Tuesday, December 23, 2008

Random Thoughts, v3

First of all, happy holidays to all my readers! I'll be taking a break in the coming weeks to celebrate, but will be back in January.

Technologies to help us get to net-zero
Getting to net-zero in buildings will require more efficiency and more on-site renewable power, and these new technologies will help:

Energy-generating revolving door
GreenBiz reports that Royal Boon Edam recently installed the first energy-generating revolving door at a railway station in Holland.

BYD unveils first mass-market plug-in hybrid electric vehicle (PHEV)
BYD finally released their mass-market PHEV, known as the F3DM. The car will sell for $22,000. The F3DM will be a barometer for uptake of PHEV's and EV's more generally in China. EV's and the associated energy storage capacity of the battery will likely play a central role in the distributed energy network of the future. Climate Progress has good analysis on the importance of this announcement.

High-efficiency elevator

Earth2Tech reports that Finland's Kone will produce a new elevator that incorporates regenerative braking and LEDs, resulting in 50% energy savings versus a standard elevator. This is important, since according to a 2005 report (PDF), elevators generally account for about 5% of a building's energy consumption.

Construction begins on 166 MW solar plant in Yunnan
New Energy Finance reports that construction recently began on a $1.32 bn solar PV demo plant in Yunnan province in southern China. China currently has 100 MW of installed PV power, but the government is aiming for 300 MW by 2010, and 1.8 GW by 2020. For comparison, Germany led the world in installed solar power capacity at the end of 2007, with 3830 MW providing about 1% of Germany's total power demand.

FYI, China is the world's second largest producer of solar PV panels, accounting for 22% of world sales in 2007. 95% of these solar panels were exported in 2005, according to Julia Wu of New Energy Finance.

Sunday, December 21, 2008

Thermal comfort in China

Walk into almost any building in Beijing and you will notice that thermal comfort standards are not as high as they are in the West. While wearing a jacket inside in the winter (or short sleeves in the winter) is not necessarily comfortable, it is energy efficient. And it also raises a key issue of whether growth of America's LEED green building standard in China is a good thing or a bad thing.

What are thermal comfort standards like in America?
Thermal comfort standards are designed to ensure that buildings occupants are comfortable while indoors, which is important since Americans spend 90% of their time indoors. Thermal comfort standards in America are set largely by ASHRAE Standard 55-2004. According to ASHRAE,
the standard specifies the combinations of indoor thermal environmental factors and personal factors that will produce thermal environmental conditions acceptable to a majority of the occupants within the space. Environmental factors include temperature, thermal radiation, humidity and air speed, while personal factors are activity and clothing.
According to Stephen Turner, PE, of CTG Energetics and a key contributor to ASHRAE Standard 55-2004:
[ASHRAE 55-2004] is based on chamber studies and results in a range of temperatures over which conditions are predicted to result in an acceptably low percent [generally 20%] of people who would express dissatisfaction with thermal conditions in the space.
So using the ASHRAE standard, you will arrive with a range of acceptable temperatures that looks like this:
This is a pretty tightly controlled range, and generally ensures you won't have to wear your Christmas sweater indoors. Increased occupant comfort also generally increases productivity. So this is a good thing. But unfortunately, there is also an energy cost associated with keeping the temperature in such a tight set range. This is why Jimmy Carter suggested that we turn down our thermostats and wear sweaters to save energy.

But as Carter's failed attempt to get people to turn down the thermostat showed, Americans are unwilling to give up their thermal comfort. So in America, the goal has shifted from expanding the range of acceptable occupancy temperatures. As codified in the LEED rating system (which has 3 ASHRAE Standard 55-2004 related credits), the new goal is to maintain the same thermal comfort standards but keep the associated energy cost as low as possible.

But as Carter's failed attempt to get people to turn down the thermostat showed, Americans are unwilling to give up their high thermal comfort standards. Rather, the new goal is to maintain the same thermal comfort standards but keep the associated energy cost as low as possible. In fact, even the LEED green building rating system codifies this high thermal comfort standard by including 3 credits related to ASHRAE Standard 55-2004.

And China?
Ostensibly, thermal comfort in Chinese buildings conforms to ASHRAE 55 or other international standards. But as with most standards in China, few buildings actually meet these standards. For example, a recent study of buildings in central southern China found that during the summer 52% of buildings had temperatures outside of the acceptable ASHRAE 55 range. But surprisingly, most building occupants still reported satisfaction with thermal comfort, with fully 87% reporting that the thermal comfort conditions were acceptable! This suggests that Chinese people are comfortable, or at least okay with, occupying buildings with temperature ranges well outside of what the ASHRAE 55 standard would require.

