China is the world’s second largest consumer of energy after the United States, and shows no sign of slowing. According to a report published by the China Greentech Initiative — a private-public commercial collaboration of alternative-energy specialists — during the World Economic Forum meeting in Dalian on September 10, China is responsible for 16% of the world’s energy consumption, is the second largest consumer of crude oil and is the largest consumer of coal. Between 70% and 80% of its energy supply comes from burning coal, and although coal a major contributor of greenhouse gases (GHG), China plans to increase its coal-fired power generation capacity by the equivalent of two 500MW plants a week to meet the country’s burgeoning energy requirements.
But while such figures throw many environmentalists into despair, others see promising opportunities. New laws, regulations and fiscal measures are encouraging the development of new alternative energy sources. So, too, are a wave of fresh investments from domestic and international companies, including a number of deals announced in recent months. For example, on August 20, GE Drivetrain Technologies, a unit of GE Transportation, and Chongqing XinXing Fengneng Investment Co. Ltd. in central China announced a joint venture to produce gears for wind turbines. Meanwhile, U.S.-based First Solar, signed a memorandum of understanding in early September to build a 2 gigawatt (GW) solar plant in Ordos City in Inner Mongolia, which will be followed by several more plant openings over the next 10 years.
China’s giant state-owned energy companies are not sitting on the sidelines during all this activity. In mid-August, China Electricity International announced plans to invest RMB120 million in a joint venture to develop wind projects in Inner Mongolia, while the other four state-owned players – GD Power Development, China Huaneng Group, Datang International Power Generation and China Power Investment Corp. – have also received approval to invest in Inner Mongolia.
A particular area of interest is wind energy. Among the reasons why, says Jeff Jiang, managing director of Renaissance Carbon Investment (RCI) — the carbon investment and trading arm of Pivoton International, a U.S. private equity company — is that it may be the most clean energy resource currently available. What’s more, unlike hydropower, he explains, wind power plants do not have to be near water or valuable arable land. Its main challenge, however, is transmitting the power from remote parts of China, such as Inner Mongolia and Xinjiang province, to areas where energy is needed most.
China’s wind power market has grown quickly, with installed capacity doubling annually over the last four years to reach 12GW in 2008. Today, China ranks fourth in the world after the United States, Germany and Spain in terms of installed wind capacity and accounts for 10% of the world’s total.
The solar photovoltaic (PV) sector is also growing, albeit more slowly. It reached 150 megawatts (MW) in 2008, representing only 1% of the global total. But China supplies 30% of the world’s PV cells, exporting 95% of its capacity in 2008.
Yet China’s alternative energy companies have not been immune to recent issues of supply and demand, some of which the result of the global economic downturn. Premier Wen Jiabao, speaking on August 26 at a State Council meeting, warned that some industries are indeed facing overcapacity amid the sharp drop in demand for their goods and need to be monitored. Among the industries cited were solar PV, wind equipment and other alternative energy-related businesses.
Overcapacity was also a topic of discussion at Greentech: A Call to Action, a forum held in Shanghai on September 7 and 8 organized by the American Chamber of Commerce in Shanghai and other organizations. But the mood was generally upbeat, with industry leaders such as Jim Finn, managing director of United Solar Ovonic, a U.S. company that builds integrated rooftop PVs, noting that once demand recovers, overcapacity will be resolved.
Promising New Policies
Regardless of the economic climate, advances in renewable energy require significant government support. The first major sign that China’s central government was serious about developing alternatives to fossil fuels was when the National People’s Congress for Economic and Social Development unveiled energy targets in its 11th Five-Year Plan (2006-2010) that included a 20% reduction of the country’s energy intensity per unit of GDP by 2010. In addition, the National Development and Reform Commission outlined its plan to generate 15% of China’s electricity from renewable energy sources (including large-scale hydropower) by 2020. Non-hydro renewable energy generation capacity is expected to reach 3% of the total energy mix by 2010 and 8% by 2020.
