JUCCCE Forum presentation

1
JUCCCE Forum presentation
November, 2008
2
Content
Chinas challenge in the coming 25 years

Opportunities to have impact

Key decisions to drive timely actions
3
Driven by continued strong economic growth and
urbanization
0.5
China population Billion
China GDP Billion USD, 2000 real
Urban
Rural
6.5
1.5
1.4
1.3
1.3
8.2
0.6
0.7
0.8
1.0
11.0
2030
2020
2010
2005
2020
2030
2005
2010
Source McKinsey analysis ERI
4
substantial end-use and intermediate demand
growth is expected
1,630
Vehicle fleet Million
Total floor space Billion sqm
Steel production Million tons
Commercial
Residential
2.9
6.3
337
91
Heavy duty
10
3.3
Medium duty
68
2005
2020
2030
12.6
Cement production Million tons
182
6
42
Light duty
291
5
1,750
1,630
66
55
1,069
152
37
31
19
2005
2020
2030
2005
2020
2030
2005
2020
2030
Source China industry year books McKinsey
analysis
5
leading to increased energy demand
1,210
Power generation Billion KWh
Building sector energy consumption Million SCE
3.7
4.1
6.6
5.7
Energy intensive industries energy
demand Million SCE
Transportation sector oil demand Million tons
Gasoline
-0.4
Diesel
3.5
4.5
526
7.8
339
110
251
48
163
62
2030
2005
2020
2005
2020
2030
Standard coal equivalent electricity is
translated into comparable primary energy units
by coal equivalent calculation coal, NG and
power included Energy intensive industry
sector includes steel, cement, chemicals and coal
mining Source China Energy Statistical Year
Book McKinsey analysis
6
Net result - a surge in energy requirements as
well as energy imports
4,000
China coal supply Million tons
China crude oil supply Million tons
1,100
4,500
17 of 2030 expected global oil production
900
2,245
100
Net import
4,000
300
3 of 2005 global oil production
2,145
Production
119
Net import
190
181
Production
2005
2030
2005
2030
2030 production is based on gasoline and
diesel demand forecast assuming 57 of
gasdiesel output ratio consistent with
international average and China status assuming
China reconfigures gas/diesel ratio to 2532 by
2030. Import of crude oil may be reduced if China
chooses to import gasoline Source EIA ERI
IEA McKinsey analysis
7
Carbon levels could rise proportionally to 23Gt
in frozen tech case, with 7-8Gt carbon reduction
projected based on current policies
15.3
Overall GHG emissions 2005-2030 Gigatons CO2e
7.6
124
2005 emissions
2030 baseline emissions
Frozen tech Emissions 2030
Projected carbon reduction in baseline
Unconstrained growth
Emission/capita Ton CO2e/capita
Emission/GDP Ton CO2e/ 000 USD GDP
Real USD in 2000, by exchange rate
Source Global Insight McKinsey analysis
8
Content
Chinas challenge in the coming 25 years

Opportunities to have impact

Key decisions to drive timely actions
9
We have identified 5 key opportunities

• Nuclear and renewables to reduce dependence on
  coal

Power

• CCSstill expensive

• Competition between two technological pathways
  ICE vs. electric

Transpor- tation

• Diesel efficiency improvement for MDV / HDVsmall
  fossil fuel saving potential at high cost

• Core process optimization and utilization /
  management of by-products and wastes

Energy intensive industry

• Marginal process optimizationniche application
  base at high cost

• Passive design to deliver more energy savings at
  the same cost

Building

• Investing in high efficiency buildings in south
  and centrallow energy savings at high cost