Thermal comfort expert Professor Zhu Yingxin of Tsinghua University fully agrees with this finding. Her research has shown that Chinese people can be comfortable at temperatures significantly warmer than ASHRAE 55 would allow, even up to 30* C (86* F). The upshot of this is that Chinese may be willing to accept a higher variation in indoor temperature, which would require less cooling and heating energy.

This suggests that applying both ASHRAE 55, and by extension, LEED, standards to China could result in unnecessarily high uses of energy for heating and cooling spaces to such tight temperature ranges. Professor Zhu agrees, and thinks it’s critical for China to create their own thermal comfort standards that effectively reflect the uniqueness of Chinese characteristics.

What about productivity?
By extension then, the widespread adoption of LEED (which again, gives 3 credits for buildings that comply with ASHRAE 55) in China may have the perverse affect of driving China to use more energy than it otherwise would have.

But on the other hand, much research related to green buildings in America has shown that green buildings can increase occupant productivity. For example, a 2005 LBNL-University of Helsinki study (PDF) suggested that the performance of office workers is best between 21-22* C and declines as temperatures rise. This temperature is within the ASHRAE 55 temperature range and suggests that adopting the ASHRAE standard could boost productivity.

So by not adopting these standards, are workers in Chinese buildings less productive? Maybe. The LBNL study concluded that at 30* C, productivity declines by 9%. But again, these results were based on American office workers. More study is needed on how Chinese worker productivity responds to temperatures.

The inevitable climb
In my view, although Professor Zhu’s research shows that the Chinese can accept warm temperatures, they don’t necessarily prefer them. For example, a Beijinger could theoretically accept public transportation, but in practice, many buy Audis. So are we to expect that as Chinese building occupants continue to increase their standards of living, they won’t aspire to the American level of thermal comfort standards? Let’s just hope that the Chinese do it in the most energy-efficient way possible.

In fact, Professor Zhu’s research will hopefully help do just that: she has found that proper natural ventilation in building spaces can make Chinese people feel much more comfortable at relatively higher temperatures. And Stephen Turner hinted that ASHRAE would think incorporating this type of research into the next Standard 55.

Wednesday, December 17, 2008

Beijing Energy Network talk on Integrated Design

Here are the slides from my presentation last night at the Beijing Energy Network event:

Thanks to all those who attended. Hopefully it was an interesting talk.

Tuesday, December 16, 2008

Beijing Energy Network talk tonight by yours truly

I am giving a short talk tonight at the Beijing Energy Network Beijing Energy & Environment Roundtable (BEER) at 8pm at the Blue Frog in the Sanlitun Village.

The title of my walk will be "Green Building Design in China: Developing Whole Systems Approaches" and will focus on the importance of integrated design to deliver cost-effective energy savings in the built environment.

If you're in Beijing, feel free to come check it out. Otherwise stay tuned to this channel as I'll post the slides tonight after my talk.

Monday, December 15, 2008

Clean Development Mechanism Ignoring Cheapest Source of Carbon Reduction: Building Energy Efficiency

According to a recent UNEP report, of the 3000+ Clean Development Mechanism (CDM) projects in the pipeline as of May 2008, only 6 projects dealt with energy efficiency! This is a real shame, because buildings are both the largest and cheapest source of reductions of carbon emissions. We need to focus on building energy efficiency now, especially as China continues to build new real estate, because the long life of buildings means that decisions made today will affect carbon emissions for the next 50 years. Hopefully negotiations for the post-Kyoto successor will result in a more effective CDM that funnels investment to the vast, cheap sources of carbon emission reductions in the built environment.

Huge Missed Opportunity
As shown in the chart below, the potential for GHG mitigation through building energy efficiency is both massive and low-cost.
Source: IPCC Scientist Diana Ürge-Vorsatz presentation (PDF)

To put this 2.5 gigatons of carbon saving potential from buildings in the developing world into perspective, this is more than China's ENTIRE EMISSIONS of carbon in 2006, which were a "mere" 1.48 gigatons.

But a look around almost any construction site in Beijing should make it clear that many of these GHG reduction measures are not being implemented, even though the CDM could theoretically be used to help fund the investment.

So what are the barriers to using the CDM for building energy efficiency?

1) The benefits of the CDM credits are outweighed by the transaction cost of applying for the CDM credits. Since building energy efficiency projects are generally small and use a variety of technologies in tandem, they are not well-suited to the CDM process. The CDM methodologies would require validation of every single technology in every single building, a time- and capital- consuming process that reduces incentives to go through the CDM process.

2) The lack of reference cases. Especially for new construction, how can we know say how much energy the building saved? What is the proper baseline building for comparison? The existing CDM methodology is unclear on this point.

