Engineering Green Transformation

Abstract

We believe that the essence of technological innovation in the field of green energy lies in cost competition—i.e., the race to reduce the “green premium,” which is the additional cost of choosing an emissions-free or low-emission innovation over an existing fossil-fuel-based option. The fossil fuel era was marked by high reliance on resource consumption amid increasingly scarce resources that constantly push up the marginal cost of energy exploitation. Thus, the purpose of technological innovation was to capitalize fully on limited fossil fuel resources. In contrast, green energies such as photovoltaic (PV) and wind do not face such constraints, but rather depend upon the manufacturing of equipment that has higher energy conversion efficiencies. We believe that more efficient and lower-cost energy equipment manufacturing is at the core of energy security. Specifically, the incentive for green energy improvement is that innovators gain greater market share and erect barriers to entry by leveraging lower manufacturing costs. However, the excess profits gained through cost reduction are not sustainable over the long term, as new entrants tend to acquire late-mover advantages.

In retrospect, we note that incremental innovation has become the dominant trend in the green energy sector, supplemented by radical innovation. Radical technological innovation in green energy creates a new generation of products, as evidenced by the improved efficiency and performance of PV and electric vehicle (EV) batteries. However, as the up-front cost can be high, companies try to gain cost advantages and leading market share via incremental innovations such as import substitution and lower unit consumption of raw materials. Internet of Energy (IoE) technology has spawned innovation in business models, and facilitated the integration of elements across the entire green energy industrial value chain on the back of digital transformation and smart technologies, which we believe will generate economic benefits and empower green energy development.

Through continuous technological innovation, the PV and EV battery technologies of domestic manufacturers are now on par with their foreign counterparts. This, coupled with strong cost advantages, enables Chinese manufacturers to capture a larger share of the global PV and EV battery supply chain, with top-tier companies reaping excess profits. In addition, IoE and energy digitalization have created an incremental market and provided external incentives for infrastructure operators. We note that innovation is primarily driven by R&D, technological convergence, and business model transformation. Government finances, policy banks, capital markets, corporate funds, and venture capital (VC) and private equity (PE) institutions comprise the major sources of funding that support innovation in the green energy sector.

Governments play a pivotal role in cultivating demand through subsidies, guiding the upgrading of demand, and establishing demonstration projects, and we think that this will facilitate technological advances in the green energy industry. We also believe that this will provide a platform to test large-scale production and cost reduction. Fierce competition among enterprises has gradually forced quantitative change to culminate, whereupon qualitative change ensues. We think that the current favorable policies will be extended to a wider range of green energy development programs such as hydrogen energy, energy storage, and carbon capture technology. Given that China still lags developed countries in radical innovation, we expect the government to further improve its talent pool and R&D system, strengthen intellectual property rights (IPR) protection, and regulate the disorderly expansion of production capacity.

The major “horizontal risk” to China’s green energy industry chain, stemming from the disruptive impact of new-generation technologies on existing ones, lies in the radical innovation of new battery technologies. We believe that the overall risk is manageable, as there is no obvious R&D gap between Chinese companies and their overseas rivals. The “vertical risks” that exist within the green energy supply chain for a particular generation of technology mainly arise from scarce resources and from equipment requiring import substitution. We think that the overall risk is manageable, given: (1) The gaps in the manufacturing of other equipment and supplies of raw material versus foreign counterparts are small; and (2) the shortage of key resources can be partially addressed by leveraging new battery technologies such as sodium-ion batteries. China also boasts a complete PV and automotive battery industrial value chain that ensures stable supply and demand.

4.1 Green Premium: The Essence of Technological Innovation in Renewable Energy

The essence of technological innovation in renewable energy is to reduce the green premium. In our report Economics of Carbon Neutrality: Macro and Sector Analysis Under New Constraints, we define the green premium as the percentage increase in the production cost of zero-emission technology versus current emission-generating technology. Since the beginning of the 21st century, there have been efforts to reduce the green premium in the energy development process. These efforts do not aim to create new demand and new products, but instead aim to encourage cost competition for particular forms of end-use energy (e.g., electricity) and reduce the cost of energy production and consumption This trend is manifested in a gradual shift to higher efficiency and lower costs in the use of energy, such as from wood to coal, then to petroleum and natural gas, and finally to photovoltaic and wind power. This chapter discusses the essence of technological innovation in green energy—cost competition; i.e., the race to reduce the green premium (Fig. 4.1).

Fig. 4.1

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

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

Green energy innovation is less resource-dependent, with a growing focus on the manufacturing of energy conversion equipment. The fossil fuel era was marked by high reliance on resource consumption amid increasingly scarce resources that constantly push up the marginal cost of energy exploitation. Thus, the purpose of technological innovation was to capitalize fully on limited fossil fuel resources. In contrast, green energies such as PV and wind come from inexhaustible solar and wind energy and do not face such constraints, but rather depend upon the manufacturing of equipment that has higher levels of energy conversion efficiency. We believe that the more efficient and lower-cost energy equipment manufacturing is the core of energy security.

Against the backdrop of a global move towards carbon neutrality, green energy firms have focused on cutting the green premium to compete against fossil fuel firms. In our report Economics of Carbon Neutrality: Macro and Sector Analysis Under New Constraints, we estimated that the green premium in the carbon neutrality case is 6% for power generation and 36× for grid absorption compared with the base case. Thus, the overall green premium in the power sector would have been 17% in 2021 (assuming electricity transmission and distribution costs remain unchanged). Compared to the base case, power generation currently has a green premium of negative 17% in the carbon neutrality case, and will be negative 4% in 2030 (Fig. 4.2).

