Wang Hui/China Foto Press

Feature: Energy

Cleantech Boom... or Bust?

An environmental freight train is speeding through China—and it needs a hybrid engine

by William Brent

This past spring Tristan Fischer, then chief executive officer of Camco International Ltd., a global firm that helps companies identify and develop projects that reduce greenhouse gas (GHG) emissions, scoured China's countryside for a new breed of opportunity. Rather than looking for cheap shoes to stock the shelves of big-box retailers, he was searching for carbon-belching smokestacks in need of clean technology to offset carbon emissions and make them available for market trading.

Though China has benefited from more than 25 years of rapid economic growth, that progress has also created an environmental nightmare of global proportions, with worse to come in the next 20 years. The country, which gets nearly 70 percent of its energy from burning dirty coal, is on track to surpass the United States as the world's top GHG emitter as early as the end of this year—more than a decade earlier than previously predicted—according to International Energy Agency Chief Economist Fatih Birol. In addition to GHG emissions, China has many other environmental problems, including water shortages and poor air quality that threaten public health and industrial output. With finite supplies of carbon-based energy and growing global demand, China will have to find other—and cleaner—sources of energy.

China's large and growing appetite for clean technology will create one of the biggest market opportunities in the next few decades, providing the potential for enormous wealth creation by cleaning up the ecological mess that has come from its miraculous, but dirty growth. Many climate change experts are betting that the solution to the world's environmental problems resides in the technological innovation coming out of Silicon Valley and other high-tech clusters in the United States and Europe. But to fully benefit from such technology, China will have to change its policies and consumer attitudes quickly to speed its adoption of the technology—or face significant economic, social, and public health ramifications.

Policy push

"China says it will obtain 15 percent of its [primary] energy from renewables by 2020," says Mike Eckhart, president of the American Council of Renewable Energy, referring to the goal China first announced in November 2005. "But China has got it backward. If it's not at 85 percent renewable, we're in big trouble."

Though China is unlikely to change its renewable energy targets so radically, the central government is highly motivated to address China's chronic energy shortage and severe environmental pollution. Across the board, Beijing is enacting policies that will require huge investments in renewable energy, energy efficiency, smart building, clean water, and cleaner coal. These initiatives include

Support for renewable technologies Under the Renewable Energy Law, which took effect January 1, 2006, and its supplementary regulations, the PRC government will provide support for wind, solar, water, biomass (natural plants, excrement, and organic waste), geothermal, ocean energy, and other nonfossil energy technology in the form of tax breaks, targeted loan subsidies, and special funding (see the CBR, July–August 2006, Green Energy Invites Investment). Wind energy has received the bulk of the support thus far; in the past five years, China has invested $1 billion in wind turbines in a dozen provinces. By 2020, it aims to increase the capacity of wind farms nearly 10-fold.
Top 1,000 enterprises program The PRC National Development and Reform Commission (NDRC) launched a program in 2006 to improve the energy efficiency of China's 1,000 largest enterprises, which together consume one-third of China's primary energy. By using energy efficiency measures determined through a still maturing auditing process, the program aims to save 100 million tons of coal and cut 242 million metric tons of carbon dioxide emissions by 2010, which is equivalent to about 5 percent of China's emissions in 2004, according to NDRC figures.
Appliance efficiency standards New efficiency standards, issued by the the China National Institute of Standardization for consumer appliances—such as refrigerators, air conditioners, TVs, lamps, and washing machines—seek to cut residential electricity use by 10 percent in 2010, thereby reducing the need for more than 30 large, coal-fired power plants.
Building codes In the last year and a half, China has seen several developments in the area of energy conservation in buildings. National standards on energy conservation for public and residential buildings and on technical evaluations of residential buildings, as well as guidelines for assessing green buildings, took effect in the first half of 2006. The new energy efficiency standards aim to reduce the energy consumption of new buildings by 65 percent in Beijing, Chongqing, Shanghai, and Tianjin and by 50 percent in less-developed cities. As the CBR went to press, the State Council was reviewing the Energy Conservation Law to accommodate the country's new energy standards. By 2020, China plans to renovate 25 percent of residential and public buildings in large cities, 15 percent of these buildings in medium-sized cities, and 10 percent in small cities. In June 2007, the State Council decreed that public buildings may not set their thermostats below 26°C (78°F) during the summer or above 20°C (68°F) during the winter.