3) Additionality. In many of these cases, the overall economics work without credits, and the only thing holding the project back is a misalignment of incentives thanks to the fragmented building market. It's not clear to me that just throwing money at this situation in the form of carbon credits is the answer, but I'm not sure. It probably would help some buildings make extra steps toward building efficiency, but might be spent more effectively elsewhere. The additionality issues are also very much still a work in progress at the UN review process, creating uncertainty and discouraging building projects from applying for credits.

How can we fix it?
UNEP suggested several straight-forward policy fixed to make the CDM work for building energy efficiency projects:

1) Adopt more statistical management tools to measure reductions- i.e. increase sampling. If we submitted a 1000-building project for CDM verification, we shouldn't have to submit every building for verification, just a sufficient number to reasonably estimate the reductions.

2) Allow performance based methodologies- i.e. instead of measuring every technology's individual contribution to carbon reductions, measure the overall effect by measuring energy use per area and comparing it to other baseline projects to determine carbon savings.

3) Establish common performance baselines- i.e. allow each region to create a baseline for buildings based on property type, energy source, and climate zone.

How can we use the CDM to drive higher energy efficiency standards for buildings?
The UNEP report also suggested an innovative approach to using the CDM to help countries reach higher building energy performance standards. The idea is this: Let's assume the government of a developing country wants to raise building code energy standards over time. The government then establishes a new performance-based code that gets progressively more stringent over time. The CDM methodology could then establish a crediting baseline to help building owners deal with the burden of getting to the new, more stringent standard. Building owners would have to get over a minimum hurdle, called the crediting baseline, and would earn credits for any reductions between the crediting baseline and the sector standard. But there would also be a kicker- for any reductions over the sector standard, buildings would earn more valuable, "premium" credits, thereby providing incentive for using innovation to go beyond the sector standard.

This is a nice approach, because it places responsibility on the developing countries and their building owners to improve energy performance, but provides ample help in the form of CDM funds and does not require mandatory caps on overall carbon emissions.

What this means for China
Source: Wikipedia CDM entry

As we can see in the chart above, China is far and away the largest CDM market. More importantly, it is also the fastest-growing big real estate market. There is a huge opportunity for a better CDM methodology to help fund building energy efficiency in China.

Moreover, as China first adopted their national building energy standard in 2007, there is presumably significant scope to continue to ratchet this standard up over time using the innovative method the UNEP report suggested. Since, ahem,
in the past, compliance with the existing regulations [in China] was a large problem. Although today this situation has improved, there is still need for further improvement.. [IEA paper on energy codes, (PDF) p. 52]

this could be a great mechanism for China to finally get serious about making sure all buildings comply with energy standards.

Tuesday, December 9, 2008

Random Thoughts

Wind power investment ramps up in China
Ecoconcern announced last week that it is investing $1.1 bn into four onshore wind farms in China, for a total of 720 mW of wind power capacity. This is the latest indicator of rapid growth in wind investment in China. China currently has more than 6 gW of installed wind power and is aiming for 10 gW by 2010.
Current rankings of installed wind power (as of Jan 2008):
1) Germany- 22 gW
2) United States- 16.8 gW
3) Spain- 15.1 gW
4) India- 8 gW
5) China- 6 gW

Wal-Mart and MEP sign a sustainability MOU
WalMart signed a memorandum of understanding with the Ministry of Environmental Protection, agreeing to reduce energy use at existing stores in China by 30% and committed to meeting 40% reduction target in all new stores. Yet another step forward for WalMart. It’s pretty crazy how this company is moving forward environmentally, although there are still many detractors out there.

Toxins are present in 1/3 of toys
GreenBiz reports on some bad news about toxins in toys: it's not just the Chinese:
While much of the blame for deadly toys in recent years was placed on Chinese manufacturers, the Ecology Center points out that this year, in its second round of testing for its HealthyToys.org database, it's not just China making unsafe toys. Twenty-one percent of toys from China had detectable levels of lead, but so did 16 percent of toys from all other countries. And of the 17 toys made in the United States that were tested, 35 percent had detectable levels of lead, with two exceeding the federal limit for recalls.
This is just so disgusting. How can a company manufacture toys that contain known harmful substances? It's both shocking, but at the same time, not really that surprising.

Other Green China Blogs
China Greenspace is back from vacation, and has some good thoughts on China’s role in climate change talks.

LiveFromBeijing gives statistics to back up what we've all been thinking: Beijing’s air quality actually has gotten better thanks to the pollution control measures taken for the Olympic Games, even after the temporary restrictions were lifted in September.

Monday, December 8, 2008

Carbon tax or cap and trade?

Yesterday’s thoughts on oil prices got me thinking about how to best price carbon. One of the key problems with oil is the price volatility: just when momentum for alternatives seems to be peaking, oil can fall and make alternatives less attractive. Moreover, the volatility of prices makes long-term business planning and investing more uncertain, and therefore more expensive. I fear a similar dynamic may develop in a cap-and-trade scheme, and therefore am now in favor of a carbon tax.