• Behaviour change and the right urban planning

Beyond technology

• Service sector macro stimulationlimited impact

Source McKinsey analysis
10
A technically possible and aggressive scenario
coal no longer the dominant fuel in power
generation
25
Capacity Projection GW
Generation Projection Twh
519
100
2,126
2,021
100
7,950
9,250
2,452
23
Coal
31
59
65
Gas
73
Coal
81
Large hydro
Small hydro
Gas
large Hydro
Nuclear
small Hydro
2
Nuclear
Wind
1
Wind
4
Solar
Solar
Others
Others
2
4
1
2
2
0
1
0
0
2005
2030 full potential scenario
2030 baseline scenario
2030 full potential scenario
2030 baseline scenario
2005
Includes geothermal, CMB, MSW, LFG and
biomass Source McKinsey analysis expert
interview ERI literature research
11
Learning effect and efficiency improvement have
the potential to drive down cost of renewable
energies close to grid parity
1.80
2030 abatement case generation cost RMB / KWh
2005 generation cost RMB / KWh
Main Drivers

• 11 coal price increase fuel efficiency
  improvement from 35 to 41

0.33
Coal
0.32

• 1 CAPEX annual reduction fuel efficiency
  improvement from 32 to 37

0.35
Nuclear
0.32

• 95 learning rate global capacity increased to
  1,250GW efficiency improvement from 24 to 32

Wind (strong)
0.58
0.42

• 84 learning rate, global capacity increased
  to 1,550GW efficiency improvement from 15 to 20

Solar PV (strong)
1.78
0.47
Grid parity
Grid parity
Generation cost includes CAPEX, OPEX and fuel
expenses, and excludes financing
cost Learning rate is applied to global
capacity built-up, as China is likely to be the
world exporter for wind and solar
equipments Source McKinsey analysis China
solar association Huangneng Group Tsinghua
Univ SERC
12
while CCS could be still expensive till 2030
CCS overall cost journey baseline EUR / tonne
of CO2 abated European rollout scenario adjusted
to China transportation distance and power plant
utilization hours
Cost of CO2 abatement
110
80
75
70
55
50
2015
2020
2030
Demonstration phase (2015)
Early commercial phase (2020)
Mature commercial phase (2030)
Source McKinsey analysis
13
Opportunities also emerge from the auto industry
ICE pathway and EV pathway have pros and cons
-3
Carbon and energy efficiency
Costs
Technology leadership
Passenger car total gas consumption Mt, 2030
Emission Ton CO2 / yr / car, 2030
Average cost EUR /t CO2e, 2030
CAPEX 000 RMB / car, 2030
Pathway potential for China to demonstrate
leadership

• Potential to be tech leader
• Leadership already in battery manufacturing
• Substantial investment from govt and private

Pure electric
0.6
39
91
16
High efficiency plug-in hybrid

• Japanese OEMs already show early sign of tech
  leadership

0.8
18
47

• Difficult to catch up, as market already
  dominated by EU, US and Japanese OEMs

High efficiency gasoline
1.4
11
114
Note all numbers are for passenger cars
Additional CAPEX on top of the base model, with
15 years lifetime Not incremental abatement
cost Electric car electricity consumption
9kwh/100km, plant to battery efficiency 85
hybrid car with 66 electric share HE gas car
fuel economy 5.2l/100km Source McKinsey analysis
ERI DRIVE expert interview
14
Electric vehicles, if quickly implemented, have
the potential to reduce expected gasoline demand
by over 70 and oil import by nearly half
510
China gasoline Consumption Million tons
China crude oil import Million tons
Medium duty vehicles
Passenger vehicles
900
275
-43
-73
73
47
17
16
2030 import in full potential case
2030 Import in baseline
Reduction
2030 after reduction
2005
Pure electric vehicle reduction
2030
MDV plug-in hybrid reduction
Reduction also including 30Mt diesel
reduction by ICE bundles assuming 57 of
gasdiesel output ratio consistent with
international average and China status assuming
China reconfigures gas/diesel ratio to 1136 by
2030. Import of crude oil may be reduced if China
chooses to import diesel instead Source
McKinsey analysis China Energy Statistical Year
Book
15
Early rollout of the electric vehicle solution is
important for realizing the gasoline reduction
potential
EV penetrationin passenger car fleetPercent
Total gasoline consumption in 2030MT, assuming
all new cars were produced as EV after starting
point
0
275
136
63
73
91
52
99
2030

