Green Technology: From Quantity to Quality

Abstract

Energy is the foundation of the green technology industry, and fossil fuel has built the current global energy and industrial system. Under the goals of emission peak and carbon neutrality, all countries need to change their energy structures to achieve net-zero carbon emissions, which in essence represents a revolution for energy. The core of carbon-neutral technologies is the transformation in the energy supply side. Without the feasibility and affordability of zero-carbon technologies, it would be impossible for the consumption side to put those technologies into practice. Considering the green premium of the current electricity supply vs. non-electricity energy supply, it is still difficult and costly to achieve carbon neutrality based on existing technologies. Hence, reducing costs will be the main development direction of energy technologies in the future. In the long term, energy technologies will demonstrate significant variations over time, which gives a perspective to this report. We will analyze the possible development of different technologies in terms of potential cost savings, and investigate the development of technological routes under constraints of scheduling and resources for China’s carbon neutrality initiative. We believe the falling cost of carbon neutrality technologies will eventually be the main driving force for large-scale application. In the power industry, photovoltaics (PV) and energy storage are expected to reach tariff parity with thermal power (or a zero green premium) by 2028. For non-electricity energy supply, a higher electrification rate will promote CO₂ emissions reduction in consumer, construction, and toll road transport sectors, and then the net-zero carbon emissions of transportation and manufacturing industries will be achieved by using hydrogen energy and carbon capture technologies ultimately. Although China’s mission to achieve carbon neutrality in 40 years is a challenging undertaking, it is ample time in which technological developments and breakthroughs are possible. For example, the technological development route would change if nuclear safety can be improved on the back of advanced nuclear energy technologies, as well as the CO₂ obtained via carbon capture technologies can be utilized and become a revenue source. In addition, if the photoelectric conversion efficiency exceeds 30%, the hydrogen energy cost will continue to drop.

5.1 Technological Breakthrough and Carbon Neutrality

5.1.1 Why Do We Need a Technological Breakthrough?

Reducing CO₂ emissions from energy projects is crucial to China’s carbon neutrality. According to the CICC macro team, the energy sector accounts for 90% of CO₂ emissions in China (before factoring in carbon sinking).

With existing technologies, it is costly to achieve carbon neutrality in the energy and manufacturing industries, which makes costs reduction via technological advancement the key to reducing the green premiums. According to our estimation, green premiums will stand at 17% in the power industry and at 175% in other industries in 2021. We attribute the high green premiums to the elevated cost of clean energy, and if there are no technological advancements, the cost of the transformation towards carbon neutrality will be high. Concerning the current situation, there is still room for improvements in the efficiency of clean power projects. Green hydrogen energy and carbon capture technologies need to further increase the technological maturity and expand industrial application, hence reducing the cost of green energy via three fundamental technological routes: economies of scale, material replacement, and efficiency enhancement.

The technological transformation will bring changes in cost. According to the sales data of wind and photovoltaic power companies, we estimate that the costs of solar and wind power dropped 89% and 34% over 2010–2020 due to developments in non-fossil energy technologies (Fig. 5.1). This means that the costs of solar and wind power fell 13% and 7% each for every 100% increase in the installation of power generation facilities. In contrast, the costs of coal, petroleum, and natural gas continued to fluctuate during this period, as shown by an increase of about 45% in China’s coal price compared with the lowest price recorded in 2015 following the short supply. China has long focused on the cost advantage in energy supply (its electricity price was 14%–64% lower than those in developed countries in 2018), and as alternative-energy costs drop following the use of advanced technologies, the costs of wind and photovoltaic power projects have fallen short of the costs of coal-fired power projects in China. These are all sensible changes brought by technological advancements.

Fig. 5.1

Source BP, Solarzoom, Corporate filings of wind and solar power companies, CICC Research

Costs of fossil energy, wind power, and photovoltaic power.

Therefore, to reach an emission peak in 2030 and achieve carbon neutrality in 2060, transformations from technological maturity to industrial maturity are needed for various carbon-reduction and carbon-neutral technologies in the next 4 decades to pave the way for China’s carbon neutrality. Currently, China is still confronting high green premiums in various industries. If green premiums are forced to be reduced without technological advancements, the significant social costs will hinder the transition to carbon neutrality.

5.1.2 What Can Become Carbon Neutral by Technological Advances and What Cannot?

Carbon neutrality will be difficult to achieve if the energy supply cannot realize net zero carbon emissions, which suggests the development of energy technologies is the foundation for carbon neutrality. In addition, since the growth of new economies also relies on electricity supply, if China can realize net zero carbon emissions of electricity generation through solar, wind, hydro, and nuclear, the growth of new economies will not be bound by emission reduction targets. We should also recognize that although energy supply depends heavily on technological development, public policy also plays an important role in end-market consumers’ choosing low-energy consumption models. Cost is only one of the factors that consumers consider when they choose low-energy consumption models. This means that companies may not spontaneously shift to zero-carbon-emissions technologies even when the green premium reaches zero. As a result, reducing carbon emissions in consumer-related industries, such as transportation and heating, requires not only technological advances but also additional policy tailwinds.

5.1.3 What Are the Technological Routes for the Carbon Neutrality Initiative? What Are the Constraints?

In the choice of the technological routes for 2020–2060, economic optimization of energy transition can be achieved through technology selection (i.e., easy to difficult). In addition to cost, resource constraints and the application scenario will also influence consumer choices in technology.

