Bigger, Greener, China

Daniel Seemann

China has become the world’s economic engine in times of crisis. This is also true for the greentech sector, which is growing at a faster pace than in many other countries around the globe. However, China still has some work to do.

The past two years have been times of growth and expansion for China’s greentech markets. Although the greentech sector still faces macroeconomic challenges, China’s overwhelming need for energy and environmental technology continues to foster its rapid growth.

“China's strategy over the past 20 years was to build, build, build and grow. Now, there is a strong focus on energy and efficiency,” says Ellen G. Carbury, co-founder and Managing Director of the China Greentech Intiative, which has just released the 2012 China Greentech Report.

This report is the institutional point of view of the CGTI, which is the only platform between China and international partner companies dedicated to identifying, developing and promoting green technology solutions in China. It was formed by more than 500 decision makers from more than 100 organizations.

Green growth with risks ahead

Several macroeconomic challenges were identified for China’s greentech markets in the report. One big obstacle is the focus on state-led growth in the energy sector that may especially harm those greentech industries dominated by smaller private companies, such as solar or energy services. In addition, a general drop in Chinese exports has particularly hurt manufacturers in these energy sectors.

Furthermore, a frugal monetary policy, together with a gradual decline in investment and infrastructure spending, has hurt financing for greentech-related projects. And finally, demographic shifts are increasing labour costs across the greentech sector. Nevertheless, the report predicts that this might lead to greater innovation and automation in renewable energy manufacturing and consolidation in other energy fields.

Changing energy policy

Since 2011, the Chinese government started to react to these circumstances by lifting targets for energy efficiency, solar and wind. In addition, the country enacted new policies in the area of energy taxes and carbon trading. However, in other areas such as biofuels, progress has faced setbacks or has been uneven. Still, based on targets in the 12th Five Year Plan, the report prognosticates that China’s energy mix will slowly shift from coal to other fuels.

This is based on strong macroeconomic facts. When it comes to energy, China already has to import over half of its oil. The country is also heavily reliant on coal, which produces high emissions of carbon and other air and water pollutants. Another major impetus for a changing energy policy in China is a rising public awareness, following a number of major pollution incidents in 2011.

Invest locally, export globally

China initiated several policies to support the domestic greentech industry. But 2011 also saw the continuation of an earlier trend, with the renewable energy sector dominating outbound investments and companies going abroad to deal in this area.

2011 also saw a new push for investing in basic infrastructure abroad - such as European water and power grid utilities - to achieve asset diversification and financial returns. The report states that in the future, China will continue to deploy its capital, labour and technology abroad, deepening international collaboration and cooperation in the area of greentech.

Greentech market opportunities

CGTI identifies different sectors in which the greentech industry might grow in the future. The size of conventional energy in China’s energy mix is still huge – and although the government continues to restructure the coal mining industry, it will continue to experience strong growth. The nuclear and gas sectors will also continue profiting from government policy support in the future.

However, stricter emission standards will affect coal plants, and the government will introduce carbon trading pilot programs. And despite large investments in the sector, China’s domestic gas production is stretched to the limit and has not kept up with consumption, increasing reliance on imports. These developments could make energy from renewable sources an incremental alternative for the future of China’s energy supply.

Low priced renewables, limited funding

2011 was a positive year for renewable energy in China, especially for solar and wind energy. In that year, the Central Government published concrete installation targets for renewable energy by 2015, doubled the surcharge rate for renewable energy and introduced specific carbon reduction policies.

However, Chinese solar module makers suffer from severe overcapacity problems and squeezed profits, as the demand from European and U.S. markets for Chinese module sales weakens. To help absorb excess solar production, the Chinese government stimulated its domestic market by raising the feed-in tariff for solar power. In the wind sector, China installed a capacity of about 18 gigawatts in 2011. Biomass power generation also experienced rapid growth thanks to favourable policies.

Given the high cost of renewable energy projects, limited funding sources have become a bottleneck for project development. Debt - such as bank loans and bonds - is currently the main source for wind and solar financing, but good terms are only available to the largest enterprises or state-owned enterprises. At the very least, there is direct financial support available from the Chinese government for wind and solar energy - including tax credits, preferential land-use policies and low-interest loans.

The biggest smart power grid ever

Energy efficiency targets and the rising share of renewable energy in the country’s energy mix represent a big challenge to the Chinese power grid as it is currently designed and operated. For this reason, China has begun with the construction phase of its Strong and Smart Grid Plan. It aims to establish the world’s largest smart power grid by 2020, including ultra-high voltage lines and distribution networks in urban and rural areas, remote monitoring, two-way communications and an electric vehicle (EV) charging infrastructure.

China’s energy storage market continues to grow consistently. Using the potential of the expanding smart grid, this sector has the potential to improve the connectivity of intermittent renewables, such as wind and solar. Yet, high costs, unproven technology and a lack of governmental policy direction make storage a tough sell over the next few years, as CGTI reports.

Electric mobility on the rise

China’s automotive market is the world’s largest and is growing rapidly. However, it will still be dominated by conventional vehicles for the next decade, the as indicated by the CGTI report. Yet cleaner transportation is an important element of China’s plan to reduce carbon emissions and use of fossil fuels. To improve fuel efficiency, China continues to raise conventional vehicle emission and fuel economy standards. In contrast, there have been few developments in the past year on biofuels.

China focuses a strong policy support on electric vehicles, which has raised expectations for the growth of the EV industry in the country. Several companies have already taken the lead in the development of the battery-charging segment by building infrastructure for EVs across the country.

The Chinese greentech forest

“China is like a vast forest, a vast ocean. It is a rapidly changing market, where information and relationships are not transparent,” explains Carberry. “Because of that problem, CGTI was created.“ The annual reports can be taken as a compass for understanding China’s rapidly changing greentech market.”

The Chinese market could become more and more interesting for investors, notably from Germany. “China and Germany will become an economic intersection for the future,” Carberry says. “This is especially true for the mindset and the innovation power of both countries.”

It is an opportunity not to be missed by German greentech entrepreneurs - especially in times of crisis.

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