G8. All eyes are on the US as G8 climate talks in Hokkaido are held next week. The US ranks dead last amongst the eight nations in terms of climate action according to a report recently released by the World Wildlife Federation and Allianz, the insurer. Though not an official member of G8, delegates of major developing countries such as China will be in attendance. China maintains its position that developed countries should lead the way on binding measures to reduce emissions, but says it is open to “discussing longer-term commitments, and Tokyo’s proposals for emissions goals for specific industries.”

Californication.  But Americans are not waiting for the US federal government to act. Previously, I highlighted the efforts of JUCCCE. China Dialogue also recently ran an interesting piece highlighting the efforts of several Californian institutions taking the lead in collaborating with China on clean energy issues, including the China Energy Group (part of the US Department of Energy’s Lawrence Berkeley National Laboratory), University of California—Berkeley, the utility Pacific Gas and Electric, US-China Green Energy Council and Energy Foundation. Just last week, California announced its ambitious plan to stabilize greenhouse gas emissions at 1990 levels by 2020.

Crossing the Straits.  Meanwhile, cross-straits relations reached a milestone with the first commercial flights in 60 years between China and Taiwan resuming today. In his short tenure at the helm so far, the new Taiwanese President, Ma Yin Jiou, has already brandished his environmental credentials. The Green Leap Forward hopes that the this new era of cross-straits relations will also mark a new avenue of clean energy and environmental cooperation. As a start, check out this zany but cool and high-tech idea of increasing efficiencies of mass transit using a “train that never stops,” courtesy of a Taiwanese inventor Peng Yu-lun (note expressions of audience towards end of video):

Plastic Bags. Finally, a look at how China’s plastic bag regulations, one month in, are faring.  Comapre the upbeat review by Worldwatch with the more sobering and mixed observations of China Environmental Law. My personal experience in Beijing has been that free plastic bags are still being freely doled out by street vendors and markets, which makes me wonder, what percentage of Chinese consumers shops in supermarkets and department stores anyways?  It will be interesting to see how enforcement of the regulations play out.  Either way, the era of free/cheap petrochemical-laden plastic bags have to come to an end as oil prices march towards US$300.  Planet Earth could certainly do without plastic soup.

If you’ve read Elizabeth Economy’s The River Runs Black or The New York Times’ doom-and-gloom Choking on Growth series, you’ll probably have a rather bleak picture of China’s water problems. Here’s a run-down on the unique factors shaping China’s water situation:

1.  Demographic Mismatch

There is a two-fold demographic mismatch. First, China has about 20% of the world’s population, but only 7% of its water resources to sustain it. Second, there is a stark regional north-south imbalance. According to the Asia Times,

Only 14.7% of the country’s water is distributed in the vast areas to the north of the Yangtze [River], where the amount of arable land accounts for 59.2% of the national total, and the population makes up 44.4% of the total. The per capita share of water in Tianjin municipality in northern China is only one-10,000th of that in Tibet.

There are ambitious plans to build a south-north water diversion project from the Yangtze River to Beijing. First proposed by Mao Zedong in 1952 but only approved by the State Council in 2001, the project will cost a whopping US$60 billion, twice the cost of building the Three Gorges Dam. In the meantime, Beijing is relying on stop-gap water diversion measures from neighboring Hebei province to ensure sufficient water supply for the upcoming Olympics. A newly released report by Probe International provides a blunt critique of Beijing’s water policies over the past 60 years.

2.  Growing Demand

The growing demand for water is underpinned by China’s continued industrialization with per annum GDP growth of 9 to 10%. As The New York Times points out, “[i]ndustry in China uses 3 to 10 times more water, depending on the product, than industries in developed nations.” The Clean Tech Revolution cites a US EPA report that says that it takes 40,000 gallons of water to manufacture a car and 60,000 gallons to manufacture 1 ton of steel; presumably, the water requirements for such processes are even higher in China.

As global food prices soar, policies to encourage grain self-sufficiency will stimulate more grain agriculture, a very water-intensive practice. Increasing proportions of meat in Chinese diets will add additional strains on water; reportedly, some 260 gallons of water are needed to produce 2.2 pounds of wheat and 3,380 gallons of water are needed to produce 2.2 pounds of beef.

As China’s energy demands soar, the construction of new coal, and soon. nuclear plants, both of which require large sources of water, energy consumption must surely become a new performance metric in assessing viable future energy options. The Green Leap Forward will delve more into the water-energy nexus in a future post.

3.  Pollution

The concentration of heavy industry along water sources means that at least 70% of China’s rivers and lakes are polluted and half of China’s cities have contaminated groundwater. Low sewage treatment rates (STR) are largely to blame, which according to water company, New China Ventures, stand at 42% for the whole country and is as low as 20% in most third-tier cities. Low sewerage treatment fees in Southern China have been blamed for underinvestment in sewerage works in that region. Hopefully, the current five-year plan to up STR to 70% will reverse this trend.  For a more detailed study on China’s water pollution woes and some policy recommendations, check out this World Bank report.

A revised water law has been passed that significantly raised penalties for pollution and civil society has ramped up its efforts to improve pollution enforcement. The Institute of Public & Environmental Affairs (IPE), an NGO directed by leading Chinese environmental crusader Ma Jun, has set up the China Water Pollution Map, a publicly-available database on water pollution information aimed at increasing transparency on pollution violators.

4.  Management Challenges

There is a lack of cross-province coordination and transparent decision making, making water rights planning difficult in Northern China. Said Christine Boyle, a Beijing-based Fulbright Scholar on China water issues and a project consultant to IPE’s program on building corporate accountability for a green supply chain, in an exclusive interview with The Green Leap Forward:

Despite presence of the Yellow River Conservation Commission to integrate the Yellow River management, provinces remain highly territorial over their rights to river water.  However, there is no formal property rights system for water (e.g. “prior appropriation” or “riparian rights”), so the ways water planning works is kind of a black box with no transparent-decision making and no public participation).  This makes it very difficult to assess future demands, needs, and supply of water for future projects.

Furthermore, Boyle explained, there is limited oversight of small-scale upstream water withdrawals, making accounting for water volumes very difficult:

There are as many as 10,000 diversions off the Yellow River, mostly by villages and irrigation districts pulling water for irrigation.  This contributed to the unexpected drying up of the Yellow River for over 100 days in 1997.

Boyle further points out that in Southern China, the high number of transboundary rivers originating on the Tibetan Plateau (Mekong (Lancang), upper Indus and Brahmaputra rivers) limits the political feasibility of water project development on these large and relatively undeveloped rivers.

A pilot project described by China Dialogue is underway in Chongqing to introduce water rights trading that will surely garner nationwide attention.

5.  Complex PPP Operating Structures

Unlike its booming and well-finance renewable energy industries, China’s water infrastructure is more heavily dependent of foreign inputs of capital, technology and management. Yet, such dependence understandably stokes up fears of water privatization and water tariff increases. Water tariffs in China have traditionally been kept below cost on the principle that it is a fundamental resource that should be universally accessible. One might argue, however, that it is precisely this undervaluation of the true cost of water that has caused overdepletion of its water resources. The debate on the privatization of water may not be fully settled, but it is an unambiguous global trend that represents increasing market-orientation of water services.