Carbon Pricing
Now that the US is serious about climate change, it will need to get serious about pricing carbon and forcing businesses to internalize the societal costs of carbon that are not currently reflected in the price of fossil fuels.

In pricing carbon, we can either choose a quantity of carbon (cap and trade) emissions or we can choose a price of carbon emissions (carbon tax). The nice thing about cap and trade is that we can choose the quantity. We know where we need to be by 2050: 80% below 1990 CO2 levels. So it would be straight forward to just reduce the cap each year until we get to the desired level in 2050.

With a carbon tax, on the other hand, we can estimate how much a price on carbon will reduce the quantity of carbon emissions, but we can't know for sure. So on the surface, it seems like cap-and-trade is the best way to price carbon.

But here’s the problem: most carbon emissions are going to come, in one way or another, from long-lived assets, be it buildings, factories, infrastructure or autos. The returns from investments in clean and efficient energy will come in part from the avoided cost of energy and carbon prices. As I described in a previous post, investment decisions must meet some sort of internal rate of return hurdle to be accepted. The key thing to note here is that increased risk and uncertainty raises IRR hurdle rates. Therefore, energy and carbon price stability will lower IRR hurdle rates, increasing investment in clean and efficient energy.

My worry with cap and trade schemes is that the price of carbon can be widely volatile. The European Union's trading scheme has shown high volatility since it's inception:

Now, this data is from Phase 1 of the trading scheme, meaning this is still very much in the preliminary stages. It's possible that this could get better as governments get better at allocating carbon emission permits. But I don't like the idea of price volatility for carbon.

Carbon taxes are effective because they make the price of carbon predictable, encouraging the long-term investments in clean, efficient assets needed to reduce carbon emissions. As economist Charles Komanoff of the Carbon Tax Center said in the New York Times:
Making the price [of carbon] predictable is the most significant move you can make to control global warming. It would tilt literally billions of energy critical decisions toward using less carbon.
Implications for China
From a carbon price policy perspective, China is in an enviable position. They clearly need to move toward a carbon price at some point, and the sooner the better. But now that the US is committed to implement some sort of carbon price, China will be able to learn from the examples of other nations and hopefully implement a highly effective carbon pricing system. I think that carbon tax makes the most sense at this point in time, but maybe cap and trade will surprise us.

Regardless, the debate over whether to price carbon should be over. It's encouraging to see that the debate in the US has now turned to how to price carbon.

China Raises Fuel Tax; Leaves America Behind the Curve, Again

Yesterday China announced a comprehensive restructuring of the fuel pricing
regime. This is a really clever move on the Chinese government’s part: they took advantage of low oil prices to both institute a higher fuel tax and allow gasoline prices to more closely follow market prices, while minimizing backlash from petrol consumers.

China just raised their petrol tax to ~$0.54 per gallon, versus just ~$0.18 in America. As an American in Beijing, it’s absolutely embarrassing that my country, the supposed leader of the free world, continues to lag even the environmental progressiveness of China, a country who by reputation doesn’t care about the environment at all.

BTW, I hope my blog shows that China’s horrible environmental reputation is undeserved, although they still have a LOT of work to do.

New Fuel Regime- Clever Public Policy
For more background on the fuel tax increases, feel free to check out this Forbes report or Green Leap Forward’s post on the change. I will describe it briefly here.

This change in the fuel price scheme will leave the price at the pump essentially unchanged from its current level of ~6.6 yuan per liter (~$3.63/ gallon), which has not been adjusted downward despite the steep decline in the price of oil.

Under the new regime, pump prices will now be tied to manufacturing cost. PetroChina and Sinopec, the two oil majors, will get a guaranteed profit margin of 4%, meaning Chinese consumers will essentially pay the cost of fuel plus 4% plus the new fuel tax. The fuel tax on gasoline will rise to 1 yuan per liter ($0.54 per gallon), up from 0.2 yuan ($0.11 per gallon). The revenue from the fuel tax increase will then be used to cut other driving-related taxes and tolls, making the tax “revenue-neutral”.

Chinese leaders showed some real savvy with this fuel tax increase. First, they get rid of the burden of subsidizing cheap oil. The Chinese government (and it’s state-owned oil majors) lost a lot of money in the early part of this year since they had to buy their oil at high prices on the world market (half of Chinese oil is imported), refine it, and sell it at low fixed prices. This new pricing scheme eliminates that burden, and will force Chinese petrol consumers to bear future cost increases.

The Chinese government did also provide a safety valve. The National Development and Reform Commission, the body responsible for the rules change, said
We will adjust the oil price regime in line with certain social groups' ability to bear the burden and to promote energy saving as well as environment protection.”
I think this safety valve is probably a good thing, as its very important for public policy to be as aggressive and progressive as possible without risking significant backlash from those hurt by such policies.

