china’s green revolution: prioritizing technologies to ...€™s green revolution: prioritizing...

February 2009McKinsey & Company

China’s Green Revolution: Prioritizing Technologies to Achieve Energy and Environmental Sustainability

1

PROJECT BACKGROUND

Objective: Develop a comprehensive, objective, and consistent fact base to inform economically sensible and environmentally sustainable approaches for meeting China’s energy and resource growth requirements

Not intended to advocate specific policies or approaches. All content and conclusions remain solely the responsibility of McKinsey & Company

2

ABOUT THIS REPORT

What it does... What it does NOT do...

• Evaluate the technical potential of 200+ energy efficiency, clean energy and carbon management technologies

• Evaluate and prioritize abatementmeasures in 5 sectors – buildings,power, transportation, emission-intensive industries, agriculture/forestry

• Consider ONLY technology-related costs

• Incorporate input from several leading authorities

• Provide a realistic forecast • Lay out specific action plans for

China

• Recommend specific abatement targets

• Consider social costs (e.g., unemployment), taxes, transaction costs, etc.

• Draw only from McKinsey sources

3

CHINA IS EXPECTED TO SEE STRONG GDP GROWTH AND CONTINUED URBANIZATION IN THE NEXT TWO DECADES…

* Exchange rate in 2005 EUR1 = RMB10.1953Source: Expert interview; McKinsey analysis

China populationBillions

China GDP*EUR Billions, 2005 real

11,936

6,359

2,8911,803

2030

9.9%

6.5%

8.2%

202005 10

0.7 0.7 0.6 0.5

0.6

1.3

0.7

2005

1.3

2010

1.4

0.8 1.0

1.5

2030

Urban

Rural

Exhibit 5

4

… DRIVING UP DEMAND FOR BUILDING FLOOR SPACE, VEHICLES AND BASIC MATERIALS

Source: China industry year books; McKinsey analysis

9

10

6

2

19

Heavy dutyMedium duty

Light duty

12.6%

6.3%

31

25

152

182

37

291

337

Vehicle fleet Millions

1424

5

37

42

55

68

66

91

Commercial

Residential

3.3%

2.9%

Total floor space Billion sq. m

755755

355

2005 20 2030

Steel demandMegatons

2030

1,630

20

1,750

2005

1,069

Cement demandMegatons

Exhibit 6

5

THE CHINESE GOVERNMENT HAS RECOGNIZED THE CHALLENGES … AND IS TAKING ACTIONS

• Target 20% reduction in energy intensity per unit of GDP in 2006-2010

• Initiated “1000 Top Enterprise Energy Saving Project” to monitor energy

efficiency performance of the most energy intensive enterprises

• Shut-down and consolidated sub-scale, inefficient capacity in energy-intensive

industries

• Implemented energy efficiency standards for automobiles, buildings, and

appliances

• Cut taxes on small cars

• Invested in grid efficiency and efficient power plants

• Invested in renewable energy

• Enacted Renewable Energy Law

• Enacted Recycling Economy Law to encourage recycling of industrial waste

Recent energy efficiency policies in China

Source: McKinsey analysis

6

CURRENT POLICIES AND PLANS EXPECTED TO SUSTAIN 5% ANNUAL CARBON EFFICIENCY IMPROVEMENT IN THE “BASELINE SCENARIO”...

-1.4

1.3

1.7

2.7

4.9

4.8China baseline forecast

China

Germany

United States

India

Indonesia 4.4

6.0

3.0

1.6

10.1

7.8

Source: IEA; expert interview; McKinsey analysis

China 1990-2005China 2005-2030

Others 1990-2005

GDP growth ratePercent

GDP carbon efficiency improvementPercent

7* The U.S. and Canada


6.82005 Emissions

16.1Frozen technologyemissions growth

22.92030 frozen technologyemissions

8.4Baseline reduction

2030 baseline emissions 14.5

-37%

7.32005 Emissions

3.6Frozen technologyemissions growth

10.92030 frozen technologyemissions

1.7Baseline reduction

2030 baseline emissions 9.2

-16%

Baseline emissions reduction -North America*Giga tons of CO2e

Baseline emissions reduction -ChinaGiga tons of CO2e

...DRIVING “BASELINE EMISSIONS” 40% LOWER THAN THE “FROZEN TECHNOLOGY” SCENARIO, A BIGGER REDUCTION THAN IN NORTH AMERICA

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BEYOND THE BASELINE, WE IDENTIFIED 5 AREAS WHERE CHINA CAN LAUNCH A “GREEN REVOLUTION’