However, regulatory complexities in China do not make it easy for private investment in this sector. There is a bewildering array of models that public-private partnerships (PPPs, defined as contractual arrangements between a public sector agency and private entity whereby resources and risks are shared to develop public infrastructure or deliver a public service/good) could take. Click here for a detailed primer on PPPs, courtesy of a Canadian government study. At a recent water conference in Beijing, Cleantech Group, observed that:

Speakers detailed the pros and cons of the confusing array of private/public partnership (PPP) models currently experimented with in the water industry in China, including build-own-transfer (BOT), build-own-operate (BOO), build-transfer-operate (BTO) and design-build-operate (DBO) for greenfield projects. Other models include transfer-operate-transfer (TOT) for existing treatment facilities, and a structure called foreign invested venture capital enterprises (FIVCE) when local Chinese ownership was still desired. The more popular arrangement, however, was offshore holding so as to facilitate IPOs on international exchanges.

The article goes on to suggest that experts do not foresee any PPP model standardization anytime soon.

So What Now?

The urgency of China’s water problems is not lost on the Chinese government.   Water quality and quantity issues figure prominently in the Ministry of Environment’s five year plan for 2006-2010 (available here). We all hope the government is aggressive about pursuing these objectives as it is with regards to it energy efficiency targets.

On the business side, the water crisis represents a big opportuinity. According to a People’s Daily article:

In its 11th five-year plan, the Chinese government projected that the total investment in its water sector would amount to almost RMB1 trillion from 2006 to 2010. Of this, some RMB300 billion would be for investments in sewage and water reclamation projects, and RMB100 billion for rehabilitation of the water supply network and infrastructure. Projects to divert supplies to cities suffering water shortages will also attract large investments.

A number of foreign companies are making notable forays into China to help slake China’s thirst. They can be divided into two general categories:

A.  Technological/Product-driven Solutions

Three American companies are bringing their products to China to address different aspects of China’s water woes.

GE sees large opportunities in China. It is helping steel giant Baosteel Group increase its water efficiency and will deploy its membrane bioreactor (MBR) technology at Taihu, China’s third largest lake that has received a lot of recent bad press for its massive algae-blooms.

Technology for desalination—essentially converting seawater to freshwater—will gain increased investor attention with the imminent IPO of California-based Energy Recovery,Inc. (ERI), a maker of energy recovery devices for salt water reverse osmosis (SWRO) desalination systems, which consists of pushing seawater through filtering membranes under high pressure conditions, to produce freshwater. Desalination is not a new technology, but has been slow to catch on due to high capital costs and energy requirements. Advances in cost reductions and energy efficiency is bucking this trend. For instance, the SWRO process is replacing thermal processes (the boiling of sea water and condensation and collection of the resulting steam in the form of freshwater) as a more energy efficient means of desalination. Citing Global Water Intelligence, the company says in its IPO prospectus that China’s desalination capacity is expected to grow approximately 24% per year from approximately 600,000 m³/day in 2005 to over 5.3 million m³/day by 2015. ERI’s PX line of pressure exchangers has only one moving part, a ceramic rotor, that transfers pressure energy from the high pressure concentrate/reject stream to the low pressure seawater stream — allowing it to recycle its own energy and reduce its consumption by 60 percent and achieving a 98 percent energy efficiency (click here for more details on ERI’s PX technology). The company says that over the last five years, its PX device was selected for 14 new SWRO plants in China, which it believes represent a majority of the new SWRO plants commissioned during the same period. One such plant is at the Yuhuan Power Station in Zhejiang province.

Energy Recovery’s PX Technology

Watts Water Technologies, another US company and listed on the New York Stock Exchange addresses the global water issue from different part of the value chain—the pipes and valves that make up the water distribution system. Besides locating a portion of its manufacturing operations in Tianjin, Taizhou and Ningbo, Watts also participates in the China domestic market through its 2006 acquisition of Changsha Valve Works, which at the time of acquisition sold large diameter hydraulic-actuated butterfly valves for thermo-power and hydro-power plants, water distribution projects and water works projects in China. As Watt’s management explained in a recent earnings call, they have had some setbacks in their China operations this year, not least being the ice storms that affected their Changsha facility adversely, but they remain firmly “bullish on the Chinese domestic market.”

B.  Facilities Management

A different approach is more service oriented, focusing on operational and management experience rather than cutting-edge technologies or products.  The following companies provide utilities services, seeking to finance, build, own and/or operate water treatment, recycling or distribution infrastructure throughout China:

Veolia is a French-based water utility and the largest in the world and is making its presence felt in China as well. In its green issue last year, Vanity Fair provided an interesting account of Veolia’s exploits in Liuzhou, Guanxi Autonomous Region, and Shanghai Pudong. Veolia also entered into a major joint venture in Tianjin last year to provide comprehensive water treatment services.

The next group of companies are from Singapore, which has very quickly established itself as an international water hub.

Sembcorp owns and operates wastewater treatment, water recycling and water treatment facilities, particularly for industrial purposes, in Singapore, China, UK and the United Arab Emirates. In China, it has recently signed agreements to develop water recycling plants and a R&D center in Zhangjiagang, Jiangsu province, expanded wastewater treatment capacity in Nanjing, Jiangsu province, and committed to develop centralized utilities projects in Qingzhou, Guangxi province.

Hyflux, has established a strong presence in China, with 44 different assets covering wastewater treatment and water recycling across the nation, in Anhui, Liaoning and Shandong among other provinces. It is also building China’s largest desalination plant in Tianjin using its proprietary ultra-filtration technology Costing about US$115 million, the plant will have a capacity of 150,000m³ per day. According to Reuters:

Sam Ong, the company’s deputy chief executive, said that he expected annual growth in China of 20 percent to 40 percent and that Hyflux was looking to fund new plants.

“We are in a sweet spot right now targeting second-tier cities in China; the global guys aren’t in this market, and the local players don’t have the technological know-how,” Ong said, referring to cities like Chengdu, Hefei, Xi’an and Xiamen.

Other Singapore based companies active in China include Dayen Environmental, Darco, Ultra-flo and Asian Environmental Holdings. But perhaps what China’s cities can best take from Singapore more than any single investment by a company or deployment of technology are the lessons taught by Singapore’s highly successful systems-level and integrated approach to urban water treatment, catchment, storage, distribution, recycling and recovery, as documented in this paper…or risk becoming another Iraq.

As a sidebar, what does everybody think of the bottled water industry?

Energy cooperation was one of the key issues that underpinned the fourth US-China Strategic Economic Dialogue held last week. Vice-Premier Wang Qishan, the head of the Chinese delegation released a statement calling for increased cooperation between the two sides on several fronts, including R&D, coordinated energy policies and increased bilateral dialogue. The energy discussions culminated in a commitment to negotiate a ten year energy and environment agreement.

Encouragingly, however, a handful of individuals and organizations have not waited for any ink to be spilled in the diplomatic arena before jumping into action. One such individual is Peggy Liu and her organization called Joint-US Cooperation on Clean Energy (JUCCCE).

The Juice on JUCCCE

JUCCCE was founded in April 2007 by Peggy Liu, a former McKinsey management consultant and COO of Mustang Ventures, a Shanghai-based venture capital firm. The organization was launched out of the MIT Forum on the Future of Energy in China held last year in Shanghai, where JUCCCE is also now based.