These targets have teeth, and some have been revised upward as developments have exceeded expectations. For example, the target for wind generating capacity, which was 30GW at the beginning of the year, has been increased to 100GW, while the target for solar PV capacity was 1.8GW and is now 20GW.
Beyond its target setting, the central government is also offering financial support. Liang Zhipeng, an official from the National Energy Bureau, told reporters at a Beijing conference in May that China will invest RMB3 trillion in alternative energy by 2020.
Meanwhile, the National People’s Congress is reviewing an amendment to the alternative energy law requiring the state grid system to purchase electricity generated by alternative energy companies. Another clause in the amendment will pave the way for setting up a state-run alternative energy development fund.
Subsidies also have a key role to play. The Ministry of Finance offers subsidies for wind power facilities and domestic makers of wind turbines and turbine components. Another initiative includes a solar subsidy program, which was launched by the Ministry of Finance in March this year, followed by another in July, which targets utility-scale solar installations.
Along with the central government’s efforts, provincial and regional governments can also use their policy leverage to support sustainable energy, according to the Greentech report. For example, China Greentech pointed out that companies at the Yixing Industrial Park in Wuxi, Jiangsu province, which offers tax holidays or reductions for up to five years. Other incentives include reduced office rents, direct financing, assistance with initial public offerings and financial support for employee training.
Out of Sync?
Even if China were to reach its target of deriving 15% of its energy from renewable sources by 2020, the majority of its energy will still come from coal, notes Greentech. It also anticipates a doubling of China’s overall capacity for electricity generation between 2008 and 2020, which means that GHG emissions will likely continue to increase.
One of the biggest challenges of wind power is matching the energy it generates with the needs of the state grid. RCI’s Jiang notes that wind power remains unstable and unsuitable for the grid, unlike thermal power.
Indeed, the rapid development of wind power projects is currently out of sync the planning of the state grid, as Jiang Liping, deputy chief engineer of Beijing Economic and Technology Research Institute of State Grid Corporation told the Daily Economic News. The major technical challenge is to balance the requirements of the grid system with that of alternative energy sources, especially wind power, she said. This will be a costly, yet necessary measure, one that may meet resistance from local grid enterprises that do not have the same incentives.
A number of speakers at the Greentech forum in Shanghai expressed a degree of caution. One participant said he didn’t believe that the grid is committed to renewable energy, while another advised companies to be connected to the grid before launching a project. Yet another noted, “The implementation and transparency and procedures in the regulatory regime on alternative energy are not clear.”
Andrew Aldridge, director of Climate Change Capital Greater China, an investment banking group, noted that the most frequently asked questions for investors are, When will my project be connected to the state grid? and When can I get my subsidy? He adds that in the United States, there’s increased consolidation in the alternative energy sector, which investors hope will help strengthen balance sheets. “In China, investors — if it’s the government – are not paying enough attention to balance sheets, which might be one of the reasons for overcapacity, but there will be more consolidation in China too,” he predicted.
While these issues pose a huge challenge, they also present vast opportunities, notes Craig Adams, principal of China Greentech Initiative. He adds that the state grid now has two main tasks. One is to upgrade its components and network so it can manage electricity transmission more efficiently. The other is to interconnect the regional grids across China. “If all your networks are well connected and one breaks down, the others can help,” he says. According to Adams, nearly 7% of power is currently lost in the grid and a significant percentage of wind power capacity generated in China is not connected to it. That represents “a huge market opportunity”. He adds that China will invest US$1.3 trillion to upgrade the grid and another US$88 billion up to 2020 to upgrade the ultra high-voltage transmission system, “which presents huge opportunities for infrastructure building enterprises like ZTE, Huawei, Cisco, meter companies and software companies.”
Adams anticipates that both public and private sectors will respond to China’s rising energy demand by encouraging unified and evenly enforced standards, introducing innovative financing mechanisms, and establishing a framework for public-private and Sino-foreign collaboration.
And the best is yet to come. “We’re only at the beginning stage of wind power…. Wait another five to ten years, there will be even more plants and much more involvement of alternative energy into the whole system,” predicts RCI’s Jiang.