Net zero emissions in the power industry should first consider multiple energy sources to help reduce the electricity generation cost. Photovoltaic and energy storage should be the major emphasis in electric supply, but the complementary smart power grid technologies that utilize multiple energy sources are also crucial. Additional policy tailwinds for power grid and energy storage technologies and a higher proportion of non-fossil energy are pivotal in helping the power system operate in a safer and steadier way and reducing the overall electricity cost.

Carbon neutrality technologies for activities other than power generation hinge on areas where the technologies are utilized. Outside the power sector, energy for other industries is used in various areas and the technologies utilized are not 100% transferable with each other. As a result, companies need to use different energy technologies in different applications. Based on the trajectory of cost reductions, we believe the cost of hydrogen energy-enabled transportation will drop to a level acceptable to consumers by 2035, while industries are more likely to achieve carbon neutrality via the use of carbon capture technologies.

To summarize the technology routes for carbon neutrality, photovoltaic and energy storage technologies will be the major technological foundation in the power sector, with hydrogen accompanying carbon capture in the non-power sector. We believe China can achieve its CO₂ emission target by 2030 through multiple technologies that reduce energy consumption and CO₂ emissions. Then we expect the power-generation industry to reach net zero emissions based on the photovoltaic-skewed power system with multiple energy sources. In addition, the supply of cleaner and cheaper electricity should lead to greater electrification in industries such as toll roads, railways, construction, and some manufacturing industries. For hard electrification fields such as heavy transportation, aviation, and the chemical industry, net zero carbon emission could be achieved through hydrogen and biofuels. Other manufacturing industries may ultimately achieve carbon neutrality by using carbon capture technologies.

Summing up the policy implications of technological routes for the carbon neutrality initiative, we believe a technological breakthrough is possible given the evolution of existing technologies, but several industries (such as hydrogen power-enabled industrial heating) probably will not be able to reach a zero green premium on the back of existing technological routes. These industries will continue to have positive green premiums and rely greatly on policy tailwinds for their carbon neutrality efforts. From our point of view, China should first propel the development of non-fossil energy to at least mitigate the CO₂ emission problem in non-electric energy sectors through increasing the electrification rate, and then promote the industrialization as well as scale-up of the use of hydrogen energy over 2020–2040 and encourage the use of carbon capture technologies over 2040–2060 to make zero-carbon-emissions technologies feasible and affordable in all industries. The technological route to realizing carbon neutrality in energy is shown in Fig. 5.2.

Fig. 5.2

Source CICC Research

Technological routes for the carbon neutrality initiative.

5.2 Cost is a Touchstone for the Development of Technology

5.2.1 What Kind of Technologies Are Capable of Reaching Emission Peak and Carbon-Neutral as Planned? What Are the Differences in the Choices of Various Technological Routes?

At the stage of emissions peak, the mainly adopted technologies should be able to help to reduce CO₂ emissions as much as possible. To pursue carbon neutrality, more advanced technologies are required. China’s forests naturally form carbon sinks, but their energy density and overall capacity remain relatively low. Therefore, net zero carbon emissions technologies and even negative carbon emissions technologies must be applied in energy and manufacturing industries to achieve carbon neutrality. In the long term, we should take the current costs of technologies as well as the potential of reducing the costs of these technologies into consideration.

5.2.2 Three Measures to Reduce the Cost of Developing Energy Technologies

Fig. 5.3

Source CICC Research

Carbon neutrality technologies for use in power generation and other industries. Note A larger number indicates better performance.

In retrospect of the history of technological development in energy, three main measures have helped to reduce technological cost: economies of scale, material replacement, and efficiency enhancement. Although photovoltaic, electrochemical EV batteries, and hydrogen energy technologies remain controversial, these technologies continue to develop rapidly. The fundamental reasons behind the rapid development in these technologies lie in their manufacturing attributes. The costs of these technologies are likely to drop on the back of economies of scale, material replacement, and efficiency enhancement, while traditional fossil energy (such as coal, petroleum, and natural gas) due to their energy attributes may see costs increase amid higher demand. As such, photovoltaic, electrochemical EV batteries, and hydrogen energy technologies will likely become pivotal energy technologies going forward. The multidimensional comparison of power sector and non-power sector’s technologies for carbon neutrality is shown in Fig. 5.3.

In conclusion, energy-efficient and carbon reduction technologies are likely to contribute more to reaching the peak of CO₂ emissions in the coming decade. Among net zero emissions technologies, hydropower has the lowest cost, followed by wind, photovoltaic, and nuclear power, while pumped hydro storage projects have lower costs than electrochemical energy storage projects. The costs of photovoltaic and electrochemical energy storage technologies will fall faster than other technologies, thanks to efficiency enhancement, material replacement, and economies of scale. Concerning net zero emissions technologies for industries other than power generation, hydrogen energy and carbon capture technologies differ in maturity and cost, and neither has yet reached the commercial stage. Nevertheless, costs of hydrogen energy could be reduced through scaling, material substitution, and efficiency. Carbon capture technologies can also realize cost reduction via the first two methods. At the critical point for carbon neutrality, the cost of manufacturing hydrogen will likely drop rapidly as the electricity generation cost at photovoltaic projects may decline notably thanks to the electrolysis of water. As a result, hydrogen energy may realize price parity with traditional energy in the toll road industry and be put into use.

