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PANEL I BUILDING THE NEW ENERGY ECONOMY Moderator: Michael Borrus X/Seed Capital Management One of the many global issues that should unite China and the United States is the “desperate need to diversify both economies,” said Mr. Borrus, the founding general partner of early-stage investment firm X/Seed Capital. Both economies must be weaned of their “dependence on sources of energy that produce massive quantities of greenhouse gases and deplete scare resources.” Leaders of both nations have embraced the goal of rebuilding economies based on renewable energy sources, Mr. Borrus noted. But they face daunting challenges, such as political pressure from powerful entrenched interests like domestic coal and oil producers. Other challenges, he said, “come from the very different ways our two nations interact to influence global competition.” A good example is in the solar energy industry. Most innovations in solar come from the U. S., he noted. But “virtually all of the manufacturing will end up in China.” Over-capacity stemming from over-investment in China has caused world solar-panel prices to plummet. That has “effectively destroyed the economic case for investment in domestic U.S. solar production capacity,” he said, “a situation that is not sustainable, in my opinion.” Only a combination of continued innovation and cooperation is likely to solve such problems, Mr. Borrus said. He noted that the first speaker addressing these challenges and opportunities for cooperation is Ren Weimin of the National Development and Reform Commission. He had been introduced previously. The other speaker, Energy Under Secretary Kristina Johnson, “embodies both innovation and entrepreneurship, as well as academic excellence,” Mr. Borrus said. Prior to her current appointment, Dr. Johnson had been dean of Duke University’s Pratt School of Engineering and provost and senior vice-president for academic affairs at Johns Hopkins University. She also has helped found two companies, performed pioneering research in optoelectronics, and 53

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54 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION was awarded the prestigious John Fritz medal.1 Previous recipients of the prize, Mr. Borrus noted, include Alexander Graham Bell, Thomas Edison, and Orville Wright. New Renewable Energy Initiatives in the United States Kristina M. Johnson U.S. Department of Energy China and the United States share many strategic energy interests, Energy Under Secretary Johnson said. Both nations are among the world’s top energy producers and consumers and emitters of carbon dioxide. “By working together we can leverage our comparative advantages in innovation and address this global climate challenge,” she said. Controlling greenhouse gas emissions is a major responsibility of both nations. Together, the United States and China emit 40 percent of the world’s CO2. Europe accounts for around 20 percent. “There is no way to tag the molecules under the Chinese flag or the American flag. We own them all,” Dr. Johnson noted. “So we will have to work together to figure out a way to mitigate the impact they have and will have in the future on our environment.” That impact already is becoming visible everywhere. In her home town in Colorado, Dr. Johnson said, an infestation of pine beetles has caused widespread deforestation. In a nearby state, half of glaciers have been lost in the last 100 years. “I am sure there are places that are familiar to you where you have seen the effects of climate change over the past several decades,” she said. The great news is that Americans and Chinese “both come from very innovative cultures and we know how to address challenging problems,” Dr. Johnson said. “As an engineer, every problem is an opportunity to innovate. So I look forward to working together.” Dr. Johnson presented an overview of the Obama Administration’s agenda to expand the clean-energy economy in the United States. The goals are to secure America’s energy future, reduce greenhouse-gas 1 The John Fritz Medal was established in 1902 in honor of steel magnate John Fritz and is awarded by the American Association of Engineering Societies (AAES) for important achievements in science or industry. Dr. Johnson won in 2008.

