Shedding Light on Energy's Dirty Secrets

Transcript

Michael Liebreich

Hello, I'm Michael Liebreich and this is Cleaning Up. Over the past decade, the story of global greenhouse gas emissions has been one of significant reductions in the developed world, which has been more than offset by soaring growth in China, India, Indonesia, Southeast Asia and other emerging economies. My guest today has more detailed knowledge of energy and air quality in those countries and regions than anyone I know. Painstakingly assembled from local language public sources, Lauri Myllyvirta is the co-founder and lead analyst at the Centre for Research on Energy and Clean Air in Helsinki.

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Cleaning Up is brought to you by our lead supporter, Capricorn Investment Group, the Liebreich Foundation and the Gilardini Foundation. Please welcome Lauri Myllyvirta to Cleaning Up.

So Lauri, welcome to Cleaning up.

Lauri Myllyvirta

Thank you. Thanks for having me.

Let's start the way we usually do, which is by asking you in your words to explain what is it that you do - the short version.

I currently run an organisation called Centre for Research on Energy and Clean Air, which provides evidence, data research to people around the world who are working for clean energy and for clean air. We cover China, India, Southeast Asia, South Asia, Europe, and we have a project looking at Russia's exports of fossil fuels and their contribution to the invasion of Ukraine.

Okay, so now what we're going to do is to do a sort of flyby of those different areas. And I think we should give a little bit of context, which is: you and I met when you were Beijing-based because you were running- or you were generating the most extraordinary research on China at the time. And you were using statistics and data that not many people could interpret: you speak Mandarin Chinese. And your output was incredibly insightful. So the context here is that I suspect you've got important things to say about China, India, Indonesia, South Africa, Russia, and so on. So we're gonna go through those different areas. Let's go back to when you and I met though, why were you in Beijing? How did you get there?

Well I started working on coal, so basically, how do we transition the world away from coal? Obviously, China was a big focus on that, in that, and it was a time back in 2011, 2012, that air pollution has- had become a massive public issue in China. And I quickly found out that, with the kind of research data and modelling that I was able to do, I was able to contribute to the understanding that the people working on that issue had and enter the public debate about that.

Now how did you end up learning to speak Chinese though?

When I- when I found out that there's something that I can- well obviously going back, for me, doing something to try and clean up the world's energy system has been what I've- what I've known I want to do since I was a teen, and when I- when I found that there were things that I was able to do in China, then I just started learning the language because I figured that that's never going to go to waste.

Now, this is already fascinating, by the way, because most people are- you're- you were at Greenpeace at the time. Most activists who are trying to improve the world, right, most of the emissions, all of the emissions growth happens not in the developed world, but in the developing world. But most of them decide that it's much easier to go after Shell or to glue yourself to the road in Amsterdam, or whatever. Very few of them make the career choice that you did, which is to learn Chinese and go to Beijing to have the most impact where the import- where the impact is, right?

Well, I think it's healthy that most people working in those geographies are local people, and I have the privilege of course to- to speak to and get to know and follow the work of amazing people working in China, India, Indonesia, and so on. So I was at a global, you know, global role at a time, and it's just something that- that I found I was- I was able to do.

And you also- you've also lived in Indonesia and speak the language?

That's right.

So you've done this multiple times, right?

Yeah, I did spend quite some time going from one country to the next, picking up a few languages and a bit of understanding of those places.

Now, if you go back to 2011, isn't that the time in Beijing where at the US Embassy, they put an air quality monitor on the roof, and it was outputting the air quality, and it got so bad, the programmer had said, "when it gets to 1000, just write something like, 'you know, geez, this is crazy bad.'" And so suddenly, you had this monitor that was saying, "this is crazy, bad, crazy bad," and it caused a bit of a diplomatic incident. Isn't it those times that you are based in Beijing?

Absolutely. So that's the time that the debate about air pollution reached a very high level and scale in China, it was a time that social media, academia and so on, were about as open, as free as they have been in China's recent history, and there started to be a middle class that started to think about quality of life, health, especially the quality of life and health- health of their children, and so on. So all of that combined to turn air pollution as a massive issue. The US Embassy played an important role, exactly because- not so much because they were putting out data that was different from the government, but because they were applying different labels to the data. So it was really the discrepancy between the government saying that it's likely polluted, and the US Embassy applying the US label, which would be "hazardous", or then, when they ran out of labels, "crazy bad" or "beyond the index", as you said.

And there was also of course the Beijing Olympics which focused a lot of international attention, and also, presumably domestic attention on the air quality issue?

Absolutely. So there was- there was a big drive by the local government, the Beijing government, to improve air quality in the run up to the Olympics. There was something that helped a bit, which was the global financial crisis, just before the Olympics, which caused coal consumption and energy consumption to drop.

Because this was 2016, wasn't it?

The the Summer Olympics were 2008-

Oh 2008. And then the winter-

Yeah. And so then what happened afterwards, after the Olympics, was the steel industry from Beijing that used to be based in Beijing was relocated- relocated to the next province across, 300, 500 kilometres away, but in the following decade, it grew up to be so big that the pollution was still travelling back to Beijing from those steel plants, and highlighting that, and highlighting that long range contribution of those steel plants and other coal burning plants was a big part of what I was focused on in China, to make that a part of the debate.