JUCCCE is a non-profit incubator of cleantech and energy efficiency capacity building institution initiatives seeking to serve, as Liu describes it in the video below, “a single bilingual and bicultural organization that will act as a hub of information exchange and cooperation” on clean energy in China. Based on the observation that China’s rapid development has it compressing 30 years of industrialization in the space of ten, JUCCCE has set itself a ten year mandate to create a legacy of self-sustaining, local capabilities. Tapping into Liu’s vast network of top minds whom she has become acquainted with as a result of her stints at consulting and venture work, JUCCCE conducted a comprehensive study of the Chinese energy industry and identified a dozen key projects designed to create the greatest impact in the shortest amount of time. What I love is the Chinese name for the organization, which is 聚思 (jǘ sì), which is not only a phonetic translation of the acronym, but by itself literally, and appropriately, translates in English to “collective thought” or “coalition of thinkers.”

Underpinning JUCCCE’s philosophy are three fundamental observations (the need to accelerate information flow, need for integrated urban planning and need to strengthen supply chains) which Liu describes in the following video:

Based on these observations, JUCCCE has formulated a three-pronged approach of education (skills building and leadership development at every level through effective channels), collaboration (with international and local institutions, taking advantage of web-based communications) and deployment (of customized green strategies for specific industrial sectors).

On education, Liu elaborated in an exclusive interview with The Green Leap Forward:

China doesn’t have an energy policy problem [GLF note: see, e.g. the various progressive policies that this blog has highlighted in its maiden post], rather, it has an energy workforce problem. We can have all the solar panels we need free of charge and that will not be enough if we don’t have the necessary skilled people to install these systems and maintain them. So, we believe that people matter…Education and skills building are very important.

Liu continued to explain that the ability to implement these progressive energy and environmental policies or programs is most effectively achieved through the strategic targeting of “channels of decision makers” rather than individual decision makers. Because Liu wants to teach the Chinese how to fish rather than catch the fish for them, JUCCCE’s programs are designed to be replicable and scalable. Let’s take a look at two of JUCCCE’s programs that Liu described for The Green Leap Forward, and that targets the decision-making channels of mayors and schools, respectively.

Mayoral Training on Energy Efficiency

One program is the Mayoral Training for City-level Energy Efficiency Programs, which was announced as a one of the commitments under the Clinton Global Initiative in 2007. As the name of the program implies, JUCCE is planning workshops to equip mayors of cities nationwide with energy efficiency solutions to deploy in their home jurisdictions. JUCCCE will partner with international experts and energy efficiency solution providers (many of which are multinational corporations) in order to build a web-based database of best practices and products, sector-by-sector, that can be presented to, and easily deployed by, the workshop participants.

The importance of focusing on cities is obvious. I have previously highlighted a McKinsey report on China’s rapid urbanization to facilitate the largest scale of rural-to-urban migration in history—approximately 350 million by 2025. “In China, city mayors are the kings of their fiefdoms, so it is really important to target them,” explains Liu, referring to the broad authority of city mayors in determining economic and development policy. This acceleration of information flow of best practices/products targeting mayors as key channels of decision making becomes even more effective when coupled with the State Council’s new policy to include environmental and energy efficiency criteria in the promotion evaluation of local and provincial bureaucrats, as well as the national goal of increasing energy consumption per unit of GDP by 20% by 2010 (see here).

Shanghai Lighting Program

Another noteworthy JUCCCE program involves the replacement of 10 million conventional incandescent light bulbs with energy efficient compact fluorescent light (CFL) bulbs in Shanghai. The brilliance of this lighting program is two-fold. First, it targets youth by directly enlisting the help of Shanghai school children for distribution. Each student will receive up to 18 CFL bulbs and will be asked to bring back an incandescent bulb for every CFL bulb they replace it with. Liu conservatively estimates that the program will reduce approximately 2.2 million tons of carbon dioxide emissions over the lifespan of the CFL bulbs. This is environmental education at its best— empowering the young to recognize that little actions can make a difference by coordinating and aggregating individually small efforts into part of a large-scale city wide program with substantive results.

Second, the method of financing the program is highly innovative. The purchase of the CFL bulbs will be made by proceeds from advertising on the packaging of the CFL bulbs and by the clean development mechanism (CDM) under the Kyoto Protocol. JUCCCE and its partners are exploring the possibility of structuring the project as a programmatic CDM, which I have previously described in the context of Xiamen’s ecocity efforts. Although Liu recognizes the legal and technical complexities involved in structuring such a CDM project, she is hopeful that such a program would be approved by the CDM authorities as it would represent of the first energy efficiency lighting programs to ever use the CDM.

Liu expects the program to launch in the next six to seven months, but JUCCCE has in the meantime partnered with Citi and GE to hold a pilot program distributing 10,000 CFL bulbs last November (pictured). The hope is that the success of this larger CFL lighting program can be adopted and replicated in cities across the country.

Why JUCCCE Matters

What makes organizations like JUCCCE so important in tackling the energy and climate challenges of our day is that it effectively bridges the gaps between the public and private realm. In the vocabulary of an economist, it helps correct market failures such as free rider problems and information asymmetry and creates incentives or platforms for businesses and policy makers to undertake clean energy initiatives that they would not normally undertake. This is demonstrated well in the two projects described above. In the case of the mayoral training program, information asymmetry is overcomed by the creation of a web-based database. In the case of the Shanghai lighting program, financial barriers are overcome through the use of innovative financing techniques.

China, and the rest of the world, needs institutions like JUCCCE to “fill in the gaps” because of the limitations to motivations/incentives inherent in political and commercial institutions to take action. The Green Leap Forward looks forward to profiling more innovative organizations like JUCCCE that are breaking silos to redefining how all stakeholders can think about tackling our energy and climate crisis.

China will raise the prices of gasoline and diesel prices at the pump by 17 to 18% and aviation kerosene by 25% starting today (June 20), and of electricity by some 4.7% starting July 1, according to the website (Chinese only) of the National Reform and Development Commission (NDRC). See also the news report by Xinhua.

These dramatic announcements coincide with the week-long high level fourth US-China Strategic Economic Dialogue (SER) in Anapolis, Maryland, USA, perhaps partially as a symbol of goodwill on China’s part. (Incidentally, the announcements also coincide with China’s annual publicity week for energy conservation.) The parties also committed to negotiate a 10 year cooperation agreement on energy and the environment. China Environmental Law reviews the basic framework of the agreement.

Pump and electricity prices in China are set by the government. These prices have been criticized as being artificially low, subsidizing China’s growing appetite for energy, and have been blamed (perhaps a little unfairly) for fueling the hike in world energy prices. Other than an 11% in crease in prices at the pump in November of last year, the government have been largely reluctant to raise prices for fear that it may exacerbate inflationary woes and hit the pockets of the poor.

On the other hand, we have already received indication from government policy statements and the draft Energy Law that some form of energy price liberalization can be expected. Though Beijing has stopped short of saying that it would allow energy prices to be completely subject to supply and demand, it will take such market prices into to account in setting its prices. The announcements come two days after China Environmental Law ran an excellent review of a recent and prescient Caijing article lamenting the missed opportunities in electricity price reform. Recently, I have also discussed to the need for energy price reforms.

So the NDRC has responded. It is not a complete liberalization of energy prices, but it is a better than expected start, i.e. a green leap forward.