5.3 Existing and Potential Technologies for Net Zero Carbon Emissions and Carbon Neutrality Initiatives

5.3.1 Technologies to Help Cut CO₂ Emissions Focus on Reducing Energy Consumption and Shifting to Energy Technologies that Produce Lower CO₂ Emissions

Technologies that help thermal power stations reduce coal consumption: Thermal power stations can raise thermal efficiency to 45%, thereby reducing CO₂ emissions. Over the past decade, coal consumption for electricity generation at domestic power stations has dropped 27g per kWh to 306g per kWh. This implies that power stations cut 320mnt of CO₂ emissions in 2019 (equal to around 3% of full-year CO₂ emissions in China), as the annual amount of electricity generated was 4.6trn kWh. We estimate that domestic thermal power stations can reduce CO₂ emissions by 470mnt if coal consumption for electricity generation drops by 41g per kWh to the level recorded by the most advanced existing supercritical reheating thermal power stations in China (265g per kWh).

Replacing coal with gas: The coal-fired heating facilities in rural areas discharge multiple pollutants, including sulfur and nitrogen. They intensify the problem of scattered CO₂ emissions. Replacing 2t of coal with natural gas in the rural heating system can help reduce CO₂ emissions by 230mnt annually, according to the CICC commodities team.

Industrial energy-efficient technologies: During the 13th FYP period (2016–2020), energy consumption per industrial value-added at companies above the designated scale dropped 15.6%, meaning that these companies cut CO₂ emissions by 240mnt in the given time span. We estimate that industrial energy consumption will drop 14% by 2025, referring to the energy reduction target formulated in the National New and High-Tech Green Development Action Implementation Plan released by the Ministry of Science and Technology. As such, we estimate that industrial companies will reduce 220mnt of CO₂ emissions by 2025.

Technologies making home appliances more energy-efficient: The amount of electricity usage may continue to increase due to consumption upgrades. Nevertheless, the CICC home appliance team estimates that the growth rate of electricity used by consumers will decrease 2.4ppt annually due to the initiative to raise energy efficiency standards for home appliances. This suggests that electricity used by home appliances will fall 36.8bn kWh (down 3.2%) in 2021, meaning a drop of 36.7mnt in CO₂ emissions.

Cultured meat technologies help reduce CO₂ emissions of the animal husbandry industry: The CICC agriculture team estimates that replacing animal protein with cultured meat can reduce CO₂ emissions by 13mnt. Coupled with photosynthesis-enabled carbon sequestration during the process of planting soybeans, it could further enhance the effect of carbon sequestration.

Operating thermal power stations more flexibly: The flexible transformation of thermal power stations may slightly increase the CO₂ emissions per kWh of electricity generated, but it also will help power grids use additional net-zero-emission non-fossil energy, thereby reducing the overall utilization hours of coal-fired power plants and reducing CO₂ emissions of the entire power system.

5.3.2 Carbon-Neutral Technologies: Technologies that Help Achieve Zero-Carbon and Negative-Carbon Emissions

Predictions of cost drops of carbon-neutral technologies in the power industry are as follows: Concerning the zero-carbon-emissions technologies available to the power industry, electrochemical energy storage technologies may record the largest drop in cost, as the use of this type of storage is currently in its infancy; we estimate that the cost of photovoltaic technologies will drop 50% in the coming decade due to economies of scale, material replacement, and efficiency enhancement; the utilization rate of wind power projects is close to the theoretical limit, but because of increased turbine capacity and the domestic production of raw materials, we expect the cost of wind power technologies to drop 20%–30%; the mass production and domestic production of nuclear power projects is expected to generate more than 10% decrease in the cost of investment, and the drop in the cost of hydropower projects will be limited, as locations suitable for hydropower stations are scarce. The expected cost drop and core driving force of carbon-neutral technologies in the power industry are listed in Table 5.1.

Table 5.1 Falling costs of carbon-neutral technologies in the power industry

Photovoltaic power cost forecast: With the use of perovskite technologies, the module efficiency is expected to reach 35% by 2030, in which the module cost will come in at Rmb0.9/W and the BOS cost will drop to Rmb0.8/W. Overall, we estimate that the CAPEX of photovoltaic power projects will drop to Rmb1.6/W by 2030. Assuming utilization hours remain unchanged, the photovoltaic cost has the potential of dropping to Rmb0.15/W in eastern China and Rmb0.2/W in western China.

Wind power cost forecast: We estimate that the cost of electricity generated by onshore and offshore wind power projects may have the potential to drop to Rmb0.21/kWh (based on the assumption that utilization hours will increase to 3,500h, construction cost will drop to Rmb5.8/W) and Rmb0.4/kWh (based on the assumption that utilization hours could reach as high as 4,000h, and investment cost could drop as low as Rmb12.5/W) to achieve price parity by 2030.

Hydropower cost forecast: Hydropower is currently one of the lowest-cost power sources in China. According to NEA, the average on-grid tariff of hydropower projects is low at less than Rmb0.25/kWh in Yunnan, Qinghai, Gansu, and Xinjiang. The current cost of hydropower equipment has stabilized in China, and given the CAPEX released by hydropower companies, we estimate that the construction cost of hydropower units that start operation after the 14th FYP period will increase to Rmb10–15/W. As upstream reservoirs will likely increase the utilization hours of hydropower units through region-wide scheduling, the overall cost of hydropower should remain stable in the future.

Nuclear power cost forecast: The cost of third-generation nuclear power units under development has exceeded Rmb0.35/kWh due to stricter safety regulations. (According to the corporate filings of power companies, the investment cost of China-made nuclear power unit Hualong One, which utilizes third-generation nuclear power technologies, stands at about Rmb16.4/W based on an operation period of 60 years and annual utilization hours of 7,500h.) The cost of nuclear power will likely decline, thanks to the domestic production of the third-generation nuclear power units, the mass-production of these products, better design, and shorter construction periods. Power companies hope to reduce the investment cost of third-generation nuclear power units to the level of second-generation nuclear power units (Rmb12.3/W).