Now the question of air quality- so your NGO, which you're now running, is the Centre for Research on Energy and Clean Air. To what extent are you using clean air as the sort of salient issue really to drive climate action?

The way I want to think about it is, we're looking at those areas where there's a synergy. So there are things that emminently make sense to do to clean up the air, but they also help with climate. And there's no shortage of those things, obviously, because fossil fuels and deforestation are the two main drivers of both of those two things.

So you're in Beijing, you're reading data from all sorts of places, the US Embassy, the Chinese government, air quality indices, output data. Also electricity, also coal consumption, imports, the whole lot. And I discovered you around I think it was 2015. I just- yesterday, I was watching myself - not that I'm vain - speaking at a New Energy Finance Summit, Bloomberg New Energy Finance Summit in 2016. The reason I was watching is I tried to- I was trying to track back when I first sort of realised what you were doing in terms of data and the sources you were using. And what was happening at that point was, the Chinese government was still saying they were going to grow at something like 8%, but electricity growth had dropped to zero. And I was stood up in front of hundreds of people, and said, "you need to understand the electricity data," which I was getting actually from you, "shows that those official GDP statistics must be wrong." So where were you getting your data from?

Electricity data, obviously, is very easy to come by. It was really finding ways to analyse it, and spending time analysing it. I think the problem with China and the world, frankly, is that there's- there's just so much data, and so few people trying to make sense of it, doing any kind of analysis beyond calculating year-on-year changes. And so, just as you said, there are, and there were, weekly surveys of steel industry operation, there- there are, of course, the prices of everything, there is monthly industry statistics and so on. So there's just so much data to work with. The funny - or challenging - thing about China is that so many of those datasets do have their own distortions, because there's always a target or a quota to hit for everything, and so on. So it's a matter of making- trying to make sense of which dataset is biassed in which direction and which ones you can actually trust at that given moment, to give an accurate picture. And another thing that helps a lot is just speaking with people. In 2015, if you spoke to anyone who is in business, manufacturing anything in China, you would get a story that made it very clear that that the economic slump, especially the slump in the construction sector, was was much worse than the government was making it out to be.

But were you not astonished that there were these enormous hedge funds, enormous banks, governments making policy, and they just didn't seem to have the quality of data that you could find, and you were just aggregating from all these different sources locally? The data was available: why were you the only person pulling it together?

I think we got lucky in the sense that we were working on this from the air quality side, and that's one of the factors that people who were in finance were overlooking. So they were not used to, before that point in time, to air quality policies being something that could drive the global commodity markets. So that was the first thing that that we picked up on. And obviously after that, a lot of people have paid very close attention to, for example, steel mill closures in China. The other thing that a lot of people were missing, if you were looking at things from the conventional frame for commodity analysts was the war on corruption, which was affecting a lot of infrastructure projects and all kinds of construction projects in China, because suddenly every bureaucrat was worried about granting permits to those projects if there was a bit of shady money involved.

And when you say that this affects commodity markets around that time, I remember talking to us Australians and saying, "look, you know, China's undergoing this incredible slowdown, your coal, which is- your exports, which is China's imports, is going to be the first to suffer, because clearly they're going to bias towards using their own resources." I know there are some quality differences, but nevertheless, "China is going to bias towards using its own coal, there's a slowdown, this is going to hurt." And their attitude was first, "well, you know, that's not what our statistics show," and they were wrong, and then of course, they jumped to saying, "well, nevermind, because we'll just sell to India, because India is growing." So, you know, getting to the bottom of these really granular datasets is kind of important, right?

Absolutely. And so the same thing happened with Australia's belief in LNG markets more recently. So, for the past couple of- few years since 2019, I've been telling people that China's gas demand isn't going to be what it used to be because of energy security policies, and that's panned out quite well. Funnily enough, China's steel mine- coal mining industry is in quite a bit of trouble and that has led to a resurgence in in coal imports more recently. But you're right that that there was a big drop off in- starting from 2014, that a lot of people got burned who were banking on growth in China's demand.

I have to just kind of take a timeout to ask you, why do you still work for an NGO? I mean, this sort of knowledge- look, that gas- miscalling China's gas demand, cost 10s of billions of dollars. This is a fantastic sort of hedge fund play. That's the sort of knowledge that these financial operators live and die by, and you've got it, and you just publish it.

I care about making a difference, and so, this is the best way that I've found of doing that.

That's a great answer. So that's the end of my, you know, sort of my probing your personal motivations, I guess. Now, let's go back to there, because what happened then was there was this dramatic slowdown, which you spotted, frankly, you know, first and better than anybody I know. But then there was also- there's been a number of different cycles since then, including 2016, you started to say, "China's coming roaring back in terms of coal demand, in terms of emissions, in terms of the economy." And that- again, you were ahead of that, I think. But then, we went into the COVID years, right, 2020. Talk us through what happened next.