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55 PANEL I-BUILDING THE NEW ENERGY ECONOMY emissions by 83 percent by 2050, demonstrate science and engineering leadership, and collaborate with the global community to clean up toxic waste that is a legacy of the Cold War by 2015. Some 70 percent of U.S. electricity is derived from fossil fuels. De- carbonizing U.S. energy generation is a challenge, but one that is “fairly straightforward,” Dr. Johnson said. The United States plans to expand commercial nuclear power generation, to install carbon-capture and storage technologies in coal-fired plants, and to increase renewable energy. “We will see a fundamental shift in how we meet our electricity demand from primary sources converted to electricity,” she said. The greatest challenge is de-carbonizing the transportation sector, Dr. Johnson said, which accounts for 29 percent of U.S. energy use and puts around 2 gigatons of CO2 into the atmosphere. Of the 28 quads2 of energy consumed by transportation, 95 percent is from petroleum. Light-duty vehicles are responsible for about 60 percent of carbon emissions, Dr. Johnson noted. Medium to heavy trucks and buses consume another 20 percent, air transportation 14 percent, and the balance by shipping and rail. Trucking is clearly less energy-efficient per ton of goods shipped than rail. To de-carbonize commercial transportation, she said, the United States must look at advanced bio- fuels, jet diesel, and fuel cells for electric vehicles, as well as shifting more freight from trucks to rail. Heat and electricity in buildings consumes about 39 percent of energy and releases about 2 gigatons of C02. Industry contributes a similar amount. Another priority, therefore, is to make buildings more energy- efficient. Industries of all sizes consume 32 percent.3 Despite the difficult economic environment in the United States, the Administration is substantially increasing investment in clean energy, Dr. Johnson explained. Under the American Recovery and Reinvestment Act, which she described as “historic legislation,” $36.7 billion has been allocated to the DoE alone for this purpose—more than twice the agency’s normal annual budget—and $80 billion across the federal government. These public funds leveraged $150 billion in private investment in clean-energy projects. The new funding also realigned DoE priorities. Under the agency’s base 2009 budget of $16.6 billion, for example, 41 percent of funds were devoted to R&D and 18 percent to deploying energy technologies, Dr. 2 A quad refers to 1 quadrillion BTUs of energy, the equivalent of 8 billion U.S. gallons of gasoline or 293 billion kilowatt hours of electricity. 3 Data from “State Energy Consumption Estimates: 1960 through 2007,” Tables 8-12, Energy Information Administration, August 2009.

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56 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION Johnson explained. By contrast, 75 percent of the DoE’s Recovery Act funds—or $27.5 billion—are earmarked for deployment while 8 percent is earmarked for R&D. Other funds went to loan guarantees and other opportunities to grow the clean-energy economy. The DoE has focused on what Dr. Johnson described as the “really difficult part of the clean-energy economy”—de-carbonizing transportation. It invested $3.4 billion to develop next-generation vehicles and fueling infrastructure. Those funds are in addition to $8.4 billion extended so far under the Advanced Technology Vehicle Manufacturing Loan Program,4 which is outside the Recovery Act. “The projects aim to transform our transportation sector by creating competition among electrification of the fleet, hydrogen fuel cells, and compressed natural gas,” she said, “as well as pushing the industry to create a pathway toward bio-fuels and more efficient commercial combustion engines.” Over the next several years, three new electric-vehicle plants will be built, Dr. Johnson noted, the first ever built in the United States. Thirty new battery and electric-vehicle component manufacturing plants also will become fully operational. To discover new sources of fuel, the Recovery Act deployed $600 million to build 19 pilot, demonstration, and commercial-scale bio- refineries. Currently, these facilities are for ethanol, Dr. Johnson explained. In the future, the focus will shift to third- and fourth- generation fuels that involve direct conversion of sunlight into fuel. In addition to the bio-refineries, the DoE “has tried to be innovative in the way we do innovation,” Dr. Johnson said. It has launched programs such as Energy Frontier Research Centers, the Advanced Research Project Agency, and hubs.5 To understand how these initiatives fit together, Dr. Johnson said, it helps to understand the historical background of America’s research-and- development ethic. Today’s U.S. innovation system was influenced 60 years ago by Vannevar Bush, who Dr. Johnson described as a “brilliant 4 The Advanced Technology Vehicle Loan program is administered by the Department of Energy. First funding of grants, loans, and other incentives to makers of automobiles and auto parts to support development and manufacturing of advanced vehicles was provided under Section 136 of the Energy Independence and Security Act of 2007. 5 For explanations of recent Department of Energy innovation initiatives, see Kristine Johnson presentation in upcoming book, Charles W. Wessner, Clustering for 21st Century Prosperity, Washington, DC: The National Academies Press, forthcoming.

