Till Heydel

The Middle Kingdom sets its sights on renewable energy sources

The rapidly expanding Chinese economy needs energy. A lot of energy. With the help of power generated from wind, sun, and water, biomass, geothermal energy, and the tides, the People's Republic of China hopes to become largely independent of imported oil, reduce the environmental burden, and counteract global warming. To achieve these goals, it needs the support of international financial markets and the insurance sector.

Oil, coal, gas, and uranium are raw materials that deliver energy — but their reserves are limited. How long will they last? One indicator is the so-called static range, which is based on current consumption per year. It thus provides comparative figures but no precise dates because worldwide energy consumption is changing.

At present, it is increasing dramatically. According to the Central Association of the German Coal Mining Industry (GVSt), the world's coal reserves will last for another 100 years at the current rate of consumption and for an even shorter period of time if energy demand increases.

Natural gas reserves will be depleted in 70 years. The same applies to uranium — which makes nuclear power plants only a temporary answer to the world's energy problems at the most.

Oil is our scarcest fossil energy source. Reserves of conventional crude oil are only expected to last for around 40 years. The German Federal Institute for Geosciences and Natural Resources (BGR) estimates that oil production will already reach its peak between 2015 and 2035 and that output will decline from then on.

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By 2020: Renewable sources share of total energy consumption is to increase to 15%

Renewable energy sources, on the other hand, are inexhaustible. This is one of the reasons underlying the People's Republic of China's announcement of its ambitious goals for this energy sector at the first International Conference for Renewable Energies held in Bonn in 2004.

By 2010, China plans to have an installed capacity of 60 GW (one gigawatt is equivalent to 1,000 megawatts) from renewable energy sources, ten times the present capacity of its nuclear power plants. By that same year, renewable energy sources are to provide 10% of the electricity generated and satisfy 5% of the country's primary energy needs.

At the Beijing International Renewable Energy Conference 2005 on 7 and 8 November 2005, representatives of the People's Republic of China announced even longer-term objectives. By 2020, renewable sources' share of total energy consumption is to increase to 15%.

Wind power capacity alone should by then amount to around 30 GW, thirty times the current amount. If this wind power capacity were fully and permanently maintained, it would theoretically be sufficient to cover half of Germany's annual power consumption.

Furthermore, the aim is to generate 20 GW from biomass and 4 GW from solar power. With the additional output from large hydroelectric power plants, the country aims to produce more than 30% of its electricity from renewable sources. Investments amounting to €150bn will be needed for this purpose.

Bill for the promotion of renewable energies enacted

One of the most important steps towards achieving this goal was decided by the National People's Congress in Peking in March 2005, when it enacted the bill for the promotion of renewable energies.

The German Agency for Technical Cooperation (GTZ) advised the National Development and Reform Commission (NDRC) in its drafting of the legislation and also contributed its experience with the German Renewable Energies Act (EEG).

The Chinese law comprises three core components. First, it guarantees a specific minimum remuneration for power from renewable sources. Secondly, it obliges the network operators to give preference to the use of this electricity. Thirdly, any increased costs associated with power from renewable energy will be shared by all power consumers.

In this way, the People's Republic of China has established a reliable framework that will also attract foreign investors. They can work with the state to plan the necessary power plant capacities and set up the infrastructure. The law also provides a firm basis for the economic fundamentals, such as plant insurability. This will speed up the growth of China's renewable energy market.

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China worldwide leader in solar thermal systems

With now 60% of global installed capacity, China leads the market in solar thermal systems. Also, the country alread y uses geothermal energy on a large scale and is a leader in hydropower generation. With the aid of renewable energy sources, it has made electricity available to one million people in remote regions within the space of just three years. All this goes to show that China is by no means still at the beginning as far as renewable energy is concerned.

Germany plans to cooperate with the People's Republic of China in this field. Among other things, the two countries have launched the German-Chinese Sustainable Fuel Partnership, an initiative devoted to the use of renewable energy in traffic and transport, biogenic fuels, synthetic fuels produced from biomass, and hydrogen as a fuel.

Renewable energy sources for a rapidly expanding national economy?

By and large, China was self-sufficient in terms of energy up until about 1994. The development of renewable energies can enable it to regain this status and in particular help to reduce oil imports, thus satisfying its need for longterm energy security.

At present, the People's Republic has only three major sources of energy: coal, oil, and water. Coal covers 65% of total energy consumption, oil 25%, and hydro power 7%, these three thus accounting for 97% of the country's total energy consumption.

Nuclear power and gas contribute only 3% to total power generation. All other fuels have played a negligible role so far. However, renewable energy will enable China to improve the infrastructure in rural areas rapidly and cost-efficiently, for instance, because decentralised renewable energy sources make it possible to provide sufficient electricity for people far away from the metropolitan centres without having to invest in supraregional supply networks.

Signed Kyoto Protocol: China agrees on developing renewable energies

Another argument in favour of developing renewable energies in the People's Republic is that China is one of the signatories of the Kyoto Protocol, which is part of the United Nations Framework Convention on Climate Protection.

Although not subject to the binding targets prescribed for the industrialised countries, the emerging countries should be placed in a situation where they can stabilise their emissions of greenhouse gases with the aid of technological partnerships.

Greenhouse gases are held to be the main cause of global warming and China is the world's secondlargest producer of carbon dioxide after the United States. By signing the Kyoto Protocol, China has indicated that it has recognised the importance of climate protection for the future: it will be one of the prerequisites for establishing the basis for sustainable economic growth in the decades to come.

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Renewable energies and reinsurance

Renewable energies are both a high-potential technology and a dynamic growth sector. Munich Re supports endeavours to significantly increase the share of renewable energies in the global power supply with the aim of giving more and more people in the world access to modern forms of energy in the future and of combating climate change.

Munich Re offers coverage concepts for the risks associated with this young industry. For many years, Munich Re has supported its clients in the development of renewable energies and has helped them to contain the risks. For instance, by comparing new projects with existing technologies, its insurance experts can make assumptions regarding renewable energies that facilitate insurance cover even without long-term statistics.

Moreover, since it has been involved in the booming German renewable energy sector from the beginning, it has acquired unique skills and experience in this field. The same applies to the impact of climate change on renewable energy technology: climate change increases the risk potentials for wind power plants, for example.

Thanks to Munich Re's unparalleled database on extreme weather-related events, it is also in a position to appraise the risks associated with strongly fluctuating wind speeds and offer appropriate covers.

Effective insurance solutions

The renewable energy sector is a prime example of how Munich Re develops effective insurance solutions to new problems. Europe's first productivity risk insurance for a geothermal power plant is a case in point. It was designed to protect the plant's operators against the risk that the water they were seeking could be less hot or flow less strongly than expected.

Munich Re was also involved in the first offshore wind parks off the coasts of Europe. For several years, it has also been offering special financial instruments, including weather derivatives which reduce the financial risks associated with the whims of nature — be it an above-average number of rainy days that reduce the yield of a solar energy system or unduly calm winds.

Munich Re also became involved at a very early stage in the debate over the Kyoto Convention on Climate Protection and carbon dioxide emissions trading. Although the prices for emission allowances have been subject to strong fluctuations since trading officially started, the climate protection instrument will make a long-term contribution to further increasing the competitiveness of renewable energies.

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