English

Zou Ji: Accelerate energy transition and demand expansion to promote a new pattern of China's green

September 28th,2024 Tsinghua PBC School of Finance Chief Economist ForumThe forum was a success. It brought together 20 chief economists and industry leaders from renowned global institutions, focusing on…Global Industrial Structure Transformation and Economic OutlookThe forum, focusing on sub-themes such as industrial transformation, monetary policy, fiscal policy, artificial intelligence, climate change, and the new energy industry, provided forward-looking analyses of the Chinese and global economies, offering new ideas for economic development policies. Hosted by Tsinghua University's PBC School of Finance and organized by the Center for International Finance and Economics (CIFER), the forum was held both in person and streamed online. Zou Ji, CEO and President of the Energy Foundation China, attended the meeting and participated in the discussions.

Zou Ji stated that the dual urgency of addressing climate change and boosting the economy globally compels energy transition to become an inevitable choice. The core issue lies in shifting from fossil fuels to non-fossil energy sources such as wind and solar power. Especially in the past decade, costs in these sectors have decreased by 80%-90%, driving the rapid development of the new energy industry and making it a crucial pillar of the economy. Currently, while China's new energy production capacity is somewhat excessive in the short term, this excess is not significant from the perspective of long-term global demand. Policy focus should be on removing obstacles to development, particularly cultivating and creating downstream demand, relying on increased demand to drive growth.

He pointed out that improving the grid's capacity to absorb renewable energy and enhancing energy storage technology are key ways to address the current overcapacity. Germany and California have already achieved significant results in increasing the proportion of renewable energy in their grids, and China also has room for improvement. Distributed energy has enormous development potential; through microgrids and virtual power plants, the burden on the main grid can be reduced, enabling wider application. Furthermore, policy consistency is crucial; energy, climate, and industrial policies need to be coordinated to support the sustainable development of the new energy industry.

The picture shows Zou Ji speaking.

Speech Shorthand

Tsinghua PBC School of Finance Chief Economist Forum

Zou Ji, CEO and President of Energy Foundation China:

First, I still want to start with the urgency of addressing climate change and boosting the economy; this is the logical starting point. Actually, I'm not an economist, but I have to speak on behalf of this forum of economists. The urgency of climate change and the urgency of boosting the economy, combined, ultimately determine our demand, and we need to transform it into effective market demand. I won't elaborate on the urgency of these two aspects, but the urgency of climate change also includes a time requirement: we need to achieve carbon neutrality globally within the next 20-30 years. Otherwise, it will be difficult to achieve our goal of reducing warming by well below 2 degrees Celsius by the end of this century, ideally reaching 1.5 degrees Celsius. Once this warming rate is exceeded, there may be irreversible and significant changes in natural ecosystems, resulting in losses that, in the words of Lurniklasden, would exceed the losses of the two World Wars. Natural science tells us that this damage will be enormous, and the entire Earth system may be irreversible; therefore, there is a time requirement. So we're not saying we should just take it slow and do things at a leisurely pace, or that if 20 years isn't enough, we should do it 30 years, or if 30 years isn't enough, we should do it 50 years. There is a requirement for this.

So, the core issue to be addressed in these two urgent matters is energy transition, though it's not limited to these two issues, but it's the core problem. Energy transition means shifting from a fossil fuel-based economy to a non-fossil fuel-based economy. Undoubtedly, the new energy industries we're discussing today, represented by wind and solar power, and also nuclear and biomass energy, are showing a significant upward trend and will play a leading role, especially wind and solar. Additionally, there are energy end-use sectors, such as industrial buildings and transportation electrification; these two are intertwined, bundled together. Regarding their development, Director Liu Shijin has already mentioned many basic aspects. One aspect was unexpected; I personally had the privilege of participating in the entire negotiation process of the Paris Agreement. At that time, we were already implementing a strategic shift, but some aspects were still largely conceptual.

I remember very clearly that I drew the Kuznets Curve for Special Envoy Xie Zhenhua, saying that China would definitely reach peak emissions, and that China should have a target for reaching peak emissions. Furthermore, the relationship between the peak level of per capita emissions and its overall trend, and income levels, was still largely conceptual at that time, based on the practical experiences of other countries and economies. However, I remember very clearly the Paris Agreement, which was successfully negotiated in December 2015 and signed in 2016. Now, eight or nine years, or about ten years, have passed, and an unexpected opportunity has emerged: renewable energy represented by wind and solar power, along with battery technology, directly impacted automotive technology. Costs have decreased by 80%-90%, and continue to decrease. Battery technology has also rapidly industrialized, quickly becoming a pillar of the national economy.