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57 PANEL I-BUILDING THE NEW ENERGY ECONOMY thinker.” Bush thought the government should fund basic research but that applied technologies and product development should be left to the private sector. “His initial vision was that there should be a continuum, and that we in the United States should support that,” she said. The approach was successful at the start and continues to serve as a model. “But the world has become more complex in the last 65 years,” she said. The process of innovation was revolutionized by the invention of the transistor, which led to the computer, Dr. Johnson said. Thanks to these breakthroughs, she said, “we can now model and simulate what we want to build before we build it.” She noted that the Boeing 777 and some submarines have been designed and built without physical prototypes. “It’s stunning if you think about that kind of change over the past 60 years,” she remarked. For a good model of how innovation works, Dr. Johnson recommended a book called Pasteur’s Quadrant.6 The book describes a model in which innovation is conducted along two axes. One axis represents fundamental research. The other represents research into applied technology. Louis Pasteur operated on both levels: He engaged in very basic scientific discovery as well as development of vaccines made possible by that research. At the DoE, the approach is to focus on “use-inspired” research, Dr. Johnson said. The agency attempts to be both at the cutting edge of fundamental discovery as well as at the frontier of applied research. “So we need new models for innovation,” she said. The DoE’s Energy Frontier Research Centers fund innovation in research, Dr. Johnson explained. The ARPA-E program, by contrast, funds innovation in technology. “As an engineer, that is where I like to play,” she said. The energy research hubs “fund innovation at scale.” Work in bio-fuels illustrates how these DoE programs support research at every level of the innovation continuum. The Energy Frontier Research Centers explore “ways to be biologically inspired by the way plants convert sunlight CO2 water into energy and bypass having to grow, harvest, and gasify the plants to create fuel,” Dr. Johnson said. ARPA-E explores ways to implement breakthroughs. The hubs “are trying to gather all of the best ideas together in order to reach commercial scale,” she said. 6 For explanation of the model of innovation based on the balance of basic and applied research, see Donald E. Stokes, Pasteur’s Quadrant: Basic Science and Technological Innovation, Washington, DC: Brookings Institution Press, 1997.

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58 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION This new approach to innovation is being “pioneered and led” by Energy Secretary Steven Chu, she said. “Part of our innovation is that we need to be open and collaborative, and together figure out the best ideas that will move our civilization and planet forward,” she said. The approach used for bio-fuels is also used for “the entire search for the next generation of renewable energy.” Collaboration is vital if the DoE is to achieve its goal of doubling renewable electricity generating capacity and advanced energy manufacturing by 2012, Dr. Johnson said. The Recovery Act investments and incentives of $23 billion, combined with private capital of $40 billion, “will give us the fuel to help meet these goals,” she said. Still, there is not enough funding from one source alone to make this clean- energy revolution happen. To give one example, Dr. Johnson said she has been very close to the effort in hydro power. She noted that her father was a hydro power engineer and her grandfather was a hydro power engineer. “Now I am a hydro power engineer,” she quipped. The DoE spent $30 million, leveraged with about $100 million from private industry, to create 30 megawatts of new hydro power. Probably 30 gigawatts to 100 gigawatts of potential hydropower can be generated in the United States. But that would require $30 billion in investment, far beyond the agency’s resources. “So we have to be clever about how we make those projects happen by using policy instruments,” she said. Dr. Johnson noted that the United States has 79,000 dams, but only 2,200 of them produce electricity. In some cases it may make sense to remove a dam and have a small hydropower in that river. “That requires us to think strategically again over how we deploy this opportunity,” The DoE is working with the Treasury Department to provide $2.3 billion in tax credits to assist such innovative activity. The United States also is promoting conservation. The government has committed $5 billion to weatherize low-income housing. “This has the potential to save 20 percent to 30 percent on the energy bills in the hardest-hit families in the economy climate,” she said. Buildings account for 40 percent of energy-use in the United States. Thirty percent of that energy can be cut through fairly simple energy-efficiency moves, such as installing more insulation and replacing incandescent bulbs with compact fluorescent bulbs. There also are incentives for more efficient furnaces and appliances. The federal funds have been matched with $3 billion from state governments and another $3 billion distributed to 2,300 cities, counties, territories, and Indian tribes. Also, the DoE is creating a regional innovation hub for energy-efficient building technologies.

