China clean energy: Policy power

China is the world’s leading polluter, but at the same time, it is greener than anyone else. On one hand, the country accounts for around 28% of global emissions; on the other, it leads the way in wind and solar farm installation and boasts half the world’s electric vehicles, including 99% of electric buses.

“Clear waters and green mountains are mountains of gold and silver” coined by President Xi Jinping in 2005 - while still governor of Zhejiang province - was written into the report to the 19th Communist Party National Congress in 2017. Referred to as the “two mountains theory,” it continues to set the tone for China’s pursuit of economic dividends through clean energy development.

While the US has pulled out of the Paris Agreement, which bound countries to curbing global average temperature increases, China remains involved. The country announced in 2018 that it had reached its 2020 carbon intensity reduction target – a 46% drop on the 2005 level – three years ahead of schedule. Its forest stock was up by 2.1 billion cubic meters and renewable energy accounted for 13.8% of primary consumption. On the first metric, the country beat the 2020 target; on the second, it was confident of getting to 15% before 2020.

“The regulators in China have a long term policy goal. It is a policy of engagement, while the US pursues a policy of isolation. China is actually taking the lead in working with European countries on general sustainability,” says Ray Fung, founding partner of JIDA Capital, one of few private equity firms focused solely on clean energy in China.

Slowdown explained

However, a recent report published by BloombergNEF claims that investment in renewable energy in China fell 8% in 2019, the worst single-year performance since 2013. Solar felt the brunt of the impact following a decision to cease national-level subsidies. Investment in the segment – by financial and strategic players – decreased 33% to $25.7 billion, less than one-third of the 2017 total. New installations fell from 53 gigawatts in 2017 to 25 GW in 2019.

Some industry watchers interpret as a policy change driven by tensions with the US. “Against the backdrop of an ongoing US-China trade war and a slowing Chinese economy, political priority of climate change in China is unlikely to become very high in the near future, indicating great difficulties for Beijing to further upgrade its climate ambitions,” says Kevin Tu, a fellow at the Center on Global Energy Policy at Columbia University.

JIDA’s Fung disagrees. The removal of solar subsidies should be seen in its proper context: solar has achieved grid parity – it generates power at a cost that is less than or equal to the market price of buying from the grid – one year ahead of the 2020 target, so subsidies were no longer deemed necessary. Meanwhile, the State Council endorsed the updated clean energy plan that envisages an accelerating pace of decarbonization through 2050.

Another view, endorsed by Li Zhang, a partner at Cathay Capital who leads the firm’s smart energy strategy, is that China’s approach to subsidies is becoming more nuanced.

“Take electric vehicles as an example,” she says. “In the past, as long as you built a car, you could get a subsidy. Now the car must be driven a certain number of kilometers before it qualifies for subsidies. The same logic is applied to charging stations. Previously, you receive subsidies once you built them; now you must operate them for a certain period of time first.”

Despite COVID-19, China’s renewable energy generation rose steadily during the first half-year, with solar and wind growing 9.1% and 6.8% year-on-year, respectively. Thermal power output fell by 1.60%.

According to BP’s 2019 energy outlook, renewables will meet 27% of China’s primary energy consumption needs by 2040, up from 11% in 2017. Most of that will be solar, wind and biofuels, with the hydropower share only projected to rise from 8% to 9%. Meanwhile, the coal share is set to plummet from 60% to 35% - coal demand peaked in 2013 – although China will remain the world’s largest consumer of the commodity.

Solar slip-ups

PE and VC investors have sought to ride the renewables growth wave, but participation has been inconsistent. A dozen or so cleantech IPOs between 2007 and 2011 raised more than $3.5 billion and this drew more capital into the space, with 70-plus deals announced during that period. Activity then quickly dropped off and it has barely recovered.

The likes of Sequoia Capital China and Qiming Partners used to have dedicated clean energy teams but these strategies have been absorbed into broader technology, media and telecom (TMT) coverage in recent years.

