I WORKED WITH WRITER LAUREN HILGERS ON THIS STORY. SHE DID A BANG-UP JOB. ADDITIONALLY, I CREATED A COOL GMAIL MAP TO PARTNER WITH THE STORY. I’LL PUT THAT UP WITH THE INFO BOX LATER. HERE IS THE ENGLISH VERSION OF THE STORY, WHICH RAN IN JUNE.
Business
Bluer Skies for Green Investors
By Lauren Hilgers (Shanghai)
Outside John Yan’s window, a thick layer of smog is blanketing Shanghai’s skyline, ushering in a premature dusk. Inside, Yan, owner of the Shanghai Aeolus Wind Tech, is entertaining visions of bluer skies. “It’s going to be a good combination,” Yan says, gingerly running his fingers along the blade of the prototype wind turbine that sits in the center of his office. “China needs clean energy – what it’s got is wind.”
And it’s not just wind that China possesses – there are also innumerable waterways, low-cost silicon supplies and enviable hours of sunshine, among other resources. Increasingly, Chinese renewable energy entrepreneurs like Yan are banking on low manufacturing costs, rising world-wide demand and home support to turn a profit on environmentally friendly energy. Embracing wind, solar, hydropower, and biomass technologies, they see opportunity in China’s blackened skies, mine-scarred earth and poisoned rivers.
In the past two years, the number of wind-turbine manufacturers in China has more than doubled, and China is currently the world’s leader in the construction of small hydropower projects. China boasts around 400 solar photovoltaic (PV) companies, 16 of which are publicly traded. With government investment in the industry on the rise, these numbers are only expected to grow.
China’s potential capacity for renewable energy is astonishing, says Jodie Roussell, associate director of the American Council on Renewable Energy. “China is installing more power right now than any other country in the world, and it has fantastic renewable energy resources,” Roussell says.
The Chinese Meteorology Research Institute estimates China’s wind-energy resource, the potential capacity of wind-generated energy in the country, surpasses all of Europe combined. The country’s potential for solar, with a resource of over 2,200 hours of sunshine each year, beats Germany, the world’s leading market for solar PV, by around 50%. Hydro-powered electricity and biomass boast equivocally impressive numbers. The country’s energy demand growth has outstripped GDP growth two years running, and the future demand for renewable energy could also be huge, Roussell adds.
It’s a combination that, for many companies, is hard to resist. As domestic manufacturers grow in number, foreign companies are also entering the market in expectation. “There is more opportunity for investment right now in China,” says John Yan, who started his company in the U.S. and moved to China after struggling to find investors. “People are interested in this kind of technology.”
For the time being, many domestic companies, including Yan’s, are catering mainly to foreign demand — exporting to countries like Germany and Spain that have established subsidies and pay a high premium for every kilowatt of renewable energy. Although Chinese renewable energy subsidies are not as generous, the industry here has the advantage of low-cost labor and manufacturing. But Yan says he is waiting for the moment when China makes the change.
The Renewable Energy Law released in 2006 might catalyze the change for which Yan and others hope. It established significant goals for the use of renewable energy throughout China. By 2020, the government aims for 16% of the country’s primary energy to come from renewable energy sources. Thirty percent of the country’s total energy capacity is expected to be renewable, including both urban power grids and single-family power systems used in rural areas. Favorable subsidies and pricing systems have been promised, and the target for investment has been set at 800 billion RMB (100 billion USD).
The law’s main impetus was industry, not concerns about pollution or energy security, says Ailun Yang, the climate and energy campaign manager at Greenpeace China. “It’s about them wanting renewable energy to play a role in the Chinese energy mix. If they want renewable energy to really play an important role, it’s quite important that it become commercially successful.”
However, despite the fact that the law has made many in the renewable energy world look at China in a new energy-saving light, many companies are still waiting to see the benefits – important implementation rules have yet to be detailed. In the meantime, entrepreneurs like Yan continue to rely on exports, keeping a watchful eye on China’s developing policy.