Biomass power cost forecast: The cost of biomass power is high at Rmb0.73/kWh given the straw cost of Rmb300/tonne, the investment cost of Rmb10/W, and 7,900 utilization hours. According to International Renewable Energy Agency (IRENA), the equipment cost of biomass power units is unlikely to drop. Since the total volume of biomass resources in China is subject to the output of the agriculture, forestry, and husbandry industry, the grain safety program, and transportation (transportation's contribution to costs is high due to straw's low energy density), we believe the cost of biomass power will remain stable.

Pumped hydro storage cost forecast: We estimate that the cost of pumped hydro storage projects could reach about Rmb0.2/kWh (given the cycle efficiency of 75%, investment cost of Rmb6/W, and 2,500 discharging hours) with efficient power grid scheduling. Pumped hydro storage is also economically viable (current annual utilization hours are generally less than 1,000h, indicating substantial room for improvements). Construction of pumped hydro storage projects, similar with construction of hydro power projects, requires certain geographic resources and conditions. The cost of pumped hydro storage is not very likely to drop, due to limited locations for such projects and higher resident resettlement costs.

Electrochemical energy storage cost forecast: With the development of advanced battery technology, the cost of electrochemical energy storage technology has dropped notably. However, the cost is still at a relatively high level, Rmb0.6–0.8/kWh (the battery system cost is Rmb0.7/Wh; the total system cost is Rmb1.7/Wh; cycle life is about 5,000 cycles). By 2030, the system cost may reach Rmb1/Wh. In addition, improved electrode materials and advanced maintenance technologies are expected to increase the cycle life of batteries to more than 10,000 cycles. As such, we anticipate the energy storage cost will drop to Rmb0.3–0.4/kWh.

Falling costs of carbon-neutral technologies besides power generation are listed as follows. Electricity substitution is the least expensive method to achieve net zero emissions in the non-power industries and may continue to benefit from the falling cost of clean electricity in the future. The cost of hydrogen energy may drop 70% as the result of economies of scale in the industrial value chain and the use of clean electricity in producing hydrogen via electrolysis. The cost of fossil energy equipped with carbon capture will likely drop by less than 10%, as the cost of fossil energy is unlikely to decrease. The cost of biomass fuel may drop 35% if technological advances can help reduce the cost of raw materials in the long term. The expected cost drop and core driving force of carbon-neutral technologies besides power industry are listed in Table 5.2.

Table 5.2 Falling costs of carbon-neutral technologies in industries other than power generation

Electricity substitution cost: Under the existing electricity supply structure in China of 2020, we estimate that the end-market cost of green electricity stands at Rmb0.58/kWh (factoring in the cost of electricity generation, peak-season power unit rescheduling, and power distribution), implying the cost of electric energy at around Rmb1,900 per tonne of standard coal equivalent. As the non-fossil energy cost keeps decreasing, the end-market cost of green electricity will likely drop to Rmb0.41/kWh in 2060, with the corresponding cost of electric energy decreasing to around Rmb1,600 per tonne of standard coal equivalent.

Hydrogen energy substitution cost: Based on the estimation of the CICC electrical equipment team, green hydrogen energy seems to have a clearer cost-reduction route than other non-power energy. The transportation and refilling cost will likely drop by around 80% to Rmb8/kg from Rmb44/kg thanks to increased hydrogen transportation and refilling facilities and improved technologies. The cost of manufacturing hydrogen will likely drop by about 60% to Rmb9/kg from Rmb22/kg thanks to lower cost of non-fossil energy. We estimate that the cost of hydrogen energy will fall short of Rmb20/kg in 2060, meaning an energy cost at Rmb3,900 per tonne of standard coal equivalent.

Biomass-based fuel ethanol cost: According to the estimates of the CICC chemicals team, the reduction in the cost of fuel ethanol is limited, for the grain and crop demand is rather significant in China, restricting the amount of available resources. We estimate that the raw material cost will drop to Rmb2,000/tonne in the long term if technological routes utilizing less expensive raw materials (such as straw) can improve the quality of their products. In addition, we expect the cost of manufacturing fuel ethanol to drop to Rmb1,500/tonne. Overall, the cost of fuel ethanol will likely fall 35% to Rmb4,000/tonne, implying the energy cost at Rmb4,500 per tonne of standard coal equivalent.

Carbon capture cost: The CICC chemicals team estimates that the cost of carbon capture will drop to Rmb306/tonne (capture cost: Rmb195/tonne) in 2030 and Rmb262/tonne (capture cost: Rmb163/tonne) in 2060. Carbon capture technologies have advantages in integrating with the existing fossil energy system, but the downside is that such technologies always increase the energy use cost no matter what cost-reducing measures are conducted, making end-market energy use cost subject to the cost of fossil energy.

Biomass and carbon capture: Using straw and other plants as fuel, combined with carbon capture technologies, net CO₂ emission is likely to be reduced (carbon negative in other words). Positive returns can also be obtained if the cost of capturing carbon is lower than the carbon price.