Second, Chinese leaders are able to advance the green agenda by raising the fuel tax. This will help price in some of the “externalities” currently not included in the price of gas. This is great from a policy perspective, but generally not popular among consumers, which is why the timing of this policy change was so savvy. Now that gas prices are low, the Chinese government and the state-owned oil firms are making windfall profits by buying the oil at low prices on world markets and selling it at high fixed costs to the market. There has not been significant widespread public backlash yet, and drivers have generally been able to bear the current price level. The government seized on this unique opportunity to quintuple petrol taxes without actually raising the price to the consumer. In fact, if oil stays at its current price for much longer, oil prices are actually likely to decline. Thus, consumers are happy with the move even though they’ll have to pay more for fuel. This doesn’t make OPEC happy, but as Green Leap Forward elegantly says, that’s a good thing for everybody else.

America, get your act together
Chinese automobile fuel economy standards are already higher than America’s. And now their fuel tax is three times higher too. Yet again, America has fallen behind China in progressive public policy. The current situation is not just Detroit's fault, in many ways it is also the fault of pervasive stubborn free market ideology on both sides of the aisle in Washington, DC.
This current financial crisis has really shown the limits of the free market economy. And the wild swings in oil futures over the past year have shown that no one can correctly predict the price of oil even a month from now. So how are corporations and individuals who purchase long-term assets that use energy going to cope? This uncertainty creates a disincentive to long-term investment in efficiency and clean fuels, which for many, many, many reasons, is so important. Clearly the free market is failing, since it is not providing the clean and efficient future we want.

We need a big tax on oil right now to set a floor and ensure that investments in alternatives will be viable, even as oil continues to fluctuate wildly.

If individuals and corporations know that the price of oil will be at a certain level or above for the next while, they can plan much more effectively. For example, if policy says the price of oil will never fall below $100, energy intensive companies will know that they need to develop a business model that works in this world. The problem with the Big Three is that they never imagined such a world. As Thomas Friedman noted in his column yesterday,
Many people will tell Mr. Obama that taxing carbon or gasoline now is a “nonstarter.” Wrong. It is the only starter. It is the game-changer. If you want to know where postponing it has gotten us, visit Detroit. No carbon tax or increased gasoline tax meant that every time the price of gasoline went down to $1 or $2 a gallon, consumers went back to buying gas guzzlers. And Detroit just fed their addictions — so it never committed to a real energy-efficiency retooling of its fleet. R.I.P.
Hopefully President-elect Obama heeds this advice and acts as soon as he comes into office. After all, he was the only presidential candidate who resisted calls for a holiday on our already measly gas-tax during the campaign. All the better for a carbon tax to happen now, while the US bails out Detroit with taxpayer money.

Friday, December 5, 2008

Green Building: Great Opp, but Perceived Cost Still a Barrier (Huh?)

Today I was reading the recently released McGraw Hill Construction SmartMarket Report on Global Green Building Trends and found myself again shocked at the massive market opportunity for green buildings in Asia, and even more shocked that more green buildings aren't being provided.

Huge opportunity for profits…
The Asian section of the report starts by noting that Asia is already a $1.4 trillion real estate market, and set to grow as China, Indonesia, Vietnam and the other developing tigers continue to expand rapidly alongside Japan and Korea. Assume 10% of this was green, and we’re talking a $140 billion market…

According to McGraw Hill, most of the growth in green buildings in Asia will be coming from the commercial and residential sectors in the near term, with government, retail and industrial lagging behind but still expanding.

I think this is powerful and shows that tenants and investors are catching on to the imperative to go green. At the US China Greentech Summit last month, Tishman Speyer’s sustainability guy, Steve Latargia, said the credit crunch will not affect Tishman’s drive to go green, saying that if they don’t build green, they wont have any tenants when the recession is over. The same trends are starting now in China and will only deepen as the market matures and more international and leading-end local tenants demand green space.

This demand for green space and a relatively small supply of space in China means that owners of green real estate should start to see a premium for their space. And sure enough, Jones Lang LaSalle reported recently that nearly ~70% of corporate real estate managers are willing to pay more for green real estate in China. This also gels with what Prosper Center has seen, commanding rents 5% above the going CBD rate. And just to drive the point home, 64% of Asian respondents to the McGraw Hill survey expect rapid growth in both sales and profits from green buildings.

…so what’s holding green back?
Higher perceived first costs are the key barrier to green building growth in Asia. In fact, fully 83% of respondents cited this as the key obstacle to further growth of green building. Interestingly, the same percentage of respondents cited higher first costs in America, a market that has much more experience with green construction. So this is a worldwide problem.