Fig. 4.2

Source China Electricity Council, corporate filings of wind, solar, hydro, and nuclear power companies, GGII, L.E.K. Consulting, National Energy Administration, CICC Research

Green premium in the power industry (2021 and 2030). Note The CICC alternative energy and electrical equipment team expects China’s power system to achieve carbon neutrality in 2051.

Technological innovation in green energy involves continuous reduction in green premiums. Specifically, the incentive for green energy improvement is that innovators gain greater market share and erect barriers to entry by leveraging lower manufacturing costs. However, the excess profits gained through cost reduction are not sustainable over the long term, which demonstrates the rapid upgrading of technological innovations. We note that incremental innovation has become the dominant trend in the green energy sector, supplemented by radical innovation.

Incremental innovation has played a dominant role throughout the history of development of green energy technology. Incremental innovations such as changes in silicon wafer dicing techniques and the replacement of conventional aluminum back-surface field (Al-BSF) solar cells with passivated emitter and rear contact (PERC) solar cells primarily depend on the optimization of manufacturing techniques and processes through practical learning. Radical innovation, in contrast, leverages R&D to produce new generations of products such as thin-film solar cells, perovskite solar cells, ternary lithium-ion batteries, and solid-state automotive batteries.

We think that innovation in the green energy industry is primarily driven by excess returns on R&D investment and market share gains. Governments, policy banks, capital markets, corporate funds, and VC and PE institutions are the major sources of funding for the green energy sector.

4.2 Green Energy Technology: Incremental Innovation as the Dominant Approach, Supplemented by Radical Innovation

4.2.1 Types of Innovation

Overall, radical innovation in green energy technology creates new generations of products, while incremental innovation involves progressive, small improvements that add value to existing products. Radical innovations are the foundation on which new products are built, with improvements in efficiency and performance to meet the changes or upgrades in demand. However, as the up-front costs are high, green energy companies seek to gain cost advantages on the back of economies of scale and incremental innovations.

4.2.1.1 Radical Innovation in Green Energy

For the PV sector, radical innovation entails changes in the underlying light-absorption materials. The goal of technological innovation in the PV sector is to enhance the cost advantages of PV power generation over other energy sources. Radical innovation in PV technologies mainly entails changes in the underlying light-absorption materials, whose properties (bandwidth) determine the upper limits of theoretical photoelectric conversion efficiency and production cost.

For the EV battery sector, radical innovation means bringing about higher-energy-density, safer, and lower cost products. We note the two radical innovations in EV batteries. First, since 2010, the demand for lithium-ion batteries has shifted from consumer electronics to electric vehicles, with the latter placing more-stringent requirements on energy density, safety, and the cost. This has driven the upgrade of lithium-ion battery technologies from liquid-state lithium cobalt oxide (LiCoO₂) cathodes to liquid-state lithium iron phosphate (LFP) and ternary cathode materials. Second, we think that third-generation battery technologies, as represented by solid-state batteries, will bring about higher-energy-density, safer, and lower cost products. We expect mass production to commence around 2030.

4.2.1.2 Incremental Innovation in Green Energy

Green energy companies try to gain cost advantages and to lead market share through incremental innovation, which entails small improvements and upgrading of new-generation technologies, such as through import substitution, lower unit consumption of raw materials, and enhancement of material efficiency.

For the PV sector, the development of mainstream crystalline silicon PV cells is driven by incremental innovations. Over the past 15 years, we have seen three major advancements in this sector. First, the shift towards domestic production of polysilicon and breakthroughs in cold hydrogenation technology significantly lowered the energy consumption of polysilicon production. Second, breakthroughs in diamond wire cutting technology for monocrystalline silicon (mono-Si) wafer production facilitated the replacement of polysilicon wafers with high-efficiency mono-Si wafers. Third, the replacement of Al-BSF solar cells with high-performance PERC solar cells led to a 94% decline in solar energy cost per kWh and a 10% increase in cell efficiency.

For the EV batteries sector, incremental innovation and economies of scale have driven down costs. Incremental innovation is embodied by two main areas. The first one is a trend towards a rising portion of domestically produced core products. For example, the proportion of domestically produced core manufacturing equipment for lithium-ion batteries rose to 90% in 2020 from 20% in 2008. The domestic production rate of lithium-ion batteries and relevant materials increased to 100% in 2015 versus 40% in 2010. The second one is lower unit consumption of raw materials due to the increasing energy density of batteries. For example, through technological upgrades that improve compaction density, LFP batteries have increased their energy density from 110–120 Wh/kg to 200 Wh/kg. The energy density of ternary lithium-ion batteries climbed to 300 Wh/kg from 160 Wh/kg thanks to increased nickel content resulting from material optimization (Figs. 4.3 and 4.4).

Fig. 4.3

Source BP, CPIA, CICC Research

Incremental innovation in PV cells.

Fig. 4.4

Source GGII, CIAPS, CICC Research

Incremental innovation in EV batteries.

4.2.1.3 Innovation in Green Energy Business Model

With the development of information technology, the traditional energy industry is facing challenges from green transformation and digital transformation. IoE integrates electricity infrastructure and various forms of energy production and consumption with advanced information and communications technologies (ICT) and internet technologies to achieve intelligent management of multiple energy sources. IoE technology enables the reconstruction of existing energy production and sales systems and the integration of elements across the entire green energy industrial value chain on the back of digital transformation and smart manufacturing, which we believe could generate economic benefits and empower green energy development.