Surging Crude Oil Prices

The recent precipitous run-up of oil prices from US$100 to nearly US$140 per barrel since February and the continued massive losses incurred by state oil refiners, especially Sinopec, which has to purchase crude oil on the open market at market prices but can only sell refined gasoline in the China market at fixed, low prices, is perceived as a major impetus to NDRC’s price hike move.

The NDRC has assured the public that the fares for railway passenger transport, urban public transport, rural road passenger transport and taxis will not be affected. These safeguards are to be commended as it sends a policy signal that public mass transit (okay so taxis don’t count) are energy saving transportation modes to be encouraged. The NDRC also made clear that liquefied petroleum gas, natural gas prices would not be affected.

Coal Power Also Getting More Expensive

On the electricity side, a Q&A (in Chinese only) on the NDRC website reveals that part of the rationale of electricity price increases is the reflection of the increased adoption of renewable energy power by the grid, and the need to cover the higher costs of such energy sources. If that is indeed true, I am encouraged. I have previously argued that central to the policy adopting feed-in tariffs, which is considered the most successful renewable energy policy as proven by its track record in Europe, is the sharing of the higher costs of renewable energy power across all users of power. This cited rationale for the electricity price hike send the message that the government is indeed willing to push the sharing of the cost burdens of renewable energy, true to the black letter law of the Renewable Energy Law of 2006, and gives me optimism that we shall one day see feed-in tariff policies in China.

The other stated reasons for the electricity price hike are the to rising costs of the country’s power plants, including rising coal prices (the NDRC also announced that it will cap coal prices starting at the end of this year, leading some analysts to forecast increased Chinese coal exports), increased costs on desulphuration facilities and investment in grid upgrading. The cynic in me believes these direct pressures on the coal power industry is a more likely reason for the electricity price hike (coupled with the coal price caps) than the desire to promote renewable energy. Still, I am not complaining.

To mitigate inflationary concerns, the electricity price hikes are also subject to significant exceptions. Urban and rural residents and sectors of farming and fertilizer production, as well as the quake-hit provinces of Sichuan, Shaanxi and Gansu, will be exempt from the electricity price rise. Thus, the hoped for behavioral changes really target commercial and industrial enterprises rather than individual consumers. Nevertheless, consumers may still feel the pinch to the extent that businesses are able to pass the increased energy costs of producing/providing their products/services to consumers.

Inflation Concerns and Opportunity for Productivity Gains

However, one observer believes that rather than hurting the pockets of cosumers, higher energy prices offer an opportunity for industry to boost productivity. Says Robert Bohlm, an investment banker, in a China Daily op-ed:

Will high oil prices cause China’s economic growth to slow? … Not unless the high oil prices are inflationary, in other words, not unless they increase too fast the demand for money whose supply is controlled by the central bank and is reflected in how low interest rates are. But China is capable of further massive improvements in efficiency (think of the huge potential for eventual large-scale industrial farming) that can more than make up for the impact of any price increase on inflation..Accordingly, companies have two ways to face cost increases—raise prices to customers (and risk inflation) or increase efficiency and productivity.

The more companies can pass through cost increases by raising prices, the greater the risk of inflation. The more companies can offset cost increases by increasing the amount of output per unit of higher-cost input, the less likely inflation is…China has huge still-untapped productivity improvement potential far more basic than the benefits of the Internet economy. These should enable China to experience non-inflationary domestic price increases, while rising income from the growing economy enables consumers to pay higher prices and still consume and save more.

My question is–can’t we have our cake and eat it too? Can’t we increase productivity and energy efficiency, while also consuming less?

UPDATE 7/2:  Daniel Ikeman of the Cato Institute says these price hikes are simply not enough in The Far Eastern Economic Review.

I attended the inaugural Western China Photovoltaic Industry & New Energy Development Forum which was held in the city of Chengdu, Sichuan province earlier this month (June 5-7).

A full transcript in Chinese of the proceedings is available here.

A recurring theme was the need to develop China’s domestic PV market. Although China is among the largest producers of solar photovoltaic (PV) cells in the world, over 90% of such PV cells are exported, leading Shi Dinghuan (石定寰), causing the Chairman of the Chinese Renewable Energy Industries Association (CREIA) to lament that China ships out its clean energy only to leave pollution (i.e. coal fired power generation) behind.　At the end of last year, just 80 MW of solar PV was installed in China compared to almost 6,000 MW of wind energy. But more on this paradox later. Let’s first see how Chengdu (成都）and Shuangliu (双流) in Sichuan province are seeking to leapfrog Jiangsu province and Baoding (in Hebei province) as the solar PV manufacturing hubs of China.

Sichuan: the Solar Gateway to the West

Sichuan is pushing solar as its next pillar industry. The governments of Chengdu and Shuangliu have established the Chengdu/Shuangliu Photovoltaic Industrial Park. The goal is to turn the region into a “Western Solar Valley” (“西部光谷”) and achieve RMB 100 billion in annual output. On the first day of the conference, some 17 agreements amounting to RMB 14.5 billion in investments into the Solar Valley were penned.

China has abundant solar resources, with solar irradiation comparable to areas of corresponding latitudes in the US, and comparing favorably over areas of corresponding latitudes in Japan and Europe (click here for Greenpeace’s China Solar PV Report 2007). Tibet, in particular, boasts the best solar irradiance of all of China, in part due to its elevated altitudes which greatly reduces irradiance diffusion. The development of a vibrant solar industry in the western regions is also consistent with the national “Go West” policy of developing China’s interior western and remote regions that have traditionally lagged behind the coastal economies. Incidentally, it is these very western remote regions that are homes to a significant portion of the estimated 15 million people in 2006 with no access to electricity. Distributed energy solutions such as solar PV, among others, can be the most cost-effective sources of power in these regions. But as alluded to earlier, these regions are not where the PV panels are being deployed.

In terms of solar PV manufacturing, Sichuan, and Chengdu/Shuagnliu in particular, boasts certain strategic advantages, such as favorable investment policies, an abundance of hydroelectric power and affordable electric power in general, and the availability of skilled labor from surrounding universities. It also a relatively well developed logistics supply chain given the pioneering work of the aviation industry which Chengdu/Shuangliu has up to now built its economic base around. But take a read at this post for a devil’s advocate point of view on shifting supply chains to the western regions.

Some anchor companies at the industrial park include Tianwei New Energy Resources and Apollo Solar, both of which are taking vertically integrated approaches in developing their operations in Sichuan. Tianwei New Energy Resources Southwest Industry Park, a subsidiary of Tianwei Group, will channel some RMB 3 billion into building solar production facilities with a capacity of producing 200 MW of silicon ingots, 50 MW of solar modules and 100 MW of solar cells and a solar research center.

Another recurring theme of the conference was thin-film PV technologies. The solar industry as a whole has hitherto been anchored on silicon based technologies. The recent explosion of solar demand, however, has cause a short to medium term bottle neck on silicon feedstock supplies, providing a boon to so-called “thin-film” technologies which use little to no silicon. Apollo Solar is striving to be the foremost vertically integrated thin-film PV module manufacturer. The competitive advantage of Apollo is that it has mining rights to certain quarries such as Dashuigou (大水沟) and Majiagou (马家沟) within Sichuan province that gives them access key precious metals such as telluride, bismuth, indium, selenium and others that go into making thin-film modules. Some conference attendees told me that the rumor on the market is that it is Apollo which is providing First Solar, the world’s biggest think-film manufacturer based in Arizona, U.S., with its supply of these precious metals. A factory visit to Apollo’s plant revealed metals processing infrastructure and a think film module manufacturing line in place, but nary an employee in sight. Reportedly, operations are to commence this October.

