China: A green energy bonanza?

Tom Miller 10 May 06 Via

China’s growing focus on energy conservation and clean energy production is likely to prove lucrative for foreign energy companies investing in the world’s second biggest power market

As a growing band of publicly listed, clean technology companies expand into China, portfolio investors also stand to benefit from the nation’s shift towards greener energy production.

One of the key numeric targets of the government’s 11th Five Year Plan is to reduce energy consumption per unit of GDP by around 20% by the end of 2010.

Last year, China consumed the equivalent of 2.2 billion tonnes of coal, and Chinese analysts warn that total energy demand may reach 4 billion standard coal equivalent (SCE) tonnes by 2020 if allowed to continue unchecked.

But this could be kept below 3 billion SCE tonnes, they say, if effective energy-saving measures are put in place.

In February, China’s central government – known as the State Council – released its science and technology strategy document for the period 2006-2020.

Clean coal moves

Emphasising the importance of energy conservation, the report also recommends promoting “clean coal” technology and diversifying into renewable energy sources, notably wind power, solar power and biomass/geothermal energy.

Renewable energy currently accounts for roughly seven percent of China’s total power supplies, and the official aim is to increase this to 15% by 2020.

“Currently,” the report states, “there is an acute imbalance in China’s energy supply and demand, which is unreasonably structured, with poor efficiency in energy utilisation. Coal figures predominantly in primary energy consumption, and massive consumption of fossil energy has caused serious environmental pollution.”

Foreign investment in clean coal technology may be the key to containing the growth of carbon emissions in China, now the world’s second biggest carbon emitter after the US.

Disputed technology

Environmentalists argue that clean coal is a myth: coal remains a dirty fossil fuel, they say, even if it does reduce carbon emissions from conventional burning.

But around 75% of China’s energy needs are currently supplied by coal, which is abundant in China and by far the cheapest energy source. Coal will remain China’s primary energy source for the foreseeable future.

One company bringing clean coal technology to China is South Africa’s Sasol Group, the world’s leading producer of coal-to-liquids and publicly listed in Johannesburg and New York.

Sasol operates the world’s only commercial scale coal liquefaction plant at Secunda in South Africa, where it produces 150,000 barrels of liquid fuel per day (bpd).

Last year, Sasol completed feasibility studies and signed agreements with two Chinese coal companies, Shenhua Group and Ningxia Coal Group, to build two coal-to-liquids plants, each with a capacity of 80,000 bpd at a total cost of US$6 billion.

The two plants will together have an annual capacity of around 8 million tonnes, with per barrel production costs of just US$10. Last, year China imported 22.1 million tonnes of crude and refined oil.

Others taking an interest

Other companies with clean coal interests that are looking to expand in China include US coal giants Peabody Energy, which is listed in New York and recently opened a representative office in Beijing, and Alliance Resource Partners, listed on the Nasdaq.

Bangkok-listed energy group Banpu Plc, one of Asia’s few large coal producers with clean coal technology, has a minority stake in Asian American Coal Inc, which operates in China.

GE Energy and Shell also have considerable investments in coal gasifiers in China.

A number of foreign companies are betting that carbon trading – whereby foreign companies provide producers in developing countries with environmental technology in exchange for buying their pollution rights – will take off in China.

The market leader in China is UK-based Camco International, which recently listed on London’s AIM stock exchange. Hong Kong’s Noble Group, listed in Singapore, has a growing carbon trading business in China, as well as further interests in clean coal technology and the worldwide ethanol market.

More dams on the way?

Hydropower ranks as China’s major energy source after coal and has received considerable international attention, largely thanks to a number of controversial damming projects – notably the Three Gorges Dam and plans to generate electricity from the upper reaches of the Chinese Mekong.

There is still huge potential for more dams in China’s water-rich, mountainous southwest. Major foreign hydropower players likely to benefit are Norway’s Veidekke (listed in Oslo), which supplied technology for the Three Gorges project, GE Energy and Siemens Power Generation.

According to Tsinghua University energy expert Professor Wang Weichang, however, wind power is on course to supplant hydropower as China’s chief renewable energy source by the middle of the century.

And wind too…

The State Council’s strategy document calls for the development of large-scale wind farms, particularly in China’s remote, underpopulated and agriculturally backward western provinces.

But China currently does not have the technology to produce wind turbines larger than 300 kilowatts, and has to import 95% of its wind technology.

The biggest beneficiary is likely to be Danish wind technology firm Vestas, the world’s largest supplier of wind power systems with 30% of the global market.

Publicly listed in Copenhagen, Vestas currently has 480 wind turbines in China with an output of 279 megawatts. There is clearly huge potential for further investment: Vestas has 2,856 wind turbines in India, producing 1,025 megawatts, and a further 8,176 turbines in the US, producing 2,778 megawatts.

Another winner could be GE Energy, which supplied 23 wind turbines to Hebei province’s Shanyi Manjing wind farm and recently announced it would provide 150 megawatts of turbines for the Rudong wind farm in Jiangsu province, to be completed in 2007.

Both Siemens and Spain’s Gamesa, the world’s second largest wind turbine manufacturer and listed on the IBES stockmarket in Spain, may also look to expand in China. Gamesa already has has a manufacturing capacity in Tianjin able to produce 600 MW per year.

Solar options

Solar power lags behind other renewables in China. But the Chinese government forecasts that the market for photovoltaic products and systems, which stood at just 20 megawatts in 2005, should reach 400 megawatts by 2010 and 10 gigawatts by 2020.

In December last year, BP Solar and China Xinjiang SunOasis Co. signed a contract to form a solar power joint venture with a 25 megawatt energy capacity. Based in the northwestern city of Xi’an, the new company will focus on providing sustainable power to remote rural areas throughout China.

And finally…fuel

As China slowly moves towards a car-owning economy, green transport fuel is also a growing concern.

One small company to watch is the UK’s D1 Oils, which makes biodiesel for the transport industry by using a unique method of crushing Jatropha seeds, a tropical oil seed plant.

Listed on the AIM stock exchange, D1 Oils recently signed a deal with the Chinese Ministry of Agriculture to promote the production of Jetropha biodiesel in southern China, where conditions are suitably warm and wet for cultivating Jetropha plants.

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