IoE and energy digitalization are in essence innovative technologies that improve the production, transmission, and consumption of traditional energy products. The heart of IoE lies in the integration and reorganization of existing internet technologies, the traditional power grid, and infrastructure for various energy forms (e.g., electricity, gas, heat). Moreover, IoE and energy digitalization involve service innovation. Digitalization could empower traditional power grids, reshape traditional energy service models, and spawn new business formats. It could also improve customer experience, enrich sources of income, and further facilitate the development of IoE.

4.2.2 Incentives for Technological Innovation

There are several methods to stimulate green energy innovation, including introducing new products and new technologies and cutting product prices to gain more market share and impede the entry of new competitors. Opening up incremental markets and employing external incentives also help.

4.2.2.1 Cost Reduction and Price Cut to Gain Market Share

The first way to stimulate green energy innovation is to introduce new products and new technologies. For example, over 2010–2020, the PV sector saw multiple rounds of technological innovation significantly drive down the levelized cost of energy (LCOE) for solar by 84% to Rmb0.38/kWh, making PV solar energy a promising substitute for traditional energy resources. GCL-Poly Energy employed cold hydrogenation technology to cut the cost of polysilicon production. Longi lowered the cost of wafer cutting by switching from traditional slurry-based wire sawing to diamond wire cutting technology.

We note that incremental technological innovation in the PV sector is continuously cutting costs, increasing product competitiveness, and enhancing the price advantage of PV over other energy sources for electricity generation. Throughout the cost cutting process, we note that the government provides support to PV manufacturers by: (1) Offering subsidies to improve the internal rate of return (IRR) of PV projects, to boost downstream demand, and to alleviate the demand shock caused by antidumping and countervailing duties against Chinese-made solar products; and (2) launching the Top Runner plot project to accelerate the commercialization and application of technological innovations, and to facilitate industrial upgrading as well as the advancement of PV power generation technologies.

We take a closer look at technological innovation and cost reduction in specific segments. For example, the replacement of traditional Al-BSF solar cells with PERC solar cells could boost cell efficiency and reduce per-watt cost, making PERC solar cells a good substitute for Al-BSF solar cells (Figs. 4.5 and 4.6).

Fig. 4.5

Source Solarzoom, CICC Research

Mono PERC solar cell prices versus mono solar cell prices.

Fig. 4.6

Source CPIA, CICC Research

Market share of different solar cell technologies (2016–2020).

As EVs are consumer goods, the overarching goal of innovation in EV battery technology is to meet the consumer demand for longer-range, safer EVs. Cost reduction is at the core of market competition when there is no obvious technology gap among battery manufacturers. Over 2010–2020, Chinese manufacturers caught up with their foreign counterparts in automotive battery technologies through radical and incremental innovations. Overall, there is no obvious technology gap between Chinese companies and their overseas rivals.

The Ministry of Industry and Information Technology (MIIT) issued a “white list” of batteries approved for use in EVs that were eligible for subsidies. This stimulated demand in the domestic lithium-ion battery industry chain and brought about economies of scale. Domestic battery manufacturers along the industry chain have continuously tried to cut costs by increasing the domestic production of core materials and continuously upgrading manufacturing technologies, enhancing product competitiveness, and enabling Chinese automotive battery manufacturers to capture a larger share of the global EV supply chain.

4.2.2.2 External Incentives and Incremental Market

Incentives for innovation in IoE and energy digitalization mainly include: (1) Profits from the incremental market created through business model innovation and digital empowerment; and (2) external incentives provided for energy infrastructure operators.

On the one hand, external incentives encourage traditional energy infrastructure operators to improve service quality through innovation. For infrastructure operators such as power grid companies, the value brought by innovation in IoE and energy digitalization is embodied in improved services provided for energy consumers, companies along the industrial value chain, the public, and governments. Specifically, this includes: (1) Assisting the government in scientific supervision, social governance, and smart city construction; (2) promoting the transition to clean and low-carbon energy, improving the level of electrification, and enhancing overall energy utilization efficiency; (3) making the power grid safer, more reliable, interactive, and open; (4) improving user experience and service quality; and (5) facilitating the modernization of the service industry chain and business transformation.

On the other hand, external incentives encourage various business entities in the incremental market to innovate service models and create new business formats. In addition to traditional energy services provided by infrastructure operators, companies could leverage energy digitalization to offer value-added services (e.g., energy efficiency management, virtual power plants, and energy trading) for energy consumers, information services (e.g., platform services and information consulting) for upstream and downstream companies along the industrial value chain, and derivative services (finance, e-commerce, and advertising) for the public.

4.2.3 Sources of Innovation

The ultimate goal of technological innovation in PV and EV batteries is to cut costs. However, the sources of innovation are diverse, either from the R&D undertaken in industrial research labs or from technological upgrading, occurring at various stages of the production process.

New products resulting from radical innovations drive technological revolution, undergoing years of research before being commercialized. The first two generations of PV technologies—crystalline silicon solar cell technology for power generation in the 1950s and thin-film battery technology in the 1970s—were created in developed areas such as the US and Europe. R&D and mass production of third-generation perovskite solar cells are well underway. Throughout the development of lithium-ion batteries, we note that each technological innovation contributed to higher battery efficiency and adapted to upgrades and changes in consumer demand at different stages. We believe team building and talent training are critical to radical innovation.

Incremental innovation seeks to optimize the performance of existing technologies based on expertise and experience accumulated during production; enterprises are the major driving force behind innovation. We note that companies along the PV industrial value chain try to strike a balance between higher efficiency and lower costs. Incremental innovation in lithium-ion batteries is manifested in an increasing percentage of domestic production of core equipment and upstream materials, and the growing use of lightweight materials for higher-energy-density batteries. The increased energy density of LFP batteries and ternary batteries led to a decline of about 85% in the cost of automotive battery packs during 2010–2020. We also believe that incremental innovations and enhanced dispatching capabilities of the power grid lay a solid foundation for IoE, enrich the application scenarios, and bring about more innovative business models.

