Cashing in on China's renewable energy boom

Fri Jul 14, 2006 3:15 AM ET

By Alison Leung

HONG KONG (Reuters) - China is set to spend $200 billion on renewable energy over the next 15 years, and industry players are racing to grab a slice of the action.

That kind of money would buy you an oil firm the size of Chevron <CVX.N> and leave change to fund the current renewables programs of all Europe's top oil firms for 25 years.

So from the arid plains of Xinjiang to the rolling hills of sub-tropical Guangdong, Chinese and foreign firms are erecting 40-storey wind turbines, installing solar panels, and conducting tests on corn for biofuel.

Beijing wants a tenth of its energy to come from environmentally friendly sources by 2010 -- a desire driven by soaring air pollution and chronic environmental degradation that is swelling medical bills and provoking discontent.

Projects will need turbines, blades and other power components, which is why General Electric Co. <GE.N>, Vestas Wind Systems <VWS.CO> and Gamesa <GAM.MC>, as well as homegrown firms China Solar Energy Holdings Ltd. <0155.HK> and Suntech <STP.N>, are expanding capacity in the country.

"Renewable energy will likely become China's next boom sector with oil at historical high prices," said Norman Ho, a fund manager at Value Partners, which has invested in Chinese wind energy components supplier Nanjing Gearbox.

"China needs energy to support its GDP growth."

Crude hit a record above $78 a barrel on Friday.

Analysts like Suntech and Shanghai Electric <2727.HK>, but call attention also to budding niche players such as China Solar and Taiwan's E-ton Solar <3452.TWO>.

"We believe solar energy's high growth prospects, particularly off a small base, make it a viable component of any investment strategy focusing on the renewable energy theme," Merrill Lynch said in a recent research report.

Credit Suisse estimates the compound annual growth rate of China's wind power capacity at 39 percent in 2004-10 and 20 percent in 2010-20. "This represents a remarkable growth potential for manufacturers of wind turbines," Credit Suisse's Angello Chan said.

RISKS

In the short run, teething troubles such as a shortfall of raw materials facing Taiwan solar player Motech Industries <6244.TWO> might be an issue.

And crucially, analysts warn of a potential regulatory about-face or waning enthusiasm, the absence so far of a detailed incentives-and-subsidies plan, and a lack of official experience in the area.

Credit Suisse also warned competition may put downward pressure on wind turbine prices, and thus margins.

Yet if all gels, China -- which claims already to be the top annual investor in renewable energy on the planet -- could leverage the world's highest wind-power capacity potential.

China aims to have 30 gigawatts of installed wind power capacity by 2020, up from just 1 GW last year and powering between 13 and 30 million households at full capacity according to industry estimates.

Beijing's new renewable energy policy, unveiled in January, aims to create a system of financial and policy support for the use of renewable energy, including preferential tariffs for fuels such as biomass.

Beyond 2010, the world's second-largest power user wants to boost consumption from renewable sources to a fifth of its total by 2020 and slash reliance on imported oil.

Alternative energy sated 7 percent of China's needs last year, and the country's top economic planning agency said up to US$188 billion must be invested to reach the 2020 goal. Economic growth hovering at 10 percent will fuel power consumption over coming years anyway.

(For stories on emerging Chinese players in the industry, please click on <ID:nHKG308652>).

China Solar wants a six-fold profit leap next year, and the nation's top wind turbine maker, Goldwind, is pursuing a U.S. IPO to propel an eight-fold surge in sales to a target of $500 million by 2008.

CLP Holdings <0002.HK>, Hong Kong's dominant power supplier, is planning Asia's largest offshore wind farm in the territory.

And following a successful U.S. IPO by Suntech Power last December, Yingli Solar plans to raise $400 million in the Nasdaq's largest IPO by a Chinese firm, the first of at least five waiting in the wings, sources have told Reuters.

Renewable energy projects need intensive and long term government support. Beijing appears to have the resolve -- and the need -- to push ahead, but a proper system of tax or policy incentives could take years.

"Solar energy today is still expensive," said Chan Ka Keung, managing director at the renewable division of CLP Holdings Ltd.

"It's beyond what we should consider on a commercial basis."

(Additional reporting by Nao Nakanishi and Joy Leung and Emma Graham Harrison in Beijing)

($1=7.988 Yuan)