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Beyond solar, wind, and hydro: China’s carbon neutrality efforts

In China's race for carbon neutrality, we see technologies strive to achieve breakeven costs. While the industry is always innovating, we are mostly familiar with the “mainstream renewable technologies” – and now Carbon Capture Utilisation Storage (CCUS) and hydrogen are gaining momentum in China's efforts.




What is Carbon Capture Utilisation Storage (CCUS)?
CCUS provides a proven and deployable route for decarbonisation within fossil-fuel power plants and the ‘hard-to-abate’ industrial sector (estimated to account for 60% of global emissions). Essentially, CCUS uses technologies related to chemical absorption, adsorption, membrane separation, Oxyfuel-combustion and batteries for storage. With CCUS estimated to account for less than 1% of investments into the global energy transition so far, estimates point to current CCUS needing to grow by more than a factor of one hundred to meet the Paris Agreement. However, the life-cycle costs currently range between USD15 to more than USD100 per ton.

For power and industrials, CCUS investments translates to costs between USD60 to USD120 per ton. For China, CCUS would be a critical part to solving its net carbon plan as China has higher fossil fuel consumption in the total energy mix, large industrial sectors and relatively young facilities. Economics for CCUS in China and globally in the coming years should improve as investments accelerate. Currently, Chinese CCUS costs are USD90 to 110 per ton and are estimated to fall by to USD30 to USD40 per ton in 2050E. This would be driven by higher efficiency for absorption materials and processes, lower input costs as industrial scale builds up, lower logistics costs on better supporting infrastructure, and lower capital cost. Depending on the level of success, CCUS is estimated by Goldman Sachs to possibly help remove 10%-24% of China’s annual carbon emissions in the coming years, mostly from industrial processes.

Despite its bad reputation, CO2 actually has a lot of use cases. Today around 230 million tons of CO2 are used globally each year, primarily to produce fertilisers (around 125 million tons a year) and for enhanced oil recovery (around 70 to 80 million tons a year). Other commercial uses of CO2 include food and fizzy drink production, cooling, water treatment and greenhouses.

What role does hydrogen have?
Hydrogen is the most abundant molecule in the universe, but it isn’t present on Earth in its free form. We must first produce it. That can be done cleanly by splitting water into hydrogen and oxygen using renewable electricity from solar and wind power. Green hydrogen (produced through the electrolysis of water powered by renewable energy) will be a transformational and disruptive technology to drive decarbonisation in the most challenging areas such as industrial fuel, heavy transport, and seasonal storage. “Dirty hydrogen” is produced more cheaply and the more prevalent method is to extract it from natural gas or coal, which emits carbon dioxide and locks us into further exploitation of fossil fuels.

Hydrogen has two very competitive characteristics: high energy density, and a calorific value per unit mass about 4 times that of coal, 3.1 times that of gasoline, and 2.6 times that of natural gas. In fact, we sent the Apollo lunar module to space largely using hydrogen. Compared to electricity, it can be stored without leakage and used flexibly at any time and location. Clean hydrogen is an ideal carbon neutral energy and add-on solution to areas that cannot be electrified. Unfortunately, the profitable commercialisation of hydrogen will take some years to turn profitable as we wait on technology improvements and establishing a more complete supply chain.

What about nuclear power?
The technical limitation on nuclear capacity expansion in China is mainly related to site availability. The most economical hydro resources have likely been utilised, leaving future deployments probably less impactful than existing ones. Safety, local opposition and lack of proper sites are major constraints limiting nuclear power roll out. Specifically, China has set a target to increase nuclear power capacity to 70 gigawatts (GW) by 2025 from 50 GW at the end of 2020. WaterRock Energy estimates that capacity is likely capped around 200 GW in the long term. Based on past studies from the Chinese government and nuclear experts, the maximum technical limitation of nuclear power due to site availability is around 200 GW in coastal provinces and another 200 GW in inland provinces along Yangtze, Pearl River and Songhua River Deltas. The nuclear generation target in the 14th five-year plan is slower than consensus expectations, which leaves an even greater role for solar and wind to play in China’s net carbon neutrality plans.

Conclusion for investors
The overriding theme of carbon net neutrality, not just for China but globally will be a long lasting tailwind for the sector. Solar and wind are expected to make up about 60% of energy generated in China by 2060. Nuclear and Hydro will seemingly play relatively lesser roles in China’s decarbonisation plan. Nascent technologies like hydrogen and CCUS are currently non-economical for full scale deployment but as technology improves, this will be a key part of the tool kit. However, as with all paradigm shifts, there will be over and undershoots in asset prices and this will largely be dictated by policy. In the current environment, high costs clash with ambitions for more sustainability and national energy security/independence. In that light, companies that are continuously innovating with strong balance sheets and execution capabilities in the solar and wind are likely to be thematic winners.

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