Insights and Opportunities
Overview: China not only has enormous needs for cleaner energy, but is also the country best able to afford the massive investment and imports to meet the need. The Chinese Government has set ambitious state investment targets for renewable energy. Rapid urbanization and continuing economic growth are placing heavy demands on the Chinese energy sector. Although fossil fuels will continue to play the dominant role in meeting this demand, environmental concerns and rising coal prices have driven the government to strongly promote renewable sources of energy.
Solar energy: China is rich in solar energy resource. The average daily radiation in most areas exceeds 4 kWh/ m2, comparable to the U.S. and much better than Japan and Europe. The need to expand electricity supply is great, especially in rural areas. Roughly 3 million mostly rural Chinese households (over 11 million people) still have no access to electricity. Grid extension, small hydro, and migration could meet electricity needs for 2 million of these households. Solar photovoltaic (PV) and PV-wind hybrid systems could supply the other 1 million households. Given the standard of cities in remote areas (annual electricity consumption of 1000 kW. h/household), installed capacity would need to reach 700 MWp. At present about 60% of the solar cells in the world are used in grid-connected power systems, mainly on-grid PV systems in cities. In China, such technology is still at a relatively early stage. Building of rooftop projects will start in China before 2010, and the installed capacity will reach 50 MWp by then. It is also expected that there will be on-grid PV projects on a larger scale before 2020, and the cumulative total installed capacity will by then reach the 700 MWp goal. The market for photovoltaic power generation is mainly composed of communications, industrial applications, rural off-grid supply, grid connected systems and small solar products. Among all these applications, about 53.8% is located in the commercial sector (telecommunications, industrial applications and solar PV appliances), while the remaining 46.2% requires support from the government (rural electrification and grid-connected generation).
The biggest potential solar PV market is large-scale desert power plants. With the development of electricity transmission and power storage technologies, large areas of desert will definitely become the future power base. If only 1% of the desert area is used to install solar cells, the total capacity would be 1,000 GWP, which is about twice the current installed power capacity in China. The area of desert, desertified land and potentially desertified land in China amounts to 2,500,000 km2, accounting for a quarter of the total land mass. Using current technology, 1% of this could be used to install 2,500 GWp of solar power plants, generating 3,000 TWh of electricity annually, equal to the current annual output in China. Based on the current potential and policy in China, it is feasible to develop a demonstration LS-PV power station before 2010. According to the Mid-Long Term Development Plan of Renewable Energy of the National Development & Reform Commission (NDRC), it is expected that there will be three to five desert power plants with an installed capacity of 1-10 MWp operating before 2010, with a total capacity of 20 MWp, in order to test the technology and its economic feasibility. LS-PV desert power plants will be further promoted from 2010-2020, and by 2020 the cumulative total installed capacity in the desert is estimated to be 200 MWp.
Wind power: The wind power market, in particular, has grown rapidly in response to a series of government reforms, and is targeted to provide 10% of China’s electricity by 2020. China currently has the capacity to produce over 6 GW of wind energy from 343 wind farm installations. Although this constitutes less than 1% of total electricity output, it makes China 5th in the world in terms of wind power production. In response to better-than-expected growth, the government has repeatedly raised its goals for wind energy production, now targeting up to 100 GW of output by 2020. If realized, this would likely position China as the world leader in wind power. Given the tight supply, foreign component manufacturers have many opportunities in China, especially for those components which Chinese manufactures remain unable to produce. High demand for continuing technology development and ever-larger turbine capacity means many Chinese firms are seeking partners for technology-sharing and cooperative development agreements. Of all the opportunities, turbine components present the best opportunity for foreign imports. Despite rising levels of technical competency and domestic manufacturing capability, the demand from turbine manufactures for components remains extremely high, with tight supplies forecast to continue for the foreseeable future. In particular, foreign electrical control devices and turbine bearings are most highly sought.
With an estimated $3.28 billion of investment in 2007, China added 122 new wind farm developments, more than doubling installed capacity to 6 GW. Although less than 1% of total energy output, it catapulted China to fifth place on the Global Wind Energy Council's annual capacity rankings, and positioned China as the third-fastest growing market for wind energy in the world. In response to this rapid build-out, in April 2008 the NDRC doubled its 11th Five-Year-Plan (2006 – 2010) target for wind power from 5 GW to 10 GW. According to Sebastian Meyer, Director of Research for Beijing-based Azure International Technology & Development, total installed capacity will have already reached 10 GW by the end of 2008, a full two years ahead of schedule. Statistics released by the China Wind Energy Association (CWEA) indicate that by 2010, total installed capacity will reach 20 GW, and it is widely reported that the NDRC is setting its sights on a target of 100 GW by 2020.