So China, obviously implemented a very dramatic and strict COVID lockdown in early 2020. There was a steep drop in industrial output, electricity demand and so on. Even at its deepest point, it wasn't as deep as it seemed to people on the ground, so, for example, there were air pollution episodes in Beijing where people were going, "what's going on?" There's nothing where this pollution could be coming from, so somehow, we must have gotten sources of air pollution completely wrong. But that wasn't right. So a lot of the heavy industry just kept running through it, and the government made sure that the demand for those heavy industry products just picked up in the second half of the year. And so, in fact, in aggregate, what happened was that China's CO2 emission growth accelerated during the zero COVID period compared with what it was up to 2019. So China was the only country to increase its emissions through that period, and they are still above that trendline where we would have- would have expected them to be before COVID. So it was a pattern of incredibly energy-intensive and carbon-intensive growth, even while GDP growth rates were surprising or disappointing.

Because I remember a time when, during the- I guess it's 2020, where the government was saying, "no, no, we're going to continue to grow 6%, it's going to be 6%," and that was sort of impossible. If you looked at what happened q1, q2, 2020, there was no way you could- you would have had to grow 11, 12% year-on-year for the second half of the year to do that. So I was sort of out there saying, "excuse me, this GDP growth is nonsense." But what you were doing was probably that, but also saying, "but from the air quality data, we know that the primary industry must be continuing."

Yeah, that's right. So in fact, for 2020, China's reported GDP growth rate was just a few percent, I think, but so very, very low. It was there - well a lot of people obviously were saying and are still saying, for good good reason that it probably in reality, was less than 2%. So that- but be it as it may, that was, that was still a slowdown. What's happened since then is that this year, at the recovery in economic growth has disappointed. People were expecting or hoping, I guess, that private consumption would pick up after the reopening of the economy and so on. That just hasn't panned out for reasons that are, at least in retrospect, quite obvious: people's incomes and so on were hit quite severely. Now, though, a lot of people are doubting the 5% growth that China just reported, precisely because of the fact that a lot of the traditional growth drivers, especially real estate, also private consumption, are in a very bad shape. What we've been looking at that explains that discrepancy is that there has been a massive growth-impulse coming from clean energy sectors. So an incredible wave of investment in battery, solar, EV, and so on, manufacturing and deployment, that is, in fact, the largest single contributor to GDP growth last year.

Let's just get back to that in one second, I want to- I want to dive in on that clearly. But I just want to make sure that I've understood and that our audience is following. So in the West, in the OECD countries, what you saw was COVID stimulus going towards mainly the people, to consumption. And, you know, what we then had was, of course, that the middle classes who had done work from home, they didn't lose their jobs, they work from home. So they were still earning, but they couldn't spend money on holidays and restaurants and DIY, you couldn't have workmen in and so on. And so there was this pent-up household savings, plus the stimulus which went to consumption, and then you saw this enormous boom, and you couldn't get waiters, and you couldn't get drivers and so on coming out of it. What you're saying is that China did something very different, it kept its primary industries going, and then stimulus went into, coming out of COVID, presumably, that's why we saw this kind of stimulus going into more construction, more capex, and now we've got this sort of- now we've got the- we've got the hangover. Now the problem's hitting those sectors. Is that a fair characterization? And then you're saying, the only one that has kind of stopped that from being catastrophic is the clean energy sector? Am I- is that a fair summary?

It's very good to summarise and that's exactly right. So the short of it is that everyone else in the world, not just the West, supported consumers, supported consumer incomes, whereas what China did was they got taxes on businesses, they got expenses, like electricity prices, and everything else, and also let businesses cut people's incomes, so the exact opposite of what the rest of the world did, supporting the supply side, and you can see that in trade balances: China had an incredible export during COVID, everyone else was importing from China.

That was PPE, personal protective equipment, but also everything else, right?

Yeah, everything that people spent on during during COVID.

So now, you have this kind of hangover hitting those kind of capital intensive: primary industry, construction, you know, the sort of mainstream narrative is that China is now faltering, China has misallocated resources, and it's going to get ugly and there's bad debt. And what you're saying though, is that the clean energy sector is actually now propping up- or is the growth sector, and is actually the only one that's accounting for this supposed 5% growth?

That's the case at least for 2023. So, if you look at the growth in fixed-asset investment, which is a huge part of China's economy, all of the growth came from investment in clean energy sectors, broadly understood. Everything else in aggregate fell.

How do you square this narrative? And by the way, you know, the extraordinary growth in Chinese wind, solar, EVs, domestically and export, I mean, that I think that our audience would recognise that as being the case, these kind of 90% market share plus in the supply chain, huge installations across clean energy. Just how can you square that story about the kind of the waves during COVID, how do you square it with the fact that we were getting stories about the traffic lights not working because there was no electricity? I mean, if they were, you know, focusing on the stimulus from from primary industries, why wasn't there enough electricity?

That was a result of the government's supply side policies. So, what they did is they had a drive to push down electricity costs to businesses, exactly to stimulate growth. And then when global fuel prices shot up, when Russia started throttling gas exports to Europe in the second half of 2022, then coal-fired power plants were not able to make money, they were not able to even recoup their fuel costs, from generation, from the electricity prices that they were getting. And so, a lot of coal plants started calling in sick, they were- they started saying that they have a technical malfunction, or "oops, we ran out of fuel," and stop generating and that created what I would call an artificial shortage of electricity.

