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China’s Renewable Energy Sector
An Overview of Key Growth Sectors




            8 January 2013
            This document has been produced by Solidiance exclusively for this presentation.
            Copyright restrictions (including those of third parties) are to be observed. All
            information, views and advice are given in good faith but without legal responsibility.
            Whilst every effort has been made to ensure the accuracy of the information and data
            contained herein, Solidiance accepts no responsibility for any errors and omissions
            however caused. The information contained herein should not be regarded as a
            substitute for legal advice.
2   www.solidiance.com
Executive Summary

R     enewable energy is an increasingly hot topic in China and
      is a sector targeted for increasing amounts of government
attention and investment before 2020.

This paper provides a snapshot of the renewable energy market
in China and demonstrates the challenges and opportunities
faced by this important industry. The paper identifies the three
key drivers behind the increasing importance of renewable
energies to China, before examining the Chinese government’s
targets and strategies at the root of this industry growth in China.

By examining four key sectors in focus, hydro power, wind
power, solar PV and biofuels, this paper ultimately demonstrates
that while renewable energies are vital to China’s continued
sustainable growth, there are a number of challenges which must
first be overcome in each of the renewable sectors examined
here if China is to extract the maximum potential from their
renewable energy industries.




                                                                       3
The Importance of
Renewable Energy
to China

T
      he use of renewable energy is an increasingly hot topic
      and important issue in China.




             In the face of the problems of climate change,
            greenhouse gas emissions and oil prices rising,
          the public has come to realize the importance of
             developing renewable energy. More and more
             people opt for green travel or low-carbon life-
           styles and the public media has been increasing
          its coverage and publicity of the development of
             low carbon technology and renewable energy.

                 – Liu Mingliang, Analyst, China Wind Energy Association




According to Solidiance analysis, there are 3 key drivers behind
the continued interest in renewable energy in China:

1.	 China’s increasing demand for electricity.
2.	 China’s need to reduce its reliance on coal for energy
    production
3.	 China’s need to reduce its greenhouse gas emissions.




4    www.solidiance.com
Increasing Demand
               for Electricity


Importance
of Renewable
Energies to    Reduce Reliance on
China          Coal




               Reduce Greenhouse
               Gas Emissions




                                    5
China’s Increasing Demand
for Electricity


                              Electricity
                              Consumption in China

    4k




3.2k




2.4k




 1.6k




800k




 0%
          2000        2001      2002   2003      2004      2005        2006        2007       2008        2009        2010         2011


                                                                                                                 Source: CIA handbook




Driven by China’s well-documented rapid economic growth over the past 30 years, China’s energy consumption has more
than doubled in less than 10 years. China is now the world’s greatest consumer of energy and as the Chinese government
continues to invest in moving Chinese manufacturers away from low-cost manufacturing and higher up the value chain into
greater value added activities, China’s demand for energy shows no signs of easing. China produced 1/5 of the world’s total
electricity in 2010, officially overtaking the USA for the first time to become the world’s largest generator of electricity.

China’s demand for energy as well as its capabilities and capacity for energy production are now positioning China to seize
the opportunity to take the lead in the development of sustainable energy technologies, so as to further cement its position
as an international leader in renewable energies.

                                                               Source: BP Statistical Review of World Energy June 2012 and CIA handbook




6        www.solidiance.com
Electricity Generation in China
Terawatt – hours (TWh)
                                                                                                                    4700

                                                                                                         4207

                                                                                              3715
                                                                                  3467

                                                                     3282

                                                              2866

                                                   2500

                                       2203

                            1911

                1654
    1481




    2001        2002       2003         2004       2005       2006   2007         2008       2009        2010        2011

                                                                            Source: BP Statistical Review of World Energy June 2012




             5%                    JAPAN                                       RUSSIA
                                                                                                 4.8%


4.6%                INDIA                         Electricity
                                                  Generation
                                                    Global
                                                    % Total
                                                                                          REST OF
                                                                                          WORLD              44.7%
                                                      2011




  21.3%                       CHINA
                                                                              USA
                                                                                                19.6%

   Although the economic development and growth is slowing down, there is still a huge demand for energy
   in China and that is certainly the main driver for renewable energy growth.

   – Qiao Liming, Director for China, Global Wind Energy Council




                                                                                                                                 7
China’s Need to Reduce
Reliance on Coal
                                                                          84%

77%

                                                                                                  69%




                           18%
                                                                                 5%                           12%          12%


                                                        3%    3%    3%                                  3%
                   2%                                                                                                2%           2%
                                                  2%
             1%                  1.3%

      0.4%



Renewables Total %: 19.3%                        Renewables Total %: 89%                          Renewables Total %: 14%
Renewables Total % (Ex-Hydro): 1.3%              Renewables Total % (Ex-Hydro): 5.2%              Renewables Total % (Ex-Hydro): 2.2%




CHINA                                           BRAZIL                                               INDIA
                                                                                                  Coal & Peat
       Renewable energy is a necessity                                                            Oil
                                                                                                  Gas
       for overall economic growth                                                                Nuclear
       and energy security in China                                                               Hydro
                                                                                                  Solar PV, Wind Biofuels
                                        Source: BP Statistical Review of World Energy June 2011




             47%
                                                  45%                                                         44%
                                                                                                  28%
                                                              23%
                           18%                                      20%                                             18%
17%
                   16%
                                                                                                                                  6%
                                                                          7%
       2%                                                                        4%
                                                                                                                           2%
                                                        1%                                              1%

                                 0.3%


Renewables Total %: 18%                          Renewables Total %: 11%                          Renewables Total %: 7%
Renewables Total % (Ex-Hydro): 0.1%              Renewables Total % (Ex-Hydro): 3.4%              Renewables Total % (Ex-Hydro): 4.9%




RUSSIA                                                  USA                                                  UK
8     www.solidiance.com
C     hina is quickly realising that coal will no longer be able to support
      the growth of its economy. Considering the logistical aspects of using
coal, China has to either import it or have it removed from mines which is
very difficult, and as a matter of fact, China is now rapidly using up its coal
capacity. China is now recognising that it is unable to get more coal as
quickly as it is needed, so China will have to switch to something else.

In the future, the effectiveness of China’s industrial evolution will no
longer be judged on the speed of development alone. Instead, the
application of smarter, more sustainable energy sourcing techniques will
serve as a stronger indicator of China’s next generation of successful
growth in the coming 10-15 years.




                                                                                  9
Carbon Dioxide Emissions
                              (Million Metric Tons)

9000




8000                                                                                            CHINA



7000




6000

                                                                                                USA

5000



4000




3000




2000
                                                                                                RUSSIA
                                                                                                JAPAN
                                                                                                INDIA
1000




     0

           2000        2001   2002   2003   2004   2005   2006   2007   2008   2009   2010


                                                                                      Source: EIA Statistics




China’s Need to Reduce
Greenhouse Gas
Emissions


10       www.solidiance.com
China’s reliance on coal and peat makes it
     the world’s highest emitter of greenhouse
     gasses. Overtaking the USA in 2007, China was
     responsible for emitting more than 8300 million
     metric tons of carbon dioxide in 2010: nearly
     3000 million metric tons more than the USA and
     more than 6500 million metric tons compared
     to India.




C      hina now faces significant pressure from
       international organisations to reduce its carbon
dioxide emissions. In November 2009, just before
the United Nations Climate Change Conference in
Copenhagen, Chinese Premier Wen Jiabao pledged to
reduce China’s carbon dioxide emissions by 40-45%
from 2005 levels by 2020. In order to do this, the
Chinese government will need to continue heavily
investing in renewable energies and increase the use
of sustainable energy sources in its overall energy
mix. China targets to increase the use of renewable
energies from around 9% of its current total energy
mix, to 15% by 2020.

Whether or not these targets will be successfully met
remains to be seen. There are still serious doubts as
to whether or not China will be able to successfully
reduce its dependence on coal generated power,
as Qiao Liming, China’s Director of the Global Wind
Energy Council acknowledges, “the Chinese energy mix
is still quite heavily reliant on coal and I don’t see that
this situation will ever fundamentally change”. Despite
this uncertainty, the Chinese government is investing
heavily in renewable energy in a bid to meet its self-
prescribed targets.




                                                              11
The
Government’s
Go Green Push
The Renewable Energies sector presents China
with an opportunity for global leadership




12   www.solidiance.com
Green economy, low carbon technology, etc. are emerging…
In some of these sectors, the gap between the emerging economies and the
developed nations is relatively small.
In that environment, all we need to do is to take advantage of these [market]
trends; if we respond appropriately we can seize this opportunity, gain the upper
hand, and push forward a new breakthrough in development.
– Chinese Vice Premier Li Keqiang




                                                                                    13
China’s                                                 C    hina’s rapidly expanding urban population and push
                                                             for continued GDP growth make its reliance on

Investment                                             non-renewable energy sources unsustainable. Continued
                                                       investment in renewable energy is required to meet
                                                       government growth targets. China’s investment in
in Renewables                                          renewables has grown at around 80% per annum since
                                                       2004, clearly demonstrating China’s commitment to
                                                       pursuing global leadership in renewable energies and
                                                       building a sustainable support structure for the continued
     RENEWABLE ENERGY                                  growth and development of its national economy.
     INVESTMENT
     US$ Billions


                                                       Chinese
                                                48.9



                                         38.3
                                                       Government
                           14.2
                                  23.9
                                                       Targets
                   9.2

            4.7

     1.5                                               The 2006 Renewable Energy Law
     2004 2005 2006 2007 2008 2009 2010

                                                       T    he China Renewable Energy Law was accepted on 1


           CHINA
                                                            January 2006 and was China’s first state-supported
                                                       mandate to help develop the use of renewable energy in
                                                       China. The law is still a key driver of renewable energy
                                                       development in China.
                                  13.2
                                                       The 2006 Renewable Energy Law not only encourages
                                          7.3
                                                6.9    the continued construction of renewable energy facilities,
                            6.4
                   4.2                                 but also puts pressure on the Chinese grid operators to
            1.8
                                                       purchase the power generated by approved renewable
     0.5
                                                       facilities. The excess cost between the lower cost
     2004 2005 2006 2007 2008 2009 2010                traditional power and the higher cost renewable energy
                                                       is subsidised by the government and collected through a

           BRAZIL                                      surcharge on the price of consumer electricity, collected
                                                       from all customers on the grid. This surcharge was
                                                       doubled in December 2011, increasing from 0.04 RMB per
                                                       kWh of electricity to 0.08 RMB per kWh, creating a total
                   3.8
                            5.1
                                  4.1                  subsidy fund of around 50 billion RMB, all of which is used
                                                3.8
            2.7                          3.0           to further develop the use of renewable energy in China.
     1.3


     2004 2005 2006 2007 2008 2009 2010                However, despite the implementation of legal obligations
                                                       at a national level, provincial and industrial level


             INDIA                                     infrastructure problems still create challenges for the




14    www.solidiance.com
future of renewable energy growth in China, thus more      periodically during peak season. This suggests a lack
specific targets and schemes must still be developed       of systematic planning of how to develop renewable
during each of China’s five year planning periods.         energy systems along with the relevant supporting
                                                           industries as part of the government’s push to reduce
                                                           China’s carbon dioxide emissions in line with their
The 12th Five Year Plan 2011 - 2015                        self-imposed targets.