5.4 “Photovoltaic + Energy Storage”, Hydrogen Energy, and Carbon Capture Becoming the Main Technological Routes

5.4.1 The Main and Auxiliary Technological Routes for the Carbon Neutrality Initiative

How to choose the main technological routes for carbon neutrality in power and non-power industries? The development targets for carbon-neutral technologies in power and non-power industries as well as the feasibility of achieving these targets should be clarified on the supply side of energy, so as to lay a foundation for industries to meet the demand for energy.

The prototypes of many carbon-neutral technologies for power and non-power industries now can be utilized, and the costs of these technologies are likely to drop in the long term. The main technology selection and the turning point of technology penetration can be deduced through the following constraints: first, the benchmark for price parity, which traditional energy sources are selected to compare the price parity of carbon-neutral technologies and the method of comparison; second, the application scenario of carbon-neutral technologies, which refers to the compatibility of carbon neutralization technology with existing technologies and equipment; third, resource constraints, referring to the accessibility of raw materials required by carbon-neutral technologies.

Overall, carbon-neutral technologies for the power industry will achieve price parity earlier than those for non-power sectors. As shown in Fig. 5.4, the timeline we speculated for price parity is that hydropower and nuclear power have achieved price parity with coal-fired power, becoming the base energy in today’s power generation hierarchy. In non-power sectors, we assess that electrification has achieved price parity with “fossil fuel + carbon capture” if we only consider the cost of energy supply. The distributed photovoltaic and energy storage may realize retail price parity with coal-fired power, and electricity consumers may spontaneously shift to clean energy in the early 14th FYP period. By the middle of the 15th FYP period, collective photovoltaic and energy storage will likely achieve on-grid tariff parity with coal-fired power projects, increasing the use of clean energy in power generation. By the end of the 16th FYP period (2030–2035), hydrogen energy will likely achieve price parity with diesel supplemented by carbon capture, and non-power toll road industry may steadily shift to clean energy. Nevertheless, it is unlikely to achieve price parity for hydrogen with “coal + carbon capture” in the industrial sector.

Fig. 5.4

Source Same as Fig. 5.5 & 5.7, CICC Research

Timing of price parity for the main carbon-neutral technological routes in power generation and other industries.

For the timing of implementing policies, we note that alternative-energy-based power projects that received 5–10-year government subsidies have achieved price parity with coal-fired power projects and this industry’s reliance on policy tailwinds has come to an end, while energy storage and hydrogen energy projects have not achieved price parity. Policies favorable for the large-scale development of these industries are still required in the efforts to reduce technology costs and help these projects achieve price parity.

5.4.2 The Main Technological Route for the Carbon Neutrality Initiative in the Power Industry

In terms of the price parity of electricity generation, we notice that wind, solar, hydro, and nuclear power projects have achieved on-grid tariff parity with coal-fired power, and the cost advantages compared to fossil energy are likely to increase in the future.

The price parity timing of carbon-neutral technologies depends on when the cost of generating electricity per kWh will fall short of the benchmark price of coal-fired power. The on-grid tariffs for coal-fired power projects now average Rmb0.37/kWh in China (we assume that the cost of generating 1 kWh of electricity will remain stable as coal-fired power projects going forward), and if the cost of carbon-neutral technologies falls below the level of 0.37, the economic competitiveness of such technologies will be demonstrated.

In 2020, the cost of most carbon-neutral power is already less than that of coal-fired power. We estimate that the cost of generating 1 kWh of electricity from nuclear, photovoltaic, wind, and hydropower is 5%, 17%, 25%, and 34% lower than the cost of electricity generated through coal-fired power. Only the costs of generating 1 kWh of electricity at gas and biomass power projects remain 143% and 98% higher. By 2060, the manufacturing attributes will keep maximizing the cost advantages of wind and photovoltaic power, where the cost of the latter will be 68% lower than that of thermal power (see Fig. 5.5), becoming the cheapest clean energy source. The cost of wind, hydro, and nuclear power will be 47%, 34%, and 18% lower than the cost of thermal power respectively. The cost of gas and biomass power is constrained by limited raw materials and will stay higher than the cost of thermal power.

Fig. 5.5

Notes The current cost of generating 1 kWh of electricity is calculated using data from China Electricity Council, corporate filings of wind, solar, hydro, and nuclear power companies, and cross-checked via electricity prices released by NEA and regional power grid companies; electricity cost for 2030 is CICC estimate; gas-based power projects utilize low-carbon technologies, with carbon emissions 50% lower than the carbon emissions of traditional thermal power projects. Source China Electricity Council, Corporate filings, CICC Research

The costs of gas, biomass, nuclear, hydro, wind, and hydropower compared to thermal power.

Conditions of price parity for grid energy storage: The cost of storing 1 kWh of electricity at electrochemical energy storage projects is unlikely to fall under the cost of pumped hydro storage projects and thermal power peak-season rescheduling projects. But the technological availability may force electrochemical energy storage to become the main technological route for the carbon neutrality initiative in the power industry.

Power grid-related energy storage costs are indispensable in electricity generation and distribution. Electricity generation from renewable energy (especially from wind power and photovoltaic projects) is less dispatchable and predictable than electricity generation from other energy sources. Improving the quality of electricity generation from these renewable-energy-based power projects requires electricity flexibility technologies. As the penetration rate of renewable energy in the power system increases, we think that inadequate flexibility in electricity will not only weigh on the balance and safety of the power system but also makes the traditional power grid model less adaptable to future power sources (and even makes existing controllable load uncontrollable). As such, the maturity of electricity flexibility technologies and lower costs of such technologies are crucial to the carbon neutrality of the power system.