Last year, our exports reached one trillion yuan, with the "new three items" alone accounting for that figure. I calculated that this represents about 4% of our total exports, which is not a small amount, and this share will continue to rise. Exports were also very strong in the first half of this year. According to Director Liu Shijin, despite the various noises in the international market, including tariffs and other issues, nothing can stop them. Moreover, I met some friends in London in June who did the math for us, and their calculations were even more insightful than ours. They said that even with tariffs of 30% or more, and the EU imposing tariffs of several tens of percent, we would still be making a profit! I thought to myself, since I'm still making a profit anyway, I can just say how low our costs are. That's where our confidence comes from.

In this situation, the question becomes how we treat these industries and how we evaluate their status—their status in the national economy, in energy transition, in addressing climate change, and even in China's strategic position in the international system. Your strategic position is determined by your basic comprehensive national strength, your leading enterprises, your economic wealth, and your technology. Today, we see the shadow of China becoming a developed country, a world-leading nation. So, we still have a long way to go, until 2050. However, if the world is filled with cars made in China—historically, Japan, Germany, and the United States, plus some France and Italy, but primarily Japan and Germany—then you will truly be a developed country. What I'm saying is only superficial.

So, here I want to say something. In the face of the huge potential demand created by the two urgent needs I just mentioned, our new energy industry's production capacity will not be excessive over a five-year timeframe. This is the goal of Triple Renewable and Double Efficiency that Director Liu Shijin mentioned at COP28, which is a global consensus.

So, under this goal, when we invest in companies, taking photovoltaics as an example, an annual production capacity of 1 billion kilowatts is definitely not enough to serve the world and achieve this goal. However, on a one- or two-year timeframe, we do see so-called overcapacity, which is an imbalance—the most perpetual state of economic development is imbalance. But the trend is towards equilibrium, without a doubt.

So, at this point, we see short-term imbalances, and the solution isn't to apply the brakes. It seems that last year, wind and solar power shipments reached 300 million kilowatts, then prices started to fall, companies lost profits, and the brakes were applied. This year's target was set at 160 million kilowatts last year, but the result was 300 million kilowatts; this year, it's set at 250 million kilowatts. I think this raises a problem: the issue of policy consistency. We're now emphasizing whether our energy policy, climate policy, and new energy industry policy are consistent with the national policy of boosting the economy, stabilizing growth, and expanding demand. At this point, the policy inclination is to apply the brakes. Just before I entered, a reporter chased after me asking, "Professor Zou, can you talk about how to clear out the photovoltaic companies this year?" I think the medicine isn't right; you may have seen the symptoms, but the medicine isn't working. The focus now isn't on clearing out the companies, but on how to remove obstacles, expand the development of these industries, and create downstream demand—the so-called supply creating demand. This is a question that policymakers and practitioners should answer.

Therefore, I believe that this year's target should still be at least 300 million kilowatts, with new wind and solar power adding another 300 million kilowatts. This should be the minimum, and I think it's achievable with a bit of effort. The first half of the year saw 125 million kilowatts added; let's not calculate linearly, the annual average seems to be 250 million kilowatts. I think it's possible to find another 300 million kilowatts in the second half of the year, especially in the fourth quarter. There's no problem with capacity; the problem is where the bottleneck lies. As I just mentioned, downstream. Physically speaking, grid connection is difficult. So, a red zone has emerged. However, there are two ways to overcome this grid connection difficulty. One is that the power grid needs to work harder; there's room for improvement in absorbing renewable energy. There are two international benchmarks: Germany's grid has already achieved 58% renewable energy integration. Next month, we will organize a dialogue with the German power grid to discuss how they achieved 58%, what problems they encountered, and what favorable conditions they had. What is China's? 20%. Our range is between 20% and 58%. Even with China's special circumstances—we lack natural gas-powered units, and most are supercritical, large-scale, megawatt-class units, which are inflexible—these are your difficulties. So, if you're below 58%, can you reach 35%? Can you reach 40%? That's a question mark.

Regarding California's power grid, I was in New York for a meeting a couple of days ago and visited the chairman of the California Energy Resources Commission again. I've discussed this with him several times already. He currently has 61% of the grid accepting renewable energy, and the grid's stability is improving. So, our power grid still has the potential to grow, and even grow faster. The difficulties are there; everyone faces challenges.