T     he 12th Five Year Plan focuses heavily on
      adjusting the economic growth model.
                                                           Highlighting the discrepancy between the planned
                                                           targets and the implementation roadmap, a Senior
Sustainability is highlighted as key for future            Diplomat from the Department of Energy at the US
development of the economy during this planning            Embassy in Beijing explains that government targets
period. 3 areas for focused investment have been           can not be met without explicit instructions on how
identified for the planning period, namely clean energy,   to achieve them. “The Five Year Plan is a strategic
energy conservation and clean energy cars. Energy use      plan of where the government wants to go, but they
is targeted to be reduced by 15% per unit of GDP, with     don’t specify how they will get there. The 12th Five
carbon dioxide emissions to be reduced by 17% by the       Year Plan has been out there for a year or so, but is




end of the planning period. There will be a minimum        not in a position of serious implementation. They are
investment of RMB 5.3 trillion (around US $830             only now beginning to look at it from an industrial
billion) into the power industry, with hydro power,        level and trying to figure out how they can get to
wind, solar, biomass and grid development as key           where they want to go, they are only now finalising
targets for this investment. The 12th Five Year Plan       the ‘how’ part of their strategy”.
marks a turning point for Chinese development and
demonstrates the Chinese government’s dedication           This raises questions as to how well government
to create a sustainable growth model to help propel        targets at a national level are coordinated with the
China into the next stage of its development.              development of renewable energy technology and
                                                           industry. To examine this further, it is necessary to
Despite having set very ambitious targets for the          explore key renewable sectors at different stages of
increased utilisation of renewable energy by the end       development in focus – hydro power (approaching
of the 12th Five Year Planning period, questions still     decline), wind power (approaching maturity), solar PV
remain as to how effective these strategic targets         (entering growth) and biofuels (introduction stage).
will be at developing the supporting industries. To
help meet the energy and carbon dioxide emission
reduction targets during the 11th Five Year Plan
period (2006-2010), factories were shut down




                                                                                                                   15
Sector Development

                       Biofuels
                       Introduction Stage

                                                         Solar PV
                                                         Entering Growth

                                                                                                   Wind
                                                                                                   Approaching
                                                                                                   Maturity
     Market Maturity




                                                                                                   Hydro
                                                                                                   Approaching
                                                                                                   Decline




These industries are particularly interesting for focused exploration as they represent different stages of development in
renewables in China.

Hydro – Approaching Decline: With fewer suitable locations for the installation of hydro power, the industry is experiencing a
‘final push’ before the final slowdown. The well-established industry is past its peak and now moving towards decline.

Wind – Approaching Maturity: With well-established distribution channels and product standards maturing, the industry is
seeing slowed growth after a period of rapid expansion, with recovery rates uncertain.

Solar PV – Entering Growth: With a large number of competitors in the market, industry players are seeking to differentiate
themselves, regularly creating product innovations and receiving increased levels of investment.

Biofuels – Introduction Stage: With technical issues still being resolved, industry players are now beginning to show an
interest in the sector. The infant industry is being investigated for future investment, with rapid future growth expected.




16      www.solidiance.com
Industry Analysis
China’s Hydro
Power

        Hydro power is China’s most well-developed renewable energy resource. In
        a sector dominated by state-owned enterprises and characterised by strict
        government influence, hydro power looks set for increased investment and
        growth until 2020.

        After 2020, investment forecasts appear bleak, with limited available capacity
        restricting the continued growth of hydro power in China.
        Source: Own interviews




                                                                                         17
197
                                                                213
                                                                        China Cumulative
                                           172                          and Newly
                129
                            145
                                                                        Installed
117                                                                     Hydro Capacity
                                                                        2005-2010
                                                                        Giga Watts (GW)
                                           27
                                                          25
                              16
                12                                              16          Cumulative Installed Capacity
                                                                            Newly Installed Capacity

                                                                        Source: Renewables 2012 Global Status Report and
2005           2006         2007          2008           2009   2010    China Electricity Council Statistics



           Total Installed Capacity 2011                               NEWLYInstalled Capacity 2011



           REST OF WORLD                         49%                   CHINA                                 50%

           CHINA                                 22%                   REST OF WORLD                         25%

           BRAZIL                                        8%            VIETNAM                                   8%

           USA                                           8%            INDIA                                     6%

           CANADA                                        8%            BRAZIL                                    6%

           RUSSIA                                        5%            CANADA                                    5%
          Source: Renewables 2012 Global Status Report




18     www.solidiance.com
Government
                                                        Targets and
                                                        Subsidies




H     ydro power remains China’s most well-
      developed form of renewable energy, with
nearly 5 times more installed capacity than wind        GOVERNMENT TARGETS
power in 2010, making up around 20% of China’s
generating capacity, compared to less than 5% for
wind and solar combined. Installations of hydro
power continued to rise in the period up to 2011,
with China accounting for 22% of the total global
installed hydro power capacity, almost 3 times                       2015
higher than its nearest rival, the USA. China’s newly        Total Installed Capacity of 325 GW -
installed capacity accounted for half of the world’s         284GW (conventional hydropower) +
total newly installed hydro power capacity in 2011,                41GW (pumped storage)
demonstrating the country’s continued determination
to exploit its available hydro power resources.

With government targets for hydro power


                                                                    2020
installations of around 325GW by 2015 and a newly
revised target of 430GW (up from 380GW) by 2020,
China’s love affair with hydro power looks set to
continue over the next decade as investment in               Total Installed Capacity of 430GW –
hydro power becomes one of China’s key focuses.                 revised upwards from 380GW
(Source – New Scientist, Xinhua, China Global Times,
Deutsche Bank, own interviews)

Although hydro power is the most cost effective
                                                        GOVERNMENT SUBSIDIES
method of creating energy from a renewable source,                    FEED IN TARIFFS
challenges such as the long development periods,                    0.2-0.3 RMB per kWh
associated social displacement and environmental
concerns as well as the increasing difficulty in
accessing potential development sites suggest that
China’s investment in hydro power will decline after      Source: New Scientist, Xinhua, China Global Times,
                                                                   Deutsche Bank, own interviews
2020.




                                                                                                               19
Who Are
                           The Key
                          Players




20   www.solidiance.com
T     he Chinese hydro power sector is dominated by SOEs, in both operation and construction. In the operation
      of Chinese hydro power facilities, the top 10 players occupy almost half of the market in terms of installed
capacity of hydro power, many of the top 10 state owned firms. In terms of the construction of Chinese hydro power
facilities, the three dominant market leaders belong to the State Owned Assets Supervision and Administration
Commission (SASAC) and the Chinese Armed Police Force.

This demonstrates not only the government’s keen interest in developing and assisting the construction of large
hydro power facilities, but it also shows clearly the dominance of Chinese players within the market. Whilst it
is possible for foreign firms to invest in the sector, their capacity is largely limited to a supporting role, with the
government firmly controlling the development of this carefully crafted sector.

Source: State Electricity Regulatory Commission (SERC)




 53%
                                                                                      A   China Yangzi River Utility
              Top Ten Domestic Hydro Facility                                         B   China Uility Investment
              Operators 2011 - Market Share %                                         C   China Huadian
                                                                                      D   China Datang
        10%
                                                                                      E   China Huaneng
               8%                                                                     F   China Guodian
                      7%     7%
                                    5%     5%
                                                                                      G   State Direct Investment
                                                  2%     2%
                                                                                      H   Hubei Energy
                                                                1%                    I   Guangdong Electricity Dev.
                                                                        0%
                                                                                      J   Zhejiang Energy Group
  A      B      C      D      E      F      G      H      I      J      K
                                                                                      K   Other
Source: State Electricity Regulatory Commission (SERC) - China Electricity Council




 66%
                                  Top Ten Domestic Hydro                              A   Sinohydro Corporation
                                  Facility Constructors                               B   China Gezhouba Group
                                  2011 - Market Share %                               C   Other
        19%                                                                           D   China Anneng Group


               11%



                       4%




  A      B      C       D

 Source: State Electricity Regulatory Commission (SERC) - China Electricity Council




                                                                                                                          21
Advantages of Hydro Power
The chief advantage of hydro power is its considerable cost effectiveness in comparison with other renewable energy forms
such as wind or solar.

Marginal Cost For Different Energy Production Methods (RMB)

                                                        Hydro         Fossil           Wind           Nuclear              Solar

 High                                                    0.37          0.53             0.62             0.48                1.4

 Medium                                                   0.2          0.38             0.43             0.38              1.23

 Low                                                     0.03          0.33             0.36             0.35              0.81

                                                                                                        Source: Haitong Securities



E      lectricity produced by hydro electric power is the most cost effective and stable form of renewable energy, allowing
       developers to install hydro electric power without the need for considerable feed in tariffs. As a senior diplomat from
the US Embassy’s Department of Energy in Beijing acknowledges, “the Chinese government’s focus has been on hydro, as it is
the most well- developed technology and can be used as a base load due to its consistency”. Hydro power also benefits from
flexibility, with plants being able to adjust their output quickly to adapt to changing energy demands over certain periods,
as confirmed by a chief engineer from the Gezhouba Group who states that “hydro is the most efficient method of power
generation, because we can control the capacity and store the power easily”.

Considering this, it is easy to understand why hydro power remains the priority interest for the Chinese government in driving
forward their use of renewable energy and reducing their carbon dioxide emissions.




22      www.solidiance.com
Disadvantages of Hydro Power
Despite its appearance as the most effective of all renewables, hydro power also carries some serious disadvantages which
will impact the future development of hydro power in China. Firstly, hydro power projects have a lengthy development period.
For example, despite the main construction of the dam body being completed in 2006, the Three Gorges Dam project was
only declared fully functional as of July 2012 when the final turbine began production. The lengthy and complex process
reduces the investment appeal of large scale hydro projects.


S     ocial and environmental consequences of large hydro power installations are another inextricable challenge for
      hydro power. Almost 1.5 million people were displaced due to the construction of the Three Gorges Dam, a level of
displacement which, according to analysts, will make future hydro power development more complicated. The enormous
reservoir created in the Yangtze River by the Three Gorges Dam project is now plagued by pollution and in 2009, construction
on a major hydro power dam project was halted due to environmental objections. In 2012, China is still experiencing one
of the most severe droughts in the past 50 years, affecting water availability and flows, complicating the coordination and
integration of hydro power. However, whether or not such issues will severely impact China’s continued investment in hydro
power is uncertain. According to one analyst, “environmental and social aspects could theoretically have the biggest impact
on China’s use of hydro power in the future, however, this really depends on the continued evolution and change in the
Chinese political system, which is not something anyone is able to predict”.