Quantity AND Quality

Anthony Chia, Vice President of Quality Control at Trina Solar based in Changzhou, Jiangsu province, said at the conference that the way to set Chinese module manufacturers apart from the competition is through quality. Until recently, Chinese modules have suffered from an image problem of having lower quality. Although that has quelled somewhat with established Chinese brands such as Trina and Suntech Power gaining increased global market shares, Chia envisions a world market where it is Chinese, rather European or North American institutions that set quality certification standards. In a very real sense, China’s PV module industry is vulnerable to the whims of these quality certification bodies (or if one might dare read into it, protectionist measures to protect local PV industries). For example in Europe, it currently takes three to six months for newly developed module to be approved for sale by one of these quality certification bodies in the European market, explained Chia. Even minor amendments to certification criteria may threaten to extend the approval process to up to a year. The essence of Chia’s message is this: If China is going to be the world’s leading producer of PV modules, does it not also make sense for it to be the standard setter for quality certification?  (I suppose critics might gripe against a potential conflicts-of-interest.)

Domestic Solar Adoption: A Chicken and the Egg Problem?

But I come back to the key issue of developing China’s domestic solar market. There is no doubt that China will have continued success in producing homegrown companies that have mastered the process of low-cost manufacturing and dominate the global PV manufacturing market. But rather than exporting all this clean energy, the Chinese solar industry should think about how it can take steps to develop the local solar market as well.

In my few months of talking to industry professionals, I have gotten the overwhelming sense that everyone is waiting for the government to enact the right policies to spur development. In turn, I have also gotten the sense that the government is waiting for the cost of solar (which in the US costs about 20 to 30 cents per kwh compared to 5 cents for coal-fired power) to drop before it goes all out to push the solar power in the same way it is pushing wind. But the price of solar is not going to achieve these dramatic cost reductions without a scaling up of solar technology deployment, and what better market (for sheerly physical reasons) to scale up solar than in China?

Here’s a preliminary policy prescription from The Green Leap Forward:

• Enact feed-in-tariffs. The National Reform and Development Commission should promulgate comprehensive feed-in tariffs which require grid companies to purchase solar power at preferential tariff rates. These tariff premiums are to be fixed, but also gradually decreased over a period of, say, 20 years. As a possible “safety valve”, these fixed tariff rates can be reexamined periodically to adjust for changing market conditions. The German government, for example, recently reevaluated the feed-in tariffs for solar. The premium that the grid company paid to solar power producers should be spread across all end-users, per the Renawable Energy Law of 2006. The hesitation of Chinese policy makers in adopting feed-in tariffs is something I hope to explore a little more in future posts.
• Strengthen Solar Lobby. Chinese solar companies should actively lobby the government to push ahead with solar policy reform. It is to their advantage, afterall, to develop a broader customer base. The newly established New Energy Chamber of Commerce may provide an avenue for such activities.
• Financial Innovation. Think about innovative ways of providing financing for solar installations. Given the early development of consumer credit in China, it may be some time before we can think of mass solar deployment in the residential sector, so continued advances along the credit front should be encouraged. For now, we should think about how third-party financing arrangements—whereby a facility engages another institution that installs and continues to own the solar panels, but sells the solar-generated electricity to the facility owner just like a utility, thereby relieving the user of prohibitive upfront costs of installing and owning the solar panels—can positively alter cost perceptions to solar power. Such third party financing institutions should target commercial and industrial entities, perhaps with the support of provincial and municipal governments which have energy efficiency and renewable energy goals to meet.
• Technical Capacity Building. Develop the necessary capacity and technical expertise for all steps of the PV value chain, but especially for downstream solar activities such as systems integration, installation, and after-sales services such as performance monitoring and system repairs and upgrades. This will require significant investments in education, but also lead to significant positive externalities such as job creation and spill-over benefits to other electrical engineering sectors.
• Government Procurement. Initiate mass procurement and deployment of PV in government facilities. Not only does the central government setting a right example work in China, but it provides a necessary starting point for the scaling up of PV deployment.  The central government is large enough a bureaucracy after all.
• Strategically Increase R&D. Much hype is generated whenever announcements on breakthroughs in PV conversion efficiencies or silicon wafer thickness are achieved. But there are plenty of cost reductions to be gained in other parts of the solar value chain. Increasing efficiency of polysilicon production, module assembly, balance-of-systems or even installation are all avenues that R&D dollars can be channeled to increase technological (and hence cost) breakthroughs.

These merely represent my initial thoughts on how to push to PV adoption agenda in China. What are your thoughts? Please leave a comment!

If China’s Green Leap Forward fails for whatever reason, it won’t be because of the lack of cash. Generally speaking, it has never been better to be a clean tech entrepreneur or project developer. Investment dollars are pouring in globally from hedge funds, private equity and venture capital funds, multinational corporations and development banks. Take these recent developments, for example:

• The clean development mechanism (CDM) under the Kyoto Protocol, for example, provides the much needed financial lifeblood to take IRRs of wind farm projects over the “hurdle rate.” There has been some criticism about the use and abuse of CDM by some camps, such as a front page article by The Guardian, but I thought China Environmental Law’s response was spot on. China is by far the world’s biggest market for CDM projects, accounting for a whopping 73% of transactions in 2007. Hong Kong joins the CDM fray as well.

• Sycamore Ventures and the China Association of Resources Comprehensive Utilization (CARCU), which operates under the State-owned Assets Supervision and Administration Commission, are to launch a US$ 1 billion dollar Greenstar fund to invest largely in China’s environmental sector.

• The World Bank will provide additional $440 million in loans for three energy efficiency projects. This will constitute one-third of the bank’s loan portfolio in 2008 to China. The three projects consist of energy efficiency financing, desulfurization in Shandong and infrastructure in medium-sized cities in Liaoning.

All this is not to say that China is reliant on external sources of funding. In fact, according to a Reuters report, Gao Guangsheng of the National Development and Reform Commission expects China to fund 90% of its renewable energy development by domestic sources of funding. Separately, Don Ye, founding partner of Tsing Capital’s China Environment Fund, for seven years, and still, China’s only fund 100% dedicated to clean tech investments told The Green Leap Forward, “There’s a trend to self sufficiency both in terms of talent as well as investments. By the end of this year, we expect to see quite a few RMB-denominated investment funds come to the market.”

Provincial and municipal governments are also investing big in renewable energy. The northeastern municipality of Tianjin has committed to invest RMB 200 million a year into mergers and pre-IPO deals in solar, wind and energy storage businesses. The southwestern province of Sichuan is pushing solar development in a big way, as evidenced by last weekend’s Western China PV Conference held in the province’s biggest city, Chengdu (成都). The governments of Chengdu and adjacent Shuang Liu (双流) county, together constituting the aviation hub of China, have now have established the Chengdu (Shuang Liu) Photovoltaic Industrial Park with the goal of becoming China’s “solar PV valley.” I’ll write more about the Western PV Conference in my next post.