Major technologies in baseline Major technologies in abatement

Power

Trans-portation

Emissions intensive industries

Buildings &

appliances

Agriculture /forestry

• Super-and ultra super-critical• Wind: onshore

• Wind: off-shore• Solar

• Conventional fuel efficiency marginal improvement measures

• Hybrid and pure electric vehicle

• Current efficiency building codes• Passive design with higher

building energy savings

• Mature efficiency improvement technologies

• Waste recovery and utilization in industry, agriculture and urban

• Conservatory tillage • Grassland restoration and management


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1. GREEN POWER IN CHINA: COAL COULD BE REPLACED BY NUCLEAR, HYDRO AND RENEWABLES AS THE PRIMARY SOURCE OF POWER

8

12

16

7

8

16

17

198165

34

1000

812

2,500

2005

20

9,250

2030 baseline

4

8,100

2030 abatement scenario

Coal

Hydro

Gas

Nuclear

WindSolarOthers*

100% =

* Including geothermal, CBM, MSW, LFG and biomassSource: Expert interview; literature research; McKinsey analysis

Generation ProjectionTWh, per cent

10

100% =

1. US CASE: SIMILAR TREND IN THE US POWER MIX

* Includes oil, geothermal, municipal solid waste, and pumped storageSource: U.S. EIA Annual Energy Outlook (2007), McKinsey analysis

2320 17

241714

9

5260

42

983

2030 baseline

1

3,865

2005

Coal


2

Gas

Nuclear

All renewables

Others*

100% = 5,385 4,135

Generation ProjectionTWh, per cent

11

* Generation cost includes amortized capital at 4% risk free discount rate, OPEX and fuel expenses, and excludes tax, subsidy, etc.** Learning rate is applied to global capacity built-up, as China is likely to be the world exporter for wind and solar equipments

Source: China solar association; Huangneng Group; Tsinghua Univ; SERC; McKinsey analysis

0.031Coal

0.035Nuclear

0.056Wind (strong)

0.170Solar PV(strong)

Grid parity

0.030

0.033

Grid parity

0.044

0.038


Generation cost*EUR/KWh

1. GREEN POWER IN CHINA: GENERATION COST FOR CLEAN TECHNOLOGIES COULD DROP TO COMPARABLE LEVELS OF COAL

12

2. GREEN FLEET IN CHINA：EV TECHNOLOGIES CAN BREAK THE RELIANCE ON IMPORTED OIL

0

1.6

4.8

5.2

7.4 0

3,600

1,600

1,500

950

7

9

13

14

20

Exhibit 30

• Japan

• Europe, US, Japan

• China shows potential to be technology leader

Base vehicle

Max ICE improvement bundle

Full hybrid

Plug-in hybrid

Pure electric vehicle

Additional investmentEUR/vehicle

Well-to-wheel emission*Kg CO2e/100 Km

Gasoline consumptionLiter/100 Km

Country technology leadership

* Emission is calculated based on 2030 power mix assumed in our baseline, where coal power share is 65 percent** Pure electric vehicle electricity consumption 9 KWh/100 Km, plant to battery efficiency 85%; Battery-to-wheel

efficiency 81%; hybrid car with 66 percent electric shareSource: DRIVE; expert interview; McKinsey analysis

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2. GREEN FLEET IN CHINA: OIL SAVINGS DEPENDS ON HOW FAST EVSROLL OUT

Total gasoline consumption in 2030Megatons, assuming EV penetration in new cars reach 100% in 5 years after starting point

2030…2016 2021Starting year of massive EV deployment

PEV penetration in passenger car fleetPercent

91

63

0


73

136

250

Exhibit 33

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3. GREEN BUILDING IN CHINA: INSULATION, HVAC SYSTEM AND LIGHTINGOFFER SUBSTANTIAL ENERGY SAVINGS WITH GOOD ECONOMICS

0.55Efficient building insulation

0.28HVAC systemimprovements

0.15Lighting

0.06Appliances

0.02Water heating

7

-50

-8

-130

-108

图24

Average abatement costEUR/ton CO2e, 2030

Abatement volumeGigatons CO2e


Though North America has similar potential to reduce its baseline emissions (i.e. 1/3), its major opportunities are in lighting and appliances

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3. GREEN BUILDING IN CHINA: ENERGY EFFICIENT BUILDING INSULATIONCOULD BE APPLIED TO 2/3 OF FLOOR SPACE BY 2030

