How will China power the Olympic Games?

May.06, 2008 in Market Outlook

China is slowly switching to green energy, but coal still dominates energy mix

By Polya Lesova, MarketWatch

Last Update: 3:54 PM ET Apr 24, 2008

NEW YORK (MarketWatch) — Two of General Electric’s 9FA gas turbines have been
installed in Beijing’s Taiyanggong power plant, which will supply electricity,
heat and air conditioning to the central area of the Olympic Games in August.

Powered by natural gas, GE’s turbines are cleaner than traditional coal systems,
and have other advantages such as a fuel-flexible combustion system and higher
output performance. For the Taiyanggong project, GE (GE) worked as the
subcontractor of Harbin Power Equipment Company Ltd. (HK:1133), a Chinese power
plant equipment manufacturer.

The Beijing Taiyanggong CCGT Trigeneration Project, as the plant is officially
called, is one example of China’s efforts to both deliver on its promise of
hosting a “green” Olympics and to ensure adequate energy supply for the sporting
event.

The Chinese government will be closing down huge swaths of industry in Beijing
and five neighboring provinces to guarantee improved air quality, which has
become a major concern.

Cement, iron and steel, coking and other industrial plants will be closed down or
curtailed. Those plants are the enormous energy consumers, and as a result,
analysts expect that Beijing’s energy demand will not rise dramatically during
the Olympic Games despite the flood of tourists and athletes.

“Any additional energy used directly, not counting the additional jet fuel used
to fly all the participants and spectators in from other countries, will be more
than offset by the closure of industrial plants in North China during the month
around the Olympics,” said David Fridley, leader of the China Energy Group at the
Lawrence Berkeley National Laboratory in California.

“Frankly, on balance, I would expect China’s energy consumption to fall slightly
or level out during July and August because of this,” Fridley said.

The bulk of additional demand during the Olympics will be in the form of
electricity, which will be supplied via the North China grid from power
producers, and China Petroleum & Chemical Corporation (SNP)(HK:386), or Sinopec,
Asia’s largest refiner by capacity, will retail the fuel used.

Electricity consumption during the Olympic Games in August may soar to 15 million
kilowatts, which would be a record level, according to media reports of Chinese
government estimates. The maximum power load will likely hit 35 million kilowatt
in the Jingjintang Grid, which supplies power to Beijing, Tianjin, and Tangshan,
according to reports. The peak power load in Beijing last summer was more than 11
million kilowatts. The North China Grid Company Ltd. has reportedly invested $2.3
billion in power grid construction and rebuilding projects since 2006.

“Right now, China is expecting serious strains on the electricity system,” said
Mikkal E. Herberg, director of Energy Security Program at the National Bureau of
Asia Research.

“Many parts of China right now are short of generating capacity,” Herberg said.
“I believe the government is making sure that there will be plenty of capacity
[for the Olympics].”

Herberg also said that oil demand will increase in Beijing this August.

China has had “some real tightness in oil products,” Herberg said. “The
government maintains heavy controls on fuel prices at the pump. On the refining
side right now, Chinese refiners are losing money on every barrel of oil they
process.”

China is currently the world’s second largest oil consumer and third-largest net
importer of oil. Its net oil imports are projected to jump to 13.1 million
barrels a day in 2030 from 3.5 million barrels a day in 2006.

Rachel Ziemba, an analyst at RGE Monitor, said that the surge in energy demand
for the Olympics will be offset by the closure of the most polluting factories
and by cars coming off the street.

“Energy demand in China is so large, but the Olympics’ demand is a drop in the
bucket,” Ziemba said. “I don’t think you’ll see a meaningful change in China’s
energy demand in those two weeks.”

Compared to other Olympic host cities, Beijing is too small relative to China for
the Olympic Games to “have a genuine national impact, either in a positive or
negative sense,” wrote Credit Suisse equity analysts in a research report last
August.

In 2005, Beijing made up only 4.4% of China’s GDP. That year, China’s energy
demand totaled 2,246.8 million tons Standard Coal Equivalent, while that of
Beijing was 55.2 million tons Standard Coal Equivalent, or only 2.5% of the
national total.

