Revamping Its Electrical Grid, China Invests in Dominating Smart Grid Technology (FXI, XLE, VDE, IXC, IYE, CHXX, CHIE, GEX, TAN, FAN)
With China’s (NYSEARCA:FXI) electricity demand forecasted to triple by 2035, and with rapidly expanding renewable energy (NYSEARCA:GEX) projects and a growing electric vehicle fleet, the Chinese central government has taken strong measures to revamp its national grid (NYSEARCA:CHXX). Stably managing its steeply rising and increasingly variable electricity demand (NYSEARCA:CHIE) has been and will likely continue to be a crucial hurdle for China to overcome in order to maintain robust economic growth. To meet this challenge, China plans to invest $490 billion in grid upgrades by 2020, including investments in smart grid technology which will improve energy efficiency (NYSEARCA:XLE) and facilitate the integration of growing renewable power sources.
Before examining China’s recent investments, it is first necessary to discuss what a smart grid is and why China wants one. In short, a smart grid is the ‘computerization’ of the electric grid. For the past century, utility companies have sent workers to read meters and look for broken equipment, but a smart grid uses two-way digital communication technology that can transmit data from numerous sensors (power meters, voltage sensors, fault detectors, and so on) to both end users and utility companies. In so doing, utilities can remotely adjust and control individual parts of the grid, while consumers gain more information about their energy consumption and the variable prices they pay.
In China’s case, a smart grid could help avoid crises like the forced power cuts in early 2011 (due to coal shortages) that threatened small- and medium-sized industrial firms, as smart grids can coordinate the deployment of stored energy to mitigate supply shortages. Furthermore, the structure of China’s electricity demand is increasingly variable, as the economy becomes more commercial and less industrial; that is, demand now tends to fluctuate more as offices use air conditioners and lights throughout the day, unlike the constant operation of factories. China’s electric vehicle fleet, which is predicted to “have upwards of 30 million electric vehicles in operation by 2020,” is also bound to add more variability to electricity demand. A smart grid can facilitate both supply- and demand-side management (i.e., end users managing their electricity consumption) to efficiently meet variable demand as well as accommodate for intermittent electricity sources like solar (NYSEARCA:TAN) and wind (NYSEARCA:FAN) power. As the transport of coal supplies saturates Chinese rail and highway infrastructure, and as more political weight is thrown behind China’s renewable energy (NYSEARCA:GEX) targets, the development of a smarter, stronger grid is ever more important for China.
In late 2011, the State Grid Corporation of China (SGCC) announced plans to invest $250 billion in grid upgrades over the next five years, $45 billion of which is marked for smart grid technologies. During 2016-2020 the SGCC plans to pour an additional $240 billion into the grid, with another $45 billion set aside for smart grid technologies. Because of these investments, China is predicted to become by far the world’s largest smart grid market. Although the SGCC is looking for domestic manufacturers to drive down the cost of smart meters through economies of scale, much of the technology inside the meters will come from Taiwan- and Silicon Valley-based companies. Eventually, though, the Chinese government seeks to supply all of the world’s smart grid technology; indeed, China has already used its market power to obligate manufacturers to comply with 22 new smart grid equipment standards.
The SGCC’s recent launch of the world’s largest battery –storing 36 megawatt hours of energy (NYSEARCA:VDE) and taking up the size of a football field (read more about football field sized batteries)–also marks a significant step in smart grid development. The battery, fed by a 100 megawatt wind farm and a 40 megawatt solar (NYSEARCA:TAN) farm, is predicted to increase renewable (NYSEARCA:CHIE) integration efficiency by 5-10 percent, as it can store energy during peaks in production and the supply power when demand is highest. China’s energy (NYSEARCA:IXC) storage capacity will only increase as more of these batteries are built and as China’s electric vehicle fleet is integrated into the grid.
Unlike the SGCC, which serves over 1 billion people, utility companies in the US number around 3000 and have met wide-spread opposition in their deployment of smart meters. Customers’ concerns over pricing and privacy have slowed smart grid development in the US, pushing green tech firms to look towards China. Furthermore, many wind (NYSEARCA:FAN) and solar (NYSEARCA:TAN) projects in the US still await connection to the grid because of transmission constraints, making the need for an upgraded US grid ever more apparent. If present trends continue, including China’s construction of three of the world’s largest ultra high-voltage transmission lines, it is possible that once the US does decide to revamp its grid (NYSEARCA:IYE) much of the equipment may have to come from China.
Ryan Landon Swanson is an associate writer for Wall Street Sector Selector. His chief research focus is on the political economy of China’s energy sector, but he also enjoys writing on the political economy of Latin America. He fluently speaks, reads, and writes Spanish and Mandarin Chinese. Ryan has substantial experience living, studying, and working in both China and Argentina. He earned a B.A. from the University of California, Berkeley in Interdisciplinary Studies with a focus on international relations and energy.