Industrial strategy and cheap energy: why China is eating, and will keep eating, our lunch

January 12, 2011
By

Future historians may look at the early 21st Century as the time when China and India emerged as the third and fourth of the great continental powers of the post–Second World War era. The first two are of course the U.S.A and Soviet (and to a lesser extent, post-Soviet) Russia. What made these powers great was their ability to project a more or less homogeneous economic, cultural, and political order onto a physical area that spanned a continent, or at least a good part of one.

Of the first two, America has of course so far been the more successful. Most observers would say that this is because America’s government, while closely involved with the economic life of the country, has a healthier relationship with the economy than Russia’s does. Actors in the American economy are, collectively, able to take fuller advantage than their Russian counterparts of the economic efficiencies possible under a more or less homogeneous economic, cultural, and political order spanning a large physical land mass.

China’s government, though a one-party dictatorship similar to that of Soviet Russia, appears to have in the last three decades achieved a realignment of the nexus of politics and economy which allows economic activity to flourish. Under the Soviets such activity was regarded as a political threat; China’s current leaders appear unthreatened by it. (I’ll deal with India in an upcoming post.)

Regardless of precisely how this state of affairs has come about, China’s internal market is about to turn into an economic force unprecedented in human history. China appears to have recognized how decisive internal-market efficiencies can be, and its economic actors are more or less free to operate in the biggest internal market in history.

To get an idea of just how China’s internal market is booming, consider this. According to a 2009 World Bank report, half a billion Chinese came out of poverty between 1981 and 2004—that’s billion, with a b. “Came out of poverty” means capable now of consuming the economic output of others to a greater degree than before 1981.

That period, 1981–2004, coincided with the greatest rural electrification drive in history. According to researchers at Stanford University, electricity has been introduced to over 900 million rural Chinese since 1950. Though China’s communist government began bringing electricity to rural areas in 1950, the period since 1981 has seen the real progress. In 1981, 98 out of every 100 rural Chinese households did not have a washing machine; 999 out of every thousand did not have a refrigerator. The corresponding figures for 2004 were three out of five and four out of five. That is enormous progress.

Electrification, above all, is the factor that defines rural China’s initial rise from poverty. Without electricity, those 900 million rural Chinese would still be living in pre-industrial conditions.

Of course, we cannot say that the half billion who came out of poverty are now rich. By western standards they are still very poor. Average rural household electricity consumption was 127 kilowatt-hours in 2004; in Canada, an average home uses more than 700 kWh per month. To repeat: three out of five rural Chinese households did not have a washing machine in 2004; four out of five did not have a refrigerator. There is still a long way to go.

That ought to give an idea of the magnitude of the economic expansion that is now occuring in China. It is actually in its early to middle stages. If you make basic electric appliances, you are looking at a growth market that simply dwarfs all others.

The same goes for makers of nuclear reactors. China did not get this far, and will not complete its historic electrification drive, by pursuing a policy of expensive electricity.  By far most power in China comes from coal-fired generators. Coal is cheap. According to the Stanford researchers, 1.8 trillion of the 2.2 trillion kilowatt-hours China generated in 2004 came from coal-fired plants.  The rest came from hydro and nuclear. That is no different from anywhere else. As I showed in “Ontario nuclear power subsidizes gas and renewables,” those three generation types are by far the cheapest where I live (Ontario, Canada).

When the other three out of five rural Chinese households finally get washing machines and refrigerators, what will power these appliances? According to Brian Wang of Next Big Future, China plans to add 120,000 megawatts of new nuclear generating capacity by 2020. That plan is already in motion as I write this. Last Friday, I had the pleasure of participating in a conference call with Jacques Besnainou, the head of Areva North America. He recently visited the Taishan site, where two 1,650 megawatt Areva EPRs are being built. (When I and some fellow pro-nuclear bloggers visited Areva’s heavy components plant in Dijon last summer, we saw the pressure vessel for one of the Taishan units.)

Besnainou pointed out that the Taishan EPRs are ahead of schedule and that the Chinese customer, the China Guangdong Nuclear Power Holding Co., is thinking of adding two more reactors of similar size at the same site. He added that those two additional reactors could well be EPRs. And if you’re the CGNPC, why not—two subsequent EPRs would apply lessons learned in building Taishan units 1 and 2, which have already benefited from the lessons learned at Olkiluoto in Finland and Flammanville in Normandy.

Besnainou also pointed out the centrality of cheap power to the Chinese economic phenomenon. That will give China a double advantage in world export markets: it has both cheap labour and cheap power. In North America, labour costs are high, he said, “and that’s good, because it gives workers here an excellent standard of living.” But North American energy doesn’t have to be expensive.

