The topic of finance has received wide attention among the many issues of global climate governance [1]. The size, source and management mode of climate finance is one of the major elements in climate governance. In the planning of medium- and long-term low emission strategy, it’s necessary to quantify the financing needs to facilitate the cost—benefit analysis. In light of existing researches, this chapter estimates the investment needs and energy cost by scenario.

8.1 Energy Investment Needs

Referring to the methodologies provided by the World Energy Investment [2] and other related studies, energy investment can be defined in terms of supply-side and demand-side in the implementation of the low emission strategy.

8.1.1 Investment on the Energy Supply Side

The investment on energy supply is calculated based on China Energy Infrastructure Investment Model, which, building on mid- and long-term energy supply and demand data, describes the size, investment and funding sources of energy infrastructure required for supporting energy demand and high quality development, taking into account the pathways, and optimization of energy infrastructure transition (see Fig. 8.1).

Fig. 8.1
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Framework of the China energy infrastructure investment analysis model

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The long-term deep decarbonization entails energy transition and corresponding structural changes in energy infrastructure system. The investment priorities shall transition from coal-fired power stations, coal transport corridors, coal ports, and coal storage bases into composite energy infrastructure system that features a coordinated complementation of coal, oil, gas and non-fossil fuels, and eventually into a low carbon energy-dominated infrastructure system, including renewable power stations, high efficiency transmission and distribution networks, hydrogen production facilities, hydrogen storage facilities, and so on. Investment in energy infrastructure should balance the long-term and short-term interests. It ought to pursue diversification in energy supply, and encourage joint participation and shared benefits of multiple parties to build a more inclusive and resilient energy infrastructure system.

Energy infrastructure investment mainly covers coal, oil, natural gas and electricity to ensure the demand, supply, distribution, and reserves of these resources (see Fig. 8.2).

Fig. 8.2
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Key investment items

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The investment needs of energy infrastructure is primarily measured by new investment and investment for retrofitting existing infrastructure. It represents the increase of investment driven by the transformation in energy infrastructure (see Table 8.1).

Table 8.1 Types of energy infrastructure investment
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New investment in infrastructure mainly covers power, oil and gas. First, the new investment demand in each period is calculated separately according to the cost changes of varied power generation facilities and their scale in different stages. Second, based on the empirical relationship between the investment in power generation facilities and the investment in power transmission and distribution facilities, the investment required for conventional grid facilities is estimated for each period, on top of that, the additional cost of renewable energy access, electrochemical energy storage, pumped storage and cross-region transmission are taken as the additional new investment demand for connecting power generation and grid facilities. The additional investment in renewable energy access also corresponds to the need for improving distribution network to cater to increasing proportion of renewables. The investment in trans-regional power transmission facilities mainly focuses on the ultra-high voltage power grid for the trans-regional power flow. Third, based on the analysis of the demand, supply, profit and loss, and flow of other energies, e.g., natural gas, the new investment required for natural gas pipeline, gas storage depot, LNG receiving station, and so on, is calculated.

Investment for retrofitting existing infrastructure mostly caters to the goal of low-carbon transition and meeting new demands at low cost, including the flexibility improvement of existing coal power facilities to accommodate high proportion of renewable energy, the installation of carbon capture devices on fossil power generators to attain the carbon emission goal, mainly targeting existing coal and gas power facilities, and the expansion of existing LNG receiving stations to meet new gas demand and ensure gas storage capacity. Investment in LNG storage is included in the construction of LNG receiving stations. The new gas storage demand in different periods will be invested according to the following cost sequence: underground gas storage → expansion of existing LNG receiving station storage tanks → construction of new LNG receiving station storage tanks → construction of new small LNG storage tanks.

All scenarios point to the fact that low-carbon transition will drive more energy infrastructure investment. As shown in the figure, the cumulative energy infrastructure investment required for the policy scenario, reinforced policy scenario, 2℃ scenario and 1.5℃ scenario from 2020 to 2050 is expected to surge from 54 trillion Chinese Yuan Renminbi (CNY) to 138 trillion CNY at the constant price of 2015 (see Fig. 8.3). The investment demand in energy infrastructure for the reinforced policy scenario is 1.5 times that of the policy scenario, while that for the 2℃ scenario and the 1.5℃ scenario is 1.8 times and 2.6 times that of the policy scenario respectively.

Fig. 8.3
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Cumulative energy infrastructure investment from 2020 to 2050 under different scenarios

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8.1.2 Investment on the Energy Demand Side

Energy demand-side investment is analyzed by sectors, namely industry, transport, and building sector, respectively.