Now, what's fascinating is a lot of people perhaps listening to this would say, you know, "China is playing on the transition an absolute blinder, you know, China owns the supply chains, China's installing this, and you need to be essentially a sort of, if not- if not a dictatorship, that at least a centrally planned economy to navigate the net-zero transition." But you know, when you- when you listen to that story about power stations "calling in sick", you call it, pretending to have a malfunction because they're not allowed to sell because the government's set price for electricity is too low to allow them to buy coal, Isn't this the flip side of the coin? And actually, in a way it's a bigger problem, that it's about misallocation of resources. A lot of this story that you've just told about China is misallocation of resources, over-investment in real estate, over-investment in primary industries. Not being able then, during the years that Premier Xi tried to move to consumption, essentially a failure, and then mispricing electricity. I mean, this is- this is a mismanagement, this is not great management is it?

Oh, the polite way to put it is that China has an extremely high tolerance for risk taking and also for misallocation, for better or worse, which does make them very good at industrial policy, so when you decide to go after something, you can do it at a scale that is extremely hard for anyone else to match. But then, of course, there are a lot of issues in China. So for example, the fact that they're still building a lot of coal-fired power plants, that is solely because of an outdated grid management model and an outdated electricity system model that doesn't make efficient use of existing capacity. So yes, there are- there are both downsides and upsides to China's way of doing this, I would say that the way that China's financial system and governing system is set up makes them very good at industrial policy, but risks creating big issues for economic policy and economic growth going forward.

So let's come back to the question of trying to sort of keep electricity prices low which backfires, we're going to talk about again when we come to South Africa. But I want to talk about those- that huge surging investment that China's got in coal-fired power stations, I mean, put it in perspective in terms of who's building coal-fired power stations today.

Out of- if you look at new projects, going into construction, getting permitted and so on, more than 80% of those are in China, which is, of course, remarkable given that there are a lot of countries in the world that do need more electricity and are investing in power generation, they're just not choosing to invest in coal.

So you've got countries like Vietnam, Thailand, Bangladesh, India, and also some of the Latin American countries, you've got people with enormous amounts of reserves of coal, and they are not exploiting them and they are not building coal-fired power stations, but China, China, China, China is. Why is that?

So India is still building a few, it's largely politically-driven projects, private developers exited quite a while ago. But overall, it's just the financials just don't stack up because of the high capital costs, uncertainty about fuel prices, competition from low cost renewables, I think it's anyone who's following the energy sector can list the reasons why coal is not happening outside of China. In China, though, there are two things. One of them is the government is providing a lot of investment security, so they can basically make any one hole by regulating electricity prices, introducing a capacity payment like they just did, or simply telling the banks to eat the losses if the projects don't work out. The other factor is that building a coal-fired power plant in China is incredibly cheap compared with anywhere else in the world. So all kinds of- China obviously has huge economies of scale, which drive costs down, and also massive structural subsidies for all kinds of heavy industry and construction, which makes it affordable. So the economics of a coal plant in China are much closer to the economics of of a gas turbine in the West.

I just I'm surprised that it's so much more profitable, if that's the argument, that it's more profitable in China than in, for instance, India, or Vietnam, where you could also build these things very cheaply, and they've got the coal supplies. So it must be because it's effectively being promoted by the political system, not just the economics. I mean, it must be, there's no other real explanation, surely?

Yeah, it's borderline profitable at best. Coal plants have been losing money most of the recent years. Last year, they managed to make a bit of money, but still not enough to justify anywhere near the kind of investment that we're seeing. The average utilisation rate is at 50% and profit margins are thin at best.

So can you talk us through- because of course, China is not monolithic in its decision making. You've got central government, you've got the provinces, you have the coal industry, which is has its own agency, I mean, its own decision making that- its own goals that it pursues, you've got the electrical system, similarly. You've got then the customers who is actually pushing for coal, and is anybody pushing back?

The energy regulators in the central government have been pushing quite strongly for coal. The provincial- Chinese provinces basically have a big preference for any kind of big infrastructure and construction projects, whatever variety, so they will grab any opportunity, whenever there is a central government policy that allows or promotes something, they're going to jump on to it. The people that I was hoping would push back are financial regulators. So the state owned enterprise wash watchdog, SASAC and the financial ministry, because they are the people who should care about return on assets, who should care about the profitability of state owned enterprises. However, after the electricity shortages that we saw over the past couple of years, the way I look at it is no local or central decision maker is going to stop any coal plant after those, simply because you're afraid of getting blamed for electricity shortages in the future. There was a very strong emphasis on ensuring electricity supply, and one issue is that local decision makers cannot fix the electricity system. So for them, the only way to keep the lights on is to build more capacity, and if the central government doesn't send a clear message that they are going to move ahead with the kinds of reforms that would be needed to make the electricity system flexible and efficient, then as a local decision maker, you just don't have other ways of managing.

Yes, I suspected that would be a big part of it. So there's an episode in my background where I worked on Perestroika, the reforms to the Soviet economy, which of course proved to be largely impossible. And the problem there was that if your five-year plan said you made this many aircraft, you absolutely needed to get that much aluminium, and that meant that much bauxite and you backward integrated, because it was the only way that you could deliver your five-year plan. And so I suspect with the provinces, there's a similar thing: you're under pressure, huge pressure for economic growth, but you don't want to rely on a political rival in a different province for your power.