I agree totally. The problem is, we in North America are embarking on deliberate policies of expensive energy. I have pointed out the situation in Ontario, where the government plans to spend real money to add wind and gas generation into our electricity system, in spite of the fact that these are ruinously expensive.

Well, throw in the factor of a Chinese economic behemoth rising, and consider that that behemoth is fueled with cheap electricity and cheap labour. How will that affect Ontario’s competitive economic position in the world? As Jacques Besnainou said, we cannot and should not compete with China by lowering our labour costs. Which means we must not increase our energy costs.

But that is exactly what we are doing. Because we are deliberately raising electricity costs, it is inevitable that North American workers will see declining wages. That is because, in the industries in which they compete, the Chinese will be eating our lunch.

Just yesterday, CBC reported that the Canadian federal cabinet will approve the Mackenzie Valley Pipeline, which, if it gets built, will bring natural gas from the Canadian arctic down to southern markets. The feds are all about natural gas: they agree entirely with Ontario’s Gas First electricity policy. Gas industry lobbyists and professional “environmentalists” will point to the Mackenzie Valley Pipeline as proof of long-term gas supply, and say that Ontario has nothing to fear by pursuing its gas-first strategy.

But the pipeline won’t be built until the price of gas goes up to where it was before the recession: i.e., to over $6 or $7 per million Btu. That means Ontario gas-fired power will cost more than the 17 cents per kWh it costs today. We could and should be getting more electricity from nuclear plants, which produce power at less than 6 cents per kWh.

With that decision, the feds have virtually ensured China will start eating our lunch soon, and keep eating it for the foreseeable future. The same historians who identify the early 21st century as the time of China’s astonishing rise will find it remarkable that western governments deliberately pursued energy policies that undercut their own economies.

7 Responses to Industrial strategy and cheap energy: why China is eating, and will keep eating, our lunch

  1. Lynne
    January 12, 2011 at 11:32 pm

    Interesting article. Perhaps it would be easier to understand the direction energy policy is taking in this province if you examine who is advising the government. As usual, one must ask,”Cui bono?”

    This article also brings up some important stats.

    “Ontario customers paid $52.8 million last month to subsidize electricity in the US and Quebec”

    http://www.windsorstar.com/Power+exports+necessarily+good+thing/4089636/story.html

    At the risk of understating the issue, this can’t be good economic policy.

  2. crf
    January 12, 2011 at 11:42 pm

    “Historians who identify the early 21st century as the time of China’s astonishing rise will find it remarkable that western governments deliberately pursued energy policies that undercut their own economies.”

    I don’t know if it so remarkable. I have lately become so utterly cynical about the politics in Canada and U.S. that what is happening makes sense to me.

    This is funny, in a tragic way. But in both the United States and Canada, we see a large fossil fuel sector in the economy, and large (but relatively shrinking) energy consumption sector (manufacturing), and a growing service sector which may not have its economic health tied strongly to the price of energy. Also, the energy producing and manufacturing sectors are geographically and politically separate! In the US, an ever larger share of manufacturing is directly government supported (via the military), and so becoming rather servile and voiceless. But there is still pushback: a public understanding that manufacturing is very important, and the idea that the manufacturing tradition ought to continue. The corporate entities in the service sector doesn’t seem to care about these issues, and service sector employees may care, but not feel that they have a real stake in the outcome – so they may care deeply and passionately, they way some people care deeply and passionately about their favourite football or hockey team.

    Right now, clearly in Canada, the sector producing fossil fuels carries larger political clout than manufacturing, due to the very high prices of fossil energy which means the bucks flow to this sector, coupled with high competition in even high-value manufacturing, which keeps growth lower than it could be in that sector.

    At some point, assuming nothing is done to publicly recognize the political and economic problems that can result from this situation, there is very likely to be ongoing strife and crises. In Canada perhaps the trouble is somewhat mitigated by the fact that, spread out fairly evenly over the country, there are service sector jobs, and mining and forestry sectors that are doing okay. (And sometimes mining and forestry companies complain in public about the rise in the dollar, but not too emphatically.) There isn’t yet, in Canada, the awesomely rancorous inter-country political debates on energy and climate change seen in the US between the “Red” fossil fuel states and “Blue” manufacturing and service sector states.

    I don’t think having energy policies in Canada that attempt to reduce the use of fossil fuels, through the increased use of nuclear (and some hydro and renewables), and further promote electrification of industry and transport, would in any way harm the interests of Alberta, Saskatchewan, Newfoundland or North-East B.C., because there will be a growing worldwide market for fossil fuels for several generations yet. Similarly, having Canada promote international sales of nuclear, hydro or renewable tech, by, for example, ensuring strong international agreements to limit and price carbon emissions, would also not do any harm to Canada’s international or domestic markets for oil and gas (lots will need to be used for generations to come).

