How Chinese Innovation is Changing Green Technology

For energy enthusiasts, China has become the main event. The country uses more energy and emits more greenhouse gas than any other on earth. Its production of power is booming, too. Every year, China generates nearly 100,000 megawatts more than the previous year -- more than the total generated by California or Texas. The scale of the accompanying infrastructure change is staggering: every week, a new large coal plant opens somewhere in China. This has led to widespread pollution, health problems, and environmental degradation -- to the cost to the Chinese economy of about 11 percent of GDP.

But this is not the same old cautionary tale of dirty development: China has taken these challenges, and the need for energy and 20 million new jobs per year, as an spur to invest in clean technology. Indeed, with the government putting over $50 billion into clean energy R&D every year, China has become a global hub for energy innovation.

The country's progress is driven by a combination of government mandate and direct investment. Examples are many. A 2007 law required four percent gains in energy efficiency each year through 2012, including in the transportation and industrial sectors. Since then, total efficiency in the power sector has increased by nearly ten percent and is likely to continue rising. Such mandates have been matched by requirements for sulfur emissions control and cleaner water, the closure of many low-efficiency coal mines and cement plants, and new investment in solar, wind, and other renewable power.

To all this, China's twelfth five-year-plan, introduced earlier this year, added goals for developing clean technology indigenously. Mostly these innovations will be for domestic use, although there is growing interest in international export markets for clean tech. Many state-funded projects now require that 80 percent of the technology used be indigenous. Two agencies are responsible for overseeing compliance. First is the National Energy Administration (NEA), which approves the financing and construction of virtually every large energy project. Second, the Ministry of Science and Technology (MOST) runs the more than 100 Chinese academies that conduct clean tech research. In 2010, China funneled tens of billions for green innovation through these two organizations.

Massive state investment has allowed Beijing to do what private industry around the world cannot. Power and energy production requires massive upfront capital investments; the total cost for building individual novel solar, nuclear, or wind power facilities often exceeds one billion dollars. The high expense makes such projects risky for capital markets around the world, not to mention for most private firms. Often, private banks only want to be fast followers and invest in second-generation plants, not first-generation plants with a new design. NEA and MOST backing helps projects clear this hurdle.

A good example is Huaneng, the world's largest power company, which generates about 160,000 megawatts of power per year -- 30 percent more than Texas. Every year, it adds 13,000 megawatts of new generation -- about the same as Massachusetts' current generation. To meet the government's many clean energy mandates, Huaneng plans to install windmills capable of generating 10,000 megawatts per year (close to the total of U.S. wind power) and solar panels capable of generating 10,000 megawatts per year (greater than the U.S. total). By 2025, Huaneng expects to add more than 50,000 megawatts of hydropower and 10,000 megawatts of nuclear power. Meanwhile, it will continue to add nearly 50 megawatts of coal power.

Beyond producing energy, Huaneng innovates through its Clean Energy Research Institute, which is funded by its own revenues and NEA and MOST. It has designed and built two major indigenous clean coal technologies in the last decade. The first is a gasifier that turns coal into synthetic gas with high efficiency and ultra-low pollution. The second is a new capture technology that strips CO2 out of coal plant emissions. It is apparently the world's largest post-combustion carbon capture facility -- and its cheapest. The deadlines set by the government mandates brought these projects to life in just three years and have already led to international licensing agreements and new proposed projects in North America and Europe.

Other companies, too, are developing clean tech from scratch, both for domestic use and for export. The XinAo Group, Shenhua, State Grid, and CNOOC, all major Chinese energy firms, have created their own innovation enterprises undergirded by the financial power of their parent companies and the state. Their efforts include solar thin-films, biofuels, batteries, efficient vehicles, coal-to-liquids, shale gas, and smart grids. In many cases, Chinese companies have even formed joint ventures with firms in the United States to accelerate development and Western commercialization. For example, Lishen, one of the world's largest battery companies, has embarked on a $7 billion development drive to improve battery technology on its own, with licensing agreements in the United States.

At the same time, China has started to repatriate Western-educated Chinese nationals, especially those who have worked at Western energy firms (GE, Dow, DuPont, Areva) or are leading scientists and engineers at Western universities (Johns Hopkins, MIT, Stanford, and USC, among others). When they return to China, they are given staffs of hundreds, multimillion-dollar budgets, and aggressive delivery timelines. Sometimes called "sea turtles" (for returning to the shores of their birth), they bring a Western innovation strategy to Chinese design, and are paired with the intellectual and financial resources needed to bring designs to life.

In many ways, China's green dreams are good news.

Consider the impact on the environment. Together the United States and China account for 40 percent of emissions, 40 percent of energy consumption, and 50 percent of global coal use. Nothing other countries do on this issue can match the impact of the actions (or innaction) of the United States or China. Without Washington and Beijing leading the way, the world will not mitigate the worst consequences of climate change. In this context, any Chinese investment in clean tech is a global good.

Many U.S. businesses will benefit, too. For one, Chinese investment in green tech is already creating jobs in the United States. Thanks to Chinese partnerships with GE, Applied Materials, Duke Energy, and others, those companies have been able to build plants, hire people, demonstrate technology, and underwrite projects. Further, U.S. companies benefit directly from Chinese research. For example, FutureFuels, a U.S. company energy company in Pennsylvania, is deploying a novel clean-coal plant that Huaneng first tested and developed. Once operational, the plant could carry the smallest carbon footprint of any coal or gas plant in the eastern United States. And it would create with it thousands of jobs in southern Pennsylvania's Rust Belt, besides.

Beyond that, U.S. companies and consumers will benefit indirectly from having access to lower-cost technologies that have already been tested on a large commercial scale, speeding the implementation of more efficient and sustainable energy technologies in the United States. So, too, will partnerships between the two countries. These commercial agreements have already started to lay a foundation of trust, absolutely essential for future U.S.-China government agreements in trade, climate, and other key areas.

At the same time, China's green innovation raises questions about U.S. and European competitiveness. For years, the West believed that its economic advantage was its ability to invent products that could be sold to eastern markets. Successive governments sold innovation as a pathway to job creation and prowess in manufacturing. However, if the West buys Chinese clean tech, that narrative reverses. It also raises the specter of permanent loss manufacturing for some heavy equipment, technology development, and high-value innovation.

One might ask, as well, whether all this will truly address China's challenges. Air quality improvement is still localized and slow, and concerns about particulates and mercury remain. Fuel shortages of all kinds, including coal, gas, and gasoline, persist, raising local and global prices despite China's impressive gains. And some in China have tried to force burgeoning commercial partnerships to start committing to intellectual property agreements that chill innovation and trade. Trade and monetary imbalances could also be magnified by Chinese clean tech exports, as could concerns for worker safety.

Ultimately, China's clean energy investment and deployment will dominate climate and trade trajectories for decades -- whatever the effects on commerce, industry, energy, and even human rights and monetary policy. The scale of its effort simply dwarfs every other on earth. That is good news for the oceans and the atmosphere, but also gives pause to the 5.5 billion people on this planet who don't live in China. For them, the economic and security implications of China's innovation drive are yet to be seen.