I continue to be surprised that the real estate market cannot get over this obsession with first costs, especially because it’s wrong: a recent report by Good Energies (PDF) shows the median cost premium for 150 recently built LEED buildings was a measly 2%, while median annual energy savings were around 30%. That’s a no-brainer investment. Jim Chen of Tishman Speyer China told me they brought in their LEED projects at a 3-5% premium, which is astounding given both the lack of a green product market in China and contractors’ relative lack of experience with green construction.

But second, and most importantly, this green premium is just an amorphous term used by developers and owners to resist change and learning. Most green building professionals now think of the green premium as a “tuition fee”, something a developer has to pay on his or her first few green projects while learning the ropes of green development. I bet that if you were to sift through the Good Energies data, you would find that developers who have done more than 5 LEED projects now pay no premium.

As Scott Muldavin of the Green Building Finance Consortium told me last summer, the green premium is not necessarily an increase in actual hard costs of construction. In most cases, developers have been building buildings the same way for a long time and are loath to change a winning formula. When they do finally begin to build green, they find that to do so successfully requires changing this formula, and they chalk this up to some amorphous, perceived “cost”. And as a result, they don’t do it.

All of this is a huge opportunity for a new type of real estate developer: one who understands integrated design, whole-systems thinking and how to tunnel through the cost barrier and doesn’t just try to tweak the old model to be “green”. With a new model, developers will be able to bring in better buildings at lower cost and outperform the tired, old real estate players who keep talking about upfront costs.

Wednesday, December 3, 2008

More on Electric Cars

This is a follow up to my previous post on the auto market in China. Greentech Media reported yesterday that Shanghai Automotive Investment Corp (SAIC) will invest 2 billion yuan ($293 million) to develop hybrid and electric vehicles in a new venture called Shanghai Jieneng (“energy saving”) Automotive Technology Co.

SAIC is China’s biggest carmaker, and a JV partner for both GM and Volkswagen. This is another good sign that electric cars are catching on in the eyes of Chinese auto-makers. For SAIC, this represents a doubling down of their investment in alternative powertrain technologies: SAIC and JV-partner GM are scheduled to release a hybrid electric Buick.

So it seems like manufacturers are making moves to help push China toward electrifying the vehicle fleet. What are the key roadblocks to making such a vision a reality?

Certainly the higher costs of electric vehicles (EVs) will be a barrier to widespread adoption in China. According to a McKinsey study (PDF), most EVs cost 25% more upfront, due largely to the expense of the battery. Moreover, based on the studies calculations, EVs don’t make sense economically at current gasoline prices in China (6.6 RMB/ liter or $3.63/ gallon). [As a note for American readers, China hasn't lowered gasoline prices despite the recent fall in oil prices.]

McKinsey calculates that gas prices would need to reach ~10 RMB/ liter ($5.50/ gallon) for BYD's new EV to make economic sense to consumers. That's too bad, since gas probably won't get that high in the near term. Hopefully BYD and the new SAIC venture can help bring down the cost premium, but I imagine that this premium is pretty fixed in the near term. Frustratingly, as with most things green, upfront costs are a serious barrier to further adoption of EVs in China.

Renewable power and carbon
Can China install the necessary amount of renewable power needed to power the auto fleet? Last time, I mentioned that it’s incredibly important that China electrify their car fleet with renewable power. While I still think that has to be the end goal, it turns out that China can reduce their transportation-related CO2 emissions even if powered by coal-fired power plants. McKinsey estimates that a coal-powered EV would produce 19% less CO2 than a similar gasoline powered standard car in China.

But 19% isn't nearly good enough. How much renewable power would it take to power China's entire car fleet on renewables? According to a Sierra Club report (PDF), EVs use about 12 kWh to travel 50 miles, more than the average US auto travels per day. Chinese autos generally drive shorter distances, but we'll stick with the 12 kWh estimate anyway. This equates to 4,380 kWh per year. So assume that all of China's existing 40 million cars were electric: this equals about 175.2 billion kWh, or about 6% of the 3 trillion kWh that China uses annually, according to the CIA World Factbook. Presumably, if these cars were all charged at night during off-peak hours, only limited additional capacity will be needed.

Of course, kWh used is not the same as installed kW capacity. I couldn't find many details on how much installed renewable capacity China would need to power their auto fleet, but will do some digging and get back to you with more detail here. FYI, this NRDC/ EPRI report says that only 4% more generating capacity would be needed if half of the US auto fleet were electrified.

Both grid infrastructure and charging infrastructure will be key to making EVs work in China. A smart grid will be critical to allow EVs to function most effectively and optimize peak power, a key selling point of the electric car model.

One related question I have concerns quick-charge battery technology. How can that work in the context of peak shaving? If batteries like BYD's are going to be 50% charged in 10 minutes, won't this put a massive strain on the electric grid? I have to look into this more.