However, these power technologies don't really have national limitations; they're applicable everywhere. Of course, a core element here is energy storage. And this trend was signaled by a very positive example this summer: Suzhou. As everyone knows, this year saw the highest and longest heatwave in the Yangtze River Delta region's history, with the highest air conditioning load and peak load. However, this year was also the first time in history that they didn't experience summer power rationing. This was due to demand-side management and other measures, with a core measure being the provision of 510,000 kilowatts of energy storage capacity this year for peak shaving and valley filling. Relying on this 510,000 kilowatts, along with adjustments based on pre-forecasted demand, they achieved this this year. This is the reality; I won't talk about theory today, just practical examples.

So, what does that mean? It means we can move beyond relying on building coal-fired power plants to prepare for peak demand periods, only to generate electricity for a mere 2,000 hours a year, resulting in huge losses. We can move on from that; we no longer need to build coal-fired power plants to maintain peak demand. If you mention a small place, like Qinghai, that's not enough to convince the questioner. What about Suzhou, a developed industrial city with a population of 16 million and a per capita GDP of $30,000, contributing to Jiangsu Province—China's second-largest economy? If this place can achieve this, and California, the world's fifth-largest economy, and Germany, the sixth-largest, can achieve it, why can't we? I'm asking this question: can the Pearl River Delta achieve this first, the Yangtze River Delta first, and the Beijing-Tianjin-Hebei region first? This is a pathway.

The last channel, distributed renewable energy, has enormous potential. Two-thirds of our annual new installed capacity is distributed, and this will continue to grow. Of course, this involves some new aspects, such as the large-scale development of microgrids, connecting them, and upgrading the distribution grid. However, can our large-scale distributed generation, without connecting to the main grid, minimize its disruption and reduce its burden of receiving intermittent energy, be used for self-consumption? Can we interconnect them? Can we have numerous virtual power plants? We have already seen this potential. The Energy Foundation has already presented several examples, which we believe are very promising, although much work needs to be done.

There's another bottleneck that needs to be addressed: the electricity they currently generate isn't enough for their own use. Farmers in Shandong only use about 10% of their electricity, mainly from rooftop solar power. We plan to increase that to 50% initially, not to expect them to fully utilize it, but rather to install energy storage – village-level, district-level, or household-level storage – tailored to local conditions. After the storage is installed, we can discuss how to use the electricity. For example, for electrifying buildings (farmers haven't electrified their houses yet), we can install heat pumps for heating in winter and cooling in summer. We can also power agricultural equipment like tractors and seeders, eliminating the need for diesel. We can even pre-charge your wells. We already have technical prototypes; we need to go to villages and counties to see for ourselves. You can't see these things sitting in ministry compounds; you have to go to the grassroots. There are many capable people among the people, and many solutions have already been implemented. Once this bottleneck is cleared, the demand can be met. After using it, I had a meeting with Professor Li Zheng in Suzhou a couple of days ago. I told Zhu Gongshan, the CEO of GCL, "Mr. Zhu, what you need least right now is subsidies; what you need most is orders." He agreed. If we do this, your photovoltaic orders will increase, and that will be our top priority.

I was saying that the consistency of policies is completely consistent with our goal of expanding demand, using that expanded demand to support growth, and maintaining a stable medium-to-high growth rate. Where will our national debt go? It will go to subsidize rural users and bring them into the second middle-income group of 400 million people over the next ten years. This is a very important area. We not only provide them with money but also energy, which will enable them to improve production and increase their productivity. This will get things moving. This is also combined with our income doubling plan and rural revitalization, and we have also contributed to addressing the urban-rural gap.

In conclusion, I feel completely aligned with the goals Director Liu Shijin just mentioned, including international goals. How should we set our next NDC target? The original target of 1.2 billion kilowatts by 2030 was achieved this year, six years ahead of schedule. Sometimes I think about the credibility and reputation of goals. If you set too many targets, it's too ambitious, and your reputation suffers. If you lag too far behind market, industry, and technological development, people won't take your goals seriously.

So, our goal—China sets goals and plans—is a reflection of China's institutional confidence and advantages. We still need to do a good job and keep pace with the times. We need to carefully consider this goal; its significance is no longer about making promises to the international community, but about ourselves. I want to send a clear signal to the market: I want to shape future demand, guide our R&D, and direct our funding. This prospect is there for all to see. That's all I wanted to say.

WeChat

Sina Weibo

QQ space

Douban

Baidu Post Bar

清华五道口首席经济学家论坛第五届（2024年）5th_econ(2024)

Prev Liu Shijin: Promote the balance between demand and production capacity through expanding domestic de

Next Shen Jianguang: The digital economy has become an important driving force for the Chinese economy. I