Meanwhile, the PRC Ministry of Construction has launched stricter energy codes in six pilot cities—Chongqing; Fuzhou and Xiamen, Fujian; Guangzhou and Shenzhen, Guangdong; and Shanghai. According to the ministry, on average, buildings in China consume two to three times as much energy as buildings in large countries with comparable climates.

Water efficiency In 2006, China launched a program with 100 pilot projects to cut water consumption per unit of GDP by 20 percent by the end of 2010, an annual drop of 4 percent in 2006–10. In May 2007, NDRC issued a water resources plan that aims for China to raise the proportion of land that is irrigated efficiently and to reuse water consumed for industrial purposes.

Fuel economy The PRC General Administration of Quality Supervision, Inspection, and Quarantine and the Standardization Administration of China jointly issued a set of compulsory fuel efficiency standards for passenger vehicles in October 2004. The Limits of Fuel Consumption for Passenger Vehicles, which took effect in July 2005, detail the limits of fuel consumption for car models with a weight below 3,500 kg and a minimum speed of 50 km per hour. The PRC standards are more stringent than US standards but less strict than the semi-voluntary standards that the auto industry has adopted in Europe. China projects that by 2008 the average fuel economy of new vehicles in the country will be 36.7 miles per gallon.

New Energy Finance Ltd. predicts that China's renewable energy industry will account for up to 19 percent of the country's energy needs by 2020, not 15 percent, and require total investment of $267 billion—about 50 percent more than the NDRC forecast. Whatever the actual dollar figure, enforcement of government policy will be key in driving investment and creating opportunities.

Challenges and conflicts of interest

In China, central government goals often conflict with local government aspirations—a fact that becomes more apparent as some of the central government's implementation deadlines pass unmet. The State Environmental Protection Administration (SEPA) has already acknowledged that China will fail to meet some goals, including the key target of reducing its level of energy consumption per unit of GDP (energy intensity) by 20 percent by 2010. This projected failure is in part the result of local intransigence. "Some cities are interested [in meeting China's energy goals], but there's an awful lot of green washing going on," says Doug Ogden, executive vice president of the Energy Foundation and director of its China Sustainable Energy Program, which works actively with PRC policymakers. Despite SEPA's acknowledgement, this goal was reiterated by the State Council in the National Plan to Address Climate Change released in June.

Critics of China's environmental and clean energy policies say that SEPA—China's ministry-level department responsible for the formulation and enforcement of national environmental policy and the coordination and supervision of major environmental projects—lacks teeth. SEPA often cannot control large enterprises with government connections and local officials who report to local governments instead of SEPA. Such problems may improve, however. In May, SEPA released measures that call upon government agencies and enterprises to disclose environmental information to the general public. And in December 2006, SEPA and the Ministry of Supervision issued regulations that penalize officials who fail to protect the environment and that incorporate environmental performance into regular performance evaluations of local officials. Ultimately, stricter enforcement will mean more cleantech business opportunities.

Critics also say China's clean energy incentives and pollution fines are weak. In addition, they remark that China's natural resources are priced too low to encourage conservation. Utility pricing needs further reform, but most analysts do not expect it anytime soon.

Finally, the central government itself sometimes creates a business environment that is difficult for investors to parse, whether because of high quotas for locally manufactured parts, opaque investment regulations and processes, restrictions on foreign investment, or vague references in merger and acquisition regulations about protecting "national economic security." Some foreign cleantech investors have privately said that PRC officials have delayed cleantech deals by trying to bring in Chinese investors; it is difficult to confirm these assertions, however.

Attracting private investors

The current potential for clean technology in China is still largely that—potential. Though government and private funding is available, the level of domestic entrepreneurship and seasoned management teams in the cleantech sector is still low, which means that a lot of money is chasing few quality investment opportunities. According to Cleantech Group LLC, a global network of companies that work to accelerate the market adoption and commercialization of clean technologies, venture capital (VC) in China's clean technology sector totaled $420 million in 26 clean-tech deals in 2006, up 147 percent over 2005. This is still a fraction of the total for North America and Europe last year, which was $3.6 billion. But with $154 million invested in the first quarter of 2007 in China—an investment level four times that of the first quarter 2006—China is starting to pick up momentum.

Foreign investors are setting up cleantech projects, many in the form of Sino-foreign partnerships. Cleantech Group recently moved into China with the backing of several large multinational corporations, private investors, and service providers. It also launched, with its Chinese joint venture partners, a cleantech park in Xuzhou, Jiangsu. The park will serve as a center for businesses that develop clean technology in renewable energy, energy efficiency, water and waste water purification, resource recycling, clean production, and more.