Finally, hydro power should be regarded as a finite resource. There are a finite number of locations suitable for large scale
hydro projects and China is quickly reaching its capacity. It is clear that China’s golden days of relying on hydro power
to meet its renewable energy quotas are gone and that whilst hydro power may be entering a new period of increased
investment, the end is in sight. Industry players are now quitting the market, as confirmed by a previous sourcing manager
from GE Energy, “we have already sold our hydro power business division because the global market is shrinking”. After 2030,
expansion in hydro power in China will become increasingly difficult as suitable sites become harder to find. (Source: Xinhua)




                                                                                                                           23
Three Gorges Dam
                 China’s Three Gorges Dam spanning the Yangtze River is the world’s largest hydro power station in terms of
                 installed capacity with a maximum capacity of 22.5GW. The dam became fully functional on 4 July 2012 when the
                 last of the 32 main turbines began production. The project is regarded as a historic feat of engineering for China
                 and can be considered as a turning point in the development of the domestic hydro power industry. Through the
                 development of the project, the Chinese industry gained valuable technological capabilities through partnering
                 with foreign suppliers. (source – China Three Gorges Corporation)




H     owever, the dam project has been widely criticised among the international community, with the Chinese government
      admitting the existence of social problems and pollution caused by the dam. A director from the Yangtze River
Water Conservancy Committee admitted “we put 1/3 of our total expenditure into the allocation of migrants”. During the
construction of the Three Gorges Dam, almost 1.5 million people were displaced, with archaeological and cultural sites being
flooded and an increased risk of landslides in the area being attributed to the construction of the dam.

According to the Chinese Society for Electrical Engineering, the dam was expected to provide 10% of China’s power, however
as electricity demand continued to increase during the lengthy construction period, the dam only supported around 1.7% of
electricity demand in China in 2011. The controversial project was expected to be the jewel in the crown of China’s hydro
development, however, the project has created a number of doubts over the application benefits of large scale hydro power
and could serve to complicate the development of similar large scale projects in the future, such as those in the Jinsha and
Mekong Rivers.




24   www.solidiance.com
Hydro Power Summary
 W       hilst on the surface the Chinese hydro power sector
         appears to be on the verge of a period of increased
 development, the government’s immediate investment plan
 within the sector masks the fact that hydro power in China
 is a market past its prime. With an ever shrinking availability
 of resources and increasing resistance to the social and
 environmental consequences of hydro power installations, China
 will need to begin investigating other options away from hydro
 power as well as to focus on other renewables, such as wind and
 solar.




                                                                   25
Industry Analysis
China’s Wind
ENERGY
                          2011 marks the beginning of a period of adjustment in the Chinese wind power
                          industry as government regulations and requirements increase, the overheated
                          market begins to consolidate and power grid capabilities take time to catch up to
                          meet the unharnessed production output of current installed capacity.

                          With key industry trends including consolidation and internationalisation, the
                          Chinese wind power market is taking the opportunity to mature.

                          While long term market growth is still likely, the unpredictable outcome of this
                          adjustment phase makes short term growth patterns uncertain.




26   www.solidiance.com
China Cumulative and
Newly Installed
Wind Capacity
2005 - 2011
Giga Watts (GW)



    Cumulative Installed Capacity
    Newly Installed Capacity

                                                                                   62.733




                                                                     44.733



                                                         25.104


                                                12.120                 19.629        18

                                5.912                    12.984

                2.599                            6.208
1.266
                                        3.313
                        1.333
        0.502



2005            2006            2007             2008     2009          2010        2011


                                                          Source: Global Wind Energy Council




        2011 is the first time that newly installed wind power capacity has
        been lower than the previous year.




                                                                                           27
Global Total Installed                     Global Newly Installed
Wind Capacity 2011                         Wind Capacity 2011
Mega Watts (MW)                            Mega Watts (MW)



CHINA                                26%   CHINA               44%

USA                                  20%   USA                 16%

GERMANY                              12%   INDIA                7%

SPAIN                                9%    GERMANY             5%

INDIA                                 7%   UK                  3%

FRANCE                               3%    CANADA              3%

ITALY                                3%    SPAIN               3%

UK                                   3%    ITALY               2%

CANADA                               2%    FRANCE              2%

PORTUGAL                             2%    SWEDEN              2%

REST OF THE WORLD                    13%   REST OF THE WORLD   13%
Source: Global Wind Energy Council




28   www.solidiance.com
Government
                                                                          Targets and
                                                                          Subsidies
                                                                          GOVERNMENT TARGETS



                                                                          2015
                                                                          Total Installed Capacity of 100 GW
                                                                          5 GW Installed Offshore – 30 GW by
                                                                          2020

                                While government targets
                                and subsidies are financially             GOVERNMENT SUBSIDIES
                                suitable to help support                  FEED IN TARIFFS
                                industry development, the
                                Global Wind Energy Council                Feed in tariffs vary according to installation
                                believe that the government               region:
                                now needs to become more
                                involved in setting policy                Windy areas of Inner Mongolia and Xinjiang –
                                for standardisation of wind               RMB 0.51/kWh, other parts of Inner Mongolia and
                                power regulations.                        Hebei – RMB 0.54/kWh, Jilin, Heilongjiang, Gansu,
                                                                          Ningxia and remaining parts of Xinjiang – 0.58/
                                                                          kWh, all other areas – RMB 0.61/kWh

                                                                          CONCESSION ROUNDS

                                                                          Primarily for offshore wind

                                                                          1.	   Pilot scheme – 2010 Shanghai Donghai
                                                                                Bridge – RMB 0.987/kWh

                                                                          2.	   Jiangsu Province – tariffs ranging from RMB
                                                                                0.62-0.73/kWh

                                                                          •	    These tariffs are regarded as too low,
                                                                                delaying construction

                                                                          •	    A second concession round due 2012



Source: China Greentech Initiative Renewable Energy Finance Autumn 2011
IEA Technology Roadmap – China Wind Energy Development Roadmap 2050




                                                                                                                         29
Current Overview




                           Although newly installed wind capacity continued to grow in
                           China in 2011, it was at a slower overall rate than previous years.
                           However, China still dominates the global wind energy market with
                           25% of total global installed wind capacity and leading global
                           growth, installing almost half of the world’s total new wind power
                           installations in 2011.

                           Source: Global Wind Energy Council




                          T     he slower pace of new installations in China marks a new
                                period of adjustment for the industry, which has, until
                          now, undergone almost a decade of unchecked, unassisted and
                          uncoordinated growth. Despite the government’s ambitious growth
                          plans by 2015, the Chinese wind power market is now expected to
                          plateau, although it is uncertain how long for. Those within the
                          wind turbine manufacturing industry expect the market to pick up
                          within 2 years, but according to Qiao Liming, the Director for China
                          at the Global Wind Energy Council, this estimate is optimistic and
                          the slowdown period could last for anything up to 5 years. Other
                          renewable energy experts in the Chinese government have even
                          suggested the wind power market may take up to a decade to
                          recover, with others suggesting wind power in China has almost
                          reached saturation, with continued future growth uncertain.

                          There are 2 key reasons for the slowdown in newly installed
                          capacity – the need for more regulated growth and the need to
                          improve grid connectivity.




30   www.solidiance.com
Regulating                                                 Improving Grid
Growth                                                     Connectivity

B      efore 2011, the wind power industry was poorly
       regulated, with no coordination between local       C       urrently, at least 30% of the installed wind
                                                                   power capacity in China is not connected to the
governments, the national government and the indus-        grid and due to problems with the old fashioned elec-
try. Wind power facility installations were approved at    tric grid system in China, the power that is connected
provincial level, often by unscrupulous local officials    to the grid suffers from curtailment and transmis-
eager to meet and exceed their local economic devel-       sion problems. (source – own interviews) This critical
opment targets, which meant permits were obtained          oversight in the rapid establishment of wind power in
quickly and easily. With subsidies arranged according      China has rendered its capabilities fruitless. The fact
to installed capacity figures rather than grid connected   remains that a meagre 1% of China’s electricity is gen-
capacity, wind power facilities were erected without       erated by wind power. The latest Five Year Plan seeks
being grid connected. According to Liu Mingliang, an       to address these problems, shifting policy away from
analyst from the China Wind Energy Association, this       targeting just capacity and towards grid connectivity.
led to the construction speed of wind power facilities
occurring faster than the network planning, which has      Transmission – The majority of the wind power genera-
resulted in a serious shortage of grid connected wind      tion facilities established in China are in the rural far
power.                                                     north and west, away from the main demand centres
                                                           along China’s eastern and southern coasts. Currently,
The Chinese government is now attempting to re-            China’s transmission lines are not sufficient to transfer
strain this kind of growth. In order to have access to     the electricity generated at the power facilities to the
national subsidies or feed in tariffs, new wind power      population centres. The Chinese grid system is very
facilities must now receive approval from the central      outdated and the transmission lines are not suitable to
government. According to a senior project manager at       handle the long distance transfer at present. To solve
Sinovel, one of China’s leading wind turbine manufac-      this, more long range transmission lines need to be in-
turers, this has seriously slowed the approval process,    stalled, which will be costly and difficult and may carry
resulting in the decline in domestic installations.        no economic benefit to the power companies them-
                                                           selves. Until China’s transmission lines are able to
However, according to Qiao Liming, the Director for        cope with the extra power transmission requirements
China at the Global Wind Energy Council, this slow-        created by wind energy as well as other renewables,
down should be perceived as a positive step, building      many projects will be stalled and remain unconnected.
a more solid platform from which the industry can
continue to grow in future. “This is the time for the      Curtailment – Energy supply and energy demand
industry to reflect on a lot of issues. The fast devel-    coming onto and off from the grid must be exactly
opment of the wind industry has diverted people’s          equal on a second by second basis. The majority of
attention from a number of important issues, includ-       wind power is produced at night, when the demand for
ing technological, planning and coordination issues        energy is lowest, which means other power generating
between the grid and the wind farm developers. Now         plants must be turned off from the grid to compensate
is the right time to slow down and to intensively adjust   for this. In China, this usually means that a coal power
regulations in order to better drive future growth in      plant will have to be turned off, in order to allow the
the sector”.                                               wind power to be accepted onto the grid. However, as
                                                           coal power does not cycle well, turning these plants off
                                                           is not efficient and is rarely done. Instead, wind power
                                                           is simply not accepted by the grid.




                                                                                                                 31
Strong and                                           PILOT

Smart Grid
Plan                                                 2009 - 2010
                                                     •	   Establish Standards
                                                     •	   228 Demonstration Projects
RMB 3.8 trillion                                     •	   26 Provinces
                                                     •	   21 Solution Ideas
investment in 3
main stages:
                                                     CONSTRUCTION


C     hinese firms stand to take the lead in smart
      grid technologies. Stakeholders – government
                                                     2011 - 2015
and grid companies – must coordinate activities
to ensure effective development and installation     •	   Ultra High Voltage (UHV) lines
of smart grid technologies to avoid future           •	   Distribution networks – Urban and Rural
compatibility issues.                                •	   Remote Monitoring Systems

There are 2 key reasons for the slowdown in newly
installed capacity – the need for more regulated
growth and the need to improve grid connectivity.    INDUSTRIALISATION



Source: China Greentech Iinitiative China’s Strong
                                                     2016 +
and Smart Grid Investment Plan Autumn 2011           •	   Planned implementation




32    www.solidiance.com
To try and address the issue of grid connectivity, China’s
               State Grid Corporation has created plans to build a strong
               and smart grid.