    But for Canada to be doing little to nothing, either internationally or domestically, to promote its nuclear (and perhaps hydro industries), only benefits the political order currently in power. Put plainly, I think it’s a long term plan to tightly shackle Ontario’s economy to Alberta’s, to ensure a degree of political servility to western Canada’s growing energy sector (i.e., to enhance the fortunes of the conservative party: don’t vote against the interests of the hand that feeds you). It’s shameful that there is no clear political voice from central Canada’s manufacturing base regarding this state of affairs. Maybe they do not care, as long as their are enough jobs and profits flowing from an expanding oil patch, and there is no slowing down the expansion of employment in the service sector (ha!).

    Canada is developing, silently, a national energy plan. The plan is to export oil, and give token appreciation to hydro, nuclear and renewables. The idea that it would be a good idea for the country to get on board expanding and exporting nuclear is pointedly not mentioned. We get a “meh, who cares”, when the CEO of AECL (who takes orders from the federal cabinet) says that his company is not going to export, and instead build domestically, which then doesn’t happen. (Can you imagine the government of Canada saying: “Meh, were going to put the breaks on the oil and gas sector, shrink its R&D, and tell it to stop any expansion of international sales.” I can’t even image Jack Layton saying this if he were to become PM and were forced to think soberly for once!)

    I don’t like it. Canada could be much more of a force for good in solving the world’s energy and climate problems. Doing so would even help resolve some if its political problems. Instead, largely due to ugly domestic politics, we are uncommitted and increasingly irrelevent and uninfluential navel gazers.

    • Steve Aplin
      January 18, 2011 at 6:00 pm

      CRF, good points. It’s time for the negotiation between Ontario and the feds to get out more into the open. Ontario has to drop its insistence that the feds pick up the cost of a Darlington overrun, if that delay is Ontario’s fault (as it was in the first Darlington project). The feds have to agree to either pay the ACR development costs and/or offer loan guarantees for an Ontario ACR project. It seems crazy that the feds would have funded the ACR up to now then stop—especially since that is a source of the kind of uncertainty that could delay a project. Ontario did its part, in choosing the ACR; now Ontario needs to get more nuanced about who should pay what in the event of a construction delay.

      Either way, the feds and Ontario have to sit down and work this out.

  3. donb
    January 13, 2011 at 8:53 pm

    Here is a blog article claiming that Hydro Quebec is getting the better deal for power shipped south of the boarder:
    http://yesvy.blogspot.com/2011/01/variable-pricing-and-vermont-yankee.html

    Maybe this just makes it all that much more confusing…

  4. January 17, 2011 at 10:26 am

    This is has been my point all along with Nuclear Green. At the heart of nuclear Green has been an analysis of steps that can be taken to lower energy costs. The primary low cost energy source is nuclear power, and the cheapest nuclear power source would be molten salt reactors which are simple, require fewer parts, and less material. Building MSRs in factories will decrease energy costs in several ways. Factory manufactured power reactors can be transported by truck, barge and train, can be set up in months rater than years, and can be manufactured with labor savings equipment. By speeding up the manufacturing process, money can be saved on deferred interest payments. Costs can be further lowered by the use of low cost manufacturing materials, with small performance penalties. Existing power plant sites can be recycled to house MSRs. MSRs can be housed underground, savings on aircraft proof containment structures. The use of Molten Salt Nuclear technology would allowte United States to compete with China and India on post-carbon energy costs.

  5. Lynne
    January 31, 2011 at 6:42 pm

    According to Lawrence Solomon in the National Post, the McGuinty government is looking to put industrial wind turbines in our provincial parks, as well as in our Great Lakes. Do you see this realistically happening, Steve?

    http://opinion.financialpost.com/2011/01/30/lawrence-solomon-multinationals-could-soon-develop-ontario%E2%80%99s-provincial-parks/

  6. February 7, 2011 at 11:11 am

    China is buying coal mines in Africa. We all know why. They are cheap a still can produce a coal with higher quality. However China is under pressure because of CO2 emissions so they have to keep up the limits. They know this is not sustainable solution. They don’t focus only on African mines but they made a huge contract on logging with Canada last year. I am wondering who is going to profit from all of this. Where the energy policy is going to lead then?

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Item 1: if Ontario did not have its nuclear generating fleet, last hour’s CO2 emissions would have been AT LEAST:

5,480 metric tons, and the CIPK would have been 373.4 grams

Item 2: Since prorogation of the Ontario legislature on October 15, 2012, provincial gas-fired generating plants have dumped this much CO2 into our air:

14,388,838 metric tons. This is a running total. Every hour, the total increases by the amount of Gas CO2 given in Table 1.

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