2011
2016
2021
Including both pure electric car and hybrid
car The 1 remaining are diesel
cars Source McKinsey analysis
16
Over half of carbon reduction opportunities lie
in efficient building envelope technologies
passive design leads the pack at negative cost
290
Abatement cost
7 areas of carbon reduction in the building sector
Reduction share ()
EUR / ton CO2e reduced
Mt CO2e
Reduction in baseline
Reduction in abatement case
Passive design, New build
-21
290
Building envelope
Enhanced code enforcement, New build
300
355
55
Retrofit building envelope
-18
258
28
HVAC system
HVAC system improvements
21
60
340
-130
135
275
Lighting
End-user goods
24
35
90
-108
Appliances
20
25
Water heating
-50
Building code abatement potential is low in
abatement case due to being displaced by passive
design Source McKinsey analysis
17
Passive design principles can realize much
stronger impact if reflected in the mandatory
building code
Updated code featuring Passive Design
Current building efficiency Code

• Lower savings per RMB spent (i.e. North 45
  savings at 1500 RMB/m2)
• Prescriptive parameters to reach target, which
• Offers one-size-fits-all solutions to cases
  requiring customization
• Overlooks possibly cheaper solutions with
  non-prescribed components
• Lack of user-friendly evaluation system that
  hinders enforcement ability of officials

• Higher savings per RMB spent (i.e. North 15
  additional savings for extra 5 RMB/m2)
• Maximization of passive solar energy and natural
  ventilation to lower heating and cooling needs
• Smart integration between design and building
  components (i.e. smaller chillers with natural
  shading)

• Accessible evaluation software that makes
  enforcement easier and permits designers to
  choose non-prescriptive building method

Source McKinsey analysis, expert interviews
18
Enforcement of the building code should
particularly concentrate efforts on commercial
northern residential buildings
Passive design cost curve in 2030
Cooling Heating consumption in 2030 Kg SCE /
m2
Abatement cost EUR/t CO2e
27
South
Transition
Cool- ing
18
Abatement potential Mt CO2e
2
North Residential
Commercial
Heat- ing
4
4
2
Majority of potential at negative cost found in
commercial and northern residential buildings
4
2
0
Commer-cial
Residen- tial North
Residen- tial South
Residen- tial Central
Power consumption is translated into
comparable primary energy units by coal
equivalent calculation methodology Source
McKinsey analysis
19
4.6Gt of emission reduction is expected from
frozen tech scenario to abatement case in the
industry and waste sector
2.8
Energy intensive industries and waste sector
emission G tons CO2e
Abatement on top of baseline
Baseline reduction
1.3
0.4
1.4
0.9
-62

0.9
0.5
1.0
0.4
0.3
Others
Abatement caseemission2030
Waste by-productmanagement
Clean power
Core processimprovement
Frozen techemission 2030
Including steel, cement, chemicals, coal
mining and waste management Mainly CCS and
less coal mining emission from reduced coal
demand Source McKinsey analysis
20
Core process improvement can be extended in
process industrieslike steel and chemicals
12
Potential Megatons CO2e
Additional abatement opportunities
Potential Megatons CO2e
Baseline opportunities
Coal mining efficiency
Catalyst optimization
Switching fromBOF to EAF
Other steel energy efficiency bundle
Quality improvementof clinker and substitute
Replace coal with NGin ammonia production