That's a huge part of it, so- and that's when I talk about flexibility or efficient operation of the electricity system, the main issue is that power isn't being dispatched across province boundaries. So all of the electricity shortage episodes that there have been in China in recent years, if you look at the capacity that would have been available at the next province across, there would not have been an electricity shortage. And you if you read news stories, the officials are describing things like making emergency phone calls, to generators to arrange electricity supply, which is not exactly how the things work on a well developed electricity market. So it's a very rigid system, and one where dispatch across provinces isn't working. And when you have 30 provinces, if each one of them plants their capacity, as if they were an island, you end up with a lot of redundant capacity.

So let's move on; I promised a fly-by of the different regions and countries that you cover. We won't be able to cover them all. But another one that has got a lot of this kind of dispatch challenges and misallocation of resources is South Africa. What spurred me to reach out and invite you to come on to this episode of Cleaning Up was that you commented on the fact that South Africa famously has got these rolling blackouts, rolling power cuts. And most people would say they haven't built enough capacity. And they've also had these incredible problems with these two huge coal-fired power stations. What are they called?

Medupi and Kusile.

Medupi and Kusile which by the way, I tried my hardest, when I was a complete unknown, to say they ought to be investing in renewables and not doing them. So I feel very vindicated. But they've got- your theory is, or your analysis shows, that the issue isn't just building more capacity. Tell us why.

Absolutely, so exactly the same thing that I mentioned with China, when you look at the peak load in the system, the maximum amount that would be needed at each moment, that's way below the amount of capacity that is available. So South Africa has, at least nominally, 44 gigawatts of coal fired capacity plus another almost 10 gigawatts of other controllable capacity like nuclear and hydro power, and their maximum peak load is well below 40 gigawatts. So that should be a very comfortable system to manage. The problem is that they have too much capacity, and that capacity just keeps breaking down. The maintenance is being neglected, left and right, and it's just developed into a point where you have a very high tolerance for failure. So even those new coal-fired power plants Medupi and Kusile, they've been breaking down, so Kusile just had a breakdown, they're obviously delayed by many, many years. In the case of Medupi, there was a specific condition from the World Bank to install sulphur dioxide-control devices in the plant, and then halfway through the project, the state-owned power utility, they said, "oops, sorry, we're not going to do that because it costs money," and so on. So, there is just a very chronic issue of under-investment in maintaining the existing capacity, and extremely high tolerance for failure, because you're used to having way too much capacity.

So you have too much capacity, that presumably drives down prices, so nobody makes any money, so therefore you don't do your maintenance, but on top of that, there's fraud and corruption and a bunch of other things going on. Is there not? So why did Kusile break? Apparently, it was to do with coal quality, so the wrong quality of coal. These are very sensitive plants, they're hyper supercritical, the most complex, the most efficient, the most this, the most that, and then if you don't get the right quality of coal, is that what happened? Or is that just what I heard and it kind of fits my priors and sounds- and has truthiness? Is that Is that what your analysis shows?

For Kusile, it was engineering issues, so the ductwork failed. But there are other plants were- so there was a scene in place where where the plants got shipped some substandard quality coal, and the better quality coal got exported. And so then, former Eskom employees were in on the take when they- and when the plants were receiving the shipments of the coal, no one just raised any alarm, they just dutifully sent the coal into the boilers and broke the plants. So this the kind of- and when the plants broke, no one really raised an alarm, either, because it's normal for Eskom plants to break. So this is what I mean when I say that, that there's just an extremely high tolerance for plants not being available. You know, when it when it happens in Texas or whatnot, that plants are not available at a critical moment, it takes up- there's at least a very serious look into what happened, who's to blame and so on. But none of that is just happening.

And the issue of the sulphur scrubbers that were not installed: there's this extraordinary statistic, isn't there, that South Africa's sulphur dioxide pollution is the worst in the world? Or what's the statistic?

So Eskom as the operator is the largest power sector emitter of sulphur dioxide. And if you consider that they've got 40 gigawatts of coal, whereas China has 1000, then emitting more from these 40 gigawatts than China's more than one 1000 gigawatts is quite an accomplishment. There are some other countries like India that emit even slightly more, but there is no company in the in the world that emits more from power plants.

So Eskom: a single company in South Africa, emitting more sulphur dioxide than China. Extraordinary.

Than China's power plants, yeah.

Absolutely extraordinary. Let's move on to- let's talk about Indonesia, because you know, this sort of- I guess, the theme that's emerging, I don't want to lead you too much, but the theme that's emerging is badly-structured markets and governance, rather than just more capacity. More capacity is not going to solve that problem. China is actually doing more capacity in clean energy, but it still hasn't solved its coal problem. What's happening in Indonesia, Jakarta, the air quality, how are we doing there?