Direct investment into electric power projects related to the Olympic Games
between 2003 and 2007 is estimated at nearly 24 billion renminbi, or about $3.4
billion, according to Credit Suisse. Indirect investment into energy projects for
the same period is forecast at nearly 32 billion renminbi, or about $4.6 billion.

A push to green

China’s Olympic bid commitments have encouraged it to diversify its energy
sources by reducing its dependence on coal and shifting to cleaner technologies
such as natural gas, solar, wind, and geothermal energy. However, coal still
makes up 69% of China’s primary energy consumption. Coal-fired power plants,
which emit huge quantities of sulphur dioxide and particulate matter air
pollution, dominate Beijing’s energy infrastructure. Alternative energy, though
growing, forms a very small part of China’s energy mix.

“While it’s important that the government’s attention is focused on renewable
energy sources, the system in China is very much oriented toward coal-fired power
plants and I don’t see that significantly changing in the near term,” said David
Riedel, president of Riedel Research Group.

The International Energy Agency projects that China’s primary energy demand will
more than double from 2005 to 2030. The country is expected to overtake the
United States as the world’s largest energy consumer soon after 2010. And coal
consumption is expected to grow rapidly and to continue to dominate primary
energy demand at 63% in 2030. To match surging demand, China needs to add more
than 1,300 giga-watts to its electricity-generating capacity, more than the total
current installed capacity in the U.S., according to IEA estimates.

“Beijing’s energy infrastructure is undergoing massive restructuring, with a
gradual transition from heavy dependence on coal to cleaner energy sources,” said
a report by the United Nations Environmental Program (UNEP), published last
October. The Olympic Games have been a catalyst for many environmental measures.

“In the meantime, though, the city remains heavily reliant on coal, with its
associated environmental consequences, ranging from local air pollution to the
long-range transport of toxic elements such as mercury,” the UNEP report said.

On the positive side, the Chinese capital is gradually shifting away from
coal-fired energy generation to less polluting fuels such as natural gas. The
ratio of Beijing’s natural gas consumption to total energy consumption rose to
6.4% in 2004 from 0.5% in 1997. Beijing Gas Group Ltd., a state-owned company,
supplies natural gas and liquefied petroleum gas to Beijing.

Two of GE’s natural gas-operated Jenbacher Tri-generation units have been
installed at the Jing Hui Garden Hotel, which will host media during the
Olympics. GE, a worldwide Olympic partner, is contributing to more than 350
infrastructure projects in and around Beijing, including projects at all 37
official Olympic venues. On the energy side, GE is involved with energy
distribution, power generation and lighting.

In late March, GE signed a multi-million dollar deal with the China State Power
Grid to supply 72 electrical substations to ensure uninterrupted power at more
than 50 Olympic sites, including the National Stadium for the opening and closing
ceremonies, the international broadcast center and the Olympic Green.

Solar power will be used extensively during the Games to light lawns, courtyards
and streets as well as to heat water in the Olympic Village. In the Feng Tai
baseball stadium, a 27 KW photovoltaic system will supply energy.

Suntech Power Holdings Co. (STP), one of the world’s leading manufacturers of
photovoltaic cells and modules, has an exclusive contract to supply a 130KW solar
energy system for Beijing’s Bird’s Nest Stadium, the main Olympic stadium.

Beijing will also rely on wind energy this summer. The Guanting Wind Farm, for
example, has been supplied with wind turbines by Goldwind Science and Technology
Co., one of the leading Chinese manufacturers of wind turbines.

GE is supplying wind turbines for the Zhangbei and Shangyi wind farms north of
Beijing, which will connect to the North China Grid to supply power during the
Olympics. They can generate nearly 80 megawatts of power and eliminate up to 18.3
million tons of greenhouse gases, GE told MarketWatch.

“China has imported a lot of green technology expertise from big multinationals
such as GE,” said Ziemba of RGE Monitor. “What remains to be seen is how
long-lived any nascent [renewable] energy use is.”

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