Process improvementof ammonia production
Production relocation to Australia
Precalciner Kilntechnology
Process automation
Coke dry quenching (steel)
Thin strip casting
Pulverised Coal Injection(steel)
Total abatement
Other
At cost of /ton CO2e
Total
Source China climate change cost curve team
21
Waste and byproduct management can be doubled in
impact
37
Potential Megatons CO2e
Additional abatement opportunities
Potential Megatons CO2e
Baseline opportunities
MSW/wastewatermanagement
Coal methane
CHP in chemical industry
Coal bed methane utilization
Municipal waste/wastewater
Clinker substitution withfly ash/slag
Combined Cycle PowerProduction
Agriculture waste toreplace coal
Utilization of blastfurnace gas
Fluorocarbon destruction
Waste heat power
Combined Cycle PowerProduction

Top pressure recoveryturbine (TRT in steel)
Total abatement
Other
At cost of /ton CO2e
Total
Source McKinsey analysis
22
Non-technology levers can potentially bring
700-800 Mt abatement opportunities
720
Abatement potential Mtons CO2e
Lower heatingtemperature
Efficient usage ofprivate cars
Behavior change
Better managementof appliances
Change fromruminant to non-ruminant cattle
200
Drive less
Urban planning
More high-rise buildings
100
Total
Source McKinsey analysis expert interview
China Building Energy Efficiency Annual Report
NSB
23
Macro measures to increase service sector
contribution to GDP have relatively low impact on
energy consumption and emission
Total emission index 2030, baseline emission as
100
Sector split
7
7
Agriculture
41
33
Industrial
52
60
Service
8.2
GDP growthCAGR (2005-2030)
7.5
6.7
Source McKinsey analysis
24
Content
Chinas challenge in the coming 25 years

Opportunities to have impact

Key decisions to drive timely actions
25
Policy measures to promote specific technologies
will have immediate and significant impact
ILLUSTRATIVE
Key decisions

• Accelerate project approval for nuclear energy
• Set generation rather than capacity targets
• Accelerate grid investment to connect renewable
  energy

Power

• Push for early adoption of electric vehicles,
  coupled with renewable energy as clean
  electricity
• Push major OEMs for timely and efficient ICE
  technology transfers from headquarter to China
  businesses
• Formulate coherent bio-fuel strategy to secure
  raw material supply

Transportation

• Make the business case for energy efficiency and
  by-product projects more attractive through
  funding support, differential energy pricing, and
  technical support
• Facilitate innovative measures, e.g., off-shoring

Energy intensive industries

• Invest in awareness campaign to encourage more
  frugal energy consumption behaviour
• Accelerate mass transit infrastructure build out
• Denser urban planning to slow down sprawling

Beyond technology
Source McKinsey analysis
26
Companies will in turn need to respond
Key decisions

• Equipment suppliers develop vision of future
  power mix and invest in new technologies to
  become less coal dependent
• Generation companies secure wind/solar
  resources for future renewable power development

Power
Source McKinsey analysis
27
The new McKinsey China research on energy and
climate change coming soon! 200 energy saving
and emission control technologies studied across
five major sectors Cost, learning curve and
technical penetration potential of each
technology The most comprehensive, bottom-up
fact base to date, first of its kind in a
developing country Report to become public in
December Stay tuned!
28
Backup
29
However, technical potential for wind power is
much higher than that in the reference case
380
??
Installed wind capacity GW, 2030
Description

• Including 100 GW onshore wind and 6 GW offshore
  wind

Reference case capacity

• Mainly from eastern coastal areas
• Much of the wind power not accessible due to port
  development and fishing needs

Additional offshore wind

• From areas with strong wind strength (gt300W/m2),
  mainly in Inner Mongolia, Xinjiang, Gansu, and
  Northeast China

Additional onshore wind strong

• From areas with medium wind strength (in the
  100-200Wm2 range), mainly in east coastal
  provinces
• Generation cost can be 4 times higher than that
  of strong wind area

