David Fishman: We're leading to some really thorny problems now as we get through this partially deregulation period and we're trying to liberalize the power sector and decarbonize the power sector at the same time while not departing from our foundation of energy security, right? We can't be having blackouts. So, we need to decarbonize, we need to liberalize, and we need to keep the lights on all the time for everybody.
Lisa Hyland: Hello and welcome to Energy 360, the podcast from the Energy Security and Climate Change Program at CSIS. I’m your host, Lisa Hyland.
This week we look at developments in China’s electric power sector. China is leading on renewable energy deployment but at the same time is building and using coal-fired power plants. So, is China a leader in renewables or not?
To help us understand China’s very large, complicated power markets, we invited David Fishman, a Senior Manager at The Lantau Group, to join the show. David is based in Shanghai and has been following the Chinese electricity sector and power grid development for nearly a decade.
He is joined today by my colleague Cy McGeady. Together they walk through the ins and out of the Chinese power markets, including the Chinese approach to energy security, demand growth, regional differences across China, and how the sector is different from the one we have in the United States.
Here’s Cy for an introduction to those issues.
Cy McGeady: Hello everyone. Today we're going to be talking about the Chinese power sector. This is a really interesting topic that I've been following, and I think is really important for the policy discussion that is happening here in dc. One of the things we hear so often is about Chinese leadership and renewables. They're deploying more than anybody else. And then simultaneously we hear about Chinese leadership in deploying coal plants. And so, we have a kind of a competing rhetoric between sort of leading the world on decarbonization and yet also leading the world in deploying fossil fuel technology. As the US sort of begins thinking about strategic competition with China, but also where we can work together with China as it relates to decarbonization policies, for example.
Understanding this sort of seeming paradox I think is really important for everyone. So, on that note, today we have David Fishman, a senior manager at the Lantau Group, a specialist on the Chinese power sector, and David has been based in China doing consulting and analyst work on the power sector, project development and investment support for nearly a decade now. And so, I'm really excited to hear his opinion on this sort of issue and go into the details of what is actually going on in the Chinese power sector and, and how do we understand that the headline data that we sort of digest here in dc. Welcome David.
David Fishman: Sure, Thanks for having me, Cy.
Cy McGeady: So, David, I know you're based in China. Before we dive into the meaty topics here as a fellow Mayer, can you sort of just tell us about how you ended up in China and the Chinese power sector and what brought you there in the first place?
David Fishman: So, I am from Maine, I grew up in Northern Maine actually, which is just about as far away from the civilized world as you can get and still be part of the USA, I think. And I went to school, I just wanted to go to school somewhere that was very different, somewhere that had more connection to the greater world out there. And somewhere that was more diverse. I find myself going to school down in Atlanta at Emory University. And then I started to study foreign languages and I didn't know what I wanted to study exactly. I just wanted to get really far away from what I had known before. And so, you know, you always say if you'd dig a hole through the world, you'll come out on the other side, you'll be in China, all right, that seems about as far away as you can get.
Then let's, let's do China. Started studying Chinese, liked it, studied abroad, liked it, and said I just, I just really want to come back, and I want to find a way to do it in, you know, a developmental educational way. Enrolled in a master's program out here, the Hopkins Nanjing program and just did my master's degree and then started my career here in China. So, it's the only place I've ever worked as an adult. That's my backstory of how I got here.
Cy McGeady: That's fascinating. And, then what brought you into the power sector? You know, was it a booming sector that sort of just was an obvious magnet or was it a specific interest or what was your introduction to this, this scene.
David Fishman: I was studying a general politics degree at Hopkins, IR, it's all international studies, but it was kind of a, politics background and I didn't really know what I wanted to do after I took a class about energy security and Asian energy security specifically. And it was just so fascinating. It was like a, a light turned on in my brain. I was like, here's the, the really cool stuff. Like just, it's so impactful for quality of life, it's so impactful for the development, high quality development of a country and the lack of it is so obvious for how much it hurts the development of a country. And it, it kind of spoke to me in that like, oh, if I get involved in this sector, then I have the opportunity to do big things, you know, really impactful things, stuff that really makes a difference. And that was really it. I was willing to start anywhere in energy. I started out actually in the nuclear sector and then later, the company I was working at was acquired by my current employer. And so now we're working on, you know, solar, wind, coal projects, grid market development, just kind of broad power sector stuff in China.
