How well is China doing in decarbonization

When I started working on my blog, one of the biggest reasons for doing this is to see how well China is actually performing in reaching carbon peaking and then carbon reduction. Unlike developed economy, China is still growing quite fast. More importantly, it’s energy needs and industrial capacity continue to increase at very fast rate. In this scenario, it needs to significantly expand its clean energy production in order to reach the goal.

Thankfully, we have finally reached that inflection point in 2024. First, let’s talk about the effect of transitioning away from crude. The rapidly increasing NEV penetration in Passenger Vehicles market is the largest driver of pressure on crude demand.

July was the first month where NEV penetration passed 50%. Since then, it has continued to rise steadily. The most recent week saw NEV penetration hit 52.12%. NEV adoption in PV sector is not slowing down. It is rapidly increasing still.

Gas price in China is dropping in the peak summer season. Gasoline receipts at PetroChina and Sinopec have dropped more than 5% since start of July. Demand for gasoline is dropping. This trend will only accelerate in the next few years as NEV penetration marches toward 75 to 80%.

Even beyond that, it appears that even diesel demand is heading toward peaking. In June, China’s diesel demand fell by 11% YoY to just 3.9 million bpd. Wood Mackenzie reported this was due to the growing sales of heavy-duty trucks powered by LNG. Diesel demand in China for second half of 2024 is expected to decline between 2 to 7% on annual basis. In one chart, I saw that road diesel demand from China may fall below 2018 levels for this year.

Of course, CNG is still emitting a lot of carbon. It is just an interim step between diesel and NEVs. However, CNG and NEV powered HDTs made up > 28% of sales so far this year. Even if CNG does not resolve the issue of carbon emissions, it will help China achieve energy security.

Using David Fishman’s chart, Chinese power consumption continue to grow faster than its GDP. July 2024 saw power consumption up 5.7% YoY.

Higher power consumption than GDP growth could be the result of China picking up energy intensive industries from other part of the world, but could also show increasing demand from EV charging. Either way, China will likely see more electricity demand increase in exchange for less crude demand over the next 10 years.

Now that we have established the increasing electrification of Chinese society, the next question is just how much emissions we are seeing from the power sector.

In July, Thermal power generation fell 4.9%. We have now seen about 4 months of lower thermal power generation. The power gap is picked up by significant increases in Hydro and Solar as well as smaller increases in Nuclear and Wind. Carbon Brief reported that China’s Carbon emissions dropped by 1% in the second quarter due to the lower cement production and thermal power generation. It is likely that 2024 Carbon emissions will be lower than 2023. More importantly, the government also issued a new policy on “low-carbon transformation” of coal plants to retrofit coal plants with target of reducing CO2 emissions of those plants by 20%. This would be done by adding Carbon Capture and storage as well as usage of blending in green ammonia or biomass.

After the blockbuster growth in the wind and solar sector last year, renewable additions this year has been even greater. Even more important that, project bidding for onshore and offshore wind have growth noticeably this year. Which means, wind additions 2 to 3 years from now will be notably higher than this year. 2023 may very well be the year when China’s carbon emissions peaked. Will we see it hang around the plateau over the next 10 years or will we see it falling significantly?

Beyond that, China is also trying to electrify other industries. In the first half of this year, China only issued permits for Electric Arc Furnace steelmaking plants. More recently, China has suspended all new steel plant permits. As such, China is shifting away from coal powered steel plant. That makes a big difference.

More recently, China also announced plans for 11 new Nuclear reactors. The most interesting one of which is the High Temperature Gas Reactor in Xuwei. David Fishman reports that plant will provide industrial stream and heat to nearby Petrochemical Base. Using heat from Nuclear Power plant isn’t a new idea. The province of Shandong has many nuclear plants and there are also plans to use heat from those plants in heating. This certainly is a good idea to replace Natural Gas in Industrial and home heating.

Outside of solar and wind installations, China’s green hydrogen growth is probably the most impressive. I just reported on another batch of green hydrogen related projects that have been announced in the past week. But overall, it appears to me that China is growing the full green hydrogen related supply chain from upstream equipment to transportation of fuel to downstream applications in FCEVs, trains, refineries, ammonia and methanol. Most recently, China just started sea trial on a large Liquid CO2 ship and also started export of Very Large Ammonia Carrier. As far as I can see, green energy will be traded in the future and they will be carried in these large transport ships. If we consider the number of LNG carriers and VLCCs out there, we will also need a large number of ships transporting ammonia, methanol, liquid CO2 and possibly even liquid hydrogen in the future. It is not possible to reach net zero without fully developing hydrogen related industries.

And more recently, we also saw CSSC delivering its first offshore carbon capture system (OCCS). This makes it possible to capture the carbon from ship exhaust. This would allow ships to carbon carbon from burning methanol fuel and then re-use that CO2 to produce more methanol from green hydrogen.

We have also seen several pilot projects for green aviation fuel. Currently, SAF is extremely expensive. More airlines will be able to purchase SAF once the various Chinese green aviation fuel projects come online. The immediate application for various green methanol and ammonia projects seem quite endless. These projects will need to keep their costs low enough to be competitive with hydrocarbon produced hydrogen products. However, we have already seen an explosion in the number of projects. Once they are completed (mostly by 2026 to 2027), there will be a huge replacement of hydrocarbon and coal usage.

So from what I can see, we are on the right path.