Additional onshore wind weak
Total wind technical potential

• Rich wind resources in Tibet, Xinjiang and
  Qinghai not economically viable under current
  technologies

estimated from State Grid UHV project from
Yunnan Chuqiong to Guangdong Huidong total
length of 1438 km at cost of 13.7 billion RMB
Source GHG abatement model 2.0
30
and the same for solar power too
553
??
Installed solar capacity GW, 2030
Description

Reference case capacity

• From areas with very abundant sunlight (1,400
  1,750 kWh/m2), mainly East Inner Mongolia, North
  Jiangsu, Huangtu Plateau, and part of West China

Additional solar PV strong

• From areas with weaker sunlight (1,050 1,400
  kwh/m2), mainly in coastal areas
• Land cost potentially push generation cost up by
  4 times

Additional solar PV weak

• From areas with extremely strong sunlight, mainly
  Tibet and Qinghai
• Much of the rich solar resources in those areas
  not economically viable under current
  technologies

Additional solar CSP
30
Total solar technical potential
estimated from State Grid UHV project from
Yunnan Chuqiong to Guangdong Huidong total
length of 1438 km at cost of 13.7 billion RMB
Source GHG abatement model 2.0
31
If technical potential of all clean energies
realized, coal power share can drop to below 40
3,100
Billion KWh
Power generation mix
9,250
140
1,600
400
7,950
39
65
Coal
8
14
Gas
7
Hydro
16
13
Nuclear
8
Renew- ables
23
7
2030 reference case
End-user demand reduction
Additional wind
Additional nuclear
Additional others
Coal reduction
2030 abatement case
Additional solar
Source McKinsey analysis
32
This is already factoring in significant rise in
renewable energy and increased efficiency in coal
fired power plants as baseline scenario
1
Fuel efficiency of coal power plants Grams of SCE
/ KWh generated
Power generation mix Percentage, billion KWh
6,440
2,452
100
9,250
-1
65
71
81
Coal
Gas
Large hydro
Small hydro
4
Nuclear
1
Wind
4
Solar
4
Others
2
1
2
0
1
0
2005
2020
2030
2020
2005
2030
Source McKinsey analysis
33
Life style is expected to evolve quickly and
approach developed country levels
BACKDUP
China 2005
China 2030
Compared to developed countries
Appliances

• 32"
• LCD/CRT 40/60

• 50"
• Plasma/LCD 50/50

• Same as projection for the U.S. market

TV
Refrigerator

• Single door
• 120 L

• Double door
• 400 L

• U.S. current average level

HVAC

• 4 months
• Up to 20C

• 5 months
• Up to 23 C

• International average level

Heating

• 20 space
• 10 hours/day
• Down to 26 C

• 55 space
• 10 hours/day
• Down to 23 C

• Japan current level

Cooling
Source Literature research team analysis
34
Imperatives for private sector are also critical

• Now is the time to

• Stress test asset portfolio with scenarios of
  energy price, environmental (e.g., carbon) price
• Formulate strategy based on scenario planning

• Identify technologies with large abatement
  potential but low cost
• Invest early to benefit from emerging value
  chains of the winning technologies, e.g.,
  nuclear, renewable energies, electric vehicles
• Invest in talent base and capabilities to gain
  defensible advantage, e.g., design knowhow,
  sourcing network

• Raise awareness of technology and behavioural
  levers along the value chain
• Proactive shape industry policy and standards by
  participating in pilots or contributing knowhow
  to policy makers