Cy McGeady: That's great. Yeah, the power sector, once you start to study it, it kind of gives you this feeling that you're at the basic level of the entire economy. This is the thing on which everything else is predicated. It really sort of sheds a light on economy-wide dynamics in a way that is really fascinating.
David Fishman: The thing that really, it was like, you know, one fascinating fact thing that like motivates you, right? I remember when I was starting a class on an Asian energy security, and I remember reading, it was at the time it was Indonesia was just over 75 percent electrified, you know, Indonesia's one of the most populous countries in the world. And so, at the time, 75 percent electrification meant something like 70 million people didn't have electricity in Indonesia. And that was mind blowing to me. That, and that that year was, you know, I was 2011, 2012, I was looking at the data just astounding to me that at that year you could still have in developing countries such low access rates for electricity. And that was, you know, one of my fascinating facts that I would tell people when they were trying to say things like, why, why do you like energy? What's so important about electricity?
Cy McGeady: There's sort of the arc of the developing economy relationship to energy and the power sector in particular pivot into China now. And I want to just ask you maybe to kind of contextualize these two claims that we hear and the two big headlines and on the, you know, leadership on the renewable side and then leadership on the coal deployment side. And so often these both get sort of formulated into rhetoric, political rhetoric, political talking points, and for different people making different arguments. So, I guess give us some context what, what is going on in terms of the numbers in terms of coal and renewables in China?
David Fishman: Both are true, both statistically, both are going to be accurate. Whether you're trying to claim that China is the most irresponsible actor or the most responsible actor in the world when comes to combating climate change and worrying about sustainable energy development. So, you know, last year China's adding tens something like, I think it was 50, maybe not as much, maybe around 30 gigawatts of coal and that's capacity and then maybe around four times, five times as much wind and solar, right? And when we account for capacity factors, we're talking about the ability of new capacity to actually meet generation needs. Renewables were able to add more to the mix, the incremental energy growth over the year. More of it was met from new renewables than was met from new coal. But it is still true that China's adding more capacity of both and adding a lot of both.
You get as much as you can out of the renewables for wind, maybe that means 20 to 25 percent capacity factor. You get as much as you can out of the solar. Maybe that means 12 to 15 percent capacity factor and then you get a lot less than you could possibly get out of the coal. Coal could theoretically be all the way up at maybe 90 percent capacity factor if it's maintained well and running well. In China, they're very far from that. They're right around 46 percent capacity factor was the average across the fleet last year. And so, what we see is as more wind and solar come into the mix, more capacity on the coal side, or sorry, more generation on the coal side is being replaced. So, you can build lots and lots of capacity and it is a, a viable thing to look at the capacity numbers certainly, but if you really want to drill into what's the story of what's getting used, what's getting, what's generating incremental, taking up small amounts of coal, but definitely more wind and solar than coal being added into each year's generation mix.
The key question, when is the year, the first year when, when wind and solar is going to be able to completely meet all the new marginal generation or the first year when we don't burn any more coal and, and maybe next year, maybe 2025, something like that. So, to try to put a big contextualization first capacity versus generation, always look at that. And then when is the incremental amount of how much power we need and what's meeting that need? When is it going to become all renewables versus or all or low carbon sources? I should include nuclear and hydro in there versus fossil fuels. That's roughly where we are right now and, and where we're heading.
Cy McGeady: That's about that tipping point. When will each incremental addition of demand become met by renewables? And that's like, that's now you're sort of hitting your peak emissions from a or peak contribution from the fossil fuel sector into the power sector.
David Fishman: That's right. We talk about China having its carbon peak in 2030, but actually, it's there's a lesser celebrated or a lesser publicized number, which is the anticipated coal peak. And the coal peak is supposed to come right around 2025, in fact. So that's, you know, what the power sector is angling towards right now.
Cy McGeady: That’s coal peaking, not in terms of capacity, but in terms of generation actual megawatt hours produced. And so, you mentioned nuclear and hydro and um, those are also big components of the Chinese power sector. Can you just say like, I guess relative contributions that the, the generation mix or the capacity mix on the grid, how big does all this new wind and solar match up against hydro, roughly speaking and nuclear?
