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.