Regarding sources of innovation in IoE and energy digitalization, the essence of these two sectors is energy internet of things (eIoT), which requires the integration of advanced information, communications, big data, artificial intelligence (AI), and internet technologies. Companies in the energy sector could leverage the power of the internet to transform their business models, and shift their focus from corporate business to consumer business to create a profitable incremental market.

4.2.4 Sources of Income

Gross margin improves on high R&D spending, and leading players are thus poised to gain excess profits. Comparing the leading domestic companies in the mono-Si wafer and polysilicon wafer sectors, we note that the wafer gross margin of Longi gradually surpassed that of GCL-Poly Energy over 2012–2015, due to the higher R&D expense ratio. We think that high R&D investment should bring innovation-based price premiums. However, such premiums are not sustainable over the long term as new entrants tend to acquire late-mover advantages. The gap in gross margin between Longi and Zhonghuan Semiconductor narrowed after Longi shared its diamond wire cutting technology throughout the industry (Fig. 4.7).

Fig. 4.7

Source Corporate filings, CICC Research

High R&D investment brought about excess profits to Longi.

Another source of innovation income for IoE and digitalization comes from the incremental market, as well as cost reduction and efficiency enhancement in infrastructure.

Employing digital and smart technologies to improve grid operational efficiency and cut costs. Upon completing market-oriented reform in the power sector, profits of power grid companies mainly came from power transmission and distribution tariffs. Power grid companies have tried to manage an increasingly complex grid through digital transformation. Data assets, as the key driver to improve productivity, could be tapped to promote the transformation of business, operation, and management models, thereby reducing operational costs.

IoE and digitalization enable business model innovation and scale expansion to gain incremental profits. We think business model innovation could open an untapped market with less intense competition in which new entrants will bring new businesses and new customers. The potential profits could be on par with those of the platform-based internet companies. Typical new entrants include comprehensive energy service providers, distributed energy resources suppliers, customer service providers, and data-platform operators.

4.2.5 Sources of Funding

The sources of funding for innovation mainly stem from government assistance, long-term financing, and market investment.

In China, government assistance comes in two types—direct government subsidies and innovation investments made by state-owned enterprises (SOEs) in accordance with national development strategies or policy guidance. The former primarily aims at creating demand and expanding market size, thereby promoting industrial innovation and development. Such funds are granted to support industries with burgeoning demand and the need for incremental innovation, such as the EV and energy sectors. The latter is undertaken by SOEs to invest in innovative infrastructure projects that could generate positive externalities. Government-sponsored innovation funds are available to all eligible enterprises, regardless of their technical specialty.

Typical cases of government assistance are as follows. In the PV sector, the Chinese government offered renewable energy subsidies to attract more investment in downstream power stations to bolster PV demand. In the automotive battery sector, state and local EV subsidies have been granted since 2011, which, coupled with the waiver of the vehicle purchasing tax, has directly stimulated demand for EVs. In the IoE sector, the State Grid carried out R&D on power grid chips under the policy guidance to improve the performance of the smart grid.

Long-term credit or industry-specific long-term bonds could provide low-cost financing for key industries to support the innovation and development of enterprises. This form of financing is more suitable to the needs of larger-scale companies with relatively high credit ratings. Similar to government grants, such funding is not confined to a specific technology area.

Classic cases of long-term financing include: (1) Special loan scheme: In 2020, China Development Bank (CDB) provided a special loan of Rmb250bn to support the development of more intelligent, eco-friendly, and high caliber industry chains in the manufacturing sector, including the EV segment. (2) Carbon-neutral bonds: As of end-July, central and local SOEs issued 129 carbon-neutral bonds (a subcategory of green debt financing instruments in the China Interbank Bond Market), totaling Rmb134.89bn.

Another source of funding is market investment. In the primary market, VC and PE firms raise capital to support the radical innovation of select small- to medium-sized startups, particularly those with promising technologies and strong growth potential. In the secondary market, funds are raised through share placement to facilitate the mass production of new products.

Classic cases of market investment are as follows: (1) PE and VC institutions funded the R&D of PV cell manufacturing equipment. (2) CATL received investments from more than 20 institutions before their initial public offering (IPO). Judging from the firm’s current stock price, these institutions earned a total of over Rmb40bn from this project. The floating profit of China Merchants Bank International Capital has exceeded Rmb17bn after two rounds of investment of nearly Rmb4bn.

4.3 Development of Green-Energy Industrial Value Chain

4.3.1 Recap of China’s Attempts at Building a Green-Energy Industrial Value Chain

Government subsidies to stimulate end-market demand and enable domestic players to create economies of scale. To boost domestic demand, China has designed and implemented a variety of favorable policies (including subsidies and tax incentives for EV purchases). The government also issued a white list of batteries approved for use in EVs that would be eligible for subsidies, which enhanced the competitiveness of domestic manufacturers. With the expansion of the domestic market, the establishment of a sound industry chain, and growing economies of scale, domestic companies can engage in a variety of trial-and-error innovation projects as the market could accommodate the coexistence of different technology roadmaps. Economies of scale further push down costs. In a sufficiently large market, the marginal benefit for introducing an innovative technology is high. Companies seek to gain market share and returns on investment through cost reduction, and continue to invest in R&D to strengthen competitive advantages (Figs. 4.8 and 4.9).

Fig. 4.8

Source BP, official government websites of countries in the above figure, CICC Research

Global newly installed PV capacity, by country; recap of major policies (1997–2020).