Even conservative estimates of wind sector growth see China reaching almost 60 GW of wind power by 2020.
There are numerous projections of China’s total wind power potential. These vary between technically feasible projections and projections assuming advances in wind turbine technology. The most often cited statistics come from the China National Meteorological Society, putting total generation capacity at around 1,000 GW, with 250 GW onshore and 750 GW offshore.
Wind farms must ‘sit’ where the wind is strongest and most consistent. In China, these places tend to be remote open flatlands in western and northern China, and coastal areas in the south and east. To date, most development of wind energy has been onshore, in Inner Mongolia, Gansu, Shandong, Heilongjiang and Xinjiang provinces, where building wind farms and connecting them to the grid is cheaper and technologically easier. Inner Mongolia and Gansu, which are expected to account for 40% of wind-generated power by 2010, represent the most developed wind power regions in China. Tapping the estimated 750 GW potential of offshore wind power has only just begun, with an NDRC plan to expand offshore development near Shanghai with 1 GW capacity by 2020. Despite the potential, offshore wind development still lags far behind onshore farms.
Even with continuing advances in turbine technology, the cost of generating electricity from wind is estimated at roughly RMB 0.6 / kWh, not yet competitive with coal. To address this gap, initial drafts of the NREL guaranteed a subsidy of RMB 0.23 / kWh above the current cost of clean (de-sulphurized) coal-produced electricity, and stipulated that the return on investment for renewable energy power projects should be higher than that of traditional power projects. However, the final version of the regulation was stripped of these provisions. Instead, wind-power pricing continues to be set (or guided) by bidding. With concession tariffs averaging RMB 0.45 / kWh and non-concession prices only marginally higher (RMB 0.5 - 0.6 / kWh), current price levels have been too low to satisfy the risk tolerance of most investors.
There is concern that China’s large, state-owned power firms - which have won every wind concession project - have been willing to bid below cost for large projects in order to secure rights to wind fields only for their future value, as well as to ensure they are able to satisfy regulatory requirements for clean energy production. According to Li Junfeng of the China Renewable Energy Industries Association (CREIA), "the big five power companies are using the profit they [make] from coal-fired power generation to make up the loss in wind power projects," while also abusing their status as joint ventures to cash in on preferential tax policies, entitling them to a refund of RMB 0.1 / kWh.” While this results in a more reasonable bottom line, “…it is not fair to other investors, especially the small private ones," said Li.5 This practice represents a significant barrier to entry for both foreign and privately-owned domestic firms, and also has the effect of putting substantial downward price pressure on turbine manufacturers. Many analysts are concerned that without significant price reforms, including the possibility of a fixed subsidy for wind power, recent growth may be unsustainable.
Even in the absence of national price reform, some recent developments suggest feed-in tariffs may be on the rise. In the latest round of concession projects, bidding rules were revised to reward offers closest to the average bid price, not the lowest. And in March, 2008 Guangdong became the first province to offer a fixed feed-in price for wind energy at 0.68 RMB / kWh. Efficiency Gains. China’s wind farms are in a relatively nascent stage of development, and typically produce less electricity than those in more developed markets.
According to data provided by Azure International, the average Chinese wind farm operates with 22% gross capacity utilization, far below the American average of 34%. Azure’s predicts that with improved capacity utilization the price of electricity produced from wind farms would drop to as low as RMB 0.38 / kWh. As the industry develops and technology improves, efficiency progress will lead to further cost competitiveness between wind power and other energy sources.
Low feed-in tariff rates and an international shortage of turbine components represent the greatest challenges to continued growth of the wind power industry. In addition, tightening credit, incomplete wind resource data, antiquated power distribution infrastructure, and human resource restraints add uncertainty to the future of the industry.
The Chinese wind turbine market has become increasingly competitive in recent years. Once dominated by foreign players, advances in technology and increasing government support have allowed domestic manufacturers to compete effectively: in 2007, more than 50% of new turbine installations were produced domestically. However, Chinese firms still remain unable to provide turbines with 3 GW+ capacity, and are only now ramping up production of 2 GW models. Nevertheless, it is expected that domestic manufacturers will be capable of meeting domestic demand entirely within two years. In response to increased competition and localization requirements, many foreign firms have moved aggressively to form domestic subsidiaries and joint venture agreements.