(1) Industrial sector

Wholistically speaking, the potential of industrial energy saving and carbon reduction could stem from efficiency improvement, energy mix optimization, electrification, raw material and fuel substitution, and improvement of product quality. While a certain proportion of the investment may be allocated specifically for the purpose of energy conservation and carbon reduction, the majority of the work lies in the investment for the construction of new projects, equipment replacement, and technological innovation, etc. Thus, it is difficult to accurately pinpoint the amount required for energy conservation and carbon reduction. In addition, great discrepancies exist in the potential and pathways of energy saving and carbon reduction between energy intensive and non-energy intensive industries. Furthermore, due to the vast differences in industrial output, technologies, and processes, the levels of energy saving, carbon reduction and investment demand may vary greatly by industry. The following study applies different methods to estimate the investment required for energy intensive and non-energy intensive industries.

For steel, cement and other industries with relatively clearly-defined products and processes, taking into account the project lifetime of about 30 years, the capacity replacement method is adopted to estimate the cumulative investment required from 2020 to 2050. The potentials of energy conservation and carbon reduction are grouped into three categories: “advanced process application”, “energy efficiency improvement” and “low-carbon energy substitution”. The potential of energy conservation and carbon reduction and investment needs are also assessed separately.

For industries with complex product cycle and production processes such as chemicals, petrochemicals, non-ferrous metals and others, the demand for increased investment is assessed individually for different scenarios based on available cases of energy conservation and carbon reduction, and the economic analysis of cutting-edge technologies, processes and equipment, through tracking changes in investment per unit of energy conservation.

For non-energy intensive industries and manufacturing industries, the need for incremental investment is assessed individually in different scenarios based on the available cases of electricity substitution, energy efficiency improvement of boilers and kilns, and energy-saving enhancement of motor system, through tracking changes in investment per unit of energy conservation.

The incremental investment needed for the industrial sector in the reinforced policy scenario, 2℃ scenario, and 1.5℃ scenario stands at 393.7 billion CNY, 2270.8 billion CNY and 4517.6 billion CNY respectively (see Fig. 8.4).Footnote 1 Applying advanced process and using low-carbon energy are the main sources of incremental investment, which contributes the most to energy saving and emission reduction. The negative incremental investment in energy conservation and efficiency is partly due to the limited potential to improve energy efficiency, which makes large investment a challenge. Meanwhile, the reduced demand dramatically downsizes the capacity of energy intensive products, resulting in a decrease in total investment despite the increasing need for investment per unit of capacity, which also partly accounts for a negative incremental investment.

Fig. 8.4
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Incremental investment by category

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Four energy-intensive industries of iron and steel, cement, chemicals and petrochemicals are the main sources of investment in energy conservation and emission reduction. Under the reinforced policy scenario, the four industries account for 24.1%, 7.6%, 19.1% and 22.1% of incremental investment respectively. Under the 2℃ scenario, the share is 39.2%, 4.5%, 19.4% and 24.2%, and for the 1.5℃ scenario, 29.8%, 5.3%, 20.4% and 22.6% respectively (see Fig. 8.5).

Fig. 8.5
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Incremental investment by industry

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Figure 8.6 shows the incremental investment under different scenarios in the steel, cement, chemical and petrochemical industries. The main incremental investment in the steel industry goes to advanced process applications, in particular hydrogen steel making. Most incremental investment in the cement industry flows to low-carbon energy substitution such as carbon capture, storage and utilization. Incremental investment in the chemical industry is mostly spent on the substitution of low-carbon energy, especially the substitution of “green hydrogen” for “grey hydrogen”. The bulk of incremental investment in the petrochemical industry is made on advanced process applications such as the production of olefins from light hydrocarbons.

Fig. 8.6
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Incremental investment in major energy-intensive industries

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It should be noted that considerable gaps exist in the production capacity of energy-intensive products among varied scenarios. Generally speaking, more ambitious targets in energy conservation and emission reduction would make for smaller production capacity of energy-intensive products. Despite a substantial rise in investment per unit of capacity due to investment in energy conservation and emission reduction - the investment per ton of steel capacity stands at 4,106 CNY, 6,844 CNY and 10,750 CNY respectively, and the investment per ton of cement capacity is 840 CNY, 1,230 CNY and 1,590 CNY respectively in the reinforced policy scenario, 2℃ scenario and 1.5℃ scenario - negative incremental investment occurs in some industries owning to the reduction in total capacity.

