Clean energy plan hinges on coal price

The world's second-largest economy faces formidable challenges to make the plan work. Beijing must upgrade its rickety electricity grid, open up the network to alternative energy and raise tariffs to make new energy sources competitive with coal-fired power. All that while retaining investor confidence China will remain the low cost factory of the world.

"Parallel policies are essential," said Wang Yi, deputy head of Institute of Policy and management, China Academy of Science.

"The government must gradually lift fossil fuel prices while granting incentives to non-fossil fuels to establish a long-term price signal."

The plan is awaiting government approval, and the loans, grants and tax breaks it includes aim to encourage renewables, gas and nuclear use.

Beijing aims to cut carbon intensity as much as 45 percent from 2005 levels by 2020 and increase the share of renewables to 15 percent of primary energy consumption. That is nearly double the current ratio and would make the country a leader in green energy manufacturing and use.

For international firms involved in the sectors expected to receive the spending, the plan is a potential gold mine. They will be sifting the sands of decision making in Beijing that puts the state firmly in control of picking winners and losers.

Companies such as nuclear experts Areva of France, wind power equipment makers Gamesa of Spain, India-listed Suzlon and solar power plays such as U.S.-based First Solar and China's Yingli are waiting to see if Beijing is ready to use their technologies on a massive scale.

One estimate has China on track to build at least 20 nuclear power plants of 2 gigawatts GW each for the next five years.

Foreign firms would also be watching how state-owned companies fit into the plan.

State energy giant PetroChina, for instance, is leading the foray to develop cleaner burning gas sources to supply nearly 10 percent of China's total energy needs by 2020, from 4 percent now, to help achieve the CO2 cut target.

State firms could absorb losses, but without changes in tariffs, private firms would have little incentive to invest, analysts said.

"Power price is the key of the keys. Without a reform only state firms want to build green facilities as they are the ones who can afford to lose money," said Lin Boqiang, head of Center of Research on Energy Economics, Xiamen University. "The private sector can't afford waiting for 5 to 10 years operating at loss."

China has pursued new sources of power generation for decades from the world's largest hydro power project at Three Gorges on the Yangtze River to a 2007 plan of 2 trillion yuan US $294 billion that set the 15 percent target for renewables by 2020.

More recent efforts link to heightened local environmental and broader global warming concerns that other countries such as the world's No. 2 emitter, the United States, also face and attempt to deal with in part through national efforts.

China surpassed the U.S. in 2007 as the world's top carbon emitter, the International Energy Agency says. The United Nations has called on China to ramp up investment in renewables and energy efficiency to rein in emissions growth as nations try to negotiate a tougher pact to fight climate change.

But China's ability to build cheap cleaner coal plants makes it hard for the world's No. 1 coal producer and user to switch to other sources. The generators, known as supercritical plants, produce about 15 percent less CO2, at a third to a half $500-$600 per kilowatt of the costs in most OECD countries.

China has largely freed prices of coal, which fires almost 80 percent of its total electricity output.

But it has kept a tight lid on power rates, worried about wider implications for the economy, effectively encouraging generators to cling to low-cost coal to maximize profit.

In recent months Beijing has drummed up support for hydropower, calling for quicker building of dams after recent years had seen plans scaled back due to tighter environmental rules and the costs or relocating the population.

Hydropower would play a big role in making the 15 percent primary consumption target for renewables, an official from China's National Energy Administration said.

"Hydropower is the key to reaching that target. It will make up 9 to 10 percentage points out of the 15," the official said.

Beijing has scaled back adding new wind and solar farms in places like the lonesome plains of Inner Mongolia, due to the cost per unit of power and access to the distribution system.

Some projects get subsidies to contribute to the grid, but there has been reluctance to embrace new sources as handling new flows requires an upgrade, industry officials have said.

"It's like human hands, they won't function perfectly without one of the ten fingers. If we manage to add wind and solar capacities, but the power grids fail to keep up, they would be wasted efforts," said an official with the National Energy Administration NEA, which drafted the plan.

Cross-sector coordination has gained urgency as major Chinese cities choke under a haze of pollution caused by rapid economic growth that has seen auto sales, already the largest in the world, balloon ninefold in the past decade to a forecast 16 million units in 2010.

"Chinese leaders are dead serious about environment, more serious than the outside world thinks," said Yan Kefeng of Cambridge Energy Research Associates.

"But the challenges are huge."