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59 PANEL I-BUILDING THE NEW ENERGY ECONOMY President Barack Obama expressed America’s commitment to the environment is a speech in Prague on April 5, 2009, Dr. Johnson noted. The President said: “To protect our planet, now is the time to change the way that we use energy. Together, we must confront climate change by ending the world's dependence on fossil fuels, by tapping the power of new sources of energy like the wind and sun, and by calling upon all nations to do their part. And I pledge to you that, in this global effort, the United States is ready to lead.”7 The United States and China have a long history of working together, Dr. Johnson noted. “We are very proud of that history,” she said, noting that the two nations currently are working through the bilateral strategic dialogue on subjects such as bio-fuels, wind, and transportation. One important example of such cooperation is a partnership involving the DoE’s Argonne National Laboratory, the U.S. Environmental Protection Agency, the Chinese Academy of Sciences, and U.S. and Chinese universities to model regional and local air quality. The program provided information to Beijing officials to improve conditions for athletes and spectators at the 2010 Summer Olympic Games, she said. Dr. Johnson noted that she attended the Beijing Olympics, and wished to compliment China for the performance of its female field hockey team. Dr. Johnson, a former field hockey player herself, attended several Olympic matches. “If you can imagine sitting in the stadium at dusk and seeing a crystal clear sky,” she said. “It was a perfect day for hockey. It was really inspiring.” The most important new collaboration is the U.S.-China Clean Energy Research and Development Center. The center was announced in July. The goal is for both the United States and China to each invest $75 million over five years in three areas—energy-efficient buildings, vehicles, and carbon capture and sequestration for coal. “I was pleased to have a role in planning this center,” she said. “And I’m looking forward to working with our colleagues in the United States and China to make this an exemplar of international cooperation in solving the global climate challenge.” She thanked her Chinese counterparts for their help. 7 See The Office of the White House Press Secretary, “Remarks by President Obama,” Hradcany Square, Prague, Czech Republic, April 5, 2009.

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60 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION Renewable Energy Policy in China Ren Weimin National Development and Reform Commission The growing pressure of energy demand is an important topic at the Academy of Macroeconomic Research, at the NDRC, said Mr. Ren, the unit’s deputy director. “Developing clean energy is an inevitable choice that China will make,” Mr. Ren said. By 2020, non-fossil fuel is expected to account for 15 percent of China’s primary energy consumption. These pressures will continue to mount as China seeks to attain its economic development goals. China already is the world’s largest developing nation, Mr. Ren noted. The nation’s long-term economic blueprint calls for becoming a “comfortably well-off society” by 2020, “more or less realizing industrialization” by 2035. By 2050, he added, China should be a “medium-level developed nation,” but not yet reaching the level of the United States. Many problems must be solved for China to meet its future energy demand, Mr. Ren said. In 2005, he noted, China already had reached very high levels of energy production and demand, consuming 2.2 billion tons of coal equivalent (TCE) worth of primary energy in that year. In 2009, consumption reached 2.8 billion TCE. Demand is expected to hit 3.1 billion TCE in 2010, 4.5 billion in 2020, and about 6 billion TCE in 2050. These required production level will be “gigantic,” he said. China currently is a major producer of fossil-based fuels. In 2009, produced about 3.05 billion tons of coal, 189 million tons of crude oil, 85 billion cubic meters of natural gas, Mr. Ren noted. These are the main sources of electrical power generation in China. “As you can imagine, as we look forward, the pressure on China’s energy need is huge,” he said. “So renewable energy is an inevitable choice for China.” In terms of renewable energy production, China’s view is similar to that of many other nations around the world, Mr. Ren said. The country is seeking a mix of wind, solar, biomass, hydro, ocean, and geothermal power,” he said. “This is our inevitable choice in our strategy in developing renewable energy.” The nation has substantial potential resources. Mr. Ren estimated that China’s “basic conditions are good” to produce 1.7 trillion TCE of solar energy and the potential for 1,000 gigawatts of wind power. China also has “technically available exploit capacity” of 540 gigawatts of hydro power and a large amount of biomass and geothermal energy.