Updating the Grid
A     s noted by Zhu Shunquan, an analyst from China’s National Renewable Energy Centre, smart grid technologies are
      still at an early stage of development across the globe. Zhu notes, “it is important that we first recognise smart grid
as a concept that is still being developed internationally, with each country now trying to use their own concept to develop
their own understanding of smart grid”. China is not the exception to this rule. Generally, it is accepted that smart grid
technologies have 2 key characteristics, one being that they are intelligent and connected to IT systems, the second being
that they are decentralised and thus reactive to consumer demand.

However, the fundamental problem with China’s grid development is that the Chinese electricity grid is monopolised by state
owned companies. The lack of a liberal market system means that the Chinese version of smart grid is thus being developed
to help the grid companies rather than the consumer.

This raises serious questions as to the future development of the smart grid and whether or not the Chinese grid will be
radically overhauled to facilitate the acceptance of renewable energies in the long term, or whether a series of small scale
developments will be made with only short term applications. This poses a significant challenge for the future development
of China’s wind power industry.




                                                                                                                            33
5GW of offshore wind capacity by 2015

China has around 750                                                      •	 Southern China’s Guangdong
GW of exploitable wind                                                       province plans to construct 2-3GW
                                                                             offshore before 2015, and another
resources offshore – 3                                                       7-8GW from 2016 to 2020
times that on land
                                                                          •	 In February 2012, Sinovel
                                                                             announced it would supply 17
                                                                             offshore turbines of 6MW for the
Local governments and                                                        first stage of Shanghai Lingang
                                                                             offshore pilot project
leading power companies
have announced                                                            •	 China Longyuan Power Group
offshore wind plans                                                          plans to build 1GW of offshore
                                                                             wind farms by 2015
larger than the national
plan


RESULTS?
•	   4 projects for 200 MW wind farms in Yancheng agreed by end of 2010      no construction started to date

•	   Delays occurring due to lack of coordination among government bodies and manufacturers


Source: Company websites




34   www.solidiance.com
Problems Affecting Offshore Wind

C    hina’s offshore wind targets and plans are extremely
     ambitious. Currently, there are serious delays in the
                                                               government entities is severely delaying the development
                                                               of agreed offshore projects. Last July, the National Energy
development of offshore wind and despite the ambitious         Bureau and the State Oceanic Administration issued rules
government installation targets, the future development        for offshore development. Under these regulations, offshore
prospects remain uncertain.                                    wind farms must be constructed no less than 10 kilometres
                                                               from shore, and in waters no less than 10 meters deep. This
One problem hindering the development of offshore wind         will limit the development of inter-tidal projects - near-
is that the technology involved is far more advanced than      shore stations in waters less than five meters deep - which
that required for inland developments. According to Zhu        are taking place mainly in Jiangsu and Shangdong provinces
Shunquan, a senior analyst from China’s National Renewable     and create further obstacles for developers. According
Energy Department, Chinese manufacturers are still learning    to Qiao Liming, China Director at the Global Wind Energy
a lot from European technology developments and have a         Council, the coordination between the different interest
long way to go before they will be fully able to develop the   groups could take as long as 2, 5 or 10 years, or even as
necessary technology to successfully exploit offshore wind.    little as only 3 months – nobody is certain. However, until
                                                               these coordination issues are solved, the future of offshore
Secondly, a lack of coordination between different             wind development remains uncertain.




                                                                                                                        35
12.9%

                                                            9.4%
Who Are
The Key                                                     8.8%

Players                                                     8.2%

                                                            7.9%
•	 4 Chinese wind turbine manufacturers
   are included in the global top ten

•	 Each of these follows the general trend
   of falling revenues and profits in Q1
                                                            7.7%
   2012

•	 Domestic competition and revised government
   policy creating a challenging domestic market            7.3%
   situation

•	 Chinese manufacturers are seeking growth
   opportunities internationally                             7.1%


                                                            6.3%

                                                            2.9%


Source: Renewable’s 2012 Global Status Report      OTHERS   21.5%

36   www.solidiance.com
How are the Key Players executing?


Q1 2012 Profits fell by 97% compared   Q1 2012 profits fell by 87% compared   Q1 2012 results ‘sluggish’ - blame   Q1 2012 profits fell by 88.9%
with Q1 2011                           with Q1 2011                           national economic slowdown           compared with Q1 2011

                                                                              March 2012 - RMB 9 billion con-      Q1 results follow a challeng-
Developing 6MW PMDD prototype for      $1.2 billion lawsuit with AMSC over
                                                                              tract with Zhoushan government       ing 2011 - profits fell by 53%
offshore use in Jiangsu                copyright infringement
                                                                              - 500 MW offshore wind farm          compared to 2010

                                                                                                                   Launch of North American R&D
Expanding globally – Ecuador, Aus-     Refocus on Middle East and Southern    First international operations – 6
                                                                                                                   centre in North Carolina, joint
tralia, United States                  Europe – 1200 GW deal in Romania       turbines in Texas
                                                                                                                   venture




                                                                                                        Source: Company websites and press releases




                                                                                                                                                     37
Industry Trend - Consolidation

D     uring China’s period of slowed, more coordinated
      growth in the wind sector, firms have gone through
                                                                  technological development and research capabilities who
                                                                  are being forced out of the market due to healthy market
significant restructuring and resizing, resulting in some         competition.
cases, obsolescence. According to Liu Mingliang from the
China National Wind Energy Association, in the past 2 years,      Industry consolidation is not only limited to small and
market consolidation in the wind power manufacturing              medium-sized domestic firms, but is also visible at a higher
sector has become more prominent. Liu Mingliang explains          level. International firms such as Vestas and Suzlon are
that by the end of 2011, there were a reported 80 domestic        consolidating their efforts in the China market, with Vestas
wind turbine enterprises in the Chinese wind power market,        selling a factory in Hohhot, Mongolia and Suzlon selling its
with the top 10 enterprises sharing 84% of the market and         Tianjin factory. (Source – interview with Sinovel employee)
more than 60 enterprises accounting for only 3.5%. In the         This shows that at all levels, competition is high and the
face of the current industry downturn, it is these small and      slowdown in China is beginning to affect strategies and
medium-sized wind turbine enterprises that are exiting            operations.
the market. At this level, it is mostly those firms with poor




Industry Trend - Internationalization

W       hile China remains the largest wind power market
        in the world, the domestic slowdown in installations
                                                                  Those foreign players who manage to maintain their
                                                                  operations within China are expected to use these factories
has caused all the large domestic manufacturers from              as a basis from which to expand into China’s neighboring
China to try and expand their operations abroad. “The             countries where the markets, despite the fact these markets
internationalisation of operations really is the big ship right   are still in what Qiao Liming describes as “very early stages
now for Chinese wind turbine manufacturers, in terms of           of development”.
trends, this one is really big,” said a Senior Project Manager
at Sinovel. He further explained that Sinovel currently has       It is worth noting that the Chinese wind power
subsidiaries in all major markets, while Ming Yang recently       manufacturers were developed with government support to
announced plans to establish a joint venture in India and in      mostly serve the domestic market, rather than for exports.
Q3 of 2012, rumours emerged of its interest in purchasing         Now that these manufacturers have reached a certain level
Vestas. Many firms in China are using the current European        of maturity, it is logical that they would begin to expand
crisis as a chance to expand into the European market and         overseas. However, Chinese firms are now having to adjust
gain market share as well as technological capabilities.          to international local content rules, similar problems that
                                                                  foreign firms had when entering China. The Chinese firms
The focus on international operations is likely to continue       are having to expand their international capabilities quickly
even after the domestic market recovers, with the Chinese         and learn how to adapt to heavily politicised and regulated
market recovery expected to help the Chinese turbine              markets.
manufacturers in their further internationalisation efforts.




38   www.solidiance.com
wind Power Summary
O      verall,
       China’s wind
power market is entering a very interesting and
unique stage. Following years of unregulated growth, the market
is entering a period of consolidation and increased regulation. Key industry trends
include consolidation and internationalisation, with key domestic players finally
taking further steps onto the world stage.

Challenges exist for the future development of the wind industry in China in the
form of the development of the Chinese grid and the continued delays in successful
coordination of government bodies in the development of offshore wind.

Opportunities in China’s wind power industry exist in the form of internationalisation
for local players. For foreign players looking to involve themselves in the wind
market, opportunities exist in the application of advanced technology to assist the
predictability and grid connectivity of wind power.

It seems that, for the next few years at least, the domestic wind power market will
be undergoing an unpredictable period of adjustment, the results of which will
determine the future growth potential of the market. While some industry operators
have unwavering confidence in the resurrection and continued growth of China’s wind
power market, some market observers and analysts appear more skeptical. However,
given China’s desire to position itself as a world leader in renewable technologies,
it seems unlikely that the market will stall for long, with pressure from industry and
the need to support the ‘national champion’ firms leading the development to be
undertaken as quickly as possible.




                                                                                         39
Industry
                          Analysis
                          China’s
                          solar
                          ENERGY
                           2     011 was a year in which solar PV installations
                                 increased by nearly 3 times in China, following
                          the government’s increased commitment to the
                          development of the industry.

                          Whilst installations are expected to continue a rapid
                          ascent, the starting point of this growth is low. The
                          overcrowded industry is pushing the weaker firms
                          out of the picture, with strong firms suffering from
                          problems of overcapacity, troublesome technological
                          development processes and an international
                          slowdown and struggle for survival.

                          Long term market growth potential is significant,
                          but coordination issues and grid capacity problems
                          will need to be resolved to ensure the continued
                          development in the short term.




40   www.solidiance.com
China Cumulative and
Newly Installed Solar
Capacity
2005 - 2011
Mega Watts (MW)
                                                                                   3093


 Cumulative Installed Capacity
 Newly Installed Capacity



                                                                                    2200
                                                                893


                                                   373

                                                                             520
                                       145
                         100
   68       80                                            228

                                             45
                 12            20
        4


  2005      2006        2007          2008         2009               2010         2011


             Source: EPIA Global Market Outlook for Pohotovoltaics Until 2016 May 2012




Global Total Installed Solar Capacity
2011 - Mega Watts (MW)


GERMANY                     36%              FRANCE                                        4%

ITALY                          18%           BELGIUM                                       4%

JAPAN                           7%           CZECH REP.                                    3%

SPAIN                           6%           AUSTRALIA                                     2%


USA                             6%           REST OF THE WORLD                             11%

                                                                                            41
Solar Power                                                          Government Targets

Government
Targets and                                                          2015
Subsidies                                                            Total Installed Capacity 21 GW




                                                                     2020
                                                                     Total Installed Capacity 50 GW




Government Subsidies
FEED IN TARIFFS                                                             THE GOLDEN SUN PROGRAMME

National Feed in Tariff (FiT):                                              •	   Started in 2009 – rural electrification and building
                                                                                 projects
•	   Approved before 1 July 2011, Operating before 31
     December 2011 RMB 1.15/kWh                                             •	   Allowed 140 MW installations in 2011

•	   Approved after 1 July 2011, Operating after 31 December                •	   Around 1GW expected installations 2012
     2011 RMB 1/kWh

                                                                            THE GOLDEN SUN PROGRAMME
Provincial Feed in Tariff:
                                                                            Subsidy programme – 2009 – to assist
•	   Shandong RMB 1.2/kWh                                                   development of building integrated solar PV.