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To witness the investment and industry renewable energy can create, China needs look no farther than its rivers and lakes. Today, one-third of China’s counties rely on some form of hydropower. Long before the renewable energy law was announced, dams, now second only to coal in terms of production capacity, dotted China’s largest rivers, and thriving hydropower companies pursued foreign markets. The industry is already profitable and already very competitive, says Ailun Yang.
Despite the drawbacks of hydropower, the industry remains strong enough to support more than 100 factories churning out hydropower generators and equipment. Moreover, China has mastered the technology, and the costs are relatively low.
“We have manufacturers for every conceivable size and shape,” says Lin Ning, a project manager at the Hangzhou Regional Center for Small Hydro Power. “There is a lot of export going on.” The challenge to overcome, Lin says, is that many of China’s large water resources are already developed. New entrepreneurs are beginning to take advantage of a growing market in China for small hydropower projects because the set up cost is very low, Lin says. And government incentives have driven profits from the small dams even higher.
Jack Wen, China region executive for General Electric (GE), also sees great potential for the Chinese market — even for foreign companies. “One phenomenon you see in the hydro world in China is there are so many suppliers — having a niche is important,” he says. “Once you’re established, though, China is aggressively building their hydro, and there is a lot of opportunity.”
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Like hydropower, today solar PV production in China testifies to renewable energy’s enormous profit. But the solar industry’s business prospects weren’t always so bright.
“When we formed in 1999, we thought we would sell domestically,” says Ma Shusheng, CEO of Shanghai Solarpanels, and one of the founders of solar PV manufacturer Shanghai Topsolar. “We found out pretty quickly that we were wrong.”
The technology was available, the manufacturing facilities were in place, but the demand was slack. Money from a few programs promoting rural solar power in the late 1990s had dried up. By the beginning of 2003, many solar PV manufacturers were about to give up. Fortunately, at that year’s end, progressive solar programs and a global lack of silicon led countries like Germany and Japan to start looking abroad for their solar PV, Ma says. They found China. “We Chinese can make a PV module out of a stone.”
Ma’s boast isn’t far from the truth. At the time, Chinese manufacturers were able to make PV with a lower grade of silicon. The electricity production wasn’t as strong, but many buyers didn’t care.
In addition to export demand and good timing, the success in PV has also been due to individual leadership, such as that of Shi Zhenrong, founder of Suntech Power Holdings, China’s largest solar PV manufacturer. Shi brought expertise back from studying the technology in Australia. When he took his company public in 2005, he became, for a time, the richest man in China. Following his lead, and taking advantage of that international shortage of silicon, a number of newly formed Chinese companies are vying for shares of markets from California to Eastern Europe where strong subsidies make the expensive technology viable.
“Solar PV in China is like the Old West in the U.S. – you dig anywhere and you find oil, steel or gold,” says Ma. “The technology is simply charming – every part of production opens up new opportunities.”
According to the solar research firm ENF, PV production capacity increased by more than 200% in 2006. Since Suntech went public in 2005, the number of solar manufacturers in the country has more than doubled. Other companies have taken the opportunity to move away from PV manufacturing into industries like solar heating and solar towers that use mirrors to concentrate and capture the sun’s rays. China is currently the largest installer of solar heating systems in the world.
While many Chinese manufacturers have well-established bases at home, they are still waiting for China to increase demand, Ma says. The price of solar PV is still high and the government has yet to create a working incentive program. “The China market will explode when we develop a real working policy. We are all hungry; we’re waiting for our mother to feed us.”
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Even though water and the sun take the lead, wind blows strongly in China. Wind-energy production capacity has increased by 80% in the last year. In the past two years, wind farms have been built from the dry plains of Inner Mongolia to the soggy fields surrounding Shanghai. Several projects have also been slated for construction offshore. Moreover, its manufacturing industry, churning out turbines and generators, entirely depends on domestic demand.
Compared to solar and hydropower, China’s wind manufacturers are newer and less established, particularly on a global scale. Technology and expertise in China lags behind that of Western companies that have been manufacturing turbines for years. Despite the drawbacks of the industry, Eric Martinot, a visiting professor at the Tsinghua–BP Clean Energy Research and Education Center at Tsinghua University, predicts that wind is going to be the largest renewable energy market in China. “This is an industry that is accelerating from almost nothing.”