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61 PANEL I-BUILDING THE NEW ENERGY ECONOMY China has “a solid foundation for developing renewable energy,” Mr. Ren said. One reason is that “Chinese leaders are very clear about their goals.” In 2009, President Hu Jintao vowed that China will do its best to develop renewable and nuclear energy, aiming to have non-fossil energies account for 15 percent of consumption of primary energy by 2020.8 “This is China’s national policy, and also our solemn promise to the whole world,” he said. By that time, he pointed out, China’s annual energy demand will have more than doubled, to 4.6 billion CTE. Meeting that target will be a major challenge. While China’s conditions for renewable energy are favorable, Mr. Ren said, it is relatively expensive. As an illustration, he cited the cost differences between power from coal and other sources. In Xinjiang Province, coal is so abundant that electricity costs only 0.23 yuan (3.4 U.S. cents) per kilowatt. Wind power, by contrast, costs 0.5 yuan to 0.65 yuan (7 cents to 9 cents). Biomass power costs 0.40 yuan to one yuan. With solar power, the price jumps to 1.2 yuan to 1.5 yuan (19 cents to 22 cents). “So you can see from these prices that we face a lot of hurdles,” Mr. Ren said. “In order to develop renewable energy, we have to gradually reduce cost a great deal.” Industrial enterprises that use energy inefficiently will be weeded out. Then it will be possible for enterprises to have both high productivity and energy efficiency, he said. In terms of the energy mix, the Chinese government wants hydro power to account for percent to 8-9 percent of primary energy by 2020. China has 400 gigawatts of potential hydro power. “So far, we have only developed 50 percent of that,” Mr. Ren said, with 196 gigawatts produced. “We hope the figure reaches 70 percent.” The government hopes solar power will account for 20 gigawatts of electricity, biomass will account for 30 gigawatts, and wind for at least 200 gigawatts. Nuclear plants are expected to produce 70 gigawatts. China set out its long-term agenda in February 2005, when it released the Renewable Energy Law.9 The law was enacted in January 2006. Two years later, the long- and medium-term goal strategies10 were published, 8 Speech by Chinese President Hu Jintao to United Nations General Assembly, September 22, 2009. 9 The Renewable Energy Law of the People’s Republic of China was approved by the Standing Committee in the 14th Session of the National People’s Congress on February 25, 2005. See . 10 For details in English, see “Medium and Long-Term Development Plan for Renewable Energy in China,” National Development and Reform Commission,

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62 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION Mr. Ren noted. The country already is making some progress. In 2008, annual utilization of renewable energy totaled 250 million CTE, or 8.6 percent of annual primary energy needs. Even though renewable energy declined slightly in 2009 as a percentage of total consumption, to 8.3 percent, output rose to 260 million CTE. “The reason for the drop in percentage is that total production and consumption of energy increased very fast,” he explained. In wind power, China now ranks as No. 2 in the world in terms of installed capacity. It has 80 manufacturers of turbines. China experienced the world’s biggest boost in wind capacity last year, rising 124 percent in 2009. With 10,129 new wind-turbine generators added last year, capacity 13,803 megawatts. China has a total of 21,851wind turbine generators with a capacity of 2,5805 megawatts. “We can say that China’s wind power is developing rapidly,” Mr. Ren said. The quality of turbines and assembly capacity of spare parts also have increased. “The current trend is very good,” he said. China also is the world’s leading producer of solar panels, with total production reaching 4 gigawatts in 2009. Ten Chinese photovoltaic manufacturers are among the 30 biggest in the world, Mr. Ren noted. The nation now has 300 megawatts of installed solar capacity. In addition, China’s is the world’s biggest consumer and producer of solar water heaters. In 2009, 145 million square meters of water were heated with solar power in China. China is producing fuel from all kinds of biomass as well, Mr. Ren said. National annual production of biogas reached 14 billion cubic meters in 2009, providing fuel for 80 million rural people. Annual output of bio-ethanol reached 1.65 million tons, and installed capacity of biomass power-generation plants across the country reached 3.2 gigawatts. About 5 million tons of biodiesel were produced. Geothermal heating also increasing, by about 10 percent annually, he said. By the end of 2008, geothermally heated water reached around 600,000 people in China. Substantial barriers still must be overcome for China to meet its renewable-energy goals, Mr. Ren said. The two biggest are the costs of renewable energy and weak market competition, he said. Another major hurdle is that the market is still immature. There is a lack of knowledge of how to improve the market performance of renewable energy. There PRC, September 2007 ().