•	   Zhejiang RMB 1.43/kWh




Source: : China Greentech Initiative Renewable Energy Finance Autumn 2011 and Center for American Progress




42   www.solidiance.com
S     olar PV installation targets have been revised again in June 2012, to 21GW by 2015 up from 15GW. This not only
      shows the determination of the Chinese government to aggressively meet the overall renewable targets, but also
demonstrates their belief that the solar industry is ready for growth and a suitable target for investment. Following the
Fukushima disaster in Japan, China’s investment in nuclear energy has been reduced and offset by an increase in solar PV
investment.

China’s solar PV manufacturers have traditionally exported, with around 80% of PV modules and cells produced in China
being exported by the end of last year. The government is keen to develop the domestic market quickly, so it’s providing a
greater number of subsidies and incentives to private manufacturers, aiming to develop the domestic market.

The national feed in tariff (FiT) has stabilised the Chinese solar sector, no longer allowing large SOEs to dominate in the
former auction style scheme which created unintentional consequences of underbidding on large scale projects by SOEs in
order to capture greater market share. The new national system eliminates such consequences and creating greater and true
market competition and dynamism within the sector. However, the FiT figures for 2012 will only incentivise projects in
locations away from demand centres, where solar energy is more cheaply produced, meaning BIPV systems,
traditionally focused near demand centres, will struggle in the coming year in comparison to
the rural based LSPV installations.




                                                                                                                             43
Current Overview

C     hina is now a multi-gigawatt market,
      with over 2GW of newly installed solar
                                                              LSPV (Large Scale PV), moving the market away from rural electrification.

PV capacity in 2011. It is also the fastest                   Despite China’s impressive investment volumes and consistent growth, the
growing solar PV market in the world, with                    global solar PV market is still dominated by Europe with around 75% of
cumulative capacity expected to continue                      the world’s total capacity. However, the EU financial crisis and changing
climbing over the next few years. According to                EU regulations and installation policies mean European demand for PV is
Lu Fang, Secretary for the Solar PV Committee                 falling and the industry is diversifying across countries, paving the way for
of the China Renewable Energy Society,                        China’s sustained growth.
experts have already assessed that in 2012
China’s domestic newly installed capacity will                The global value chain for solar PV is suffering from serious overcapacity,
be around 5GW, bringing the total cumulative                  leading to increased competition and consolidation in the manufacturing
installed capacity before the end of the year                 market. Excess components from the value chain are being reinstalled
to 8GW. The majority of the new installations                 domestically, increasing newly installed capacity but limiting
will be in grid connected solar PV projects,                  opportunities for foreign investment.
such as BIPV (Building Integrated PV) and




How are the Key Players executing?
                                                                                                                             OTHER KEY
                                                                                                                             MOVEMENT

 Q1 2012 gross profit fell by 99%        Q1 2012 profits fell by 87% compared   Q1 2012 gross profit fell by 34.7%   Overcapacity of solar modules
 compared with Q1 2011                   with Q1 2011                           compared with Q4 2011                globally – impacting price

                                         Excessive module supply, US anti-                                           Consolidation - mergers and
 US Anti-Dumping / Countervailing                                               Continued global module price
                                         dumping measures and European                                               acquisitions - Jiangsu Shenlong
 Duties equated to 4.7% of revenues                                             decline impacting profitability
                                         subsidy adjustments                                                             Hareon

                                                                                                                     Fukushima disaster – China re-
 Slim frame 60 cell panel – one of the   An official sponsor of Brazil 2014     High efficiency ‘Honey Technology’
                                                                                                                     ducing nuclear targets, offsetting
 lightest in the industry                World Cup                              – Honey Ultra
                                                                                                                     with solar


Source: : China Green Tech Initiative and company websites




44   www.solidiance.com
5.8%

                                                            5.7%

Top Ten Global
                                                           4.85%
Wind Turbine
Manufacturers
                                                            4.3%
2011 - Market
Share %
                                                             4%
•	 6 Chinese wind turbine
   manufacturers are included in
   the global top ten                                       2.8%
•	 Domestic and global trend of
   falling revenues and profits in
   Q1 2012                                                  2.8%
•	 Extreme overcapacity at all
   stages of the solar PV value
   chain – future consolidation
                                                            2.7%
•	    EU financial crisis and adjusted
     energy policies impacting
     Chinese manufacturer
                                                            2.7%

                                                            2.5%


Source: : Renewable s 2012 Global Status Report   OTHERS   61.9%


                                                                   45
Industry                                                       Industry
Trends                                                         Opportunities
W        hilst growth is expected in installed solar PV
         capacity in China, the manufacturing industry         C      learly then, opportunities for growth and
                                                                      development exist within the solar PV industry.
has been suffering from serious overcapacity and profit        Solidiance analysis has identified 3 chief opportunities for
reduction. According to a solar technology developer at        growth within the Chinese solar PV sector – 1. domestic
3M, around half of the domestic module companies have          development, 2, new technology research and development
disappeared in the last year and only large companies          and 3. cost reduction.
with strong technological capabilities survive. Industry
consolidation is rampant, the consistent fall in the price     The change in EU subsidies for solar PV creates a huge
of silicon and the increased availability of domestically      opportunity to reinvest excessive capacity into the
produced silicon in China (at 70% in Q3 2012 according         domestic market. China has an abundance of potential
to the Solar PV Committee of the Renewable Energy              for solar PV installations, with 1 GW of installations in
Society of China), small manufacturers who only focus on       Qinghai province alone, a figure exceeding the entire
assembly are struggling to remain competitive and falling      solar installations of the UK and over half of the total
out of the market. According to a senior diplomat at the US    installations of France in 2011. Qinghai is also home
China Embassy Department of Energy, this is now causing        to the world’s largest PV plant with 200MW capacity,
a large number of SOEs to enter the solar industry. Until      the equivalent of 6 times Brazil’s cumulative installed
now, the industry has been dominated by private firms, but     capacity in 2011. In 2011, PV shipments from China shared
following the consolidation of the solar market, combined      around 50% of the world total PV shipments, suggesting
with the Chinese government’s push for increased solar         a significant availability of technology for domestic
PV installations, SOEs are becoming increasingly involved      installation within a compressed time frame.
in the solar industry. This could increase competition
and serve to drive the market, but the long term impact        Chinese companies have gained strength in terms
remains uncertain.                                             of production quality and cost on a global scale in
                                                               comparison to market developments of the last 2-3 years.
Following the global financial crisis, many Chinese            According to Lu Fang, Secretary for the Solar PV Committee
companies are now focusing on domestic orders to               of the China Renewable Energy Society, Chinese firms are
survive. In comparing some of the chief local players,         now developing technologies and efficiencies of their
industry experts explain that Yingli Solar are surviving       solar cells on a ‘world class scale’. Suntech is researching
the industry consolidation period well due to the skillful     technology that will improve the efficiency of their mono
and aggressive push on developing domestic demand,             and poly crystalline solar cells, with Trina Solar also
whereas Suntech are struggling to maintain profits with        reported to be increasing the efficiency of their solar cells
the reduction in their core enterprises abroad. According      at extremely fast rates. According to a senior electricity
to a solar technology developer at 3M, survival at this        analyst from the US Energy Information Administration,
point seems to be the key goal, “the manufacturers are         opportunities for technological innovation in the solar
just trying to survive through this hard time. Some of the     sector are continually emerging, The analyst explains,
really big companies have a lot of loans and a lot of money    “if someone were to come out with an inexpensive solar
borrowed from the banks, which means that even if they         cell that is actually cost competitive with other electricity
sell a lot of modules, they can’t even balance their books”.   generation technologies, that would change the story
                                                               of solar all over the world, not only in China – of all the
                                                               companies with opportunity, the Chinese seem most likely
                                                               to access such technology first”.




46   www.solidiance.com
with the falling price of silicon expected to increase
Prices for solar module components are continuing
                                                            the market share of thin film technologies by as much
to drop, allowing manufacturers to produce solar
                                                            as 10% within the next 2 to 3 years, according to the
modules in greater volumes for more cost effective
                                                            National Renewable Energy Centre.
installations. For example, one component, called
E.V.A, vital for manufacture of solar modules, has          The drop in demand from the USA and Europe for
fallen by around 5RMB (US $0.80) per square metre in        solar PV exports presents a challenge for many high
the last 2 years. At the same time, manufacturers are       level Chinese domestic solar module manufacturers.
continuously putting vendors under pressure to lower        In Europe, Spain and Germany in particular have
costs, according to 3M. The falling cost of silicon         been reducing their incentives for solar installations
cells has also contributed greatly to the falling cost      owing to the recent EU financial crisis, whilst the
of solar modules, making lower cost, higher efficiency      USA is now focusing financial incentives towards
modules one of the leading market opportunities.            consumers, rather than importing businesses. Further,
                                                            following the bankruptcies of some high profile US
However, despite being at a prime development               solar manufacturers, such as Solyndra in 2011, the
stage ready for investment and rapid development,           USA has imposed countervailing duties between
there are a number of challenges being faced by the         2.9% and 4.75% on all Chinese made solar panels
Chinese solar PV market which can not be ignored.           starting in 2012. For Chinese firms, this creates a
                                                            unique challenge and will require them to adjust their
                                                            business models away from international exports
                                                            and toward domestic installations and technology
                                                            development.
Industry                                                    Given the variability in energy production cycles of

CHALLeNGEs                                                  solar PV, the challenges facing the Chinese electricity
                                                            grid will increasingly also serve to create difficulties
                                                            for the development of the solar industry. It is
irstly, overcapacity issues within all stages of the        expected that LSPV systems, installed in western

F     solar PV value chain will present a short
      term challenge to the future development of
                                                            deserts where the solar radiation is highest, will
                                                            struggle to be connected to the grid, and according
key solar manufacturers in China. Whilst Chinese            to Lu Fang, “a lot of the solar electricity produced in
manufacturers dominate the export market, with an           LSPV plants will be wasted”. However, the issue of grid
existing trade US trade surplus of US $1.6 billion,         connectivity is potentially less serious in the solar
overcapacity issues are creating a difficult operating      industry than in the wind power industry as solar
environment for smaller, assembly focused plants.           power is much better at load following than wind.
These plants are mainly exiting the market or               When the solar power generated is at its highest
being bought by SOEs which creates a new level              and supply is high, the electricity demand on the
of competition for the established, high level solar        grid is equally high, which enables more power to be
module manufacturers. Whilst the precise role of the        accepted by the grid.
SOEs in the market remains to be seen, it is clear that
competition is building within the market.