(2) Transport sector

Analysis of the transport sector takes into account the increased cost of EVs relative to traditional vehicles and the construction of charging piles. The cost increase of EVs compared to traditional vehicles is estimated based on the number of new EVs on the road and the ratio of varied types of vehicle. The medium and long term investment of charging piles is projected based on the vehicle-to-pile ratio and the proportion of diverse types of charging piles. The vehicle-to-pile ratio has improved from 7.8:1 in 2015 to 3.1:1 in 2019 [3, 4]. In the long run, the vehicle-to-pile ratio will be around 1:1.

On new investment in EVs, it is estimated that the average production cost of EV in 2020 is 126,000 CNY - a difference of 62,000 CNY compared to gasoline vehicles [5]. Considering the decreasing production costs of specific car models, it is projected that by 2050, the average production cost of EVs will be lowered to 83,000 CNY, and the difference with gasoline vehicles will be reduced to 16,000 CNY. Therefore, the total investment in the four scenarios from 2020 to 2050 is approximately 9.0, 11.9, 15.0 and 18.6 trillion CNY respectively.

The new investment of charging piles is estimated based on the ratio of public DC, public AC, and private charging piles and their cost changes. The average cost in 2020 and 2025 is 4,400 CNY and 3,300 CNY per unit, assuming that it remains unchanged afterward. In 2019, a total of 1.22 million charging piles were operational nationwide. It is projected that the total investment between 2020 and 2050 is about 1.5, 2.1, 2.5 and 3.0 trillion CNY under the four scenarios in this study.

(3) Building sector

The emission reduction potential of the building sector mainly comes from maintaining green and energy-saving behaviors, improving the performance of building envelope, enhancing the efficiency of equipment system, optimizing energy mix, and tapping into renewable energy. Currently, there are various methods to estimate the investment need for low-carbon buildings, with different boundaries and definitions. This study, centering around the building hulk and the northern heating system, makes the projections for improving the performance of building envelope and the northern heating system.

The investment for performance improvement of building envelope includes the increased cost of new buildings due to higher design standards and the cost of existing building envelope renovation, of which the energy-saving renovation of existing buildings in rural areas accommodates the usage of “part of the space” of rural residents and gives priority to economic renovation [6].

Analysis on the improvement of heating systems in northern China accommodates the difference between urban and rural areas. For the urban areas, the focus is the varied types of CHP and low-grade waste heat from industrial production process. The use of waste heat requires the construction of heating pipelines for long distance transport. And in areas where waste heat is out of reach, heat pumps with high efficiency are preferred. Rural areas shall slash the use of bulk coal and inefficient biomass, and encourage the use of new and efficient biomass boilers and heat pumps.

The cost data of this study is obtained by referring to previous engineering survey and related cases [6,7,, 7, 8, 9].

According to the estimates, 1.1 trillion CNY more investment is required in the reinforced policy scenario than the policy scenario for the two main undertakings proposed in this study; and additional 0.5 trillion CNY is needed in the 2℃ scenario compared to the reinforced policy scenario; and the 1.5℃ scenario requires 0.06 trillion CNY less than the 2℃ scenario.

As for the improvement of envelope performance, more aggressive targets for energy conservation and emission reduction lead to an enormous downsizing of new buildings, hence the reduced cost in this regard. Yet the cost of energy conservation renovation for existing buildings is on the rise. By 2050, the additional cost for the four scenario is estimated to be 0.65 trillion CNY, 0.15 trillion CNY and -0.18 trillion CNY respectively.

Regarding heating upgrade in the north, the investment required by all scenarios in the northern urban areas is on a steady rise due to the waste heat utilization, heat pump installation and elimination of all boilers. For rural areas, the four scenarios mostly feature a rising trajectory, except for the 1.5℃ scenario that shows a drop in overall investment due to the fact that fewer rural residents choose to embrace the earlier electrification after they have already switched from bulk coal and inefficient biomass to gas-fired wall-mounted furnace. The scenario difference of investment in heating in the north is 0.48 trillion CNY, 0.37 trillion CNY, and 0.12 trillion CNY respectively in 2050.

Specific scenario differences of investment to 2050 are shown in Table 8.2.

Table 8.2 Investment differences between scenarios (in billion CNY)
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8.1.3 Total Investment Needs

Considering investment on both energy supply and demand side, the cumulative energy investment from 2020 to 2050 stands at 71 trillion CNY, 100 trillion CNY, 127 trillion CNY, and 174 trillion CNY respectively under different low-emission scenarios (Table 8.3, Fig. 8.7). Compared with the policy scenario, the cumulative investment in the reinforced scenario, 2℃ scenario and 1.5℃ scenario rises by 29 trillion CNY, 57 trillion CNY, and 104 trillion CNY respectively. And the average annual investment from 2020 to 2050 is 2.4 trillion CNY, 3.3 trillion CNY, 4.2 trillion CNY, and 5.8 trillion CNY respectively.