In another example, Peggy Liu, chief operating officer of Mustang Ventures, a US VC firm based in Shanghai, recently organized a forum on the future of China's energy sector. Liu plans to start up a new US-China public-private body, tentatively called Joint US-China Cooperation on Clean Energy, which would more aggressively foster an environment conducive to clean energy deals.

Many other Sino-foreign partnerships have emerged with a focus on green building, renewable energy, and energy efficiency. All of these efforts will be needed to turn China into a consumer of clean technology. Currently, it is largely an exporter—primarily of photovoltaics (PV) and meters that were developed by foreign companies attracted to China's high-tech, lower-wage dynamic.

Signs that China will soon become a cleantech consumer and innovator are slowly emerging. For example, the General Electric Co. has based its global water technology research efforts in China, which will inevitably lead to significant innovation coming out of China. Other organizations are following suit: The US Business Council for Sustainable Development is working with the US Environmental Protection Agency to set up an exchange center in Beijing to foster sustainable technology projects, and the China-US Energy Efficiency Alliance is promoting the use of existing energy efficiency technologies as the cheapest and easiest way to reduce GHG emissions in China.

A fully developed carbon market will be one key to China's ability to attract clean energy investment. Although China ratified the Kyoto Protocol in August 2002, its status as a developing country exempts it from meeting the protocol's GHG emission reduction targets. China can, however, provide carbon credits to developed countries under the protocol's Clean Development Mechanism (CDM). The CDM allows developed countries to fulfill their emission reduction requirements by investing in clean energy projects in developing countries, where carbon credits generally cost much less (see the CBR, November–December 2002, The Clean Development Mechanism in China). As of early June, China had registered 85 CDM projects with the United Nations (UN) Framework Convention on Climate Change secretariat—about 12.3 percent of UN CDM projects. The total average annual certified emission reductions (CER, equivalent to 1 metric ton of carbon dioxide reduction) from China's registered projects were estimated at about 64.7 million metric tons of carbon dioxide equivalent—roughly 43.2 percent of total CER in UN CDM projects. China's CDM project priority areas include energy efficiency improvements, development and use of new and renewable energy, and methane recovery and use.

Camco International completed its first CDM deal in China in 2004 and has since made considerable capital investments in GHG-reducing technologies. It now boasts 100 million metric tons of carbon credits, the majority of which are from China. In one project, Camco worked with a coal mine in Shanxi to convert methane—a GHG more than 20 times more potent than carbon dioxide—into natural gas. "Clearly there is a lot of carbon credit that can come from China, but the question is: What is the demand?" says Fischer. Currently, demand is lagging because the verification of offsets has been difficult to standardize, and the immature market remains illiquid.

Asia's first carbon exchange is scheduled to open in Beijing sometime this year and will tap into a market worth billions of dollars. The exchange is a joint effort between the UN Development Program, the Ministry of Science and Technology, and the Ministry of Commerce's China International Center of Economic and Technical Exchange.

Energies to tap

Wind energy

Wind capacity has grown 20–30 percent a year for the past five years. According to its draft Medium- and Long- Term Renewable Energy Development Plan (Renewable Energy Plan), China aims to increase wind capacity from 3,500 MW today to 30,000 MW by 2020, which would place China's wind power output at about twice that of Germany—currently the world's largest wind power producer. But several issues impede faster growth, including the fact that competitive bidding by state-financed domestic utility companies in the wind tendering process is driving prices up, which may cool off the market (see the CBR, July–August 2006, Green Energy Invites Investment). In addition, foreign manufacturers looking to sell wind turbines to China are restricted by the PRC government's shifting local-content requirements, despite the fact that local manufacturing cannot support demand. China's wind turbine sector currently has more than 30 domestic firms, which some industry insiders argue are over-supplying the sector with low-priced and low-quality equipment.

Solar power

China's entry into the PV industry and the initial public offering (IPO) of the solar gear maker Suntech Power Holdings Co., Ltd. drew the attention of many industry observers and Wall Street. A slew of other solar manufacturers, such as Trina Solar Ltd., Solarfun Power Holdings Co., Ltd., and JA Solar Holdings Co., Ltd., have also listed, and Yingli Green Energy Holding Co. Ltd. and others are poised to list, taking China from not even a blip on the solar radar five years ago to becoming the world's third-largest producer of PV. But with a conservative target of using 1,800 MW from solar energy by 2020, solar is not a major focus of China's new energy plans under the draft Renewable Energy Plan.