High cost of technology – Solar PV technology
remains comparatively more expensive than hydro
or wind power, with many technologies dependent
on subsidies and feed in tariffs for economically
viable installation. If the solar industry is to witness
continued growth and development, the technologies
will have to rapidly fall in price and match grid parity.
However, this problem appears to be gradually easing,




                                                                                                                       47
Solar Summary
                          T   he Chinese solar PV market shows future potential and is
                              earmarked for concentrated government investment and
                          development. Solar PV is China’s next big renewable sector.

                          However, the global solar situation is causing short term
                          development issues, with many Chinese domestic module
                          manufacturers struggling for survival amid growing competition
                          and shrinking international demand. Grid problems also cause
                          concern for the immediate future of solar technology, with grid
                          capacity and transmission problems affecting solar development
                          and installation.

                          Given China’s increasing technological capabilities and
                          determination to quickly develop their domestic industry, it
                          seems that solar PV growth will continue unabated despite these
                          concerns, although questions of regulation and coordination
                          must be raised and addressed in order to guarantee the solar
                          industry does not reach industry slowdowns as has been affecting
                          the wind industry.




48   www.solidiance.com
49
Biomass
and
Biofuels
B   iomass and biofuels represent a key potential future growth area for renewables in China, with
    opportunities in second generation biofuels, ethanol and energy produce from feed stock sources.
Despite their future potential, it is important to recognise that these areas are just getting started in
China and currently have very poor supporting infrastructures.

In biomass, China has strong existing understanding and knowledge of the required technologies as
well as understanding of how to build and operate the power plants. According to discussions with
experts in this field from governmental energy departments, the main restriction for development
of biomass is currently the lack of supportive infrastructure. China is currently investing in a small
number of test projects for biomass, which are expected to lead the way for further research and
investment before 2015.

The focus for Chinese biofuel development has been in two areas – ethanol production and second
generation biofuels. Ethanol production remains a small area of investment for China, who lacks
processors and matching infrastructure as well as knowledge on the right mixture to create a suitable
power source. However, as the production of such energy would likely use stocks that will compete
with food, some experts believe that investing heavily in this area would be “a negative thing for them
to do”.

Second generation biofuels (non food sources that can be generated into biofuels) offer potential to
China, who are now placing emphasis on the use of jet fuel in a bid to try and create a national source
of price stable biofuels to reduce the impact of external geopolitical situations which could impact fuel
security. According to China’s Civil Aviation Administration, China is expected to use 12 million metric
tons of aviation biofuels by 2020, accounting for around 30% of the country’s total use of jet fuel.




50   www.solidiance.com
C    hina is also beginning to invest in energy that can be
     produced from feed stock sources such as corn stocks,
wheat stocks and gutter oil. They are also investigating the
use of different grasses and algae and other fast growing
plant materials that can be used a feed stock that is not
competing with food sources. Biofuels using algae are already
more advanced than in other countries, according to the US
Department of Energy at the US Embassy in Beijing, China’s
the scale of China’s investment and existing capabilities are
already greater than those of the US in this area.

Sinopec and Sinoc, as well as other Chinese oil companies
are beginning to recognize the potential value of this area for
future development. They see that if they can generate aviation
biofuels in China and export them globally, they would quickly
rise to a position of global leadership. Which is why entities
such as the China National Petroleum Corporation announced
plans this year to build a refinery capable of producing 60,000
tons of biofuel annually by 2014.

Although these areas remain underdeveloped in China,
compared to solar, wind or hydro technologies, biomass
and biofuels could be described as the next generation of
renewable energies in China and are the key growth markets to
watch over the course of the 12th and 13th Five Year Planning
periods.




                                                                  51
SUMMARY
                          China’s ever growing demand for energy necessitates the use of
Energy Demand             sustainable production methods


Government                Clean energy as key investment sector - $51 billion invested in
                          renewables 2011
Priority
                          China’s most well developed renewable energy sector, set for
Hydro Power               short term investment boost but ultimately an industry in
                          decline sustainable production methods

                          Challenging market undergoing domestic adjustment causing
Wind Power                leading Chinese firms to seek international expansion
                          sustainable production methods

                          China’s grid system is in need of complete overhaul, investment
Smart Grid                in smart grid systems vital for future growth of renewables in
                          China

                          Chinese market set for long term growth after period of global
Solar Power               and domestic consolidation



                          Underdeveloped infrastructure limiting short term growth,
Biofuels                  industries at early stages of development, being investigated for
                          future development potential




52   www.solidiance.com
Conclusion

R     enewable energy is undoubtedly of vital importance to
      China. Owing to China’s increasing energy consumption,
its need to restructure a coal-dominated industry and the need
to meet greenhouse gas reduction targets, renewable energies
application in China and indeed globally, are gaining significant
attention on the global energy platform.

However, despite ambitious government targets and investment
into the sector, a lack of coordination between concerned
stakeholders in the development of China’s renewable energy
industries is the key barrier to the future growth of renewables
in China. With China’s main source of renewable power (hydro)
entering its final flourish and with its designated successor
(wind) entering a period of consolidation and uncertainty, China
will need to invest heavily in sectors marked for growth (solar
PV and biofuels) to ensure its own national growth remains
sustainable.

Renewable energies are here to stay in China, but it is not
without significant coordination and continued investment
that the reliability on alternative energy sources, in the
manufacturing center of the world, becomes a reality.




                                                              53
Solidiance is a dedicated B2B marketing and
                          growth strategy and consultancy firm focused on
                          the Asia Pacific Region.




54   www.solidiance.com
about solidiance



What We Do
We help multinational clients understand the Asian market landscape by profiling industries and competition, sizing the markets,

segmenting customers, analyzing distribution channels, determining the best locations, preparing investment feasibility studies,

identifying suppliers, reviewing potential joint ventures or acquisitions, and delivering market entry and growth strategy in Asia.



What We Are Focus On
Our industry experience is centered on industrial applications, green buildings, cleantech, technology, and healthcare. Our Asian

market entry and growth strategy services provide the required insights and the necessary roadmap to capture a profitable market

share in the region.



Additional Details
Solidiance has offices in China, India, Indonesia, Malaysia, Singapore, Thailand, Myanmar and Vietnam. We are fast expanding and

always on the lookout for exceptional people.




                                                                                                                                      55
OUR OFFICES
Singapore                  Indonesia                          India
Suite 07-05                Suite 6A, 15/F                     A-9, Third Avenue
High Street Centre         Menara Palma                       Bandh Road
1 North Bridge Road        Jl Rasuna Said Block X-2 Kav 6     New Delhi
Singapore 179094           Jakarta 12950                      Phone: +91 9999988859
Phone: + 65 31520301       Phone: +62 2157957465
                                                              Myanmar
Thailand                   Vietnam                            33B, Thiri Mingalar Lane
Interchange Tower 21       Suite 704, Satra Dong Khoi         Maynagone - 7 Miles
#2109 - 21F                Building                           Yangon
399 Sukhumvit Road         58 Dong Khoi street                Phone: +95 943154745
North Klongtoey, Wattana   District 1, Ho Chi Minh City
Bangkok 10110              Phone: +84 835218639
Phone: +66 26112664
                           Malaysia
China                      Level 8, Suite 832, Pavillion KL
Suite 516, Fuxing Plaza    169 Jalan Bukit Bintang
109 Yan Dang Road          Kuala Lumpur 55100
Shanghai 200020            Phone: +60 392058429
Phone: +86 2153019980




                                                              @

                                                          info@solidiance.com




                                                                  www.solidiance.com

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The China market for renewable energy: boom or bust ? | www.solidiance.com