* Majority will be floor space in rural areasSource: McKinsey analysis

4838

15

32

18

10

03050

2010

1

12

67

2020 2030

91

31

Passive designCompliance of current building codes

Economic retrofit

Inadequate insulation*

Penetration of energy efficient building insulation technologies, abatement scenario

Billion square meters, 2030

Energy efficiency building insulation technologies

16

0.84

0.39

0.34

~1.6

PotentialGiga tons CO2e Key technologies

4. GREEN INDUSTRY IN CHINA: ON TOP OF ENERGY EFFICIENCY, WASTE RECOVERY PRESENTS A SIZEABLE ABATEMENT OPPORTUNITY

图38

• Steel– CCPP– CMC

• Coal bed methane utilization

• Municipal waste management

• CCS• Relocating steel

production to Australia for NG-based DRI

• Clinker substitution• Agriculture waste

utilization

• Chemical – Process automation – Catalyst optimization

• Switching from coal-based ammonia production to NG-based

CCS and others

Total

Energy efficiency

By-product and waste recovering


17

5. GREEN ECO-SYSTEM IN CHINA: RESTORING AND EXPANDING FORESTS AND GRASSLANDS

23

5

57

-20

-41

28

0.64

-10

0.34

0.02

0.08

0.07

0.06

0.04

0.04

图54

Forestry

Agriculture

Grassland management &restoration

Fertilizermanagement

Afforestation &reforestation

Livestockmanagement

Croplandmanagement &restoration

Forestmanagement

Total

Methane utilization

PotentialGigatons CO2e

Average abatement cost EUR/ton CO2e


18

GREEN MINDSET IN CHINA: SMALL CHANGES TO CONSUMER BEHAVIOR + DENSER URBAN PLANNING = ADDITIONAL ABATEMENT

0.67

0.10Lower heatingtemperature

0.15Efficient usage ofprivate cars

0.02Better managementof appliances

Total

More high-rise buildings 0.10

Drive less 0.20

Change fromruminant to non-ruminant animals

0.10

Source: China Building Energy Efficiency Annual Report; NSB; expert interview; McKinsey analysis

Abatement potentialGigatons CO2e

+

Behaviorchange

Urbanplanning

Exhibit 19

19

FULL APPLICATION OF THESE TECHNOLOGIES COULD BRING A “GREEN REVOLUTION” FOR BOTH CHINA AND NORTH AMERICA

Abatement potential of China vs. baselineGiga tons CO2e

Abatement potential of North Americavs. baselineGiga tons CO2e


14.52030 baselinescenarioemissions

6.7Technicalabatementpotential

7.82030 abatement scenarioemissions

-46%

9.22030 baselinescenarioemissions

5.1Technicalabatementpotential

4.12030 abatement scenarioemissions

-55%

20

THIS GREEN REVOLUTION COULD SIGNIFICANTLY IMPROVE CHINA’S ENERGY SECURITY

* 2030 crude oil demand is based on demand forecast of gasoline, diesel and other oil productsSource: EIA; IEA; expert interview; McKinsey analysis

Exhibit 18

China crude oil demand and supply*Million tons

~700

~190

~900

2030 baseline

400-500

~190


600-700

30-40% drop in oil

import demand

400-900

3,500-4,000

4,400

2030 baseline


2,650

-40%

China coal demand and supplyMillion tons

21

300

240

145

35

Average150~200

2011-2015 2016-2020 2021-2025 2026-2030

ON AVERAGE EUR 150-200 BILLION WILL BE NEEDED IN ADDITIONAL ANNUAL INVESTMENT TO COMPREHENSIVELY IMPLEMENT THE TECHNOLOGIES


Incremental capital needed to capture the technical potentialReal 2005 EUR billions, annual average of each 5-year period

Exhibit 15

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JUST A FIVE-YEAR DELAY COULD REDUCE ABATEMENT POTENTIAL BY ONE-THIRD

图16

1.4

1.6

0.6

0.5

0.6

Power

0.7

0.4

2030 reduced abatement

1.3

Building

0.2

Industry

0.2

1.1

Transportation

Industry

Forestry & agriculture

0.1 4.4

Power

Building

2.8

Others

6.7

0.4

2030 totalabatement

1.5

Trans-portation

-35%

Loss of abatement potential due to 5-year delay of technology implementationGigatons CO2e

Loss of abatement due to5-year implementation delay

Power

Building


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IN SUM…

• Current policies will deliver real impact

• Additional reductions are possible and significant...

• ...which will deliver both environmental and energy security benefits

• However, investments needed are very large

• And decisions need to be made soon

china’s green revolution: prioritizing technologies to ...€™s green revolution: prioritizing...

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