Source China climate change cost curve team
35
which makes China a moderate emitter per capita
and per of GDP
3.1
Top per-capita emitters Tons CO2e per capita
GHG intensity of domestic production - 2005 Tons
CO2e per US 1,000 GDP
Rank
28.7
Australia
0.4
France
24.9
Canada
0.4
Japan
0.4
United Kingdom
24.3
United States
0.4
Italy
19.0
Netherlands
0.5
Germany
18.5
Saudi Arabia
0.5
Spain
14.6
Russia
0.6
Netherlands
14.1
Indonesia
0.7
United States
13.0
Brazil
Canada
0.8
12.0
Germany
0.9
South Korea
11.8
South Korea
China
3.6
Ukraine
7.3
12.8
Indonesia
5.2
China
Includes emissions associated with
deforestation and land-use changes Real USD
in 2000 Source UNFCCC IEA EPA Global
Insight McKinsey analysis
36
China is expected to overtake USA as the top
emitter in the world, accounting for nearly a
quarter of global emissions by 2030
2
Gt CO2e
Share of world emission Percentage, 2030
2030
2005
23
7
16
China
14
7
10
United States
9
5
6
Rest of developing Asia
7
4
West Europe
5
5
Brazil
3
2
5
3
2
Rest of Latin America
4
2
3
Russia
7
2
5
India
2
1
1
Japan
24
17
ROW
Source Global Climate Change cost curve model
2.0 China cost curve model IEA team analysis
37
Out of industrial sector GDP, 33 has the
potential to be impacted by service sector
stimulation, while the remaining 8 inflexible
0.8
Industry GDP total, 2030 baseline
41
Total 5 Gton emission from the 33 industrial GDP
prone to service stimulation impact

• GDP prone to service stimulation impact
• Manufacturing industries at down stream of value
  chain are more likely to change in structural
  shift
• 100 of chemical, 45 of steel, and 7 of oil are
  supplied to these industries and will follow the
  trend
• These industries contribute 33 to the total 41
  industrial GDP

CO2 e G tons
0.4
Power
2.9
2.3
0.1
33
0.4
0.3
Primary energy
1.1
0.5
0
0.8
0.9
Process
0.1
5.0
Total

• GDP inflexible
• Products related to floor space and
  infrastructure construction and passenger
  transportation are les likely to change
• Cement and steel supplied to construction and
  auto industry assumed not to change

• All these sectors put together consumes 54 of
  all power, 16 of coal, 7 of oil, and 15 of
  natural gas

8
Source China Statistics Yearbook 2006 Team
analysis
38
8 sector GDP share shift from industrial to
service will lead to 5 drop of total emission
0.9
Emission change with 8 shift from industrialto
service sector CO2e G tons
Sector GDP share scenarios 2030 Percentage of
total
Agriculture
-0.9
0.3
Industrial
-1.2

• Industrial sector
• 8 drop on the 33 share of downstream
  manufacturing
• This means a 24 drop of the 5 G ton emission in
  the sector, or 1.2 G tons

• Service sector
• 8 increase over the original 52 share
• This means a 15 increase of service emission on
  0.3 G tons

• Net effect
• -0.94 tons, or -5 of total emission driven by 8
  sector share shift

60
52
Service
Baseline
Serviceintensive
Service sector emission include mainly
commercial building and vehicles Source Team
analysis
39
Steady passive design learning curve bolsters
efficiency impact of current building code
0
Reference case efficiency building (new build)
penetration Percentage
Abatement case efficiency building (new build)
penetration Percentage
Passive design
Current building code
100
95
Includes lever of enhanced code enforcement
40
0
80
40
30
2010
2020
2030
2010
2020
2030
Commercial as example. Residential is slightly
lower, reaching 60 penetration by 2030, due to
lower energy consumption base and implementation
constraints of passive design Source McKinsey
analysis
40
Total floor space inventory penetration of
building envelope levers in abatement case
13

• 96 of eligible stock will benefit from
  high-efficiency building envelope
• 20 of commercial floor space doesnt need
  envelope (e.g. warehouse)
• Certain number of very old styled houses are not
  suited for retrofit
• Only 25 of stock built post-2005 will not be
  penetrated
• Retrofit players can penetrate up to 70 of
  eligible stock by 2030

91
Unit Billion Sqm
Passive Design
Code compliance in abatement
67
1
Code compliance in baseline
25
4
11
50
3
0
Retrofit
None
2010
2030
2020
Source McKinsey analysis, expert interviews