Of all the opportunities, turbine components present the best opportunity for foreign imports. Despite rising levels of technical competency and domestic manufacturing capability, the demand from turbine manufactures for components remains extremely high, with tight supplies forecast to continue for the foreseeable future. In particular, foreign electrical control devices and turbine bearings are most highly sought. Chinese component manufacturers have made great strides in blade, gearbox and generator production, meeting the majority of domestic demand for these items. Nevertheless, turbine developers still rely primarily on foreign firms for a number of technologically advanced components, including bearings and electrical control systems.
As a developing industry, Chinese turbine and component manufacturers are eager for the latest technologies. While the acquisition of technology from overseas is the easiest way to accomplish this, leading international firms are wary of licensing their latest proprietary designs to potential competitors. Consequently, smaller wind power companies who do not compete directly in the Chinese market, and who stand to benefit more from licensing fees, have many potential – and willing – partners for co-development and technology transfer in China.
Firms that plan to operate directly in the Chinese market; localization requirements, cost-savings, and customer relationship management all suggest establishing a local presence in China. Whether this takes the form of a joint-venture operation or wholly-owned domestic subsidiary depends largely on the willingness of the foreign firm to expose themselves to technology transfer. Because domestic firms are unable to develop cutting-edge technology in-house, many Chinese turbine and component manufacturers are eager to form joint-ventures based on cooperative design and production models. In cases where loss of proprietary IP is not a concern, foreign firms can both profit from technological expertise and gain access to the operational knowledge of their local partner to navigate the vagaries of the Chinese market and regulatory system.
Hydropower: China’s hydropower installed capacity reached 172 million kwh in 2008, ranking first in the world. The utilization rate of hydropower resources has also increased to 27%. At present, a large number of world-class projects and leading technologies have emerged in China. At the end of last year, 26 sets of 700,000KW power generators of the world famous Three Gorges Dam Project were put into operation. From 2008 to 2015, China will build a number of cascade hydropower stations on the upper reaches of the Jinsha River, Dadu River, Yalong River, Lancang River, Wujiang River, and Yellow River, and about 150 sets of 700,000KW mega water turbine generators will go into production. Currently, 10 pump storage power stations are under construction, and can add another 30 million kilowatts of installed capacity.
Biodiesel Energy: China’s biodiesel market is a relatively new and expanding rapidly. China’s three-fold need to increase energy availability, reign in pollution, and improve rural welfare has triggered a renewed push for clean energy solutions. From publicly traded biodiesel companies, to clean energy bureaus in the Ministry of Science and Technology, China has a pronounced interest in, and solid foundation for, establishing a prominent biodiesel market. The potential for U.S. firms to enter the Chinese biodiesel market is very strong, and the Chinese government’s positive involvement in biodiesel has propelled the current surge of the industry. This is a new and high-growth industry, which needs foreign expertise, funding, and cooperation. U.S. firms have long-term potential in China’s biodiesel market.
While the current U.S. position on biodiesel, and biofuels overall, is made ponderous by the debate of corn’s use in making ethanol, in China, the prospects for U.S. firms to
export and expand is very promising. Chinese officials have said China would increase biodiesel output to 200,000 tons by 2010 and to 2 million tons by 2020. These estimates are conservative compared to German reports done in conjunction with Tsinghua University, which place biodiesel output at 10.6 million tons by 2020. The discrepancy in the numbers can be attributed to the varying estimates of biodiesel feedstock’s availability. While the German study looks more closely at theoretical availability, the government estimate incorporates fuel versus food demand.
Animal fat and waste oil will continue their dominance of China’s biodiesel market. Presently, waste oil is the dominant material for biodiesel production in China. This waste oil includes acidified oil, grease trap waste, slop oil, and waste cooking oil; however, other materials are quickly becoming viable. In Shaanxi and Henan, Chinese pistachios are the crop of choice grown for feedstock. Meanwhile, in Hainan, Fujian, Sichuan, Yunnan and Guizhou, jatropha and palm-oil-based facilities are cropping up. And in Anhui, Jiangsu and Shandong, waste oil, peanut oil, cotton oil and rapeseed are the dominant biodiesel materials.
Concerning location, the major biodiesel facilities that use waste oil and feedstock will continue the trend of being based near medium and large urban cities. Close proximity facilitates the cheaper and more efficient collection of oil. Examples of this include the publicly-traded China Biodiesel International Holding Company (AIM:CIB), which is developing facilities in Fujian, and Gushan Environmental Energy Limited, which has plants in Fujian, Hebei and Sichuan.