Cathay’s Zhang notes that relatively few investors profited from their cleantech deals. This is because solar and wind farms survived on subsidies. Much has changed in the past 12 months, though – which might explain why investment in cleantech investment stands at $1.1 billion for 2020 to date, already the second-highest annual total on record.

With many developers now able to generate clean energy as cheap as coal-fired plants, Beijing decided to add 48 GW of solar capacity this year, twice as much as in 2019. Only projects that have achieved grid parity would be approved.

There are still lessons that can be learned from the capacity binge of 2017 that ultimately led to a raft of bankruptcies when national-level subsidies were withdrawn. “China installed 53 GW of capacity in 2017, but the government’s plan was for only 20 GW, so obviously something was going wrong,” says JIDA’s Fung, who had predicted the crash. He warns that industry participants must understand the investment and regulatory cycles.

Nevertheless, Fung believes that distributed solar farms are attractive assets – with very low operating costs, very high EBITDA margins and a long asset life that fits the profile of infrastructure investors. The grid parity requirement is also crucial. “A profitable industry is emerging in clean energy,” says Zhang. “It’s a huge sector, with few investors participating.”

Cathay’s smart energy fund recently invested in a Chinese developer of perovskite-based solar cells. Perovskite represents a cost-effective alternative to traditional silicon-based raw materials, which consume a lot of energy during fabrication. The photoelectric conversion rate of perovskite is significantly higher and the fabrication process happens at a lower temperature and pressure. The company is set to enter commercialization in 3-5 years.

Storage solutions

The bottleneck in clean energy development is storage. Many large projects are located in remote provinces like Qinghai, Gansu, and Inner Mongolia, where energy supply far outstrips demand. The level of “curtailment” – energy that is generated but not purchased because it cannot be absorbed by the electricity grid – is a pressing issue. Elevated solar curtailment rates in Gansu, Xinjiang and Tibet, led China’s National Energy Agency to halt approvals for new solar projects in those areas last year.

One solution is to build transmission lines that enable the transportation of power from these western provinces to more densely populated and industrialized locations along the coast. China recently completed construction of a RMB22.6 billion ($3.17 billion), 1,587-kilometer ultra-high voltage electricity line, the first to be used exclusively for clean energy. Connecting Qinghai and Henan it is scheduled to come into full operation in December.

Even then, there are still challenges around integrating renewable energy into traditional grids because it isn’t stable. Wind farms and solar farms only produces electricity when the wind blows or the sun shines. “Power integration is a challenge for the whole world. If you don’t have good energy storage technology, you can only use green energy in local networks. You won’t be able to connect it to a larger power grid,” says Jiantao Xia, founder of Allsense Technology, a smart energy-saving solutions provider.

Numerous business models have emerged for storage, to the point that battery systems have now become a standardized component of solar farms. Several PE investors told AVCJ that storage is one of the biggest opportunities within clean energy sector, especially given how aggressive electric vehicle (EV) development has brought down the cost of batteries.

Recent deal activity in this area includes Hillhouse Capital committing RMB10.6 billion ($1.5 billion) to EV battery manufacturer Contemporary Amperex Technology (CATL). It is part of a RMB19.7 billion capital raise by the Shenzhen-listed company, which counts Tesla as one of its customers

“While the infrastructure side is regulated, we can invest more in products, implementation and application side. The battery is one of the most promising sectors. Along the supply chain, you have battery manufacturers, assemblers, and battery material providers,” says Kevin Yang, a senior associate and ESG [environment, social and governance] team leader at Starquest Capital, a domestic fund-of-funds.

Starquest’s portfolio includes EV makers Li Auto and WM Motors as well as battery components supplier Kaijing New Energy.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Cleantech
• Expansion
• Infrastructure
• Technology
• China
• energy
• renewable energy
• JIDA Capital
• Cathay Capital Private Equity
• Starquest Capital