Jakarta just had a very nasty dry season last year, and that raised air pollution into a major public issue. We were- we were doing a lot of analysis of that, the sources, the trends, and so on, and it in fact got quite controversial. So what we were doing is we were pointing to coal-fired power plants and other far away emitters that are contributing to Jakarta's pollution, and that turned out to be politically inconvenient for some people, so we had to endure pretty nasty public attacks because of that. But I'm very happy that we're doing that work. In terms of coal-fired power plants, Indonesia has seen a huge surge in coal power capacity and they've, in fact, managed to get into a situation where they have overcapacity of coal-fired power, and most importantly, a lot of that coal-fired power has been contracted on take-or-break pay terms, so those coal plants must be run at a high utilisation rate, which then means that there's no space to add renewables into the grid, which of course, the country- would be good for the country to do, otherwise. They also cross-subsidise coal for domestic consumption by requiring coal exporters to sell at a lower regulated price to domestic users. I'm all for the country getting more value out of its commodity exports, but doing that as a cross-subsidy to coal, rather than putting money into a fund that you can use to build clean energy, for example, is of course- introduces a massive bias for coal.

So what you've got then is a- is it a- the state utility, is that a monopoly? That would be PLM, is that right?

Yeah, so they have a monopoly on-

And they have no incentive to build renewables?

Exactly.

They have no incentive to introduce renewables, or to let anybody else do renewables?

Exactly. So what PLN has to do is they have to make money from the main power grid that covers Java, Bali and South Sumatra, because they're forced to sell at a loss on the other islands. And so if they have- and so, on the main island, installing solar or the renewables would be economically very attractive because of the regulated prices. But if that starts to happen, then PLN starts to lose market-share on their cash-coal market, and then they can't fund the rest of their operation. So that's the trap.

Now, both South Africa and Indonesia entered into these partnerships, post the Glasgow COP, COP26, 2021, they were called JETPs, the Joint Energy Transition Partnerships, and both of those are in trouble. Both of those- it's been very difficult to kind of- the the idea was you do a transition, and our investors with a bit of help from our public funds will provide the money. Both of those have been in trouble. I mean, is it around these issues like the monopoly, either, you know, Eskom and its governance, or in Indonesia's case, the way that the monopoly utility is regulated?

Yeah, in both cases, it's really the politics around closing down coal plants that has proved very, very tricky. So in Indonesia, they did land on an investment plan for the JETP that includes all kinds of nice things, but essentially, no commitments to close down coal-fired power plants. They do have a commitment to do about 10 gigawatts of solar, which, if that happens, at least means breaking down some of the barriers for that. But so the whole- the political economy and the strong interests around the existing coal plants just didn't get broken by this. For Indonesia, the really big sticking point was that they wanted to only look at grid-connected coal-fired power plants, and there has been a parallel boom in coal plants on the outer islands to power smelters, especially nickel smelters,

Nickel smelters.

Exactly. And so when people started to- and we started to look at the numbers, the CO2 emissions from those captive power plants, it just became clear that if you include them, there was no way that Indonesia was going to live up to what they promised, they would target as a part of the JETP. for South Africa, similarly, there's been two issues. One of them is Eskom is in a political trap, where closing down the plants is politically very hard, there's opposition from unions and coal interests. But also because they can't seem to get any of the plants fixed. They're just stuck with way too many plants that keep breaking down, and then it always seems that you can't afford to close down a single plant, and then when you can't close down a single plant, you can't afford to get all of them fixed. So that's the trap that they are in, and that's why the coal-retirement part of it hasn't been coming through. There's one plant that has been committed for closure, but all the other ones around it seem to be getting delayed in their retirement again.

So what's so interesting is in the COP discussions, there are these endless discussions about, "are we facing down, phasing out, transitioning away from fossil fuels?" And I think a lot of people, particularly in the developed world, in the West would say, "oh, that's all about oil. It's all about the oil companies. It's all about, you know, Adnoc and Sultan Al Jaber, and it's all about the Saudi Arabians, and they're doing their market stimulation, they were caught stimulating the markets in Asia and so on. But it actually, in terms of the vast amounts of emissions that come out of coal-fired power stations, still, it's not enough just to do renewables on top, we've actually got to- we don't care what- it doesn't matter what it's called, phasing down/out or transitioning. But unless you're fundamentally prepared to shut coal-fired power stations in countries like Indonesia, South Africa there is no transition, really, there's just a bit of new clean energy on top. Is that the same discussion in India?

I'll just say in general that I think in South Africa, the only way that this is going to play out is that more and more people vote with their feet and just stop buying from Eskom. So they're just choosing a path where they're going to get redundant themselves. And so with Indonesia, the ability of PLN to block solar has hinged on their blocking people from selling their excess power to the grid, and that's why solar-powered projects don't make economic sense. But with what's happening with batteries, now, I think that's going to start happening a lot faster, that in fact, solar with batteries basically off-grid or partially off-grid becomes profitable, and that just forces PLN to start moving.

Well that feels like that will take longer- that will take longer than perhaps in South Africa where you can find an alternative supply?

Yeah, not necessarily. These things do happen. Usually- well if you look at what happened across the world in in response to the spike in fuel prices, it was really those technologies that people can just go and buy themselves, like solar and EVs that spiked, whereas wind and so on, were struggling. So it might be- it's going to be much messier, certainly not a just transition for workers and all of those, but it can be a lot faster when it's driven by distributed technologies and the breakdown of traditional utilities.