The timing of price parity for carbon-neutral technologies utilized in power grid-related energy storage: Electrochemical energy storage and pumped hydro storage are not very likely to reach price parity with thermal power peak-season rescheduling projects (measured by the electricity cost per kWh). Given the existing technological routes, we think the electricity charging cost of electrochemical energy storage projects and pumped hydro storage projects per kWh is unlikely to fall short of the electricity charging cost of thermal power peak-season rescheduling projects (Rmb0.14/kWh).

Electrochemical energy storage will likely become the main carbon-neutral technology for power grid-related energy storage, due to restraints from application scenarios and the potential of project development. Given the life cycle of thermal power units, we think that from 2030 the phase-out of coal-fired power units that are less than 0.6mn kW will be intensive (such units have been transformed so as to become more flexible, and they can improve power grids’ capabilities of receiving renewable energy), and that most thermal power units in the power system will be more than 1mn kW (such units have high parameters and low emissions, and are less flexible) as well as combined heat and power (CHP) units (electricity generation from such units is subject to heat supply conditions, and they are less flexible). As a result, the energy storage competence of thermal power peak-season rescheduling projects will likely weaken from 2030. In addition, the pumped hydro storage capacity that can be developed in China is around 120GW, according to China Renewable Energy Engineering Institute. We think that as the penetration rate of wind and photovoltaic power exceeds 30%, the existing energy storage capacity of the power system will become insufficient to store electricity generated by renewable-energy-based power projects and electrochemical energy storage may become the main technological route for the carbon neutrality initiative in the power industry.

Factoring in electricity generation and energy storage, we think that photovoltaic and electrochemical energy storage projects will achieve on-grid tariff parity with coal-fired power projects in 2028, and the cost of photovoltaic and electrochemical energy storage projects will be slightly higher than the cost of hydro and nuclear power projects in 2060. We believe photochemical energy storage technologies will play an important role in the carbon neutrality initiative of the power industry, given the flexibility of these technologies and the availability of related resources.

The timing of the price parity of carbon-neutral technologies in the power sector depends on when the cost of electricity generation and storage will drop below the on-grid tariff for coal-fired power. As shown in Fig. 5.6, the costs of electricity generation and energy storage of photovoltaic and wind power are 77% and 69% higher than the cost of thermal power, assuming the energy storage ratio to be 50%. Their costs are also higher than the costs of nuclear and hydropower that are capable of self-adjusting and relieving energy storage problem of the power grids. We expect the cost of photovoltaic and energy storage to be on par with the average on-grid tariff for coal-fired power (Rmb0.37/kWh) by 2028. As thermal power is phased-out subsequently, photovoltaic will gradually replace thermal power to avoid cost rebounds and the cost of photovoltaic will be 41% lower than that of thermal power by 2060. In addition, nuclear and hydro power projects do not incur energy storage problems in power grids. We estimate that the costs of nuclear and hydro power will be 18% and 34% lower than the cost of thermal power by 2060, largely on par with the cost of photovoltaic power.

Fig. 5.6

Note The current cost of generating and storing 1 kWh of electricity is calculated from data of China Electricity Council, corporate filings of wind, solar, hydro, and nuclear power companies, and cross-checked via electricity prices released by NEA and regional power grid companies; electricity cost for 2030 is CICC estimate; gas-based power projects utilize low-carbon technologies, with carbon emissions 50% lower than the carbon emissions of traditional thermal power projects. Source CICC Research

Comparing the electricity generation and energy storage cost of gas, biomass, nuclear, hydro, wind, and solar power to thermal power projects (assuming an energy storage ratio of 50%).

The places where energy technologies are utilized and the potential of developing power projects: Photovoltaic projects can be developed in a rather flexible way and photovoltaic resources are ample (see Fig. 5.7). As such, we believe photovoltaic technology will become the main technological route for carbon neutrality in the power industry, even if it does not have an absolute cost advantage compared with nuclear and hydropower. We think hydro, nuclear and wind power technologies will become the auxiliary technological routes for a multi-energy complementary system.

Fig. 5.7

Note The sizes of these bubbles represent the volume of carbon-neutral resources that are available in China; we show only 25% of the bubble for photovoltaic resources, as the volume of this energy source is markedly higher than the volume of other resources. Source China Meteorological Administration, National Bureau of Statistics of China, CICC Research

Carbon-neutral resources for electricity projects in China.

Application scenarios: Distributed photovoltaic and energy storage projects can help reduce the cost of power distribution. We expect such projects to achieve price parity more easily than centralized photovoltaic and energy storage projects.

The exploitation boundaries: The volume of photovoltaic resources is higher than that of other clean energy, which makes it possible to meet the increased energy demand.

5.4.2.1 Assessment of Practical Potential for Carbon-Neutral Technologies in Non-Power Industries

The concept of price parity is not applicable to carbon capture alone. Given estimates on technology-enabled drops in energy costs per tonne of standard coal equivalent, we think that electrification has largely achieved price parity with the fossil energy and carbon capture technological route, and hydrogen energy may reach price parity in the land transportation industry by 2035. However, biomass fuel and hydrogen energy are not very likely to achieve price parity in the manufacturing and aviation industries.

Electrification: According to the estimates of CICC industry teams, the cost of electrification technologies stands at Rmb1,900 per tonne of standard coal equivalent, lower than the cost of natural gas and carbon capture technologies (around Rmb3,600 per tonne of standard coal equivalent), diesel and carbon capture technologies (around Rmb6,000 per tonne of standard coal equivalent), and on par with the cost of coal and carbon capture technologies (around Rmb1,700 per tonne of standard coal equivalent). Thanks to lower clean energy costs, the cost of electrification technologies may continue to drop and maintain its economic advantage.

