China Pours Money Into Smart Grid Technology

By Melanie Hart, Center for American Progress

There is no way to get around this fact—China aims to modernize its energy infrastructure at home and dominate clean energy technology markets abroad. At the 2011 Smart Grid World Forum in Beijing late last month, China’s State Grid Corporation announced plans to invest $250 billion in electric power infrastructure upgrades over the next five years, of which $45 billion is earmarked for smart grid technologies. According to its three-stage plan, China will invest another $240 billion between 2016 and 2020 (including another $45 billion toward smart grid technologies) to complete the build-out of a “stronger, smarter” Chinese power grid.

When complete, this system will improve energy efficiency, lower carbon emissions, and give Chinese consumers more control over their utility bills. Chinese leaders are betting that upgrading to a smarter electricity grid will also drive technology innovation and move the country up the manufacturing value chain. The Chinese view smart grid technology as the next industrial revolution—and they want to make sure that once other countries start upgrading their own grids, they will buy most of their equipment from China.

clean-energy power grid, Western states

image via Shutterstock

This issue brief details why the United States should take note of China’s ambitions and step up our own smart grid efforts. We, too, need a stronger, smarter electricity grid, and in many smart grid sectors, our enterprises are already producing the best technologies. All they need is a bit more policy support at home to speed up interoperability, to drive down equipment prices, and to ensure the smart grid revolution will be a market driver not only for China but also for the United States both at home and in export markets abroad.

What is a smart grid and why does China need one?

The main difference between a smart grid and a conventional grid is that smart grid components (similar to smartphones) are upgraded to include sensors, computers, and a wireless interface. That means the bits and pieces of the electric grid—the transmission wires, transformers, distribution wires, and usage meters—transmit and distribute electricity more efficiently and reliably to end users, and they can also report back on how that process is going and adjust operations along the line to fit changing conditions.

This smart functionality is critical for integrating key elements of a clean energy future, such as renewable power generation and electric vehicles. Unlike traditional coal-fired power, renewable power can be decentralized (multiple wind farms instead of one massive coal-fired power plant) and is often weather dependent. Conventional grid systems are designed to transfer a steady and predictable flow of power from point A to point B. When a thunderstorm reduces solar panel output or increases wind turbine output, those power fluctuations can trigger blackouts and burnouts in a conventional grid system. But a smarter grid can adjust, either by storing excess energy in batteries until it is needed or by moving power more efficiently across longer distances.

Smarter grids are also better at handling higher and more variable demand loads, and that will be critical when more electric vehicles are added to the system. Current consumer demand is very predictable, so utility companies know exactly what times of the day to purchase and distribute extra power to counteract daily peaks. Electric vehicles likely will not follow traditional consumption patterns—meaning demand peaks will be harder to anticipate—and that will create new operational challenges that will be hard to address without a more automated system.

The Chinese need more clean energy to meet their escalating electricity demand, and that will require a smarter grid. China is now the world’s largest electricity consumer, and Chinese demand is expected to double over the next decade, and triple by 2035. Their current energy mix is heavily dependent on coal—around 70 percent of overall consumption in 2010—and coal supply and price fluctuations are threatening economic growth. In 2011, for example, coal shortages forced China’s national economic planner, the National Development and Reform Commission, to begin rationing electricity in April, months ahead of the normal summer peak.

To comply with the rationing, officials in China’s power-hungry industrial regions cut off power to small enterprises from 5:30 a.m. to 7:00 p.m. daily and to medium-sized enterprises every few days. This forced many small- and medium-sized companies to operate only at night or to rely on pricey gas-fired power generators to keep their businesses running.

The only way Chinese leaders can keep their economy growing at current rates is to bring in more renewable energy power onto their national grids. Their latest targets call for the country to increase renewable energy to 9.5 percent of overall consumption by 2015, and a smarter electricity grid will be critical for integrating those supplies into the system.

The Chinese are also grappling with a major geographic issue. Energy supplies are concentrated in the west (including coal, natural gas, hydropower, and large wind farms), but demand is concentrated in the east, which creates major transportation challenges. China’s west-to-east grid infrastructure is already overloaded, so coal supplies are often shipped via rail and road. Problem is, transport bottlenecks are so bad that in 2010 coal trucks triggered a month-long traffic jam on the Beijing-Zhangjiakou highway.

To relieve congestion, the Chinese want to shift more west-to-east transport to the grid, so a large chunk of China’s upcoming grid investments (around $78 billion out of the $250 billion mentioned above) will go toward cross-country ultra-high-voltage transmission lines.

Killing two birds with one stone

As is the case throughout the green energy sector, Chinese leaders are betting that if they can roll out a smarter electricity grid before the United States, China can not only address their domestic energy challenges but also get a head start on technology standardization. And they see standardization as a critical step toward moving up the value chain and playing a stronger role in global technology markets.

China’s electricity market is divided geographically. China’s State Grid Corporation controls 88 percent of the country and serves more than 1 billion customers, and State Grid wants to leverage that position to become a global smart grid standard setter. Smart grid networks involve hundreds of new technologies, from wireless sensors and smart meters to high-voltage transmission technologies, electrical vehicle charging stations, and many others. State Grid is aiming to dominate many of those industries, not only in China but also abroad.

image via Shutterstock

In June 2010 State Grid issued its own proprietary equipment standards for 22 different critical smart grid technology solutions. Equipment manufacturers must abide by those proprietary standards to become State Grid vendors, and since State Grid is the biggest smart grid customer in the world, equipment manufacturers have a strong incentive to comply.

In most markets, equipment based on proprietary standards such as the ones State Grid would like to see developed for its forthcoming smart grid do not have good economies of scale because their equipment is expensive to produce and less competitive compared to equipment based on global standards. State Grid is betting that the Chinese market is big enough (and they themselves control so much of it, including both transmission and distribution) that they can use their massive purchasing power to achieve economy of scale and drive down manufacturing prices on their own.

Then, once Chinese manufacturers (many of which are State Grid subsidiaries) are churning out competitively priced smart grid products, they can export those same products to overseas markets such as the United States—and if those products are based on State Grid proprietary standards and intellectual property, the company will profit from every unit sold.

It is not yet clear how strongly China’s national leaders support State Grid’s one-grid-to-rule-them-all technology ambitions. Some in China are calling for a new round of restructuring to make the market more competitive and to reduce State Grid’s massive purchasing (and therefore standard-setting) power. China’s National Development and Reform Commission recently called for a new round of trials to experiment with splitting up electricity transmission and distribution. If they proceed with those reforms, that will take a big chunk of the market away from State Grid.

No matter how they divide the market at home, however, Chinese leaders have already elevated smart grid development to a strategic national priority. Smart grid technologies are also considered a “strategic emerging industry.” Overall, that means that whoever drives the market, whether it is State Grid acting alone or a more diversified group of Chinese enterprises, Chinese leaders will provide strong policy support, and China’s massive domestic demand will ensure that the country becomes a major player in global technology markets.

I am the editor-in-chief and founder for EarthTechling. This site is my desire to bring the world of green technology to consumers in a timely and informative matter. Prior to this my previous ventures have included a strong freelance writing career and time spent at Silicon Valley start ups.