There will be occasional bottlenecks to capital availability. Last month, the central government raised bank reserve ratios yet again to reduce liquidity in the market so as to combat inflation. The series of bank reserve ratio increases has resulted in a tightening in the availability of bank loans for renewable energy projects (although these have tend to affect foreign project developers, which are typically last in line, more than the major state-owned enterprise developers, which get priority access to capital) . But such a phenomenon does not detract from the favorable patchwork of investment policies enacted by the central, provincial and municipal governments for clean energy. If I were a betting man, my money would be on the red (the color of RMB 100 notes) to continue chasing the green (energy).

]]> http://greenleapforward.com/2008/06/12/follow-the-money/feed/ http://greenleapforward.com/2008/05/31/xiamen-city-urban-planning-for-climate-change/ http://greenleapforward.com/2008/05/31/xiamen-city-urban-planning-for-climate-change/#comments Sat, 31 May 2008 14:08:23 +0000 Julian http://greenleapforward.com/?p=99

I am really excited.

On May 10 (incidentally, but fittingly, Pangea Day) at the Xiamen Climate Change Symposium held at Xiamen University in Xiamen City, Fujian, I was introduced to an exciting opportunity for Xiamen City to undertake what has potential to be a truly groundbreaking project.

A consortium comprised by CHORA (an urban planning, architectural and research organization based in London), Atelier Liu Yuyang Architects (a Shanghai-based architectural firm), Caspervandertak (a Beijing-based CDM consulting firm) and Xiamen University, each joint-hosts of the symposium, are pitching the idea of establishing Xiamen as an “climate change incubator”—i.e. the creation of an institutional structure for the promotion and development of a series of climate change mitigation projects that will the take the form of renewable energy (RE) and energy efficiency (EE) installations. A key feature of the proposal is the use of financing from the clean development mechanism (CDM) under the Kyoto Protocol.

Architects Raoul Bunschoten of CHORA (right) and Liu Yuyang of Atelier making the pitch in Xiamen.

In basic terms, the CDM is a program in which developing countries, like China, who are not bound by carbon emission reduction obligations, are encouraged to undertake projects in their jurisdiction that result in carbon emission reductions through financing provided by developed countries, who are themselves bound by such obligations and can credit such emission reductions to their obligations, even though those reductions have taken place in the developing country.

Up to now, CDM projects, shaped by the complicated rules that govern them, have almost always taken the form of single large installations, e.g. a biogas plant or a wind farm. However, two alternative forms of CDM exist—“bundling” and “programme of activities” (POA)—which may be better suited for the urban environment. Bundling, as the name implies, consist of a series of small-scale installations can be bundled together under a single umbrella CDM structure. POA is similar, with an emphasis that a private or public body coordinates the implementation of a series of policies or measures that result in emissions reductions. The rules for POA were only recently promulgated at the end of last year.

Bundling and POA allow, for the first time, RE/EE projects that traditionally would not have qualified for the CDM due to not meeting the required threshold size to obtain CDM funding. Examples of bundling projects include the Kuyasa EE projects in South Africa and the distribution of photovoltaic kits in Morocco, while examples of POA projects that are now in the pipeline as a result of these new rules include solar home system installations in rural India through the organization, Grameen Shakti, and biogas projects in Brazil by the meat company, Sadia.

And soon, it is hoped that Xiamen can use CDM as the springboard for a green leap forward. Said Joost van Acht of Caspervandertak:

Coordination between all stakeholders and the engagement of specialized expertise will be crucial to cut through the complexities of the rules governing CDM. This is where the City of Xiamen can play a leading role as an incubator that brings together developers and specialized knowledge on RE/EE technologies and the carbon market which will be the key to successfully take advantage of the opportunities offered by CDM.

Raoul Bunschoten, director of CHORA and the brainchild of this vision for Xiamen, further observes that the use of POA and bundling is perhaps better suited than the vanilla CDM structure for urban greening initiatives:

[U]rban planning is complex by nature, has to address many stakeholders and touches economy, culture, politics and society in many ways, so is closer to a population in a way, but also is inherently complex in terms of management, or should be. This complexity seems to match or map the complexity of POA and bundling [under the] CDM, or at least they can be tuned to each other. New urban planning methods can be a vehicle for POA and bundling applications and processes, and these may need the urban environment to be effective, to get a critical mass of projects and to become visible.

Why Xiamen?

Xiamen, formerly Amoy, is a port city in the southeastern province of Fujian. Metropolitan Xiamen covers an area of 1565 square kilometers and is home to just under 3 million residents. One of the earliest designated special economic zones (SEZs) in China and one of the top ten busiest ports, Xiamen is very visibly not only one of the more prosperous cities I have visited, but also one of the most thoughtfully landscaped, with tree-lined boulevards that remind me a lot about my hometown, Singapore. It is clear that the people of Xiamen place value quality of life, and derive a great sense of pride of the city that they have built.**

[**It was noted by a participant of the symposium that the people of Xiamen have a great sense of pride about their city. It was later explained to me by Dahpon Ho, a Fulbright Scholar doing historical research in Xiamen that a large part of that pride stems from the fact that for several decades after the founding of modern China until only the early/mid 1990s, Fujian and the rest of southeast China did not figure in the economic development plans of the central government and were considered the backwaters of China. As a result of this historical political neglect, there is a feeling among Xiamen residents that the prosperity they enjoy today was accomplished largely on their own.]

Over the past decade, Xiamen has garnered numerous awards for being a green and healthy city. Hitherto, however, none of these awards have likely included the city’s carbon profile into their evaluation criteria. The consortium’s proposal thus represents an excellent opportunity for Xiamen to redefine what it means to be a green, sustainable city, using carbon as a key metric.

As Bunschoten puts it, given the complexities of the CDM, especially bundling or PoA structures, “talking about environmental pilot projects made sense in a city with a desire to be the cleanest city in China.” A recent incident in mid-2007 also underscores the probable acceptance of the people of Xiamen to such a project—a proposal to build a chemical plant was scrapped after significant public outcry over its environmental ramifications.

Not Just Any Other Eco-City Project

The Xiamen proposal is unique because unlike some other China eco-city projects such as Dongtan-Shanghai and Singapore-Tianjin (see previous post), it does not aim to build an sustainable city on a bare piece of land from scratch, but to retrofit an already existing medium sized metropolitan area, a much more complicated endeavor given the need for re-engineering not only incumbent urban infrastructure, but also social and political mindsets of the city’s stakeholders. After all, the implementation of the project will have to be undertaken by these very stakeholders, all of whom have already established a pattern of living, behavior and beliefs.

Furthermore, the consortium seeks not only merely to turn Xiamen into an “eco-city” (a buzzword that is being thrown around a lot lately but is in sore need of a precise definition), but to also consciously redefine how urban planning and governance is carried out. According to Raoul, the Xiamen proposal is driven by the “Urban Gallery” concept—an urban planning methodology developed by Chora. Under this methodology, the relationship of an urban planner to a city is analogized to that of a curator to a gallery. Says Bunschoten, it is a relationship

that links an interactive management of knowledge with negotiation methods for prototypical urban projects. The Urban Gallery is managed by “Urban Curators”…The Urban Curator designs the linking of processes, or in other words designs the organisational form of the dynamics or behaviour of an urban environment, in essence a cybernetic practice…the programmatic CDM process proscribes clusters of projects rather than one large one needing a Curator.

This emphasis on process and social/political dynamics in a context of urban development is profound in that it recognizes a concept of innovation that I have been harping on previously, i.e. the need for social innovation in addition to technological innovation, and the need for disruptive systems over disruptive technologies. Indeed, during the half day symposium, there was scant notion of specific energy technologies that should be considered for the project.

