $4.4 billion of those bonds due from renewable companies. This record debt is plaguing China’s largest renewable energy producers, with four companies defaulting on $1.8 billion worth of bonds—including top solar panel producer, Yingli Green Energy Holding Co., which missed payments on more than $268 million of notes. These financial trends are highly concerning, as solar- and wind-power generating plants throughout the country are noticeably lagging behind production of equipment—a potentially destabilizing trend as the Xi Jinping Administration strives to uphold its commitments toward reducing never-ending nationwide pollution problems.

Yet, while these limitations pose fundamental challenges for China in its long-term efforts to realize its energy efficient goals, they remain a technical obstacle within what is proving to be an encouraging stage in the country’s clean energy revolution. China’s impressive investments in renewables are influencing other developing countries to push strongly for similar clean energy development, while simultaneously pressuring leading developed countries—such as the US—to expedite domestic transitions to energy efficient economies. The International Energy Agency (IEA) announced earlier this month its decision to select a Chinese official as a special advisor to the IEA head. This is the first time a Chinese official has filled the role, underscoring growing cooperation between the leading energy agency and the world’s number one polluter and energy consumer.

China’s ability to overcome inefficiencies by successfully integrating renewables into the larger national grid could serve as a blueprint for a globally integrated sustainable energy grid

China’s ability to overcome inefficiencies by successfully integrating renewables into the larger national grid could serve as a blueprint for a globally integrated sustainable energy grid

China’s growing leadership around energy efficient technology and policy, coupled with its perpetuating environmental troubles and grid infrastructure inefficiencies, demonstrate the complex and dichotomous identity of this 21stcentury global giant. Though record-breaking investments in renewable energy and concurrent efforts to curb carbon output through coal factory closings offer a glimpse of China’s great desire to surmount its environmental struggles, a bureaucratic stranglehold over state-owned energy companies enables industrial overcapacity to offset much of the nation’s progress in clean energy.

China’s prospects for accomplishing its clean energy and climate change prevention goals will greatly depend on its ability to overcome internal political and infrastructural inconsistencies. However, should the country prevail in its energy goals—transforming successful local energy systems into a blueprint for a comprehensive integrated national grid—China will usher in an innovative future for global energy. The successful integration of renewables could offer a new foundation of technologies and standards for a globally integrated grid—enabling humanity to move one step closer toward achieving a healthier future for the planet.

This article was originally posted here on David Solomon’s China Rising blog and is reposted with permission from the author.

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