David Fishman: Well, it depends on what kind of year hydro is having, of course. A couple years ago, hydro had a great year, 2021 was kind of a lousy year. 2022 was a catastrophic year for hydro in China. Severe droughts in the southwest part of the country. In, in a general year, or at least in the past few years, trend-wise, hydro made up most of the renewable generation in China and wind and solar, you know, starting to make a small contribution. But if we talk about the, the low carbon, the renewable generation, it's, it's mostly hydro in China and it's still, we're talking small percentages, right? We're still talking about 50. It's come down, it's come down in a lot in the last few years, but coal is still, I think 56 percent of the generation mix or of the energy mix and about similar levels on the generation mix.
And then you've got nuclear and it's like 6 percent or something. It's, there's ambitions to, to bring it up more, but nuclear is still in single digits and then gas a few percentage points, gas is just too expensive, China doesn't have much gas. Then you've got your wind and solar where it could be playing a huge role in some parts of the country and almost no role in other parts of the country. This is a good place to point out that talking about China as a whole is, is often really misleading because there's such huge regional differences between what the South uses and what the North uses and what they have for resources.
Cy McGeady: Yeah, that's great. That's a great lead into what I was going to ask next, which is I want to dive into these generation numbers and sort of understand some of, the trends pushing these numbers and so pushing the deployment, but as sort of setting up some context and backing up, obviously China's a very big place and um, I think our audience will be broadly familiar with sort of how the US power system is set up. You know, we have ISOs and or RTOs depending on how, how you want to call them, sort of organized markets cover much of the country. And then there's some places in the southeast, the mountain west that is sort of still vertically integrated utilities and of course is all regionalized across the us. And what does the comparable sort of Chinese landscape look like in terms of how the sector is organized regionally but also sort of regulatory standpoint? Are there markets like we have in the U.S.? Just set us up the context in which these deployments are actually, what system are they plugging into?
David fishman: So, China has been unbundling and unpinning, its centralized, fully regulated power system for several decades now and it's well on its path to liberalization and power markets on a regional basis. You started out with one super massive national power entity that handled generation transmission, distribution and retail or power distribution at the user end. And that's been slowly spun out first into a bunch of state-owned generation groups and the grid companies. So that we had two sections for a while after that it was further spread out and so you had your generation groups, you had your transmission and distribution entities and then you had your retail end. And so now that's kind of where we are now. We've got three layers. You've got functional distribution, transmission and retail end. You've introduced IPPs starting in the mid-2000s. We were able to bring in EPPS, Chinese as well as some foreign players came in, and started investing, especially in the generation sector.
And the way we're organized broadly across the country, you've got your two major transmission and distribution companies. You've got State Grid and you've got China Southern Grid. State Grid handles five out of the six regional grids and then Southern Grid handles the last grid. So, you've got six regional grids that have varying degrees of interconnectivity among them. So, each grid, maybe it covers five to six provinces. With Southern Grid, you know, kind of its own little regional zone. There's not much interconnection between the southern grid zone and the state grid zone. And you've got, you know, its provincial grid is the backbone and then you've got the super provincial, the kind of that regional block grid. That cross-region grid is pretty weak. There's not that many connections. We're looking at ultra-high voltage lines usually that go all the way across the country, maybe from somewhere in the far west to somewhere on the east coast.
So now we're at a stage now where we do have a somewhat open generation sector. Certainly, you can go in, anybody can go in and invest in wind and solar, nuclear a little bit more closed off, coal, it kind of depends. Then we got the transmission and distribution sector, which is almost entirely monopolized by State Grid and China Southern Grid. There's a little bit of space for some, from incremental distribution grid stuff. There are some private players doing things in there, you know, local to their own assets. And then you have a retail sector which has emerged in the last couple of years and retail is serving the needs of industrial and commercial power customers. State Grid still has a monopoly over serving residential and agricultural power customers, but CNI is now open to the private sector, to the retail sector. An open market so to speak.
Cy McGeady: Sounds like it roughly tracks the development of the U.S. power sector. I mean this is sort of the same arc in which the U.S. power sector has deregulated into these sorts of layers, the generation side, the transmission side, the distribution side, the creation of retail markets. Do you know if that's like a conscious policy choice to sort of looking at the lessons from the U.S. and saying this is working in the U.S. or I guess more broadly the Western world, the EU as well, these sort of liberalized electricity markets are working. We want to deploy those same mechanisms here.
David Fishman: That's right. The stated long-term policy outcome of the sector reform-- and we are in the midst of sector reform; sector reform has been going on for a while -- is to create a fairly liberalized power market.