Hydrogen energy: Hydrogen energy is expected to achieve price parity with diesel and carbon capture technologies in the ground transportation industry by the end of the 16th FYP period, with the cost of hydrogen energy coming in at around Rmb5,500 per tonne of standard coal equivalent according to CICC’s estimates. However, price parity with coal and carbon capture technologies (Rmb1,200 per tonne of standard coal equivalent) in the manufacturing industries and with jet fuel and carbon capture technologies (Rmb2,500 per tonne of standard coal equivalent) for hydrogen is relatively hard to achieve by 2060.

Biomass-based fuel ethanol: The CICC agriculture team estimates that the price of biomass-based fuel ethanol will drop to Rmb4,500 per tonne of standard coal equivalent by 2060 from nearly Rmb7,000 per tonne of standard coal equivalent in 2021e, higher than the cost of jet fuel and carbon capture technologies (Rmb2,500 per tonne of standard coal equivalent) and thus cannot realize price parity.

If higher photovoltaic efficiency and lower electricity cost can reduce the end-market hydrogen price to Rmb12.5/kg (and Rmb5.8/kg for manufacturing industries, lower than our base-case hydrogen price forecast of Rmb18.8/kg for 2060), hydrogen will achieve price parity in the aviation industry (and the manufacturing industries). The cost of photovoltaic power should drop to Rmb0.02/kWh or even Rmb0.00/kWh to enable price parity of hydrogen in the aviation industry, lower than our base-case photovoltaic power price forecast of Rmb0.12/kWh for 2060. This shows that the large-scale use of hydrogen in the aviation and manufacturing industries remains difficult. In addition to hydrogen manufacturing costs, hydrogen storage and transportation costs should also decline. Otherwise, end-market users are more likely to utilize carbon capture technologies to achieve carbon neutrality.

Comparisons among costs of traditional energy, electrification, hydrogen energy, and biomass fuel are shown in Fig. 5.8.

Fig. 5.8

Source CICC Research

Comparing the cost of traditional energy and the costs of electrification, hydrogen energy, and biomass fuel. Note Existing cost based on market prices; we use the CICC chemicals team’s carbon capture cost estimate, the CICC electrical equipment’s hydrogen cost estimate, and the cost of electricity substitution program is the cost of carbon-neutral technologies in the power industry.

In addition to the cost reduction of energy technologies, the penetration rate of technologies is also important. Exploitations in application scenarios and boundaries should expand from the application side.

Application scenarios: Hydrogen energy substitution is incompatible with current mainstream technologies. Carbon capture technologies can only be utilized in fixed manufacturing facilities.

Application boundaries: Obtaining the raw materials for manufacturing biomass fuels faces constraints.

5.5 Policy Suggestions: Enhancing Technology R&D Protection; Supporting the Industrialization of New Technologies

Policies should give support to energy forms that are cleaner and more efficient, and create an open environment for various technologies to compete, leaving room for the market to decide the main direction for technology development. In formulating policies, the common development direction of energy technologies should be clarified. For the development of low-carbon clean energy, policies should put forward specific requirements (such as support for zero emissions and advanced technologies that have higher efficiency and the potential of “surpassing” the existing more advanced technologies) so as to improve China’s advantage in top-level design. Judging from past experience, we think that China should allow multiple technological routes to co-exist and compete. Market should have the final say, with end-market users making choices based on the advances in and the costs of energy technologies. Patent protection is crucial to the shift from importing technologies to developing proprietary technologies. Since the protection of intellectual property has not been emphasized in China, some Chinese companies were forced to locate their R&D centers overseas, which bodes will for the development of alternative energy technologies in China. Policies that support patent protection should be intensified and should encourage patent applications for research outputs, as well as support for enterprises that keep investing in technological development, so as to improve energy technologies.

Power sector should focus on propelling the use of non-fossil energy technologies. Emphasis should be put on the large-scale use of energy storage and power grid-related technologies. As the proportion of non-fossil energy rises, whether energy storage technologies can keep abreast of such energy holds the key. On the one hand, energy storage technologies are slightly different from electric vehicle (EV) batteries. Such technologies require lower energy density, more cycles, and attach greater importance on safety. It will be difficult to promote energy storage technology development without sufficient market demand. On the other hand, the structure of electrical grids will turn from the previous “uncontrollable load and controllable electricity source” structure to “uncontrollable load and uncontrollable electricity source” structure, suggesting that not only policies that clarify costs are required, technological applications that reduce standby redundancy in power grids are also indispensable to increase efficiency and optimize the parity between supply and demand. Policies should put emphasis on propelling pilot projects for smart power grid technologies, showing development directions of such technologies. Non-power sectors should also support the industrialization of new technologies and introduce incentive policies at the appropriate time. Only technological advancements could stimulate the end-market usage in non-power sectors as the costs remain relatively high. Based on historical experience, we estimate that it takes 20 years for a technology to attain the level of industrialization, and takes the same amount of time to achieve maturity in the application. Multiple technologies, including hydrogen energy, carbon capture, and biomass technologies, among others, are now utilized in non-power industries. However, hydrogen energy technologies are not compatible with the fossil energy technologies utilized in non-power industries. As such, policies that support the development of hydrogen energy-related technologies are necessary.