The real challenge at hand, especially given the complexities of a bundling or POA project, is creating the vision, organizational structure and administrative processes to execute a long-term low carbon strategy through the full engagement and coordination of the strengths and interests of all stakeholders. These stakeholders include, but are not limited to, property developers, renewable energy technology developers, R&D institutions, businesses that want to be perceived as green, media, and general public (including minority and underprivileged groups).

Although a full explanation of the parenthetical in the preceding sentence is beyond the scope of this article, it is worth acknowledging that there is an emerging recognition that an eco-city is not self-sustaining if it is built merely with eco-hardware. Eco-software, i.e. values and beliefs systems and practices consistent with sustainability, equity, and public participation, must also be installed. Indeed, this recent comment by a reader of this blog makes exactly this point.

Architects and Urban Planners as Climate Initiators

It is significant that it is architects such as Bunschoten and Liu Yuyang of Atelier that are leading this initiative as it. Said Liu:

This project is exciting and significant because architects and urbanists are playing a much more proactive role as “initiators” or “enablers” of a larger development mechanism as opposed to just being hired as consultants or service providers. So what architects do well: realization of a built structure and environment by integrating different needs, desires, and constrains, can now be quantifiable into not just how many more apartment units they help to sell, but how many tons of carbon emission they help to reduce and how that brings in certain financial return.

In the same vain, Bunschoten believes that, the practice of urban design and planning will change radically in due course because climate change is a problem that all learning and professional institutions have will have to address with growing awareness or the problem globally.

Why Xiamen Should Say Yes

The consortium’s proposal is ambitious and complex and will require much effort, dedication and resources. Yet, if it is executed well, it has the power to energize and increase wealth, both psychic and economic. The direct benefits are obvious—CDM revenues; a lower carbon profile that imply greater natural resource utilization efficiency that can, especially in these times of spiraling commodity prices, translate into tangible costs savings; and the environmental and health benefits that comes with an economy that relies on cleaner and more efficient uses of energy. But this is just the beginning. There are also tremendous spin-off effects. Aside from the psychological benefits to the people of Xiamen that come with a sense of pride in living in China’s greenest city, and the increased quality of life and general “happiness” that comes with living in a cleaner environment, there are very real economic multiplier effects that the government of Xiamen should appreciate:

1. RE/EE projects will create jobs. Not just any jobs, but green jobs—jobs that labor that is highly skilled and technical in nature, which will also enhance educational and training standards in Xiamen in order to meet the job supply.
2. Green businesses, and newly formed institutions that are created as a result of implementing the RE/EE projects will have to set up offices in Xiamen, creating an influx of potential tax revenue and desirable brain power.
3. The reputation and branding of Xiamen as a RE/EE hub and low-carbon city will attract other green and cleantech businesses to locate offices or operations in Xiamen as these businesses like to be established in a geographical context that is consistent with their business mission.
4. Xiamen can be an eco-tourisim destination, providing a showcase to eco-tourists on how to successfully retrofit (and integrate into) a small to medium sized Chinese city with low carbon hardware and software.
5. A cleaner environment results in healthier residents, resulting in reduces health care costs and lower rates of absenteeism (and hence increased productivity).

What is not to like?

From Excitement to Action

If you have read everything up to this point, I hope that my enthusiasm for this project has infected you. The task ahead for the consortium is to build on the momentum generated by the symposium to get buy-in from the key decision makers in the Xiamen government, and move forward with developing a detailed time table and action plan. There would be a lot of work ahead—lots of brainstorming and discussions; technical assessments of Xiamen’s baseline carbon profile and forecasting under different scenarios; perhaps the administration of a tendering system to RE/EE project developers; figuring out how to allocate the revenues generated from the project, project monitoring, supervision and consultation, but just to mention a few aspects.

But the end result may be something that is not only economically and socially self-sustaining, but can serve as a prototype for urban development across China and beyond.

Late last month, a Shanghai Daily article reported that the National Reform and Development Commission was considering almost tripling wind energy targets for 2020, from 30 GW to as much as 100 GW. To put that number in context, realize that current installed wind capacity is about 94 GW…globally.

A wind farm in the northwestern province of Xinjiang

Although some warn against drawing hasty conclusions, there has more talk in the market recently to back up that report. At the Renewable Energy Finance Forum on May 14, Jens Olsen, newly minted CEO of Nordex China, talked about the NDRC’s renegotiation of the 2020 wind energy target. According to Olsen, a 60 to 100 GW target is being considered, so 100 GW is really at the upper range. Still, a few panelists at the forum expressed bullish sentiments that 60 to 80 GW of installed wind capacity would be achievable. Olsen himself thinks that the wind supply chain in China is capable of manufacturing 80 GW by 2012-13. One industry executive went so far as to suggest that 120 GW of installed capacity by 2020 would be possible.

All these giddy projections have been cast in the background of a flurry of large scale wind projects announced recently. China Power International will spend RMB 6 billion over five years for at least 600 MW in wind projects along the coast of Guandong. Elsewhere, JiuQuan city in the northwestern province of Gansu is poised to take Chicago’s moniker as ‘the Windy City’ by adding 28 new wind farms for a whopping total 10 GW of wind by 2015.

What accounts for the big wind surge in China? According to Liu Qi, the Vice General Manager at Sewind, the Chinese wind market is blessed with supportive government policies (e.g. the Renewable Energy Law of 2006, national targets for wind, etc.), a good foundation of wind developers and a growing components industry (fostered by regulatory requirements that 70% of wind turbines have to be made of components manufactured domestically). Domestic component makers like China Transmission, which commands 90% of the China market for gearboxes, are poised to benefit from these policies as they quadruple capacity over the next two years.

Another supportive government policy has been the refunding of value-added tax and import duties on core wind power turbine materials to ease the supply chain bottle necks and also plans to cease its tariff-free policy on the import of whole turbines with a capacity of less than 2.5 MW. The combined effect is to encourage the import of foreign-made components and more advanced foreign turbine technologies (the average capacity for turbines installed in China is 1 MW).

Short-Medium Term Bottlenecks on the Horizon

Supply Chain Hiccups

Whatever China buys becomes more expensive—such is the buying power of any Chinese industry because of its sheer scale. In the wind industry, turbine prices have been increasing consistently for the past four years, said a Morgan Stanley analyst in the audience. Paulo Fernando Soares, CEO of Suzlon’s China operations, attributes this to the increasing costs of components. Indeed, the wind market globally has been facing a supply chain crunch, and any raising of national targets will only serve to stretch the global wind supply chain. Yet, not everyone considers supply chain issues as the main concern. At least domestically, expected manufacturing output rates for 2008 are expected to increase and thereby reduct the backlog in turbine orders ranging to a manageable11-12 months, says Sebastian Meyer of Azure International.

Low/No Tariffs

Moreover, while Soares observes that only 55% of wind farm projects awarded since 2004 have been built, he does not attribute this bottleneck to a turbine or component shortage. Indeed, it is the view of Paul Eveleigh, group CEO of Honiton Energy, that turbine overcapacity will be a problem in China unless there is a massive drive for export; the top four Chinese turbine manufacturers are projected to have 9GW of capacity by 2010 (compared to the just under 6 GW of installed capacity at the end of 2007!).