Cy McGeady: So that's fascinating. It sounds like the arc of the Chinese sector, broadly speaking has sort of followed or matched the arc of the U.S. power sector in which we've deregulated starting in the nineties we created sort of competitive generation markets. We created retail markets, obviously still sort of incomplete as I mentioned, the southeast US still vertically integrated mostly. Was that a conscious choice? Do you know by the Chinese government policymakers to look at the lessons of the U.S. power market and say, this is working, we want to do that here domestically in China?
David Fishman: Yeah, so certainly there is an active decision to liberalize the power sector. The stated policy goal is to end up with a fairly liberalized power sector. So that means we're looking at, you know, from the generation side, we would expect to see most generators selling into the market on a merchant generator basis. And on the end-user side, we would expect to see freedom of choice for power users to select their power provider and to purchase power via long-term or short-term power contracts in an open market. Open markets that include long-term power contracts, multi-year or you know, one year that include mid-term power contracts like multi-month or month long. And then active and functional power markets on a spot basis going all the way down to 15-minute increments. So that's the end goal where they want to head.
As for residential and agriculture, I'm not sure that the goal is ever to spin those off. I think it's, those are considered to be a natural monopoly for State Grid to serve those power customers. Maybe there'll be a change in, in thinking in the future, but I think for now that the plan is to keep those customer classes in a more regulated scheme. As for whether they're trying to perfectly emulate the ISO system in the U.S., I think maybe it depends on which ISO you're looking at. I know they spend a lot of time looking at PJM and they spend, they have a lot of references to PJM in, you know, industry analysts. I think certainly if you're looking for something that doesn't look that attractive to try to emulate maybe ERCOT or CAISO look like, something that might be less attractive for them. I know China wants to set up a, they are setting up a capacity market, for instance, which is something that is, you know, just seems like bad juju if you try to mention that down in Texas.
Cy McGeady: Yeah, that's fascinating because in the U.S. also, you know, we've now had let's say roughly 30 years of deregulated markets and there's sort of a murmur developing here about, wait, are these markets working the way we think they are? Are they capable of sort of delivering on the objectives of the energy transition? And yeah, it's just sort of a, a moment in which there's a reconsideration taking place. And I want to circle back to that eventually maybe think about what, how the Chinese are thinking about the ability of power markets to serve their priorities, their policy priorities. And I guess I want to move to that quickly, which is who, when we say, so it sounds like there's a deregulated generation side of that's, that's definitely heavily deregulated or opened up to competition. So, when we talk about China is leading in deployment of wind and solar, you know, matching the rest of the world combined, but also let's say China's leading the charge on deployment of coal capacity. What type of entities are we talking about? Are these state entities, are these independent power producers primarily? Are they foreign companies? Are they domestic? What are the actual entities driving this deployment?
David Fishman: On both the traditional or conventional fuels and the renewables, it’s really state-owned entities driving the charge. And it's not because they are, you know, shutting out the other players or that other players aren't allowed to participate. It's that structurally there's a lot more, you know, just advantages for them to build certain types of assets and to build in a certain way, they have access to more capital at a better cost. They have access to more land, especially in the eastern part of the country. Land development rights have become very difficult and very expensive and time consuming. And also, they have all these legacy connections with the power company to get dispatch agreements, to get grid access and on grid agreements signed. That's not to say IPPs aren't in there and especially in the wind and solar sector when it comes to certain types of projects, especially, distributed solar rooftop solar projects, you don't see a lot of participation from the big SOEs and the rooftop solar projects.
They can, there's nothing stopping them. It's hard for them to execute because they're these massive companies headquartered in Beijing. And to be really effective to execute this like village level distributed solar project, you have to be kind of a hyper-local presence to get that done. And so, it's just easier for nimble, small privately-owned companies to slip in there and get those projects built. Also, SOEs have a project IRR target in China of 8 percent. And a lot of, some of these, you know, more questionable distributed solar projects, maybe they're only getting 6 percent IRR or 5 and a half percent IRR and that's just not attractive to an SOE where it doesn't meet their development mandates. Whereas a small, you know, private developer says, we're okay with that. We’ll go in with those numbers. So, you see this mix across the country now when it comes to the supermassive projects, the giant based out in the middle of the desert, a hundred gigawatts of coal plus wind plus solar plus UHV lines and two pumped hydro facilities.