Fig. 4.9

Source CPIA, BP, CICC Research

Export value growth of China’s PV industry versus growth of newly installed PV capacity.

Looking at the EV battery industry as an example, the government provides subsidies and tax breaks to fuel EV demand and facilitate the development of the domestic automotive lithium-ion battery industry. Demand for automotive lithium-ion batteries mainly comes from the EV sector. However, two factors dampened demand in the early stages of development. First, EVs were not an economical choice versus the fossil fuel vehicles. Second, batteries had a low energy density and delivered a shorter range for EVs. The government introduced a wide spectrum of policies, such as subsidies, waiver of vehicle purchasing tax, and issuance of free license plates to EV owners to increase the economic benefits of EVs, boost demand, and bring economies of scale to the domestic lithium-ion battery industry chain.

The government also issued a white list of batteries approved for use in EVs and eligible for subsidies, which enhanced the competitiveness of domestic manufacturers. The government also raised the technological threshold for receiving subsidies to encourage the upgrading of lithium-ion battery technology. China’s EV sales volume increased nearly nine hundredfold to 1.17 mn units in 2020 from 1,400 units in 2010, resulting in a nearly a hundredfold increase in lithium-ion battery installation volume. EV and automotive battery assembly has mainly been concentrated in China over the past decade (Fig. 4.10).

Fig. 4.10

Source SNE, GGII, MIIT, CICC Research

Development history of China’s automotive battery industry.

In addition to providing subsidies, the government plays a leading role in guiding the direction of technological upgrading and providing a platform for experimentation. Companies along the green energy industry chain attach great importance to R&D and innovation, while the freedom to choose which technology roadmap to adopt is left to the market. The visible hand of government guidance and the invisible hand of a free market have worked together to facilitate the technological upgrading of the PV and automotive battery industries.

For the PV industry, the government has called for an increasing share of renewable energies in gross electricity consumption, and specified different provinces’ responsibility for the level of consumption of renewable-energy-generated electricity. However, it does not spell out the exact proportion of PV and wind energy consumption. Those with lower cost would contribute to more renewable electricity generation. China released the Guideline on Promoting Advanced Photovoltaic Technology Application and Industrial Upgrading in 2015, in which clear requirements were set out regarding the conversion efficiency and attenuation rate of solar battery modules used for new PV projects. In addition, the Top Runner Program was designed to increase power generation efficiency by 1 ppt and promote the wider application of higher-efficiency PV products, which ended the phase of insufficient government support and guidance of China’s PV industry. However, the government does not impose restrictions on the selection of specific technology roadmaps for PV modules. Instead, market competition comes into play—the technology that potentially generates greater economic benefits with lower costs will stand out and gain more market share.

For the EV battery industry, the government has continuously raised the technological threshold for receiving subsidies to guide the upgrading of lithium-ion battery technology in China. The EV subsidy policy issued in 2016 added a new eligibility threshold, stating that the energy density of batteries eligible for receiving subsidies shall not be lower than 90 Wh/kg, with larger amounts of subsidies tilted toward higher-energy-density batteries. The continuous increase in the energy-density threshold over 2018–2019 expedited the upgrading of the mainstream battery technology in China from LFP batteries to higher-energy-density, high caliber ternary batteries. This also motivated domestic battery companies to continuously upgrade the materials, manufacturing processes, and battery structures for LFP batteries and ternary batteries, and make technological breakthroughs in nickel-rich ternary cathode and LFP cathode materials, as well as the structural cell-to-pack (CTP) and cell-to-chassis (CTC) battery designs, leading to a continuous increase in energy density. During this process, the government did not intervene in the selection of technology roadmaps for automotive batteries, but allowed market forces to play a central role in selecting the most suitable technology roadmap to meet downstream demand.

At the same time, the government also adopts favorable policies to support the upgrading of infrastructure and the enrichment of application scenarios:

For the PV industry: As the power grid ensures reliable delivery of electricity to end-users, strengthening the construction of grid infrastructure boosts demand for PV installation and reduces wind and solar energy curtailment. The National Development and Reform Commission and the National Energy Administration jointly issued the Clean Energy Consumption Action Plan (2018–2020), emphasizing the importance of improving grid infrastructure and giving full play to the role of the grid resource allocation platform. The ministries set the goal that the clean energy absorption rate (the percentage of the clean energy collected that can be absorbed by the power grid) would reach 95% by 2020. Since 2018, the renewable energy curtailment rate of the State Grid has declined year by year and remained below 5%. The proportion of renewable energy sources in total electricity transmitted by the 22 ultra-high-voltage (UHV) lines (18 operated by the State Grid and four by the China Southern Power Grid) has exceeded 30% since 2018.¹

For the EV battery industry: In 2015, the State Council issued Guidance on Accelerating the Construction of Electric Vehicle Charging Infrastructure, and the National Development and Reform Commission released Guidelines for Developing Electric Vehicle Charging Infrastructure (2015–2020). Meanwhile, local governments introduced subsidy policies for the construction and operation of charging stations to encourage third-party participation and improve the deployment of EV charging infrastructure.