One area in which China is the undisputed leader, however, is the solar water heater industry, which made around ¥19.9 billion ($2.6 billion) last year. Under the draft Renewable Energy Plan, China should have 300 million m² of solar water heater panels by 2020.

Smart meters and power storage

Chinese companies are also emerging in the markets for power storage, such as batteries and fuel cells, and smart meters—advanced meters that take interval measurements, automatically transmit data, and are capable of two-way communication between the point of electricity consumption and the utility. China is already the world's largest manufacturer of smart meters and batteries—two technologies that will be crucial for utility reform and advanced transportation, respectively. In addition, power storage will be critical to the success of renewables, which often need to be stored for peak use. China manufactures 75 percent of the world's meters, largely for export, but it will also become a market for smart meters, according to Peter Xiong, founder and CEO of Miartech, Inc., a global fabless semiconductor company with operations in the United States and China. Xiong says that pilot smart-grid projects will be launched this year in Guangdong, Hunan, and Sichuan.

Biomass

According to China's draft Renewable Energy Plan, by 2020 China aims to generate 30,000 MW of energy from biomass sources. A number of biomass and waste-to-energy facilities are coming online in China, but feedstock and transportation remain a challenge (see the CBR, May–June 2003, Generating Profits from Waste in Wenzhou). Canada's Richway Environmental Technologies Ltd. is building a facility near Xi'an, Shaanxi, with an exclusive biomass contract for corn straw, and is setting up a municipal solid waste facility in Qingdao, Shandong.

By 2020, China aims to generate 10 million tons of bio-ethanol and 2 million tons of bio-diesel, according to the draft Renewable Energy Plan. Ultimately, however, water problems may force China to adopt an import-focused biofuel policy, because food security is likely to take precedence.

Coal

Coal is indisputably the energy source most in need of clean technology. Cheap and plentiful, coal will be the most tempting energy choice for China as it grows rapidly. According to the NDRC's 11th Five-Year Plan (FYP) on Energy Development, in 2010 coal power will make up 74.7 percent of China's total power produced and 66.1 percent of power consumed—down only slightly from 76.5 percent and 69.1 percent, respectively, in 2005.

The country added a staggering 92,000 MW of coal-fired electricity generating capacity in 2006, about the same capacity as two Californias, according to Ogden. Last year, the carbon dioxide emitted from those coal plants alone exceeded the amount the European Union committed to cut under the Kyoto Protocol. To make matters worse, most of China's coal-powered plants are dirty (spewing forth nitrogen oxides, sulfur dioxide, carbon dioxide, particulate matter, and mercury) and use antiquated emissions systems. Because of a lack of central coordination, few, if any, of the new generating facilities are connected to China's grid, resulting in huge inefficiencies.

Though "clean coal" projects like FutureGen—a multi-national initiative to design, build, and operate the world's first coal-fueled, near-zero emissions power plant—are still years from commercial viability, China has a huge need today for pre-burn coal technologies, says Robert Hanfling, senior vice president of Evergreen Energy Inc. Others, like Chris Poirier, the CEO of Coaltek Inc., agree, but he also cautions that "the power infrastructure system in China is inconsistent. We rely on a consistent source of high-quality line power and relatively high up time to be successful, so China presents a number of execution challenges that other markets don't." Both Evergreen and Coaltek offer pre-burn technologies.

Helping to build a more intelligent transmission grid in China is critical for achieving efficiency. Many of the new plants being built are not on the network and are running below capacity. To achieve the most efficient use of these plants, transmission and monitoring equipment needs to be upgraded (see the CBR, September–October 2005, Electricity Woes).

Nuclear energy

Though uranium is not a renewable source, the PRC government groups nuclear power with other clean energy sources. China has stated publicly that it will heavily promote nuclear energy and leapfrog into more efficient, safer nuclear technologies than those currently used in the United States—but that will take time. According to NDRC's FYP on Energy Development, in 2010 nuclear power will make up 1 percent of China's total power produced and 0.9 percent of power consumed, up slightly from 0.9 percent and 0.8 percent, respectively, in 2005.