Like those, yeah, those are big SOEs of course, we're talking about, you know, tens of billions, maybe hundreds of billions of loans that need to go into that. And, and no small developer, not even large international developers are going to go into that. And then speaking of international developers, yeah, they're, they're active here too. There was a time when they were more active in the mid-2000s, a lot of them came in. That was when China was undergoing a severe power shortage and opened up kind of the market opened up capital control. Please come on in, we'll give you these benefits, we'll give you tax breaks, we'll give you preferential dispatch agreements, whatever you want, please come here and build power plants. And then kind of flipped over. We ended up with some of those projects, some of those developers that rushed in and encountered, situations where the local government maybe wanted to renegotiate.
The offtake agreement is actually we're kind of oversupplied now. We don't like the agreement we signed back in 2005. If you've got situations where some foreign developers, maybe they didn't have the, the deep, deep pockets of the SOEs. So, when the local government or the national government said, oh, the subsidy disbursement fund is overdrawn and we're going to be delayed in paying out your subsidies, is that okay? And they go, no, that's not okay. My cash flow relies on that. Whereas, you know, a major Chinese SOE says, okay, stinks. But you know, that's, that's our job. We swallow it, <laugh>, we take it on the chin.
Cy McGeady: This is interesting. I guess, so you know, you have, so it's these SOEs primarily, it sounds like maybe in the past there were more kind of foreign IPPs. There is some competition among sort of independent IPPs, but you mentioned the IRR targets. Is it primarily like the market incentive? Is there, is there money to be made for these projects, without incentives or is there a direct policy that's sort of driving deployment? And I think I'm curious both on the coal side, I assume sort of a different set of issues. And then on the wind and solar, what is the policy, I guess what are the market conditions and to what degree is that inflect created by policy?
David Fishman: Let's just take the case of, say you're a coal developer. You're a coal-fired developer for many years. You enjoyed very reliable, predictable returns. So, on the upstream side, the price of coal was regulated. It was fixed within a certain price band. And on the power sales side, you had a guaranteed odd and grid rate. Additionally, you also had a guaranteed number of dispatch hours each year. So, it was really easy to ensure project returns for a coal-fired power plant. That actually contributed to a lot of overdevelopments and a lot of overbuilding. When we moved coal into or tried to move them into the market-driven era, we actually, when we had an interesting situation back in 2021 where the upstream, the, the fuel side was de-liberalized very quickly and coal prices were allowed to do whatever the market says they should do, but the on-grid rate of power was not adjusted.
The on-grid rate of power was still fixed. And that led to a bunch of coal generators unable to make any money in 2021 back when they were buying coal for a really high price and they're selling power for a fixed low price. And we ended up with these, these, these massive blackouts or brownouts across the country in late 2021 with coal generators, lots of capacity, but unable to actually generate enough cash to buy coal and refill their stocks to generate. That's the situation with coal, right? We, we've moved away from that. That was kind of an awkward growing pain moment. Now we've got both deregulated with guardrails, you know, fuel, coal market, and then we've got mostly deregulated, but with guardrails, power sales. So now both ends have moved a little bit more towards the deregulation side and coal generators, if they're buying most of their coal and long-term contracts at a reasonable price, they're, and they're probably doing all right this year.
And if they're buying mostly at the spot, they're not doing, all right. Let's switch over to wind and solar for years, wind and solar had this guaranteed feed and tariff on grid rate, high subsidies, fantastic. Build the project and as long as you can get the thing built, you've got guaranteed money for 20 years. So, their costs were coming down every year. Solar panels were getting cheaper, wind turbines were getting cheaper. The on-grid price of power for, for their power type is still high. Project returns were high, things were great on paper. Project problem was their on-grid rate was split up into, of course, this is what the grid is going to give you and this other section is the subsidy, what the government is going to give you from the subsidy fund. You're guaranteed the part that the grid company is going to give you.
You're not guaranteed the part that comes from the subsidy fund. Because what if the subsidy fund is overdrawn? What if there are too many projects claiming subsidies and we didn't collect enough end user surcharges? That's what happens starting around 2017, 2018. And then all of a sudden, all those wind and solar projects that looked good on paper they started burning a whole bunch of investors. They had a great theoretical cash flow and they had, you know, millions and unpaid subsidies from the central government, but their actual real cash flow was really, really poor at that point. We saw a lot of IPPs sold off their assets. A lot of foreign developers got out of the market too. They sold it to those SOEs who could afford to keep kind of lousy assets on their book for a long time waiting for the subsidies that eventually did come, eventually have been flowing now. So that's kind of two different scenarios of China's growing pains going from a, a very regulated and very predictable market and then trying to slip into a deregulated market. But along the way, you know, some things broke, a lot of things broke in some cases.