Rather, the bottleneck, according to Soares, is the unattractive tariff structures, which are the lowest in the world for wind and makes it tricky for foreign players with a vastly different perception of cost. Such tariffs in China are typically only half of what a developer could get in a Western market, says Eveleigh. Of course, the cost structure of business inputs in China is vastly different as well, though this gap is surely narrowing as of late with domestic inflation.

Lower tariff rates are better than zero tariffs, however. Yet, said KK Chan of Climate Change Capital at the forum, some wind developers are getting stiffed by tariff payment delays.

It is also argued that a move towards a German-style feed-in-tariff system should be adopted. In fact, this was originally contemplated in the Renewable Energy Law of 2006, as a reader to my last blog post commented. However, this policy tool was abandoned in favor of a bidding system. A full discussion of this issue is beyond the scope of this post but can be found here, although I suspect that the debate has cooled off a bit over the course of the pass 12 to 18 months given the explosion of installed capacity over the same period.

Competition

With a proliferation of new entrants, competition in the China turbine market is stiffening, and domestic players are growing from strength to strength. For the first time, Chinese turbine manufacturers now have the majority of the Chinese market at 56%, said Soares, with Sinovel and Dongfang gaining market share recently, while every other player lost some of theirs. A consolidation in the wind turbine manufacturing market is surely imminent.

The competition picture is different in terms of wind developers and the grid transmission—with different implications. The biggest wind farm developers are the big five national utilities. Ironically, the price squeeze in coal (i.e. the inability of these utilities to pass on the increasing costs of raw coal inputs to retail customers due to mandated price controls) is not working to the advantage of the wind industry. All big five utilities experiences a net loss in Q1’08, observed Meyer, largely due to the coal price squeeze. In the long term, if the leading investors in wind farms are not profitable, Meyer went on to say, their ability to invest in wind is negatively impacted.

The dominance of the big 5 utilities in wind development, coupled with the duopoly of the two national grid transmission companies—State Grid Corporation and China Southern Power Grid, make it difficult for small wind farm developers to negotiate with the grid transmission companies for interconnection.

It seems to me, then, that the wind development sector is facing the opposite situation as turbine manufacturing—the dominance of few big players rather than a fragmented market with too many new entrants. Wind development is capital intensive and carries its unique risk profile and there are limited players up to the task. Will the government recognize the need to create a favorable policy environment to attract new entrants, especially foreign developers?

Tightening Financing

Access to debt capital is getting tougher. As discussed in my last post, bank credit is tightening due to the mandated increase in bank reserve ratios. Moreover, observes Sebastian Meyer of Azure International, that the cost of capital is going up as global interest rates, including those in China, are climbing, making it more expensive to borrow. Justin Wu, a senior analyst at New Energy Finance, observes that the belt tightening in the credit market has also affected the ability of wind farm developers to pay their turbine suppliers on time, and this is in turn cutting into the margins of turbine manufacturers.

Also described in my last post was the lack of reliable wind data raises the risk profile of wind projects, which makes lenders hesitant to offer more flexible loan packages, and insurers less willing to offer business interruption insurance.

Currently, rules governing clean development mechanism projects in China prohibit foreign developers from owning majority interests in CDM projects. The CDM is crucial in making wind projects in China financially viable. An easing of this prohibition may encourage foreign players to make further inroads into the China market, and create more competition amongst developers. According to some observers, including Jacob Jacobelli of Merrill Lynch, this easing of this prohibition on foreign-controlled CDM projects is imminent.

Separately, if what the World Bank says is true about an impending carbon credit crash, then there may be tough times ahead for wind development in the medium term given how instrumental the CDM is in making wind projects profitable

Conclusion

I have not mentioned other potential bottlenecks such as the shortage of skilled talent and intellectual property concerns. But I don’t want to take the above list of industry challenges out of context and lose the forest for the trees. Wind energy has its skeptics, but the reality is that the wind industry in China is powering ahead compelled by the three forces Jacbobelli described in my last post (logistical energy security, environmental protection and poverty alleviation). The announcement of Texas-based GreenHunter at the forum on May 14 to build a 300 MW wind farm near Shanghai, using turbines manufactured by Mingyang Electric, is just a portents of things to come.

RE Looking Bullish in the Long-Term

The sentiment at the forum on the renewable energy (RE) industry in China was overwhelmingly bullish. The government’s targets for renewable energy are well known—15% of primary energy from renewable sources by 2020—and there is little to suggest that this will not be achieved. Perhaps the wind industry, more than any other RE sector, is emblematic of China’s fast growing RE industry–the national targets to install 30GW of wind power by 2020 will be easily exceeded by as much as another 30 to 50GW according to some of the forum’s panelists.

A recent paper (excerpt here) by Eric Martinot of Tsinghua University and Li Junfeng, a conference panelist and head of the Chinese Renewable Energy Industry Association paints the sunny state of China’s RE industry.

Joseph Jacobelli, a senior banker at Merrill Lynch, put forth three reasons at the conference why the RE industry was on an unambiguous march towards growth:

1. Logistical energy security (especially in the wake of lack of domestic sources of conventional energy supply, and rising oil and coal prices)
2. Environmental protection (this one is obvious)
3. Poverty alleviation (where distributed power generation, especially wind, solar and biomass, have advantages over centralized fossil fuel supply)

As Li pointed out in his keynote speech, China has, since the release of the energy white paper last year, modified the presumption of a “coal-based energy structure.” Renewables, energy efficiency, and even nuclear (gasp!) will have an increasing part to play. The Renewable Energy Law of 2006 and the impending comprehensive Energy Law (currently in draft form) reflects this shift.

But Coal to Remain King

But make no mistake, coal will continue dominate China’s energy structure for years to come, unless major breakthroughs in utility-scale or distributed solar occur. Coal is an entrenched energy choice at the moment because of distorted price signals (the health and environmental costs of coal are not reflected in its price)  and huge sunk costs of coal infrastructure. The sheer scale of coal use, accounting for some 70% of electricity production in China, is what, in the eyes of venture capitalist and entrepreneur-in-residence at Qiming Ventures, Brian Curtis, presents the greatest investment opportunity. Increasingly, it looks like these investment opportunities in China will be undertaken by RMB-denominated funds, rather than offshore US or European funds, due to the evolving regulatory landscape governing China investments.

Curtis did not elaborate on specific opportunities that coal presented, but one would have to imagine they would include efficiency technologies such as gasification, co-generation or poly-generation. I personally wonder, however, if the capital-intensive nature of “clean coal” technologies lend itself well to venture capital-type equity investments. As we shall soon see, bank credit in China is tightening as well, leaving “clean coal” in a temporary bind.

What perpetuates the coal industry is the continued government subsidies on energy. Despite repeated calls by international policy makers to reduce subsidies and allow market forces to determine prices, concerns of inflation means that in the short term, price controls will remain in place. However, the draft energy law and recent moves to allow increases in the price of gasoline indicate an unavoidable, even if not complete, shift towards market prices some time down the road.

The Need for Progressive Policies

In the mean time, RE will need the aid of policy and finance to change the status quo. KK Chan, of Climate Change Capital, laments that long term power purchase agreements (PPA) between RE generation companies and utilities, which are so crucial to assuring investor certainty, are simply not an option in China.

Gao Guansheng of the National Coordination Committee of the National Development and Reform Commission (NDRC) went as far as to suggest that a serious consideration should be given to German-style