As far as charging infrastructure goes, McKinsey estimates that China will have to spend between 5 and 10 billion RMB by 2020 to get to scale. Compared to the 1 trillion RMB that the State Grid plans to spend on grid infrastructure in the next three years, this is nothing, but still has to get approved by the government. Also, I have to imagine that the 5-10 billion needed for charging infrastructure is much, much cheaper than a similar scale of petrol station rollouts. But will the Chinese government challenge PetroChina and SinoPec and provide support for rolling out EV charging infrastructure? Or, alternatively, how can the oil companies put themselves in position to benefit from the trend toward EVs?

Buy-in from Chinese consumers
I think this will be the easiest piece of the EV puzzle for China. As the Greentech article on the SAIC investment noted, China already produces 5.5 million electric bikes a year. The streets of Beijing and Shanghai are already swamped with electric bikes, and they seem to outnumber motor bikes considerably. So I think the Chinese consumer already has a feel for electric transport, and it won't be a stretch to extend this to EVs. But as I mentioned in the last post, auto growth has been most rapid in the luxury and SUV sectors. Will newly affluent Chinese give up the power and feel of a V8 Audi for an electric vehicle, even if it's a Tesla Roadster?

Better Place?

All told, I think these problems are not actual roadblocks, but mere speed bumps on the road to electrifying China's vehicle fleet. In fact, I think the models already exist to overcome the problems described above. As I've mentioned before, I've really fallen in love with the Better Place model. And just yesterday, they announced a roll-out to Hawaii, in addition to the already announced roll-outs in the San Francisco Bay Area, Australia, Denmark and Israel. The reason I'm so fascinated with their business model is the way they can get over all four of the stumbling blocks described above. But most importantly, their model means that drivers don't have to buy the battery, bringing the price of an electric car in line with standard cars and eliminating the biggest hurdle to widespread adoption of EVs.

In my view, Better Place is a powerful symbol of what the future looks like. The company doesn't have any new technology, just an innovative business model for providing mobility. I've talked often about the need to use innovation to break the link between CO2 emissions and economic prosperity. While certainly some of this innovation will be high-tech, the majority will be low-tech innovation that finds new business models to deploy already existing technologies. Better Place is just one of the early movers, but I hope their success convinces other companies to follow their lead. And in the meantime, hopefully it helps the world electrify their auto fleet.

China Mobile is the biggest mobile phone network operator in the world. When will China Mobility, China's version of Better Place, become the biggest mobility network operator in the world?

Random thoughts

No more redeyes
GreenBiz blog has an interesting post on airplane CO2 emissions:
Carbon dioxide accounts for only half of a flight's contribution to the greenhouse effect. Just as important are thermal impacts of jet contrails -- a phenomenon known as radiative forcing. Contrails are high ice clouds whose development is catalyzed by the particulate in jet exhaust. These clouds block sunlight entering and heat leaving the atmosphere and account for half of total jet warming effects.
The effects of jet contrails are lowest in the summer and during the day. Nighttime flights contribute twice as much to the warming effect as daytime flights. Flying during the summer reduces carbon footprint by a quarter. Make that next trip to China a daytime flight during the summer.

Will US be able to ratify post-Kyoto treaty without China committing to carbon caps?

I had naively thinking that the Obama victory and his pleasing rhetoric on climate change meant that it was likely that the US would lead the post-Kyoto negotiation process, but as ClimateProgress notes, that's not necessarily the case. Getting a cap-and-trade or carbon tax scheme in place will take time, and China and India are still unwilling to commit to binding caps on carbon. This will make it tough for the US Senate to ratify the treaty, just like in 1997 with Kyoto. However, I think waiting for China to move is a total abdication of responsibility and leadership on the part of the US Senate, as the imperatives are even more clear this time around.

New Clean Energy Commercialization Center in China
BP and the Chinese Academy of Sciences are teaming up and investing $73 million in a new clean energy commercialization research center in Shanghai. Most of the focus seems to be on technologies I'm not particularly fond of (coal gasification, for example), but the center is also focusing on trying to roll out carbon capture and storage. Coal is a reality for the foreseeable future in China, and if CCS can become viable, this will help reduce emissions. If all went well, it might even allow China's leaders to commit to binding carbon caps.

NYC nightclub goes green...

NY Times GreenInc reports that a New York City nightclub is seeking LEED certification. The club, cleverly called Greenhouse, will seek LEED certification. When told of the concept, Julian of GreenLeapForward asked if they would be using human energy on the dance floor to power the lights. Unfortunately not, but means there is still large scope for innovation in the green nightclub scene. While sort of a silly idea for something as hedonistic as a night club to seek LEED certification, I think this is a continuation of the trend toward linking high-end consumerism with good causes. The RED campaign is a good example of this. While we can't consume our way out of the energy and climate mess we're currently in, responsible consumerism can at least help at the margins.