Cy McGeady: It seems like it's present on the coal side primarily, but it's seeming, it's also sort of showing up there on the, on the winded solar, which is, I guess I would say sort of malinvestment or miss investment and then the possibility of stranded assets. And I guess I'm curious what the sense is about the possibility for large scale stranded assets, especially on the coal side, given sort of the rate of renewable deployment. Is this a kind of, of a policy concern? How do people, how is someone building a coal plant knowing that, like as you mentioned earlier, in 2025, we might be seeing peak contribution of coal to the grid. And so, what can justify a plant, building a plant that's supposed to run for 30 years, given that setup? And you mentioned the capacity is, is that a response to this concern?
David Fishman: Definitely. So, if you're, and we talk to coal owners, you know, coal, coal plant people all the time and they know, right, they're not oblivious, they don't think they're going to be, you know, first off, they're already not thrilled about the prospect of 46 percent capacity factor over the year. And nobody's, you know, super excited about that. But what they're looking at is they're saying, we see the development trajectory of our country's electricity mix. We see all the forecasts that say we're going to have this much wind and this much solar. And until you figure out, until batteries get much, much cheaper, you figure out some other solution, find more hydropower, you start building nuclear plants in land, which they're not doing right now, then you're going to be using us the coal plants for flexibility. So, we're going to wait, we're going to invest in flexibility upgrades, we're going to enable us to do some deep ramping.
We're going to upgrade our boilers, we're going to do all these things that allow us to, you know, maybe we're only going to dispatch 46 percent over the year, but we're going to be making our money in the capacity market. We're going to be making our money providing load following, deep ramping in the auxiliary services market, which are also being set up right now in real time. Other countries have an abundance of gas, and they get to use gas for peaking. China gets to take the much harder approach of, but feasible but practical, you know, possible of ramping with coal.
Cy McGeady: Yeah, it's fascinating because of course the U.S. is burning more natural gas in the power sector than ever before. And I always say there's, there's been two transitions overlapping in the U.S. you have a renewable transition, which is happening slowly, but it's happening for sure and it's accelerating. But the big transition, the far larger transmission has been the displacement of coal by natural gas and, and natural gas in the US is set to play that exact role, that balancing role, that load following role, that ramping role in the US for decades to come. It's, it's just, there's no way around it. And China doesn't have the gas resources, gas is so much more expensive relative to coal as a fuel. And so, these coal deployments, especially the new capacity it sounds like, is really engineered around these sorts of, the requirements of ramp steep ramp rates.
David Fishman: That's right, everybody's talking about how Guangdong approved, you know, 40, 50 gigawatts of coal plants last year. No, huge, huge numbers, right? But in the, the technical specs for those plants, you know, they have to be able to ramp down to 30 percent load, which is just unheard of normally for, for a coal plant. These are all, you know, ultra super critical coal plants and they have to ramp down to 30 percent. It's clear that they're being blueprinted out to be the future of the flexibility fleet and, and maybe something else can compete effectively against them for that flexibility role. It might be the handful of gas plants, it might be some pump storage, it might be hydropower of hydropower is good that year. It might be, I don't know, batteries. But right now, the assumption appears to be that coal was really going to be filling most of that hole in the schedule.
Cy McGeady: There's another big bucket of generation that we haven't dived into here and, and that's nuclear. And I want to, I'm curious how that fits into this issue because in the US we've got I think more momentum for a nuclear renaissance than ever before. People are talking about it does. Everybody's the second one. Yeah, exactly. And you know, of course nothing really has happened yet. It, there's a lot of talk, there's a lot of potential, there's a lot of interesting things happening on SMRs. But um, you know, we've built one nuclear power plant in a decade, and I don't know how many over the last 30 years, not very many, maybe one or two <laugh>. Meanwhile China's building nuclear power plants at a regular steady rate and what is, what's going on there? What's the policy vision there? Is that, is that at what level has, does that policy directive come down and give us an introduction to nuclear?