4.3.2 More Policies Are Needed to Support Applications for Green Energy Technologies

4.3.2.1 Energy Storage

China’s energy storage market is relatively small; as of 2020, cumulative installations of electrochemical energy storage systems accounted for less than 20% of the global total.² The major bottleneck stifling industrial development lies in insufficient demand, which we attribute to the lack of application scenarios and high cost. Specifically, downstream energy storage demand is mainly concentrated in areas such as supporting equipment for renewable power generation, large-scale grid storage, and user electricity-bill management. However, given the dominant position of coal-fired thermal power in China’s electricity supply, the strong grid structure, and inexpensive end-user electricity prices, we think that the domestic energy storage industry faces headwinds in that it lacks profitable application scenarios. Energy storage (primarily electrochemical energy storage) projects in China are expensive, with a single source of revenue and few economic benefits. We estimate the IRR of PV energy storage projects at 4–5%, indicating weak organic growth. We think the current policies have partly drawn upon the successful experience from the development of PV and EV batteries, which require further fine-tuning and elaboration in order to remove the bottlenecks that impede the development of the domestic energy storage industry.

Top-level policies support the optimization of electricity supply mix and pricing mechanism, as well as the creation of application scenarios for energy storage. The government fueled demand for EV batteries by fostering the development of EVs. Similarly, China’s pledge to achieve carbon peaking by 2030 and achieve carbon neutrality by 2060 is driving a massive expansion of renewable power generation to replace fossil fuels. We believe this will boost power consumption supplied from renewables, stimulate demand for grid ancillary services, and create application scenarios for power generation and grid-scale energy storage. The government also implemented peak and off-peak power tariffs, and improved the seasonally differentiated pricing mechanism. Given that the profit and cost of energy storage mainly depends on the arbitrage between the highs and lows of electricity prices, we believe that greater upside for user-end energy storage will be created by improving electricity-pricing policies.

More effective policies are needed to bolster economies of scale and demand for energy storage. Once these scenarios have been developed and implemented, the core issue surrounding the demand growth is how to create economies of scale for energy storage as the existing policy support has been shown to be inadequate. In light of the development of PV and EV batteries and the experience at overseas energy-storage companies, we think policymakers could create opportunities for domestic energy storage companies to achieve economies of scale by: (1) Providing subsidies or low-interest loans for energy storage projects; (2) enabling energy storage participation in the wholesale electricity and ancillary service markets; and (3) establishing a sound electricity price mechanism for energy storage facilities to generate incremental profits.

Guiding the development of energy storage technology to meet diverse demand from a broad range of application scenarios. Downstream applications of energy storage technologies include electricity storage and energy storage for communications and data center infrastructure. Application scenarios of electricity storage encompass power generation, power grid, and commercial, industrial, and residential consumption. Demand for economic benefits and product performance varies in different scenarios. Thus, we think that the government should implement policies tailored to guide diversification of energy storage technologies, and strike a balance between high performance and cost saving on the back of more advanced technologies.

4.3.2.2 Hydrogen Energy

Bottlenecks hinder the development of the domestic hydrogen energy industry. 1. High cost of fuel cell and hydrogen energy applications. The selling prices of 10.5-meter and 12-meter fuel cell buses exceed Rmb2mn, while conventional gas-powered buses sell for around Rmb0.5mn. Hydrogen prices now range between Rmb60–80/kg, and the cost of hydrogen for a fuel cell vehicle is more than double the cost of gasoline for a gas-powered vehicle. Hydrogen energy applications in fields such as industrial heating and energy storage are even more expensive. 2. Reliance on overseas supply of key raw materials and components. China has achieved the import substitution of fuel cell systems and stacks, but it still relies on foreign supply of key raw materials such as proton-exchange membranes, catalysts, carbon paper, and carbon fibers used in hydrogen storage tanks. 3. Incomplete hydrogen energy industry chain and infrastructure. China has yet to establish a complete and efficient hydrogen industrial value chain that encompasses the entire production, storage, and distribution process. Coupled with poor hydrogen refueling infrastructure, this further hampers the large-scale application of fuel cell vehicles.

We believe that the upcoming Demonstration Applications of Fuel Cell Vehicles policy is similar to the PV feed-in tariff and EV subsidy policies. The new policy proposes increasing government procurement and subsidies to boost the sales volume of fuel cell cars and buses, which we think will help drive down costs, create new demand, and make hydrogen-powered vehicles more affordable for the public. The technological threshold for receiving the subsidies is raised under the new policy. Subsidies are tilted more towards medium- and long-haul and medium- and heavy-duty hydrogen-fuel-cell commercial vehicles. The new policy clarifies the major application scenarios for fuel cells, and underlines the importance of industry leaders in establishing demonstration city clusters and an industrial value chain. The government has also improved policy support for the construction and operation of hydrogen refueling stations, as well as demonstration projects for fuel-cell vehicles, and building a complete hydrogen energy and fuel cell industry chain.

4.3.2.3 Carbon Capture

We believe that carbon capture technologies hold the key to cutting carbon emissions in China’s power and cement industries. Negative emissions technologies such as direct air capture with carbon storage (DACCS) and bioenergy with carbon capture and storage (BECCS) should be an integral part of the future energy system and will yield net CO₂ removal if deployed. The biggest pain point for carbon capture, utilization, and storage (CCUS) technologies is the high cost. For example, the installation of carbon capture devices will increase the cost of electricity by around Rmb0.4/kWh, making thermal power generation no longer economical. The cost of the first-generation CCUS technologies has fallen by nearly half over the past decade, contributing to sizable economies of scale and cost reduction. Thus, policy design mainly focuses on promoting large-scale demonstration projects for CCUS technologies and the construction of industrial clusters to reduce costs. The government has introduced tax incentives and subsidies tailored to national specificities to bolster the economies of scale of CCUS projects and maximize the benefits of emission reduction.