It's not easy being green—but it's necessary

With new studies and estimates painting ever bleaker pictures of looming environmental disaster, the need to reduce pollution and GHG emissions has never been more urgent, and that sense of urgency among PRC leaders and senior business executives in China is increasing. China, as both a rising power and as one of the world's largest energy consumers and polluters, has a key role to play in mitigating the effects of climate change—as does the United States. China also has the ability to take previously unaffordable technologies and make them commercially viable. "This is the century for transition to sustainable energy, and China could be the low-cost provider," says Ogden. "China could help everyone get to a green energy future, but it's got to get the policies in place and be able to enforce them and support technology innovation and adoption." Foreign companies and investors stand ready to help with new technologies and investments.

Cleaning China's Water

Just as shifting energy consumption and production to cleaner alternatives is vital, so is solving China's impending water crisis.

Jeff Fulgham, chief marketing officer for GE Water & Process Technologies, is bullish about China's cleantech business opportunities in water. He notes that water in China "is more of a technology play [more about technology innovation] than just building concrete basins in the ground," in part because the water in China is much dirtier than in other markets and requires more effective and relevant technology. He predicts that China will play a significant role in the innovation of technology for water disinfection and biological control. GE's technology research center in Shanghai is expected to become a global hub for developing new technologies in the coming years.

David Henderson, managing director of Toronto-based XPV Capital Corp., a boutique venture capital firm focused on water technology, adds that traditional purification technologies like reverse osmosis use too much energy and waste too much water for a market like China. He says that "China is already starting to leapfrog" existing water technologies, noting that the Beijing National Laboratory for Molecular Sciences is producing homegrown innovation around nanocomposite (a plastic that is stiffer and lighter than other plastics when heated or cooled) structures with water treatment applications.

China also uses water less efficiently than many other countries. For example, Chinese steelmakers use 20 times more water than their US counterparts, according to Fulgham. This means China needs industrial water reuse, effluent, and membrane technologies. Fulgham predicts that in 5–10 years, China will have a market for point-of-use systems that treat water in the basement of green buildings.

—William Brent

China's Plan to Address Climate Change

China released several environmental and energy efficiency plans and regulations in June, including the first policy blueprint on climate change. The National Plan to Address Climate Change discusses in general terms the broad array of policies that China will implement to mitigate and adapt to climate change, some of which may present opportunities for companies in the energy, building materials, transportation, and other sectors.

According to the plan, by 2010 China will reduce its energy consumption per unit of GDP by 20 percent and renewable energy will account for 10 percent of its primary energy supply. The plan also states that China will emit the same amount of industrially produced nitrous oxide as it did in 2005, "control the growth rate" of methane emissions, raise the percentage of land covered by forests from 18.2 percent in 2005 to 20 percent, and implement a variety of other measures to enable China to adapt to climate change. It is unclear whether China will meet all of these goals, particularly its energy efficiency target. Observers have widely noted that the plan does not mandate a cap on the emission of carbon dioxide, a principal greenhouse gas (GHG). Instead, the plan states that by 2010, China will emit 950 million metric tons carbon dioxide equivalent (MMTCO₂e) less in GHGs by developing renewable and other energy sources.

In the realm of energy efficiency, the plan reiterates many existing policies. These include prohibiting the production, import, and sale of products that fail to meet energy efficiency standards; encouraging consumers to purchase energy-saving products; devising incentives to encourage energy-saving buildings and vehicles; and focusing on energy use in the iron and steel, construction, and other sectors. According to the plan, the energy efficiency programs should reduce China's GHG emissions by 550 MMTCO₂e by 2010. The plan notes, however, that China lacks the best technology in all areas of energy production and use and lists the different technologies that China needs to better monitor, mitigate, and adapt to climate change.

—USCBC staff

NDRC's Energy Consumption and Production Forecasts (%)
Note: NDRC = PRC National Development and Reform Commission Source: NDRC's 11th Five-Year Plan on Energy Development
Energy Source	2005 Consumption	2010 Consumption
Coal	69.1	66.1
Oil	21.0	20.5
Hydropower	6.2	6.8
Natural gas	2.8	5.3
Nuclear power	0.8	0.9
Other renewable energy	0.1	0.4
Energy Source	2005 Production	2010 Production
Coal	76.5	74.7
Oil	12.6	11.3
Hydropower	6.7	7.5
Natural gas	3.2	5.0
Nuclear power	0.9	1.0
Other renewable energy	0.1	0.5

William Brent (wbrent@webershandwick.com) has worked in China for 20 years as an entrepreneur and journalist. He is now the Seattle-based head of the clean technology practice of Weber Shandwick, a public relations firm.

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