David Fishman: Yeah, we're looking at the, the 2060 goal, right? We look at the end game, which is the ‘carbon neutrality for China’ day, that's 2060. And you look at the different pathways to get there, you know, different climate research institutes or departments, Tsinghua University for example. They've got their scenarios. The fast scenario, the advanced policy scenario, whatever you call it, whichever policy you choose, nuclear plays a big role in it. And you can have all your wind in your solar and your ramping coal backed up by carbon capture and some hydro and maybe green hydrogen is a thing by then, but there's still nuclear. There's always nuclear in the mix. The ultimate 2060 generation mix calls for something like 20 percent nuclear, nuclear advocates scream that that's too low of course. But to get to where that is true in 2060, they need something like 400 to 500 gigawatts of nuclear capacity, in the country.
So where are we now? You know, we're looking at 67, right? We're in that range. We talk about operating reactors plus under construction reactors. And so, we're looking at over the next 3 37 years, right? Three decades plus 37 years, we're going to be trying to get to 400, right? Well, how many do we have to build each year to get to that, right? 7, 8, 10, something like that. That that's how many reactors have to be licensed four years ago, five years ago, and then be constructed in four or five years and then be built on a regular clip? We need to build eight reactors a year, every year for the next 37 years. Well, if we're going to hit 2060, we only get until 2055 to start that last batch reactors, right? Cause it's going to take five years. So that's how many years. China has to build as many nuclear plants as it can at a breakneck pace.
China's good at building them. It achieves cost reductions versus it's, it's, you know, worldwide peers or the western peers I should say, all across the cost structure from labor to components to cost of capital to everything is just a little bit lower. They build them on time, that's incredibly helpful. And then we end up with building them at this breakneck pace. That's how big of a contribution we end up with. So, when the nuclear advocates scream at me and say, China should be building more go, how many reactor pressure vessels do you think we can turn out in a year? How many steam generators, how many licensed nuclear operators, how many people to work at the regulator? How many nuclear graduates are coming out of Chinese schools every year? You're asking tens of thousands of people every single year to maintain that pace. It's already going to be very difficult. That's the role that I see nuclear playing now, right now they're only building in the coastal regions. They need to start building them inland. The inland nuclear power plants have been installed for a long time since the 2011 Fukushima accident. And they’re not going to be building them in in the next few years, probably not even until 2030. But if they're going to be building 400 reactors, they're going to run out of suitable sites on the coasts.
Cy McGeady: The limiting factor about going inland, I'm curious about that. Is that water availability issues or is that more, um, earthquake concerns? And I guess what is the policy change or technology change that people are thinking might occur such that that could happen, that move inland?
David Fishman: I think both water and, and earthquake concerns are good reasonable guesses. When I talk to friends in the nuclear sector here, they usually focus on water and not so much lack of availability of water, although that is, that is maybe part of it. But because it has to be cited on a, a body of water that any body of water, any river you choose in inland China flows into another river which eventually flows into either the Yangtze River or the Yellow River, which is the watershed by which 50 percent of Chinese agriculture relies on. And so, the logic being that when we do the risk analysis of the likelihood of an occurrence versus the magnitude of harm, when you talk about what if there was a, some type of unscheduled release of radioactivity into the water and now although the likelihood of occurrence is very low, the magnitude of harm is immeasurable at this point. You, that's the kind of risk framework that I've understood from contacts here in the, in the industry that's driving the hesitancy to build inland power plants, which would necessarily be, you know, creating a risk that doesn't exist yet because they're not building them there.
Cy McGeady: Makes sense. I think the U.S. watersheds are less concentrated though the Mississippi obviously is a massive watershed and I believe there's nuclear power plants up in Iowa and Illinois that are, must be cited on those watersheds. My next question is, it sounds like all of these things, the sound like the Chinese model, the Chinese market, the Chinese system mimics the U.S. It's very comparable. There's a lot of the same issues at play. You know that the dilemma about figuring out how to handle the ramp rates is an issue, the dilemma with nuclear. And to what degree can you ramp up and deploy nuclear at a pace that makes a contribution that is significant? It sounds very similar. I'm very familiar with like the headaches the U.S. system has. I think a lot of our listeners are familiar with some of the debates we're having here. Permitting reform, load ramping, how to deal with intermittency. If we go to China and we ask a Chinese grid operator or a Chinese energy economist, someone who's working in the issues in China, what is their biggest headache? What are the things that they are most sort of perplexed and struggling with?