Although that leaves the industry behind somewhat. So Lauri, I don't want to shortchange India, I am going to slightly shortchange India because I'm very keen to talk about the work you're doing in Russia, which is very different. But you know, India is always launching these very ambitious programmes, renewable energy, clean energy, also, potentially its own manufacturing, its exporting, Made in India and so on. And it always seems to disappoint. Now, why is that?

So when you're talking about mega-projects, huge, centralised renewables projects in India, it's easy to see why they're hard to implement. There are- it's a country with with a very dense population, obviously, lots of issues with with land ownership and so on. So land acquisition for those projects is hard and has to be hard because there are communities that face the impacts if it's done wrong. I think the most important question is: why isn't distributed solar, especially, happening faster in India? And that goes back to the electricity market. So when you have still have electricity theft you have every election cycle, there are new promises of cheap or free electricity, and so on, then that just means that there isn't an incentive to provide full supply of electricity. So again, it's an issue of having existing overcapacity as a result of that, and not being able to recoup costs for new projects.

So it feels like a political problem, in that case, which is promised cheap electricity, and of course, you destroy then the incentive for people to invest. And I guess there's also, still, there's been historically also sort of tariffs on imports, restrictions on who can lend, an unwillingness to become dependent on China's supply chain and all of these kind of almost geopolitical issues.

Absolutely, and it's not hard to understand why India wouldn't want to be reliant on Chinese supply, but then at least you have to make sure that the conditions are there to build a domestic manufacturing base.

And nevertheless, there is a lot going on, is there not?

Absolutely, it's just that India's electricity demand growth in the in the past year or a few years has been absolutely blistering. And that just meant that the growth has still come from coal, unfortunately, so there's a long, long way to go, and I think the only way to get to the scale needed in India is for a lot more of the projects to happen on the distributed solar side of things.

And I do worry that the next 20 years, we might see both India and Africa doing what China did during the periods of 1990 to 2010, this incredible growth. The good news is it will bring a lot of people out of poverty, the bad news is, if it's not clean growth, if it's not based on clean energy, nuclear renewables, and if it's not efficient, it's gonna have horrible impacts on climate and air quality.

Well what people tend to underappreciate is how incredibly energy-intensive China's economic model has been. And so there simply just isn't going to be another China unless Africa somehow switches to a continent-wide planned economy, which I don't think is going to happen. So people, of course, talk about China's dependence on coal, but the bigger piece of why China's per capita emissions have already overtaken the EU with 1/3 of the GDP per capita is the economic model, and they have a huge bias for massive projects and construction that it brings, and exports.

It's always extraordinary when you get people saying, "oh, you know, the UK, Europe, US, we have to take responsibility for China's emissions because we import goods from them." But they're the ones that chose this incredible coal-dependent, incredible sort of export-driven growth model. We didn't force them to adopt that economic model, but nevertheless, we're supposed to somehow be responsible for their emissions, which I always find difficult. I do want to move on to Russia, though, because we're running out of time. And the work you've done there, you've been tracking- you were working, you were operating in Ukraine, you were operating, I don't know, in Russia or tracking Russia's developments before Russia's invasion of Ukraine. But you kind of pivoted to tracking Russia's fossil fuel exports. Talk us through how that happened and what did you learn?

Yeah, so we did work on industrial emissions and air pollution in Ukraine before the invasion. So personally, the way it played out was the day after the invasion started, when tanks were literally rolling towards Kiev, we were having- we were supposed to have a meeting with our Ukrainian partners, and I assume that it's off, but just a bit before, they message us and said that, "you know what, we're just sitting in bomb shelters. There's nothing else for us to do. So why don't we just dial in and have a meeting?" and then we started talking about what can we do in this situation to help Ukraine, and they said that, "if you can provide that the data and the analytical basis for targeting Russia's fossil fuel exports that's what you can do to help Ukraine survive in this situation." And and so for me personally, I grew up very close to the Russian border, I have personal family history like everyone in Finland that has to do with with Russia's subjugation of Finland and so on. So I felt very strongly that this is something that I want to work on, and from an organisational perspective, this conflict is so strongly-enabled by fossil fuels and Europe's dependence on fossil fuels, that I felt that there is a case for our organisation to work on this as well. So we took the money that we had for working on industrial emissions in Ukraine, and use that to kickstart a project that provides a macro-picture of all of Russia's fossil fuel exports.

And what did you find, and what did you do with that? Are you feeding that into the kind of sanctions discussions? Or what did you- well first, talk us through what you found, and indeed, what you are finding still, correct?

Absolutely. So initially, in the very beginning, we just started tallying how much money Russia made from exporting fossil fuels since the start of the invasion, and started putting out those numbers, because, you know, there are a lot of people in the commodities sector and so on, who are tracking specific flows, like seaborne crude oil, but no one had the macro picture of all the flows. So we started putting out those numbers, and they got covered extremely widely and helped push for sanctions on Russia's fossil fuel exports. And then, after that initial phase of just raising that issue, it's been more and more analysing the effects of different measures that have been taken, where are the remaining loopholes, what is Russia doing to try and work around them what can be done in response, and so on? And so currently, the situation is that oil imports into Europe have been banned, for the most part, but European and UK shipping industry still continues to carry about half of all of Russia's exports of oil when you include both oil products and crude oil, which is just incredible, that we keep essentially ferrying money to Kremlin that they then use to build missiles and tanks and pay recruits to attack us, attack Europe. And the issue here is that the enforcement of the price cap that is supposed to apply on Russia's fossil fuel/oil exports, is not working, and the level of the price cap is way too high.