... and liquor store follows suit

Building Environmental and Performance News reports that a liquor store in Minnesota is seeking Green Globes certification, the first building in the state to do so. The store will be heated with a geothermal heat pump.

Monday, December 1, 2008

Cars in China

On the plane back to Beijing, I read a great Economist special report on cars in emerging markets. It’s about time I wrote something about autos in China, so I will focus on the important China conclusions from the report.

China- Poised to be the World's Biggest Auto Market by 2010
As with almost every meaningful absolute development statistic, it’s not a question of if China will pass the US, but when. In the case of total passenger-vehicle sales, China is predicted to pass the US for good in 2010. But relative development statistics usually tell a different story. China only has 30 cars for every 1,000 people of driving age, versus more than 900 cars for every 1,000 people in America. But China’s market is growing rapidly, while America’s is stagnating or even reversing.

Just over 70% of cars sold in China are foreign made, with VW and GM leading the charts. Interestingly, the article notes that in the early days of the Chinese auto industry, VW, the first to set up a Chinese JV with Shanghai Automotive Industry Association, accounted for 56% of the domestic market! This helps explains the remaining dominance of VW in some markets, like the Shanghai taxi market. Will Chinese brands take more of the market? It’s an interesting question.

According to the Economist, Chinese don’t feel very nationalistic when purchasing cars and will not put country of origin above quality, saying that the
Chinese still look down on their native brands, often with good cause… Chinese consumers are brand snobs who increasingly expect to be able to buy the best. Yet with its gigantic home market and a supportive government, it would be surprising if in ten years’ time China did not have at least a couple of car firms competing on equal terms with the world’s giants.
I truly hope that’s the case, and my Chinese manufacturer of choice is BYD, who I will describe in a moment.

What About the Environment?
As with most environment and development issues, you can either see China as the problem or as the solution.

Without a doubt, rising car use in China will be an environmental problem in the short term. Increased local pollution from tailpipes as well as carbon emissions will damage the environment. Moreover, the Chinese market looks to be copying the US’s bad example of large-car growth: in 2007, luxury car sales grew by 35% and SUV sales grew by 50%, versus just 4% sales growth for small cars.

A new “green” tax may help to incentivize growth in smaller cars and will also help domestic automakers. This is a tiered tax related to engine size that puts the lowest tax rate (1%) on cars with engines smaller than 1 liter, a market dominated by Chinese automakers. The tax increases progressively to the highest tax rate (41%) on engines larger than 4.1 liters, a market dominated by foreign automakers. A clever use of green protectionism, and also good public policy. But while the tax will help, it probably won’t make much of a dent in the massive growth of the Chinese auto market.

And even still, auto growth outside of China will be massive. According to the IMF, the world will have 2.9 billion cars in 2050, up from 600 million now.

The Upside
How will the environment cope with 3 billion cars on the road? The only hope is to decouple the growth in autos from growth in CO2 emissions from autos.

China is already starting to take up the challenge. Chinese electronics firm BYD is rolling out a fully electric car with incredibly promising battery technology. The first models will hit the street in Israel in 2009. A firm controlled by Warren Buffett’s Berkshire Hathaway took a 10% stake in BYD in October (See Green Leap Forward’s blog post on it for a closer look at BYD and Buffett’s investment). I really think/ hope that BYD’s technology platform will it allow to roll out cheap, reliable, comfortable and marketable electric cars in short order. I also think they’re right to start by selling their cars first in foreign markets. This way, if all goes well, BYD can bring the product back to China as a successful developed world concept, which will help combat the traditional mainland China consumer bias against domestic auto brands.

I think BYD also represents a new model for China and it's industrial policy. BYD is essentially leapfrogging the old guard of internal combustion engines, and moving straight to the future. i personally think China's push into auto manufacturing is misguided, since gasoline powered autos make no sense in the carbon neutral world that we're ultimately going to have to get to. I think biofuels could be a useful intermediary step, but doubt they will make it in the long run.

China can also use its relative lack of installed petrol infrastructure as an advantage, and leap frog to an electric grid. (For more on how this might be done, read about betterplace, a company with a business plan for replacing that really wowed me.) But in order to get over the CO2 emissions problem, the car fleet must be powered by renewables.

While I really think that China’s leadership can help the world cope with the environmental strain of 3 billon autos, I don’t know why we would want to. Even after we solve the environmental piece of the problem, we will still have the problems of both traffic and social isolation that go hand and hand with car-centric development. I’ll leave the readers with the below photograph from TreeHugger. In 2050, in a world with 9 billion people, how can we find space for 3 billion cars on the road?