David Fishman: I bet I'm not one of them, but I talk to a lot of people working in the sector here. And the stuff that comes up a lot is, you know, the system is the way it is at any given moment as a reaction to some problem that came before, right? You, you had an issue and then you tried to fix it by regulating something new and maybe you fix the old problem that you created some new problems and, and China's been steering its sector in that way for a few decades now, fixing big problems, creating other problems. Sometimes big, sometimes small. We're leading to some really thorny problems now as we get through this partially deregulation period and we're trying to liberalize the power sector and decarbonize the power sector at the same time while not departing from our foundation of energy security, right?
We can't be having blackouts. So, we need to decarbonize, we need to liberalize, and we need to keep the lights on all the time for everybody. They're going to end up forced to make hard decisions about violating that, that triangle, right? Energy security can't be violated, right? So, on the premise of maintaining energy security, you have to choose one or the other. Do we give up our green energy goal temporarily? Do we give up our liberalization goal temporarily? That, do we put it by the wayside in order to make the rest of the system work for a while? We talk about the power markets not advancing quickly enough. That's a real problem. And the power markets are going to struggle to continue to advance quickly enough. As long as you have all these stresses being put on this system. You have coal generators struggling to make money.
You have solar and wind developers being told we really need you to hit certain targets. But they're like, look, these projects stink. They're not making money anymore. Create some stressors and then other things break and you try to patch it up with policies and then something else breaks somewhere else. That's, I think the Chinese energy sector is, is heading for a kind of tumultuous few years. It's getting better. I do believe the car is consistently driving forward on this track towards some more decarbonized, more liberalized future, but it's going to hit the curb a few times as it drives forward. And so that's just kind of keeping all that stuff in balance, I think is going to be very difficult.
Cy McGeady: I think it's remarkable the degree to which that sort of matches the sentiment I have for the US sector. You know, we've had a series of increasingly severe capacity adequacy driven blackouts, for lack of a better word. You know, we've had load shedding happen on a sort of in ERCOT in the Southeast and in CAISO in California. And it, we too sort of face a power grid under increasing stress and, and policy figuring out how to make the markets and some of those, the benefits that markets bring match sort of the government directed priorities of energy security and decarbonization is, is a real challenge for I think power sectors and governments globally.
David Fishman: You know, I will say this, that there is a, a certain philosophical contrast almost to how China is approaching its grid because energy security is really the unshakable, unbreakable foundation of all of this. That they are willing to introduce a lot of what macroeconomists might call inefficiency to the system. Overbuilding, right? Stranded assets. Oh no, what is Huaneng going to do with all these bad assets in their book? What is State Grid going to do that they've now that they've overbuilt transmission infrastructure, something like that?
And yeah, from a pure efficiency standpoint, like it's probably not ideal. I know the greatest manifestation for some people in the U.S. power sector is just enough power just in time. That's perfection, that's max efficiency. And China is more like minimize risk of blackout at all times if we could, you know, sum it up in a different way and that they're willing to overbuild. And you know, what if, if the massive state-owned entity Huaneng has dozens of gigawatts of bad assets on its book, well you know what? You're a state-owned entity. Your job is to absorb the inefficiencies of the state for the betterment of the people. Like let's just put it really bluntly, right? That's your job, state-owned entity. You don't have the right to cry about it. IPPs, you probably want to stay away from that part of the sector. You don't want to get involved in that. SOEs is your job.
Cy McGeady: That's fascinating just because in the U.S. except for a few exceptions, the U.S. power sector's entirely in the hands of the private sector, right? It's private generation, it's privately held, investor-owned utilities. At no point is they sort of an extension of state policy that can just bear some uneconomic burden in the way that you're describing the state-owned entities’ abilities to do so. And, and that gives the Chinese system sort of a flexibility to deal with sort of let's say national priorities in a way that we in the U.S. have to like to create a system that works for the, the network of private entities that our system exists in the hands of.
Great. David, this has been so, such a great conversation. Thank you so much for joining us. Talk to you next time.
David Fishman: Great. Thanks for having me.
Lisa Hyland: Thanks to David for joining us this week. We will be tracking developments in Chinese electricity market, so, we look forward to hearing from him again soon. You can find more of Energy 360 wherever you listen to podcast and at CSIS.org. For update, follow us on twitter @csisenergy, and as always, thanks for listening.
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