China’s biodiesel production was between 100,000 and 200,000 tons in 2006 and 2007, but according to SGS, the domestic output was around 500,000 tons. China’s potential demand for biodiesel is around 18 million tons. On the consumption side, China’s annual diesel consumption reached over 90 million tons in 2007. Despite the annual import of diesel from other countries, China still lacks more than 30 million tons of diesel to meet its needs. China’s potential market demand for biodiesel is around 18 million tons. There are still big gaps between domestic production and demand. According to “ The Medium-to-Long Term Renewable Energy Plan”, China’s annual biodiesel production capacity will reach 2 million tons by 2020.
For the time being, many biodiesel projects are under construction. The total designed annual production capacity is over 3 million tons. Among those projects, there are also several large projects with an annual capacity of 500,000 tons. Domestic biodiesel producers began appearing in 2001. Only a few of them have an annual production capacity over 10,000 or 20,000 tons. Among them are Hainan Zhenghe Bioenergy Co, Ltd; Fujian Zhuoyue New Energy Development Co, Ltd; and Sichuan Gushan Grease and Chemical Company; Xi’an Bluesky Bioengineering Co., Ltd; and Fujian Yuanhua New Energy Development Co., Ltd.
Domestic producers can be categorized into three groups: 1. Small and medium-sized private plants – mainly rely on spent cooking oil and waste oil they collect themselves, easy-to-find sales channels for their products, and production of low-grade products; 2. Large private firms – lack sufficient raw materials and funding to plant sufficient numbers of biodiesel trees. Also lack channels to collect spent cooking oil, waste oil, etc.; and 3. State-owned companies with production capacity above 50,000 tons – mainly focusing on the plantation of raw materials, enjoy government support, and face better long-term development potential.
Production is mainly limited by the availability of raw materials and remains unregulated. Twenty or so small-scale production facilities, each with annual capacities of less than 20,000 tons, rely primarily on spent cooking oil as raw material and sell their low-grade diesel to agricultural producers. Without government support, these enterprises remain profitable because of low production costs. The main impediment to the future growth of China’s biodiesel industry is a lack of government initiatives and guidance. There is still currently little government incentive to encourage the development of alternative oil sources from biodiesel plants such as canola, palm and jatropha. According to the China Renewable Industry Association, the current base of biofuel trees and plants has a production capacity of 5 million tons, and waste oil and spent cooking oil can supply 2 million tons annually. It is estimated that by 2010, China’s demand of biodiesel will be 20 million tons, and the production by 2010 and 2020 can reach 2 million tons and 9 million tons respectively. Although there are many problems with, and impediments to, the growth of the biodiesel market in China, it also has attracted the attention and involvement of three major oil companies and a foodstuff corporation.
Foreign firms have made significant strides in China’s biodiesel industry. Many foreign players have been actively involved in China’s biodiesel market since 2005. Some firms cooperated with local provincial governments, while others chose to cooperate directly with oil majors such as CNPC, CNOOC or private companies. Still others prefer to direct project investment.
Examples of some foreign activities include: Biolux Nantong (Austrian) – Signed contract with Chinese government to grow rapeseed on 325,000 hectares of farmland along the Yangtze River; U.S. Becker Biofuel intends to invest between $ 1.6 and 2.0 billion within the next ten years to develop jatropha plantation and a 500 million liter biodiesel plant; CNPC plans to invest $297 million in jatropha plantations and processing facilities; UK Sunshine Technology Group plans to invest $506 million in Chinese biodiesel operations; and Local company, Qingyan Lihua Renewable Energy Technology Co., Ltd cooperated with German PT to establish a biodiesel production facility with 100,000 tons annual production capacity in Hebei GuAn Industrial Development Zone on April 20, 2007.
Other foreign cooperation projects are: Italian company’s biodiesel project cooperation with Jiamusi, Heilongjiang Province, in 2005; Singapore invested significant funds in Fujian’s biodiesel project in 2006; Sino-German biodiesel cooperation project in Guizhou in 2006; and 2007, Austria invested in a Chinese biodiesel project.
Although the biodiesel market in China is still nascent, there is still a promising future ahead. The following areas have great potentials for U.S. firms: Core technology for Biodiesel Oxidation Stability; Technology/equipment to lower the cost of producing biodiesel; Testing Labs – China only has only one biodiesel testing agency: SGS Technology to utilize inexpensive raw materials to produce biodiesel with high rate of transformation capability; Core additives; Biodiesel processing technology for high grade biodiesel output; and Technology for using corn stover to produce biodiesel.
China does not have national standards for biodiesel’s application in the automotive industry. In this case, biodiesel cannot be used as a transportation fuel, which hurdles the testing and promotion of using 10% biodiesel mixed with fossil diesel in vehicles. China also lacks of experience to implement such a target.