So is it the level of the price cap, which I can't remember exactly what it is at the moment? So there is a price cap. Is it that it's too high? Or is it that there are ways around it? You can pay so much officially, and then you can have some other flow of commodities or goods that then remunerates under the table, et's call it?

It's both of them. But yeah, so enforcement is not working: we've seen that, in the Pacific, that the prices that are paid for Russian oil have consistently been above the price cap, which is at $60 for crude, and still, UK-insured, European-insured ships have shown up in in eastern Russia, to load the oil, and also in the Baltic and Black Sea, when prices have risen above the cap, the tankers have continued to show up. So enforcement needs to be fixed. It's currently based on what is called "attestations" which is a world where that I'm- if I'm being honest, I had to look up in the dictionary when this came up, but it just means a solemn promise, basically. And that's all that it is. And then when you have shady traders outside of the jurisdiction of the sanction-imposing countries who can issue these solemn promises, they are worth nothing at all. So enforcement needs to be fixed, and the reason why the price cap hasn't been revised down to a more meaningful level, I believe, is that that would expose the fact that the enforcement is not working. So either one of those steps needs to be taken, and then followed up by the other.

But how do you- how does this in a sense make you feel? Because on the one hand, we're supposed to be you know, Ukraine is an ally, we are supporting it militarily, we're supporting it with aid, with humanitarian aid, obviously there is the issues with the horrendous rump of the Republican Party, the MAGA Republicans who are essentially working for Putin, we all know. But then the rest of us, surely, ought to be focused, and this ought to gbe fixed. So how- what do you- how do you feel when you see that it's not being fixed?

It's, of course been incredibly frustrating, and still, you know, the measures as an aggregate have had an impact, so Russia's fossil fuel revenues have come down massively from their peak. So it's not all in vain. But it's just clear that there's so much more that that could be done. I think a big part of this is that there was this moral clarity when it was fossil fuels literally physically coming into Europe that were the main issue, that it was a lot harder to get minds focused on that, whereas now when it's fossil fuels going to China, India, Turkey, and it's the shipping part, then it gets more technical and harder to get public focus on it.

But if it's our insurance, our own ships enabling that trade, then that's pretty morally clear. But we also still have fossil fuels coming into Europe. So OMV refuses to countenance not buying and paying for gas contracts that it's entered into before the conflict, which could easily- it could easily escape from with a bit of help from the EU and from its own government, and yet they refuse to do so.

Absolutely. So there's also- there's a lot of LNG coming from Russian Arctic to Europe, Europe is still the biggest buyer of Russian LNG even overall, so that needs to be addressed. That's an area where there seems to be some momentum, and another issue that we've highlighted for quite a while is that it's still perfectly legal to refine Russian crude oil in third countries, and then export those products to Europe, to the UK, and so on. There's even a refinery in China that gets crude oil directly by pipeline from Russia, and that can go to these markets. So yeah, there is still Russian crude oil coming coming to Europe, and that needs to be banned, obviously.

I have to say, listening to this, it's hardly surprising that Mr. Putin thinks he can outlast the will of the West to actually support Ukraine, to push back and to reverse his invasion, because, you know, if we're not doing it now, maybe in year three, four or five of the conflict, we'll get serious about this stuff. I will say that- I want to thank you for the time you spent with us, it resonates in lots of ways. There's a number of themes there. For me, personally, it's this idea that using data, you can affect change. You don't have to be a huge advocate, you don't have to be glueing yourselves to things and protesting and campaigning. You know, your background was that originally, but the fact that you're using data: that resonates because I don't see myself in any way as an activist for clean energy or for the transition, But it so happens that by providing information and data, I think I and yourself as well, you know, I think we have accelerated some of these very, very important and critical trends. So that's how I- you know, one of my takeaways has been that.

Yeah, no, absolutely. I agree. It's by providing data and evidence to people who use it to drive change. That's one way of changing the balance of power.

So thank you very much for coming on Cleaning Up. It's been an enormous pleasure and very insightful speaking with you, Lauri.

Thank you so much, Michael.

So that was Lowry Myllyvirta, co-founder and lead analyst at the Centre for Research on Energy and Clean Air, CREA, in Helsinki, and one of the world's preeminent experts on energy and emissions in emerging markets and Russia. As usual, we'll put links in the shownotes to resources that were mentioned or might be of use. In this case, CREA's website, and recent reports on Russian fossil fuel exports, and energy and air quality trends in the other countries they cover.

If you've enjoyed today's conversation, please remember to like, share, and subscribe to Cleaning Up, or leave us a review on your favourite podcast platform. And do please spread the word. Tell your friends and colleagues. And if you want more from Cleaning Up, sign up for our free newsletter on the publishing platform Substack at mlcleaningup.substack.com, that's mlcleaningup.substack.com or visit us on cleaningup.live, that's cleaningup.live.

Shedding Light on Energy's Dirty Secrets - Ep153: Lauri Myllyvirta

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