China's decarbonation plans will require an estimated annual investment of over US$2 trillion in a period from 2020 to 2060

As a result, the share of non-fossil energy in total energy consumprion will jump to 85 percent by 2060 from just 12 perecent in 2015

If there is one word that sums up China’s approach to decarbonizing its huge economy, it is ambition.

All this could be disruptive, given the country’s heavy reliance on coal-fired power and industrialization. Data from UBS Evidence Lab, an alternative data provider, indicates that China's last coal-fired power station will likely be decommissioned in 2067, which is misaligned with the 2060 net-zero carbon target. There are truly dramatic energy and economic structural changes ahead.

Boosting competitiveness

Amid the disruption and upheaval, the country’s decarbonization plans will boost China’s economic competitiveness, create jobs, drive technological innovation, and improve sustainability, UBS analysts believe.

Such an effort will require an estimated annual investment of over US$2 trillion in a period that started last year and runs to 2060, the bank estimates. This will see a dramatic shift in the share of non-fossil energy in total energy consumption, jumping to 85 percent by 2060—the level at which fossil fuel energy currently sits—from a mere 12 percent in 2015.

This level of ambition has impressed environmental policymakers. It also heralds significant investment opportunities.

New renewables infrastructure

Given that UBS believes that wind and solar power will be the major drivers of China reaching its 2060 target, that opportunity appears to be great in renewables. There are also compelling cases to be made in the supporting infrastructure, such as power grids, as well as in China’s fast-developing electric vehicle (EV) ecosystem, and in hydrogen.

Over the past decade, growth of renewables in China has been unprecedented, with the installed capacity of wind and solar farms increasing to almost 500 gigawatts (GW) in 2020, from 30GW in 2010, accounting for 23 percent of China’s total power capacity. Yet UBS believes that in order to meet the 2060 net-zero carbon target, China would still have to accelerate further its annual renewable installations to around 250GW, from the 75GW in Beijing’s current Five-Year Plan.

Ronald Wu, Head of ESG/Sustainability Research APAC at UBS, says that falling costs in renewables will help. “The year 2020 was a milestone for Chinese renewables because costs are now on some measures on a par with coal. This is just the beginning, however: it’s clear that wind and solar costs will fall significantly further over the next decade.”

He believes there will be opportunities in digitalizing the grid infrastructure that would enable more efficient management of the intermittent nature of wind and solar power, including through upgrading the power dispatch system and using artificial intelligence (AI) for maintenance.

The economics of renewables also promises to be improved as fresh financing opportunities flow from China’s maturing green bond market. Such bonds are set to be an increasingly important component of the country’s debt financing needs to meet its net zero emissions target by 2060.

In April, authorities took significant steps forward in harmonizing domestic standards for green bonds, notably by aligning them with Europe’s by removing fossil-fuel related projects from the list of projects that can take advantage of such funding. “In the domestic market we do see there is fast growth in the green bond market, especially after the regulations clarified what ‘use of proceeds’ will be considered eligible for [the] green bond framework,” says Jason Wang, a UBS Managing Director.

Leading the EV revolution

Another big area where decarbonization will play out is e-mobility. China is the largest EV market globally, accounting for almost half of it, compared with the less than 30 percent share that China has of global combustion engine vehicles. Chinese brands have more than an 80 percent share in the country’s market, meaning that they account for 40 percent of global EV production, compared with about 10 percent of global combustion engine car production accounted for by Chinese brands.

The country also has a comprehensive EV supply chain, covering essentially everything needed to build an EV. UBS estimates that China has 70 percent of the global battery supply chain and is home to 80 percent of battery materials capacity.

Paul Gong, UBS Automotive Analyst, China, says: “As Chinese carmakers continue to roll out competitive EV models and develop a diverse ecosystem, we believe [China] is heading toward disrupting the current global auto-industry landscape.”

To better understand the competitive nature of the market, UBS Research and UBS Evidence Lab have since 2017 conducted “tear-downs” of products to assess their composition, allowing for accurate assessment of the relative amounts, and therefore cost, of raw materials used in models.

A 2018 tear-down showed how far ahead a leading US EV manufacturer was in what UBS calls “battery-to-wheel” efficiency, due to the design of its powertrain (the equipment that drives a vehicle). Less than two years later, similar designs were being used in Chinese EVs.

Foreign manufacturers are not standing still, with Europe’s largest car manufacturer pledging to have invested, with its Chinese joint venture partners, around €15 billion in the industrialization of e-mobility in the country by 2025.

The intense competition, coupled with the proliferation of Chinese start-ups in the EV parts industry, is creating opportunities for investment in China’s whole automotive ecosystem as the country decarbonizes. “We are seeing that there will be quite transformational changes,” says Mr. Gong. 

Views correct as at 3 September 2021.

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