The Development and Reform Commission recently issued the Dual Control Program to Improve the Intensity and Total Use of Energy Consumption, and the supporting green power trading pilot has been officially launched. In the chemical industry, Wanhua Chemical, Jinneng Science & Technology, and other companies announced investment in PV, wind power, nuclear power, and other green energy.
The Dual Control Program further implements the future development requirements with energy consumption as the overall constraint, and it proposes a way to allocate quotas based on energy output efficiency as an important basis as well as a mechanism to promote market-based trading of quotas. This will have a far-reaching impact on the future development of the manufacturing industry. It puts forward different requirements for chemical enterprises than before, and whether a company can survive or even thrive under these new conditions will become a very important influencing factor for its future development.
The main impact of carbon neutrality on the supply side of the manufacturing industry is the addition of carbon emissions as a new constraint. Thus, it requires companies to find new models to achieve development without increasing carbon emissions or even reducing them. Some manufacturing companies have recently disclosed their plans to invest in new energy projects. Wanhua and Huaneng announced joint investment in a wind power project, the establishment of Shandong Nuclear Energy Company with China Nuclear Power, and plans to invest in a PV project. Jinneng announced an investment in a PV power generation project in Qingdao. The information disclosed regarding these projects mention the volume of CO2 emission reduction and coal replacement after they are commissioned.
Now companies are investing in new energy projects mainly to cope with their future demand for energy consumption. If they do not prepare new energy projects in time, there is a risk of losing the initiative in future development, resulting in loss of market share.
Current investment in new energy projects is for the sake of the long-term development of chemical companies, but the price of acquiring this development space is not low. The current investment intensity of domestic PV and wind power is about RMB 4-5/W, which is obviously no longer something that can be achieved by SMEs. Further, energy and emission quotas will be core factors in the future development of manufacturing enterprises, and there are obvious investment barriers due to the Dual Control policy which will further the divide between leading enterprises from SMEs.
The recently started green power trading pilot provides another option for a wide range of companies. The green power market does not trade electricity, but green certificates. The sellers are mainly PV and wind power generation enterprises, while the buyers can be anyone. For every MWh of green power generated by wind and solar power companies, they will receive one green certificate, and buyers will purchase green certificates to fulfill the requirements of sustainable development and carbon emission reduction. The national government set a price ceiling for green certificates—each green certificate price cannot exceed 1,000 times the difference between the local wind power or PV benchmark price and the desulfurization coal-fired benchmark price. The benchmark price is generally the feed-in tariff. Despite declining somewhat, the benchmark prices for wind and solar energy have been higher than the benchmark price of coal-fired energy for a long time. The difference is actually a subsidy to support the development of wind and solar energy.
After the establishment of the green power trading platform, power generation enterprises can choose to bring their electricity online at the benchmark price of wind and solar, but they will not receive a green certificate. They can also bring their electricity online at the coal-fired price and receive a green certificate to sell. This is actually a transfer of national subsidies for new energy generation to enterprises that now need to reduce emissions, so as to continue to promote the development of new energy. In the past, buyer companies only needed to buy electricity according to the feed-in tariff. In the future, if a company must meet the emission reduction requirements and it does not have the ability to build its own new energy project, it must achieve compliance via the purchase of green certificates.
The current green certificate transaction price for wind power is on average RMB 90.6, and for PV it is on average RMB 57.1, which means that buyers need to pay an additional premium of more than RMB 0.05/kWh in order to obtain green power certification. Further, according to statistics, in 2015-2018 China’s chemical raw materials and chemicals industry’s gross profit was only about RMB 1/kWh, while net profit was estimated to be about RMB 0.8/kWh. If only green power is used, net profit will be affected by about 6%. After the domestic supply-side reform that began in 2016, the profitability of leading and non-leading chemical companies has been more obviously differentiated. Thus, the impact of green power on profits will be more significant for SMEs, and it will gradually intensify industry concentration.
The change of power cost is relatively consistent for manufacturing companies and will not create drastic differences. However, the green hydrogen generated from green electricity may lead to very obvious differentiation between different enterprises and different production routes.
The cost of green hydrogen is much higher than that of traditional hydrogen production from coal or natural gas. According to the electricity price from power coal, natural gas and green electricity in Shanghai, the cost of green hydrogen production is 140% higher than that of coal to hydrogen production. Even considering the further reduction of the cost of green hydrogen and water electrolysis in the future, the production cost of green hydrogen will still be much higher than that of traditional route. However, traditional hydrogen production methods will produce a large amount of CO2 emissions. It is imperative to be replaced by low emission hydrogen production methods in the future.
Therefore, low-cost and low emission blue hydrogen (from light hydrocarbon chemical PDH) will become a high-quality hydrogen source in the future. At present, there are few examples of domestic light hydrocarbon chemical industry combined with downstream hydrogenation process, and the most successful is Yantai Wanhua Chemical. Wanhua has built a complete industrial chain in Yantai to produce MDI from the most basic raw materials. The production process of MDI involves multi-step hydrogenation reaction, which consumes a lot of hydrogen, including methanol synthesis, nitric acid production and nitrobenzene hydrogenation. For each ton of MDI produced, 0.11 tons of hydrogen is required. If the MDI production units in Shanghai Chemical Industry Park need to use green hydrogen in the future, the MDI cost of these units will increase by more than RMB 1,500/ton.
Source: Oriental View Chemical Industry