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63 PANEL I-BUILDING THE NEW ENERGY ECONOMY also is “lack of broad social recognition” of the importance of renewable energies, he said. Mr. Ren presented a long list of other shortcomings. A “weak industrial system and supporting capacity” is an obstacle to wider deployment of renewable energy, Mr. Ren said. The “policy system” is imperfect. There is little in-depth assessment and no “clear mechanisms guided by objective,” he said. “Market monitoring mechanisms,” policy coordination, public disclosure, legal frameworks, and security policies are weak, he said. Research and development also needs to be strengthened, Mr. Ren said. Currently, China is weak in technological innovation. More R&D funds and a “clear roadmap” are needed. Some Chinese-made renewable- energy equipment is “technologically backward” and “lacks competitiveness,” Mr. Ren said. The key technology, equipment, and raw materials must be imported. As a result, China still is far from “high- efficiency, large-scale development and utilization of renewable energy,” he said. Nevertheless, there is plenty of reason to push ahead. “The world financial crisis has provided opportunities for leapfrogging forward in renewable energies,” he said. “We should have strategic positioning and strategic goals.” Advocates of clean energy “should neither be overly optimistic nor overly pessimistic on this issue,” he said. China is not backing off of its long-term goals. It aims to produce and consume the equivalent of 700 million tons of coal in renewable energy by 2020, about 10 percent of primary energy, Mr. Ren noted. By 2030, the target is to have the equivalent of 1 billion tons of coal, 20 percent of primary energy from non-fossil sources, and one-third by 2050, which would be equal to 2 billion tons of coal. “By 2020, we hope renewable energy will be an effective supplement,” Mr. Ren said. “By 2030, it will become one of the mainstream energy sources. And by 2050, it will become the main energy.” In terms of strategic importance, wind power ranks first, Mr. Ren said, wind ranks at the top. After that comes solar power, and then bio- fuels. With wind power, he explained, China is focusing on developing land-based systems and connecting them to the power grid. The government also wants to advance industrialization of wind turbines. In terms of solar power, China is focusing on thermal utilization technology that is connected with architecture and the “balanced development of the photovoltaic industry,” he said.

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64 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION China’s strategy in bio-fuels is to focus on biomass feed stocks that do not require arable land or potable water. 11 That means “no robbing people of their grains, no grabbing land from crops, no snatching water sources from farm land, and no taking feed from livestock,” Mr. Ren said. “As you know, China is a country that has just accomplished its goal of feeding people,” he said. “So we will pay attention to liquid fuel that will not consume grain or food.” To go forward, China is developing a “comprehensive policy and institutional framework” for renewable energy. This involves strengthening laws and establishing a “very rational structure” for government policy. “Economic and industrial policy should be compatible with energy policy,” he said. Another element of the plan is to nurture talent. China needs to “foster people who have the ability to development renewable energy and to make decisions,” Mr. Ren said. By implementing these measures, “China can improve its level of development for renewable energy to reach the goal that we promised to the world,” Mr. Ren said. 11 The conversion of agricultural land to grow crops for bio-fuels has been blamed by some for food shortages and rising prices for crops such as corn, commonly used to produce ethanol.