4.4 Comparative Risk Analysis of China’s Green Energy Industry Chain

The major “horizontal risk” stems from the disruptive impact of the radical innovation of new battery technologies. We believe that the overall risk is manageable as there is no obvious R&D gap between Chinese companies and their overseas rivals. The “vertical risks” (which exist within the green energy supply chain for a particular generation of technology) mainly arise from equipment that requires import substitution, and from the scarcity of resources. We believe the overall risk is manageable, considering the following two factors. First, the gaps in the manufacturing of equipment and supplies of raw materials compared with foreign counterparts are relatively small. Second, the shortage of key resources could be partially addressed by leveraging new battery technologies such as sodium-ion batteries. Meanwhile, China boasts a complete PV and automotive battery industrial value chain to ensure stable supply and demand.

4.4.1 Analysis of Horizontal Risks

The major horizontal risk faced by China’s green energy industry chain stems from the radical innovation of new battery technologies. Domestic PV and EV battery manufacturers are trying to cut costs further, and the radical innovation brought by new battery technologies should accelerate the rate of cost reduction. Specifically, PV technology focuses mainly on improving the power conversion efficiency of solar cells to reduce power generation costs. We believe that the third-generation PV cell technologies (as represented by perovskite solar cells), once industrialized, will have a disruptive impact on the existing crystalline silicon PV industry chain. We believe that the future of EV battery technology rests with solid-state batteries (significant improvement in safety levels; cost reduction potential) and sodium-ion batteries (cost reduction potential). Both are compatible with existing liquid-state lithium-ion battery manufacturing processes and equipment. The major risk confronted by domestic companies is the possibility of being overtaken by overseas key material suppliers. Overall, there is no obvious R&D gap between Chinese companies and their overseas rivals in terms of new battery technologies.

4.4.1.1 The Major Horizontal Risk for China’s PV Industry Chain Lies in Third-Generation Perovskite Solar Cell

Third-generation PV cell technologies have a disruptive impact on the existing crystalline silicon PV industrial value chain. Crystalline silicon PV cell production adopts the vertical industry structure by which raw materials (silicon) are turned into final components (silicon-based solar cells) after a series of operations (e.g., silicon material production, crystal pulling, wafer slicing, and battery processing). In contrast, perovskite solar cells are assembled directly on glass substrates in a one-stop, layer-by-layer, spray-coating process.

PV industrial value chain may face disruptions from changes in core light-absorption materials. The groundbreaking perovskite solar cell technology may bring disruptions to crystalline silicon PV cell production, purification, processing companies, as well as manufacturers and consumables suppliers along the PV packaging material value chain.

Inducing changes in other general-purpose auxiliary materials. Conventional PV rolled glass is being replaced by ultra-white float glass coated with transparent, conductive oxide (TCO). The impact of third-generation PV cell technologies on the PV film segment is relatively small, with ethylene vinyl acetate (EVA) and polyolefin elastomer (POE) films still being widely used.

Incompatible with existing core equipment; back-end equipment may require further improvement. For equipment manufacturers, the preparation of perovskite thin films using liquid-phase spin coating or vacuum deposition techniques is not compatible with existing crystalline silicon PV production equipment. The back-end packaging process shares certain similarities with the crystalline silicon manufacturing process (Fig. 4.11).

Fig. 4.11

Source CICC Research

Potential disruptive impact of perovskite solar cell on existing crystalline silicon PV cell industrial value chain.

Solar-cell efficiency tables published periodically in Progress in Photovoltaics show the progress of China’s R&D in PV to be ahead of peers. We note that the efficiency records for single-junction perovskite solar micro-modules (close to the size for mass production) have been set by Chinese companies, with the latest conversion efficiency reaching 20.1%. Oxford PV has maintained the world efficiency record for lab-scale perovskite-silicon tandem cells, with the new cell efficiency record hitting 29.52% due to its perovskite and silicon-heterojunction tandem solar cell technology roadmap.³ Chinese universities have led the industry in developing the perovskite-perovskite tandem solar cell technology roadmap, with the latest lab-scale cell efficiency reaching 26.4%.⁴

Chinese companies are global frontrunners in the mass production of perovskite solar cells. Three major companies engaged in commercializing perovskite solar cells, with Chinese companies maintaining leading positions in terms of production capacity and progress in capacity expansion. Corporate filings show that Hangzhou Microquant and GCL Nano (Chinese firms focusing on the single-junction perovskite solar cell technology roadmap), and Oxford PV (a UK-based firm focusing on the perovskite and silicon-heterojunction tandem solar cell technology roadmap) all plan to commission their 100 MW production lines in 2021 and 2022. Perovskite solar cells are mainly used in products that enjoy high price premiums, such as rooftop PV and building-integrated PV systems. In addition, Chinese PV glass, PV film, and solar cell manufacturing equipment companies have stepped up efforts to build labs for conducting research on perovskite solar cell applications. Hangzhou Microquant and GCL Nano plan to use self-developed or domestically produced manufacturing equipment in the mass production of perovskite solar cells.

4.4.1.2 Analysis of Horizontal Risks Within the EV Battery Industrial Value Chain: Being Overtaken by Overseas Rivals in Terms of Solid-State Battery Technology

From a long-term perspective, achieving the target energy density of 500 Wh/kg for high-end automotive batteries by 2035, in our view, means that Chinese firms must match them with high-energy-density electrode materials. However, such materials are incompatible with the current liquid-state lithium-ion battery system, which raise safety concerns despite improvements in battery performance. In contrast, the solid-state battery, which is intrinsically safer with better electrochemical stability, could match cathodes with voltages above 5 V and lithium metal anodes, pointing to high development potential. Specifically, quasi-solid-state and all-solid-state batteries with sulfides, oxides, and polymer electrolytes at the core each have their distinctive advantages, and we suggest closely tracking the technological progress and final application.