  • 1. China’s Renewable Energy Sector An Overview of Key Growth Sectors 8 January 2013 This document has been produced by Solidiance exclusively for this presentation. Copyright restrictions (including those of third parties) are to be observed. All information, views and advice are given in good faith but without legal responsibility. Whilst every effort has been made to ensure the accuracy of the information and data contained herein, Solidiance accepts no responsibility for any errors and omissions however caused. The information contained herein should not be regarded as a substitute for legal advice.
  • 2. 2 www.solidiance.com
  • 3. Executive Summary R enewable energy is an increasingly hot topic in China and is a sector targeted for increasing amounts of government attention and investment before 2020. This paper provides a snapshot of the renewable energy market in China and demonstrates the challenges and opportunities faced by this important industry. The paper identifies the three key drivers behind the increasing importance of renewable energies to China, before examining the Chinese government’s targets and strategies at the root of this industry growth in China. By examining four key sectors in focus, hydro power, wind power, solar PV and biofuels, this paper ultimately demonstrates that while renewable energies are vital to China’s continued sustainable growth, there are a number of challenges which must first be overcome in each of the renewable sectors examined here if China is to extract the maximum potential from their renewable energy industries. 3
  • 4. The Importance of Renewable Energy to China T he use of renewable energy is an increasingly hot topic and important issue in China. In the face of the problems of climate change, greenhouse gas emissions and oil prices rising, the public has come to realize the importance of developing renewable energy. More and more people opt for green travel or low-carbon life- styles and the public media has been increasing its coverage and publicity of the development of low carbon technology and renewable energy. – Liu Mingliang, Analyst, China Wind Energy Association According to Solidiance analysis, there are 3 key drivers behind the continued interest in renewable energy in China: 1. China’s increasing demand for electricity. 2. China’s need to reduce its reliance on coal for energy production 3. China’s need to reduce its greenhouse gas emissions. 4 www.solidiance.com
  • 5. Increasing Demand for Electricity Importance of Renewable Energies to Reduce Reliance on China Coal Reduce Greenhouse Gas Emissions 5
  • 6. China’s Increasing Demand for Electricity Electricity Consumption in China 4k 3.2k 2.4k 1.6k 800k 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: CIA handbook Driven by China’s well-documented rapid economic growth over the past 30 years, China’s energy consumption has more than doubled in less than 10 years. China is now the world’s greatest consumer of energy and as the Chinese government continues to invest in moving Chinese manufacturers away from low-cost manufacturing and higher up the value chain into greater value added activities, China’s demand for energy shows no signs of easing. China produced 1/5 of the world’s total electricity in 2010, officially overtaking the USA for the first time to become the world’s largest generator of electricity. China’s demand for energy as well as its capabilities and capacity for energy production are now positioning China to seize the opportunity to take the lead in the development of sustainable energy technologies, so as to further cement its position as an international leader in renewable energies. Source: BP Statistical Review of World Energy June 2012 and CIA handbook 6 www.solidiance.com
  • 7. Electricity Generation in China Terawatt – hours (TWh) 4700 4207 3715 3467 3282 2866 2500 2203 1911 1654 1481 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: BP Statistical Review of World Energy June 2012 5% JAPAN RUSSIA 4.8% 4.6% INDIA Electricity Generation Global % Total REST OF WORLD 44.7% 2011 21.3% CHINA USA 19.6% Although the economic development and growth is slowing down, there is still a huge demand for energy in China and that is certainly the main driver for renewable energy growth. – Qiao Liming, Director for China, Global Wind Energy Council 7
  • 8. China’s Need to Reduce Reliance on Coal 84% 77% 69% 18% 5% 12% 12% 3% 3% 3% 3% 2% 2% 2% 2% 1% 1.3% 0.4% Renewables Total %: 19.3% Renewables Total %: 89% Renewables Total %: 14% Renewables Total % (Ex-Hydro): 1.3% Renewables Total % (Ex-Hydro): 5.2% Renewables Total % (Ex-Hydro): 2.2% CHINA BRAZIL INDIA Coal & Peat Renewable energy is a necessity Oil Gas for overall economic growth Nuclear and energy security in China Hydro Solar PV, Wind Biofuels Source: BP Statistical Review of World Energy June 2011 47% 45% 44% 28% 23% 18% 20% 18% 17% 16% 6% 7% 2% 4% 2% 1% 1% 0.3% Renewables Total %: 18% Renewables Total %: 11% Renewables Total %: 7% Renewables Total % (Ex-Hydro): 0.1% Renewables Total % (Ex-Hydro): 3.4% Renewables Total % (Ex-Hydro): 4.9% RUSSIA USA UK 8 www.solidiance.com
  • 9. C hina is quickly realising that coal will no longer be able to support the growth of its economy. Considering the logistical aspects of using coal, China has to either import it or have it removed from mines which is very difficult, and as a matter of fact, China is now rapidly using up its coal capacity. China is now recognising that it is unable to get more coal as quickly as it is needed, so China will have to switch to something else. In the future, the effectiveness of China’s industrial evolution will no longer be judged on the speed of development alone. Instead, the application of smarter, more sustainable energy sourcing techniques will serve as a stronger indicator of China’s next generation of successful growth in the coming 10-15 years. 9
  • 10. Carbon Dioxide Emissions (Million Metric Tons) 9000 8000 CHINA 7000 6000 USA 5000 4000 3000 2000 RUSSIA JAPAN INDIA 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: EIA Statistics China’s Need to Reduce Greenhouse Gas Emissions 10 www.solidiance.com
  • 11. China’s reliance on coal and peat makes it the world’s highest emitter of greenhouse gasses. Overtaking the USA in 2007, China was responsible for emitting more than 8300 million metric tons of carbon dioxide in 2010: nearly 3000 million metric tons more than the USA and more than 6500 million metric tons compared to India. C hina now faces significant pressure from international organisations to reduce its carbon dioxide emissions. In November 2009, just before the United Nations Climate Change Conference in Copenhagen, Chinese Premier Wen Jiabao pledged to reduce China’s carbon dioxide emissions by 40-45% from 2005 levels by 2020. In order to do this, the Chinese government will need to continue heavily investing in renewable energies and increase the use of sustainable energy sources in its overall energy mix. China targets to increase the use of renewable energies from around 9% of its current total energy mix, to 15% by 2020. Whether or not these targets will be successfully met remains to be seen. There are still serious doubts as to whether or not China will be able to successfully reduce its dependence on coal generated power, as Qiao Liming, China’s Director of the Global Wind Energy Council acknowledges, “the Chinese energy mix is still quite heavily reliant on coal and I don’t see that this situation will ever fundamentally change”. Despite this uncertainty, the Chinese government is investing heavily in renewable energy in a bid to meet its self- prescribed targets. 11
  • 12. The Government’s Go Green Push The Renewable Energies sector presents China with an opportunity for global leadership 12 www.solidiance.com
  • 13. Green economy, low carbon technology, etc. are emerging… In some of these sectors, the gap between the emerging economies and the developed nations is relatively small. In that environment, all we need to do is to take advantage of these [market] trends; if we respond appropriately we can seize this opportunity, gain the upper hand, and push forward a new breakthrough in development. – Chinese Vice Premier Li Keqiang 13
  • 14. China’s C hina’s rapidly expanding urban population and push for continued GDP growth make its reliance on Investment non-renewable energy sources unsustainable. Continued investment in renewable energy is required to meet government growth targets. China’s investment in in Renewables renewables has grown at around 80% per annum since 2004, clearly demonstrating China’s commitment to pursuing global leadership in renewable energies and building a sustainable support structure for the continued RENEWABLE ENERGY growth and development of its national economy. INVESTMENT US$ Billions Chinese 48.9 38.3 Government 14.2 23.9 Targets 9.2 4.7 1.5 The 2006 Renewable Energy Law 2004 2005 2006 2007 2008 2009 2010 T he China Renewable Energy Law was accepted on 1 CHINA January 2006 and was China’s first state-supported mandate to help develop the use of renewable energy in China. The law is still a key driver of renewable energy development in China. 13.2 The 2006 Renewable Energy Law not only encourages 7.3 6.9 the continued construction of renewable energy facilities, 6.4 4.2 but also puts pressure on the Chinese grid operators to 1.8 purchase the power generated by approved renewable 0.5 facilities. The excess cost between the lower cost 2004 2005 2006 2007 2008 2009 2010 traditional power and the higher cost renewable energy is subsidised by the government and collected through a BRAZIL surcharge on the price of consumer electricity, collected from all customers on the grid. This surcharge was doubled in December 2011, increasing from 0.04 RMB per kWh of electricity to 0.08 RMB per kWh, creating a total 3.8 5.1 4.1 subsidy fund of around 50 billion RMB, all of which is used 3.8 2.7 3.0 to further develop the use of renewable energy in China. 1.3 2004 2005 2006 2007 2008 2009 2010 However, despite the implementation of legal obligations at a national level, provincial and industrial level INDIA infrastructure problems still create challenges for the 14 www.solidiance.com
  • 15. future of renewable energy growth in China, thus more periodically during peak season. This suggests a lack specific targets and schemes must still be developed of systematic planning of how to develop renewable during each of China’s five year planning periods. energy systems along with the relevant supporting industries as part of the government’s push to reduce China’s carbon dioxide emissions in line with their The 12th Five Year Plan 2011 - 2015 self-imposed targets. T he 12th Five Year Plan focuses heavily on adjusting the economic growth model. Highlighting the discrepancy between the planned targets and the implementation roadmap, a Senior Sustainability is highlighted as key for future Diplomat from the Department of Energy at the US development of the economy during this planning Embassy in Beijing explains that government targets period. 3 areas for focused investment have been can not be met without explicit instructions on how identified for the planning period, namely clean energy, to achieve them. “The Five Year Plan is a strategic energy conservation and clean energy cars. Energy use plan of where the government wants to go, but they is targeted to be reduced by 15% per unit of GDP, with don’t specify how they will get there. The 12th Five carbon dioxide emissions to be reduced by 17% by the Year Plan has been out there for a year or so, but is end of the planning period. There will be a minimum not in a position of serious implementation. They are investment of RMB 5.3 trillion (around US $830 only now beginning to look at it from an industrial billion) into the power industry, with hydro power, level and trying to figure out how they can get to wind, solar, biomass and grid development as key where they want to go, they are only now finalising targets for this investment. The 12th Five Year Plan the ‘how’ part of their strategy”. marks a turning point for Chinese development and demonstrates the Chinese government’s dedication This raises questions as to how well government to create a sustainable growth model to help propel targets at a national level are coordinated with the China into the next stage of its development. development of renewable energy technology and industry. To examine this further, it is necessary to Despite having set very ambitious targets for the explore key renewable sectors at different stages of increased utilisation of renewable energy by the end development in focus – hydro power (approaching of the 12th Five Year Planning period, questions still decline), wind power (approaching maturity), solar PV remain as to how effective these strategic targets (entering growth) and biofuels (introduction stage). will be at developing the supporting industries. To help meet the energy and carbon dioxide emission reduction targets during the 11th Five Year Plan period (2006-2010), factories were shut down 15
  • 16. Sector Development Biofuels Introduction Stage Solar PV Entering Growth Wind Approaching Maturity Market Maturity Hydro Approaching Decline These industries are particularly interesting for focused exploration as they represent different stages of development in renewables in China. Hydro – Approaching Decline: With fewer suitable locations for the installation of hydro power, the industry is experiencing a ‘final push’ before the final slowdown. The well-established industry is past its peak and now moving towards decline. Wind – Approaching Maturity: With well-established distribution channels and product standards maturing, the industry is seeing slowed growth after a period of rapid expansion, with recovery rates uncertain. Solar PV – Entering Growth: With a large number of competitors in the market, industry players are seeking to differentiate themselves, regularly creating product innovations and receiving increased levels of investment. Biofuels – Introduction Stage: With technical issues still being resolved, industry players are now beginning to show an interest in the sector. The infant industry is being investigated for future investment, with rapid future growth expected. 16 www.solidiance.com
  • 17. Industry Analysis China’s Hydro Power Hydro power is China’s most well-developed renewable energy resource. In a sector dominated by state-owned enterprises and characterised by strict government influence, hydro power looks set for increased investment and growth until 2020. After 2020, investment forecasts appear bleak, with limited available capacity restricting the continued growth of hydro power in China. Source: Own interviews 17