The Frontrunner Photovoltaic program is a replicable success and can help industrialize new technologies. Government executes pilot projects and implement preferential policies that provide subsidies and reduce taxation to facilitate new technologies to overcome barriers. The Frontrunner Photovoltaic program has provided an arena for high-efficient products and advanced technologies in the photovoltaic industry. In the meantime, projects under this program enjoy a series of favorable policies that pertain to land parcels and network connections. These favorable policies can reduce non-technological costs to the fullest, allowing projects to focus on cutting photovoltaic power cost and enhancing electricity generation efficiency.

When should policy support be provided? Judging from experience in other countries and subsidy policies launched at the preliminary development stage for renewable energy in China, we think that governments can roll out favorable policies for non-power technologies (such as hydrogen and carbon capture technologies) when the costs of such technologies are 200% higher than the cost of traditional energy.

Reviewing Germany and Japan’s experiences in rolling out photovoltaic power subsidies in 2000 and 2012, the prices of photovoltaic power were 163% and 250% higher than the on-grid electricity prices. In addition, China began to provide subsidies for onshore wind power, photovoltaic power, and offshore wind power in 2009, 2013, and 2014 respectively, as the prices of onshore wind power, photovoltaic power, and offshore wind power were 45%–68%, 120%–254%, and 89% higher than the on-grid tariff for coal-fired power projects. According to these cases, it seems to be a general pattern that countries typically provide photovoltaic power subsidies when the price of photovoltaic power is around 200% higher than the on-grid tariff. The cost of photovoltaic power continues to drop following the implementation of subsidy policies, and photovoltaic power can ultimately achieve price parity with traditional power sources. As a result, favorable policies can be rolled out for hydrogen energy and carbon capture technologies when the costs of these technologies are nearly 200% higher than the cost of traditional energy. In our opinion, these policy tailwinds will facilitate the development of hydrogen energy and carbon capture technologies, and help reduce the costs of these technologies.

5.5.1 Technologies that May Develop More Rapidly Than Expected

If the cost of carbon capture reduces and brings the economic advantage of this technology, the demand for developing hydrogen technologies may shrink. Carbon-neutral technologies used in non-power industries are mainly carbon capture, hydrogen, and biomass technologies, each having different pros and cons. Carbon capture technologies have gained the advantage of being compatible with existing energy technologies, for carbon capture devices can be attached to the tail ends of existing facilities to reduce CO₂ emissions, which is more convenient than hydrogen technologies. But reducing the cost of storing the carbon captured from energy projects remains difficult, and the overall zero-carbon cost (fossil energy + carbon capture) is subject to fossil energy prices. If carbon capture technologies can make a new breakthrough in application, the cost of carbon capture technologies may drop markedly, which means carbon neutrality will likely come earlier than expected as these technologies are compatible with existing energy and manufacturing systems.

The use of nuclear power may increase markedly if fourth-generation technologies can notably improve the safety of nuclear power projects, which may further affect the power structure. Nuclear power is of great importance as one of the cleanest and highly efficient base-load powers. However, the development of the nuclear power industry has faced headwinds, e.g., nuclear power stations must be built far from residential areas. Workplace safety is the top priority in the nuclear power industry and the focus of nuclear technological development. Hence, if the design of nuclear power stations can secure the safety of these projects, the scale of application will increase rapidly. In the long term, nuclear energy is still an energy source with the highest energy density available, and solar energy also comes from the reaction of nuclear fusion, suggesting the sustainability of nuclear power. We believe the use of nuclear fusion technologies will start a new technological revolution in the energy industry once controllable nuclear fusion is achieved.

Photovoltaic efficiency is also likely to exceed our estimate. In the previous section, we only considered the perovskite technology (the photoelectric conversion efficiency of this technology can reach 30% thanks to the current technological route), and we did not consider the use of condensation and multi-junction technologies. It is likely for the photoelectric conversion efficiency of photovoltaic technologies to exceed 40% in the long term, given continuous technological advancements. If the costs of photovoltaic technologies continue to drop, more applications and energy usages can be expected.

5.5.2 Technologies that May Develop More Slowly Than Expected

The development of energy storage technologies may proceed more slowly than we expect. Connecting voluminous renewable-energy-based power projects to the existing electricity system in China may make regional power grids less balanced, due to the fluctuation in instantaneous electricity generation, daily curves, and seasonal resources of renewable-energy-based power projects. The penetration rates of renewable-energy-based power projects (such as wind and solar power projects) are high in Australia, the UK, and California. Their power systems in recent years experienced balance and safety issues under extreme conditions, requiring stronger instantaneous balancing capabilities. In the short term, enhancing the flexibility of the electricity system is crucial to increasing the use of non-fossil energy. Electricity systems could encourage thermal power peak-season rescheduling and pumped energy storage to improve scheduling at regional and national levels. However, problems related to electricity demand forecasts and electricity price signals need to be resolved.

The development of hydrogen energy technologies may proceed more slowly than expected. Hydrogen energy technologies are not compatible with the existing technologies. Technologies should improve notably so as to enable industries to shift from traditional energies to hydrogen energy. In the air transportation industry, countries have accelerated the R&D of hydrogen-powered airplanes to resolve related problems. The mixed combustion of hydrogen in aero-engines requires technological breakthroughs, and hydrogen storage has imposed higher requirements on the design of fuel tanks. In September 2020, Airbus released three concepts for zero-emission hydrogen-powered commercial aircraft slated to enter service in 2035. China’s carbon neutrality initiative may be affected, if the use of hydrogen technologies proceeds more slowly than expected (or such technologies cannot be utilized).