The 12th 5 year plan – is China just blowing smoke? Alternative energy and its potential

In 2009, thermal energy was the country's primary source of electricity production, representing 80% of electricity generation, followed by hydro-power at 16%, nuclear power at 1.8% and other non-hydro renewables at 1.24%.

The 12th 5 year plan is ground-breaking in its emphasis on the importance of sustainable growth and using renewable sources of energy. Water consumption in industrial processes is to be cut by 30%. Non-fossil fuels are to account for 11.4 % of primary energy consumption. GDP CO2 emissions are to be cut by 17%. Forest coverage is to rise by 21.66%. Companies, such as Nalco, which sees the potential in this shift, is adamant to get involved and aims to grow in China by 20% in the next 5 years.

Does the Plan Mark a Transition?

This new 5 year plan is by no means an eco-political tectonic shift. China treads a fine line between slowing growth and inflation. But, this plan marks the realisation that continued reliance upon foreign resources undermines its security. China’s heavy involvement in Africa, Afghanistan, Indonesia and South America belie an insatiable thirst for raw materials, from oil to rare earths, timber through to copper. This reliance upon foreign resources, particularly from areas of unrest, is not ideal. Coupled with the notion of defence is of course the problem of our environment. In a recent RUSI report (Royal United Services Institute), John Mabey remarked:

“Climate impacts will force us into a radical rethink of how we identify and secure our national interests. For example, our energy and climate security will increasingly depend on stronger alliances with other large energy consumers, such as China, to develop and deploy new energy technologies, and less on relations with oil producing states.”

Defence

National Defence, the fear of climate change and potential profits are driving further R&D of sustainable energy. The production of renewable tech not only reduces China’s reliance upon other countries, but increases international reliance upon China. China is increasingly directing its efforts towards wind and solar power; it is now the largest global supplier of turbines and panels. China’s comparatively cheap labour allows it to undercut the US and European markets. Additionally, its value added tax, subsidies and forced purchase of renewable energy provides financial incentives.

Since 2000, the government has poured billions into the wind power sector, offering value added tax reductions for turbines with locally produced parts. Moreover, China has pushed down the price of solar panels by approximately half in the past 2 years. In an interview with the NY Times, Shi Zhengrong, CEO of Suntech, one of China’s largest solar panel manufacturers, said that it sells “solar panels on the American market for less than the cost of the materials, assembly and shipping.”

The result? Western companies will have to come to China in order to compete. China has simply priced many companies out of the market. Some companies, such as Evergreen Solar Inc, have shut down local operations in the US, and relocated to places like Wuhan, where they have minority stakes in solar power companies. By 2020, China aims to source a fifth of its energy from renewable resources. Currently, the goal for wind energy is 30 GW, but it has been said that the new goal could be 100GW. China generates only 120 megawatts of its electricity from solar power, so the new goal represents a 75-fold expansion in just over a decade. New incentives released mean that solar power projects approved after July 1 or projects that will finish construction after the end of this year will be paid CNY1 a kilowatt hour, according to the NDRC (National Development and Reform Commission). Solar projects that will be completed before the end of this year will be paid CNY1.15/kWh.

Problems of Infrastructure - the real hurdle

With this expansion, China must create or upgrade the existing infrastructure to make this process smooth. Currently, power is lost through transfer, or is inefficiently fed into the grid. Wind turbines stand by nuclear grids in Mongolia, or are situated 4,000 km from the main consumers on the East coast. And the rush to get subsidies or tax breaks  has resulted in local governments funding manufacturing, which in turn has led to over capacity. For example, China Power Union suggests that only 72% of the country's total wind power capacity is connected to the grid. Heavy investment is therefore required to create UHV (Ultra high voltage) lines and link up these isolated areas.

Foreign Companies

All this leaves western companies in an interesting position. The 5 year plan symbolises China gently opening up its doors to foreign investment and share uptake. It has the work force, but for the time being, the West has the technological edge. Companies should not only consider moving their operations to China, but also investing in this burgeoning area. Whether foreigners can access the market, invest in energy, or create safe JVs, is another matter altogether and necessarily comes down to negotiating China’s system.

The importance of competition provisions

A word of advice, if you enter a contract to license technology to a Chinese partner, or if you invite a partner to negotiate a deal, a license contract should always contain a clause which binds the partner’s employees by using non-compete provisions. Don’t let your greatest asset be taken. IP protection is fundamental and one should refer to a good lawyer. Too many JVs now compete with ex-employees. As for the rest, consider a company such as PTL Group, which already deals with a number of clients in industries such as water filtration, purification and waste management. Its experience in outsource management, establishing an entity, and factory set-up may be of use.