The real story on cleantech in China

October 6, 2009 - by Emma Ritch, Cleantech Group

The Chinese government wants 8 percent of energy from renewables and 30 GW of wind by 2020. What does this mean for investors?

China has emerged as one of the biggest potential markets for clean technologies thanks to the government's aggressive mandates.

But questions remain as to whether China's RMB 4 trillion stimulus package is boosting the right industries, according to a panel today on cleantech in China at Thomson Reuters' The China Deal 2010 conference.

"The jury is still out," said Fraser Mendel, partner at law firm Schwabe, Williamson & Watt. Mendel said the stimulus is prompting the development of wind farms in the wind-rich Inner Mongolia region but not sufficient transmission lines to carry the load to population centers (see China's stimulus package boosts water desal, recycling).

Inner Mongolia is estimated to have 787 gigawatts of potential wind power, with just 1.6 GW developed and installed in September 2008, according to the Chinese Renewable Energy Industry Association (see A-Power scores 50 MW wind contract for Inner Mongolia).

"I know the state grid is doing some development of very high voltage transmission lines, but it's not scheduled for implementation for three or four years, and the [wind power] plants are already done," he said. "You have plants in the middle of nowhere generating electricity that’s going nowhere."

Rocky Lee, a partner in the Beijing office of DLA Piper, noted that global reaction to China's clean energy goals has been skeptical. Among the mandates, China said it plans to reach 8 percent of energy from renewables and 30 gigawatts of wind by 2020 (see China drives global market, supply for wind).

"You need to have it independently verified," Lee said. "You'll probably hear this at Copenhagen."

But even as the market grows, many sectors are off limits for direct foreign investment, said Mendel of Schwabe, Williamson & Watt.

"One of the largest opportunities is in renewable energy, but a lot of foreign investors can't play," he said.

Matt McGovern, managing partner of McGovern Wang, noted that there are some exceptions, including that it's easier for foreign firms to make equity investments as opposed to loans.

"You can't give debt basically from outside," he said. Still, "the structural issues continually move, and it makes it difficult for bankers."

During the last couple years, many Chinese companies have turned to the public markets for new capital, said Bryce Lee, managing director of Credit Suisse. That's especially true for solar developers wanting to repair their balance sheets thanks to rapidly declining module and polysilicon prices (see ReneSola makes $325M acquisition, lowers ’09 guidance).

Lee said he thinks a new trend will soon emerge.

"Over time, the opportunities will shift from capital raising to mergers and acquisitions," Lee said. "One of the big issues in China is there's very little barrier to entry so many companies are trying same thing. Ultimately as the market develops you'll see consolidation, so M&A will be the next wave."

Lee highlighted China's traditional strength as a manufacturing base, and the U.S. strength of developing new technologies. Chinese manufacturers already make 39 percent of the world's solar panels and 45 percent of wind equipment.

Lee forecast that all of Asia will play a bigger role in developing technologies during the next 10 years.

"Hopefully it serves as a wakeup call for the United States, and hopefully it spurs what we saw in the early '60s," Lee said, invoking the rush to action in the U.S. after the Soviet Union's Sputnik launch.