Table 8.3 Total investment from 2020 to 2050 (in trillion CNY)
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Fig. 8.7
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Total energy investment by scenario

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8.2 Energy Cost Analysis

This research makes further estimates on the comprehensive power supply cost and society-wide energy cost.

8.2.1 Cost of Electricity Supply

Electricity supply is one of the major costs of production and living. Generally speaking, electricity price is the sum of the cost and profit of electricity supply. The electricity supply cost in this study mainly refers to the weighted average cost per kilowatt-hour of each generation technology. The long-term trend of power supply cost varies greatly under different scenarios. The policy scenario features an overall decline in the cost; the reinforced policy scenario is characterized by a stable and slight increase in the cost over a fairly long period of time until a slump after 2033; both the 2℃ and 1.5℃ scenarios witness a pattern of an increase before a drop, with the cost hitting the peak in 2028 and 2033, respectively which is 1.4 and 1.42 times of that in 2018 respectively (see Fig. 8.8). In the long run, the power supply cost witnesses a downward trend, and the cost in 2050 under the policy, reinforced policy, 2℃, and 1.5℃ scenarios is 69%, 66%, 75%, and 90% of that in 2018 respectively (see Fig. 8.8). Looking at the cost composition of electricity supply in 2050, higher costs occur in the 2℃ and 1.5℃ scenarios compared to the policy and reinforced policy scenarios, this is mainly attributed to the higher fixed investment costs, operation and maintenance, and power transmission costs (see Fig. 8.9).

Fig. 8.8
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Trend of changes in power supply cost

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Fig. 8.9
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Cost composition of power supply in 2050

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Future cost reduction in power supply is primarily driven by the reduced fuel cost. The cost of fuel in 2018 accounts for about 29% of the total cost of electricity supply. In the reinforced policy and 2℃ scenarios, fuel cost falls to 8.4% and 8.5% of cost of electricity supply respectively as coal-fired power plant capacity downsize (see Fig. 8.9). Despite minor increases in the cost of operating and maintenance, power transmission, and energy storage in the long-term, the dramatic reductions in fuel cost offset these increased costs.

8.2.2 Cost of Energy Use in the Entire Society

This study estimates the energy cost of the whole society based on the energy consumption of different varieties. The formula is as follows:

$$ {\text{EC}}_{j} = \mathop \sum \limits_{i}^{5} E_{ij} \times EP_{ij} $$

ECj is the energy cost of the whole society in the jth year; i stands for five energy varieties, including coal, oil, natural gas, electricity and others; Eij refers to the consumption of different energy varieties in different years; EPij refers to the price of different energy varieties in different years. The base year data of energy price is from existing literature [10], and its variation trend over time is assumed based on the trend of cost variation of different energy categories.

As shown in Table 8.4, it is estimated that the energy cost of the whole society under the four scenarios sees continued increase from 2020 to 2030; the policy scenario, reinforced scenario and 2℃ scenario report a drop from 2030 to 2050; and a steady climb is observed from 2020 to 2050 in the 1.5℃ scenario. Under the four scenarios, the total energy cost of the whole society in 2050 is approximately CNY 11–14 trillion.

Table 8.4 Energy cost of the whole society (in trillion CNY)
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8.3 Summary

Overall, there are notable discrepancies in the amount of investment under the various scenarios. Between 2020 and 2050, cumulative energy investment in policy, reinforced policy, 2℃ and 1.5℃ scenario amounts to 71 trillion, 100 trillion, 127 trillion, and 174 trillion CNY respectively, with the average annual investment of 2.4 trillion, 3.3 trillion, 4.2 trillion, and 5.8 trillion CNY respectively. Compared with the 2℃ scenario, the cumulative investment in the 1.5℃ scenario increases by an additional 47 trillion, which averages to 1.6 trillion CNY additional investment on an annual basis.

In terms of average power supply cost, both 2℃ and 1.5℃ scenarios witness an increase before decreasing from around 2030. The costs in 2050 under the 2℃ scenario and 1.5℃ scenario are markedly higher than that under the policy and the reinforced policy scenario. The energy cost of the whole society sees continued growth from 2020 to 2030, and might experience a fall from 2030 to 2050, reaching roughly 11–14 trillion CNY by 2050.