Separators, cathodes, anodes, and electrolytes may undergo technological upgrading, which only has a small impact on manufacturers in the near term. SES and Samsung have realized the production of solid-state batteries with energy densities of 450 Wh/kg and 900 Wh/L by using the NCM811 and NCM955 lithium-ion battery materials. Thus, we believe significant room remains for further development of ternary cathodes, and the future application is highly probable. Although the production of solid-state batteries with sulfide and oxide electrolytes will not employ the current separator and electrolyte systems in the future, we think it will take a decade for the large-scale application of solid-state batteries. During this period, the separator and electrolyte systems for quasi-solid-state batteries may undergo technological upgrading, but they will not be replaced in the near term, in our view. In addition, silicon carbon and lithium metal are both promising anode materials for lithium-ion batteries. We think the large-scale application of lithium metal anodes is unlikely to occur in the medium term.

Demands for production processes and equipment vary among different technology roadmaps for solid-state batteries; domestic technology roadmap could retain over 70% of the traditional liquid-state battery manufacturing techniques. The basic properties of solid-state electrolyte materials determine the development roadmap of solid-state batteries. Solid-state electrolytes are divided into three major categories: Polymer, oxide, and sulfide electrolytes. Five major technology roadmaps for quasi-solid-state batteries with hybrid solid-liquid electrolytes exist. Specifically, the sulfide-based electrolyte technology roadmap commonly adopted in Japan and South Korea is incompatible with existing battery manufacturing equipment. It is still in the laboratory stage, and may take a decade before it is widely applied. In contrast, over 70% of the oxide-based quasi-solid-state battery technologies adopted by Chinese firms are compatible with traditional lithium-ion battery manufacturing processes and equipment.

China’s EV battery industrial value chain faces two major risks amid the shift towards solid-state batteries. The first one is that the technology roadmap may be leading in the wrong direction. Solid-state electrolytes are divided into three major categories: Polymer, oxide, and sulfide electrolytes. Japanese and South Korean companies mainly focus on the sulfide-based electrolyte technology roadmap, while Chinese companies are inclined to adopt the oxide-based quasi-solid-state battery technology roadmap. The domestic technology roadmap should make full use of the existing production lines, and possibly realize a smooth transition toward a wider application of solid-state batteries; while the Japanese and South Korean technology roadmaps involve significant innovations in manufacturing processes and equipment. A consensus has yet to be reached on the maximum performance and technical difficulties of different technology roadmaps.

The second is that patents raise barriers to entry. Leading companies in the US, Japan, and other countries have secured the core patents on solid electrolyte materials used in solid-state batteries. The number of patents for solid-state batteries obtained by Japanese and South Korean companies far exceeds that obtained by Chinese companies. Leading players as represented by Toyota have built a dense network of patent rights around basic materials, which serves as a barrier to entry that impedes Chinese companies’ overseas expansion.

4.4.2 Analysis of Vertical Risks

Vertical risks confronting the domestic green energy industrial value chain mainly arise from equipment that requires import substitution, and from the scarcity of resources. Specifically, core components and materials such as insulated-gate bipolar transistors (IGBT), n-type solar cell manufacturing equipment, low-temperature silver pastes, and silver powders are relatively dependent upon overseas imports. In the EV battery industrial value chain, domestic companies tend to place undue reliance on the overseas supply of key upstream resources such as lithium, cobalt, and nickel, as well as some imported equipment such as separators and copper foils. However, we think the overall risk is manageable, given: (1) The gaps in the manufacturing of other equipment and supplies of raw material compared with foreign counterparts are relatively small; and (2) the shortage of key resources could be partially addressed by leveraging new battery technologies such as sodium-ion batteries.

Vertical risks within the EV battery industrial value chain lie in the shortage of upstream lithium and cobalt resources. China is largely self-sufficient in the production of lithium-ion batteries, separators, cathodes, anodes, and electrolytes, with each segment accounting for over 50% of global supplies.⁵ We think the current vertical risk facing China’s EV battery industrial value chain lies in the shortage of upstream core resources such as lithium and cobalt. However, with the rollout of the sodium-ion batteries by CATL and the gradual industrialization of sodium-ion batteries in the future, we believe the shortage of key resources could be partially alleviated.

Root cause of China’s supply risk stems from the uneven distribution of global resources; domestic lithium reserves mainly come from the lithium brine deposits in the Qinghai-Tibet Plateau; high-grade lithium mines are rare. Global lithium resources are abundant but unevenly distributed. The US Geological Survey (USGS) states that as of 2020, lithium brines in South America and lithium mines in Australia combined accounted for 65% of the proven global lithium reserves, and China’s lithium reserves made up about 7%. Lithium brines—mainly located in Qinghai and Tibet—account for about 79% of China’s total lithium reserves, while the high-grade hard-rock lithium deposits (21% of the nationwide total) are relatively rare. The lithium mining market is highly concentrated. In 2020, Australian lithium mines and South American lithium brines represented about 79% of global lithium supply, and China’s lithium mines and brines accounted for about 10% of global lithium supply.⁶

Global cobalt resources are largely concentrated in Congo and Australia. The Democratic Republic of Congo is the clear leader among the world’s top cobalt-producing countries, accounting for 68% of global output (0.14 mnt) in 2020. China’s cobalt reserves made up only 1.1% of the global total, pointing to the scarcity of cobalt resources in China. Cobalt is widely used in battery materials, high-temperature alloys, and cemented carbides. Domestic cobalt demand mainly arises from the battery materials segment, accounting for 77% of the total.⁷ Given the high proportion of battery materials in the downstream application of cobalt, we believe the strategic deployment of upstream cobalt resources is vital to the development of EVs.