He attributes the industry’s success to China’s strong wind resources from the plains of Inner Mongolia to locations down China’s coast. China has also built up its technology quickly and aggressively promoted a domestic wind-energy business. Ten years ago, Chinese companies supplied only 23% of the turbines used in China. Today, all large wind-farm projects go to domestic companies. The change is due, in great part, to the way China’s government determines what energy companies are awarded the country’s largest wind-energy projects.
For example, while Western countries will generally determine a set price for each kilowatt of wind energy, China establishes prices through a bidding system. An energy company hoping to win a wind-farm contract will place a bid offering to develop the project in return for a certain price for each unit of energy the project produces. Critics of the system say bidding leads to impossibly low pricing, forcing many foreign manufacturers out of the running and leading to the installation of much cheaper and less reliable wind turbines. Local manufacturing foreign companies are also required to have at least 70% of their equipment manufactured in China.
In response to demand, the number of turbine manufacturers in China has increased from a small handful to around 40. Newcomers often focus on smaller projects. To improve their technology, many form joint ventures with Western firms, or simply buy the rights to turbine design and technology.
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While some foreign companies struggle to compete in wind, others are turning their attention to China’s relatively undeveloped market for biomass – a technology that turns organic waste into fuel or electricity.
“The market at this point in time is not very big,” says GE’s Jack Wen. “But given the water problem I see in China and chicken farms and pig farms and the amount of waste being generated, the industry has great potential. GE is exploring turning everything from landfill gas and chicken waste to the residuals from their water treatment facilities into electricity. Currently, China’s largest ethanol plant relies on a surplus of corn from China’s Jilin Province. Another large factory under construction in Guanxi Province will explore the use of the plant cassava as a fuel source.
Mark Begert, former CFO of the Shanghai-based Linktone Ltd., recognizes biomass as a nascent market with real growth potential. He is now raising a US-based venture capital firm, Future Energy Assets, LP., which will make one third of its investment in China’s clean tech and energy companies – exactly the kind of interest and support that Yan, Ma, and hundreds of other likeminded entrepreneurs are counting on for survival.
With solar and hydropower, Begert says, China has proven its ability to develop the technology and the manufacturing expertise in renewable energy. Newer markets, like wind and biofuel, are of particular interest to investors. “The bigger opportunities in biofuels are such that you would suspect that the large oil and gas state-owned, state-run corps that have close ties to government would be more aggressive in wanting to control them,” he says.
Begert is keeping watch on the feed stock industry – a potential supplier for ethanol plants. “It will be interesting to see how they could use new technology to generate energy,” he says. It could be anything from waste to sorghum—or sugarcane.
Global renewable energy companies are also trying to get into China in time to access China’s domestic market. “What you’re seeing is large corporate conglomerates that are also manufacturers in the renewable energy space. They’re going over to China and they’re setting up joint ventures with domestic manufacturers,” Begert says. “That’s sort of been the initial stage.”
Implementation of state-run agency policy that encourages the biomass and biofuel industries has also just begun. Recently, China’s State Forestry Administration announced plans to set aside 200 million acres for biomass production. Even the Chinese National Petroleum Corporation has agreed to clean up its act and provide thousands of tons of biodiesel each year. The government has also been exploring the use of organic waste to make fuel. By 2020, China will comprise 50% of Asia’s biofuel production.
The next stage, for both investors and manufacturers, will rely on China’s own renewable energy policies being put into practice. “The Chinese government is offering increasing support and will be offering some very interesting incentives in the near future,” Begert says. “A lot will depend on what happens next.”
What’s next for Shanghai Aeolus, Yan hopes, is international success. The entrepreneur has his sights set on Korea’s streetlights, Spain’s fields, and rooftops around the globe. “In about half a year I think people all over the world will know about us,” Yan says. “We entered the industry because we believe there is a lot of space to grow.”
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