  • 18. 197 213 China Cumulative 172 and Newly 129 145 Installed 117 Hydro Capacity 2005-2010 Giga Watts (GW) 27 25 16 12 16 Cumulative Installed Capacity Newly Installed Capacity Source: Renewables 2012 Global Status Report and 2005 2006 2007 2008 2009 2010 China Electricity Council Statistics Total Installed Capacity 2011 NEWLYInstalled Capacity 2011 REST OF WORLD 49% CHINA 50% CHINA 22% REST OF WORLD 25% BRAZIL 8% VIETNAM 8% USA 8% INDIA 6% CANADA 8% BRAZIL 6% RUSSIA 5% CANADA 5% Source: Renewables 2012 Global Status Report 18 www.solidiance.com
  • 19. Government Targets and Subsidies H ydro power remains China’s most well- developed form of renewable energy, with nearly 5 times more installed capacity than wind GOVERNMENT TARGETS power in 2010, making up around 20% of China’s generating capacity, compared to less than 5% for wind and solar combined. Installations of hydro power continued to rise in the period up to 2011, with China accounting for 22% of the total global installed hydro power capacity, almost 3 times 2015 higher than its nearest rival, the USA. China’s newly Total Installed Capacity of 325 GW - installed capacity accounted for half of the world’s 284GW (conventional hydropower) + total newly installed hydro power capacity in 2011, 41GW (pumped storage) demonstrating the country’s continued determination to exploit its available hydro power resources. With government targets for hydro power 2020 installations of around 325GW by 2015 and a newly revised target of 430GW (up from 380GW) by 2020, China’s love affair with hydro power looks set to continue over the next decade as investment in Total Installed Capacity of 430GW – hydro power becomes one of China’s key focuses. revised upwards from 380GW (Source – New Scientist, Xinhua, China Global Times, Deutsche Bank, own interviews) Although hydro power is the most cost effective GOVERNMENT SUBSIDIES method of creating energy from a renewable source, FEED IN TARIFFS challenges such as the long development periods, 0.2-0.3 RMB per kWh associated social displacement and environmental concerns as well as the increasing difficulty in accessing potential development sites suggest that China’s investment in hydro power will decline after Source: New Scientist, Xinhua, China Global Times, Deutsche Bank, own interviews 2020. 19
  • 20. Who Are The Key Players 20 www.solidiance.com
  • 21. T he Chinese hydro power sector is dominated by SOEs, in both operation and construction. In the operation of Chinese hydro power facilities, the top 10 players occupy almost half of the market in terms of installed capacity of hydro power, many of the top 10 state owned firms. In terms of the construction of Chinese hydro power facilities, the three dominant market leaders belong to the State Owned Assets Supervision and Administration Commission (SASAC) and the Chinese Armed Police Force. This demonstrates not only the government’s keen interest in developing and assisting the construction of large hydro power facilities, but it also shows clearly the dominance of Chinese players within the market. Whilst it is possible for foreign firms to invest in the sector, their capacity is largely limited to a supporting role, with the government firmly controlling the development of this carefully crafted sector. Source: State Electricity Regulatory Commission (SERC) 53% A China Yangzi River Utility Top Ten Domestic Hydro Facility B China Uility Investment Operators 2011 - Market Share % C China Huadian D China Datang 10% E China Huaneng 8% F China Guodian 7% 7% 5% 5% G State Direct Investment 2% 2% H Hubei Energy 1% I Guangdong Electricity Dev. 0% J Zhejiang Energy Group A B C D E F G H I J K K Other Source: State Electricity Regulatory Commission (SERC) - China Electricity Council 66% Top Ten Domestic Hydro A Sinohydro Corporation Facility Constructors B China Gezhouba Group 2011 - Market Share % C Other 19% D China Anneng Group 11% 4% A B C D Source: State Electricity Regulatory Commission (SERC) - China Electricity Council 21
  • 22. Advantages of Hydro Power The chief advantage of hydro power is its considerable cost effectiveness in comparison with other renewable energy forms such as wind or solar. Marginal Cost For Different Energy Production Methods (RMB) Hydro Fossil Wind Nuclear Solar High 0.37 0.53 0.62 0.48 1.4 Medium 0.2 0.38 0.43 0.38 1.23 Low 0.03 0.33 0.36 0.35 0.81 Source: Haitong Securities E lectricity produced by hydro electric power is the most cost effective and stable form of renewable energy, allowing developers to install hydro electric power without the need for considerable feed in tariffs. As a senior diplomat from the US Embassy’s Department of Energy in Beijing acknowledges, “the Chinese government’s focus has been on hydro, as it is the most well- developed technology and can be used as a base load due to its consistency”. Hydro power also benefits from flexibility, with plants being able to adjust their output quickly to adapt to changing energy demands over certain periods, as confirmed by a chief engineer from the Gezhouba Group who states that “hydro is the most efficient method of power generation, because we can control the capacity and store the power easily”. Considering this, it is easy to understand why hydro power remains the priority interest for the Chinese government in driving forward their use of renewable energy and reducing their carbon dioxide emissions. 22 www.solidiance.com
  • 23. Disadvantages of Hydro Power Despite its appearance as the most effective of all renewables, hydro power also carries some serious disadvantages which will impact the future development of hydro power in China. Firstly, hydro power projects have a lengthy development period. For example, despite the main construction of the dam body being completed in 2006, the Three Gorges Dam project was only declared fully functional as of July 2012 when the final turbine began production. The lengthy and complex process reduces the investment appeal of large scale hydro projects. S ocial and environmental consequences of large hydro power installations are another inextricable challenge for hydro power. Almost 1.5 million people were displaced due to the construction of the Three Gorges Dam, a level of displacement which, according to analysts, will make future hydro power development more complicated. The enormous reservoir created in the Yangtze River by the Three Gorges Dam project is now plagued by pollution and in 2009, construction on a major hydro power dam project was halted due to environmental objections. In 2012, China is still experiencing one of the most severe droughts in the past 50 years, affecting water availability and flows, complicating the coordination and integration of hydro power. However, whether or not such issues will severely impact China’s continued investment in hydro power is uncertain. According to one analyst, “environmental and social aspects could theoretically have the biggest impact on China’s use of hydro power in the future, however, this really depends on the continued evolution and change in the Chinese political system, which is not something anyone is able to predict”. Finally, hydro power should be regarded as a finite resource. There are a finite number of locations suitable for large scale hydro projects and China is quickly reaching its capacity. It is clear that China’s golden days of relying on hydro power to meet its renewable energy quotas are gone and that whilst hydro power may be entering a new period of increased investment, the end is in sight. Industry players are now quitting the market, as confirmed by a previous sourcing manager from GE Energy, “we have already sold our hydro power business division because the global market is shrinking”. After 2030, expansion in hydro power in China will become increasingly difficult as suitable sites become harder to find. (Source: Xinhua) 23
  • 24. Three Gorges Dam China’s Three Gorges Dam spanning the Yangtze River is the world’s largest hydro power station in terms of installed capacity with a maximum capacity of 22.5GW. The dam became fully functional on 4 July 2012 when the last of the 32 main turbines began production. The project is regarded as a historic feat of engineering for China and can be considered as a turning point in the development of the domestic hydro power industry. Through the development of the project, the Chinese industry gained valuable technological capabilities through partnering with foreign suppliers. (source – China Three Gorges Corporation) H owever, the dam project has been widely criticised among the international community, with the Chinese government admitting the existence of social problems and pollution caused by the dam. A director from the Yangtze River Water Conservancy Committee admitted “we put 1/3 of our total expenditure into the allocation of migrants”. During the construction of the Three Gorges Dam, almost 1.5 million people were displaced, with archaeological and cultural sites being flooded and an increased risk of landslides in the area being attributed to the construction of the dam. According to the Chinese Society for Electrical Engineering, the dam was expected to provide 10% of China’s power, however as electricity demand continued to increase during the lengthy construction period, the dam only supported around 1.7% of electricity demand in China in 2011. The controversial project was expected to be the jewel in the crown of China’s hydro development, however, the project has created a number of doubts over the application benefits of large scale hydro power and could serve to complicate the development of similar large scale projects in the future, such as those in the Jinsha and Mekong Rivers. 24 www.solidiance.com
  • 25. Hydro Power Summary W hilst on the surface the Chinese hydro power sector appears to be on the verge of a period of increased development, the government’s immediate investment plan within the sector masks the fact that hydro power in China is a market past its prime. With an ever shrinking availability of resources and increasing resistance to the social and environmental consequences of hydro power installations, China will need to begin investigating other options away from hydro power as well as to focus on other renewables, such as wind and solar. 25
  • 26. Industry Analysis China’s Wind ENERGY 2011 marks the beginning of a period of adjustment in the Chinese wind power industry as government regulations and requirements increase, the overheated market begins to consolidate and power grid capabilities take time to catch up to meet the unharnessed production output of current installed capacity. With key industry trends including consolidation and internationalisation, the Chinese wind power market is taking the opportunity to mature. While long term market growth is still likely, the unpredictable outcome of this adjustment phase makes short term growth patterns uncertain. 26 www.solidiance.com
  • 27. China Cumulative and Newly Installed Wind Capacity 2005 - 2011 Giga Watts (GW) Cumulative Installed Capacity Newly Installed Capacity 62.733 44.733 25.104 12.120 19.629 18 5.912 12.984 2.599 6.208 1.266 3.313 1.333 0.502 2005 2006 2007 2008 2009 2010 2011 Source: Global Wind Energy Council 2011 is the first time that newly installed wind power capacity has been lower than the previous year. 27
  • 28. Global Total Installed Global Newly Installed Wind Capacity 2011 Wind Capacity 2011 Mega Watts (MW) Mega Watts (MW) CHINA 26% CHINA 44% USA 20% USA 16% GERMANY 12% INDIA 7% SPAIN 9% GERMANY 5% INDIA 7% UK 3% FRANCE 3% CANADA 3% ITALY 3% SPAIN 3% UK 3% ITALY 2% CANADA 2% FRANCE 2% PORTUGAL 2% SWEDEN 2% REST OF THE WORLD 13% REST OF THE WORLD 13% Source: Global Wind Energy Council 28 www.solidiance.com
  • 29. Government Targets and Subsidies GOVERNMENT TARGETS 2015 Total Installed Capacity of 100 GW 5 GW Installed Offshore – 30 GW by 2020 While government targets and subsidies are financially GOVERNMENT SUBSIDIES suitable to help support FEED IN TARIFFS industry development, the Global Wind Energy Council Feed in tariffs vary according to installation believe that the government region: now needs to become more involved in setting policy Windy areas of Inner Mongolia and Xinjiang – for standardisation of wind RMB 0.51/kWh, other parts of Inner Mongolia and power regulations. Hebei – RMB 0.54/kWh, Jilin, Heilongjiang, Gansu, Ningxia and remaining parts of Xinjiang – 0.58/ kWh, all other areas – RMB 0.61/kWh CONCESSION ROUNDS Primarily for offshore wind 1. Pilot scheme – 2010 Shanghai Donghai Bridge – RMB 0.987/kWh 2. Jiangsu Province – tariffs ranging from RMB 0.62-0.73/kWh • These tariffs are regarded as too low, delaying construction • A second concession round due 2012 Source: China Greentech Initiative Renewable Energy Finance Autumn 2011 IEA Technology Roadmap – China Wind Energy Development Roadmap 2050 29
  • 30. Current Overview Although newly installed wind capacity continued to grow in China in 2011, it was at a slower overall rate than previous years. However, China still dominates the global wind energy market with 25% of total global installed wind capacity and leading global growth, installing almost half of the world’s total new wind power installations in 2011. Source: Global Wind Energy Council T he slower pace of new installations in China marks a new period of adjustment for the industry, which has, until now, undergone almost a decade of unchecked, unassisted and uncoordinated growth. Despite the government’s ambitious growth plans by 2015, the Chinese wind power market is now expected to plateau, although it is uncertain how long for. Those within the wind turbine manufacturing industry expect the market to pick up within 2 years, but according to Qiao Liming, the Director for China at the Global Wind Energy Council, this estimate is optimistic and the slowdown period could last for anything up to 5 years. Other renewable energy experts in the Chinese government have even suggested the wind power market may take up to a decade to recover, with others suggesting wind power in China has almost reached saturation, with continued future growth uncertain. There are 2 key reasons for the slowdown in newly installed capacity – the need for more regulated growth and the need to improve grid connectivity. 30 www.solidiance.com
  • 31. Regulating Improving Grid Growth Connectivity B efore 2011, the wind power industry was poorly regulated, with no coordination between local C urrently, at least 30% of the installed wind power capacity in China is not connected to the governments, the national government and the indus- grid and due to problems with the old fashioned elec- try. Wind power facility installations were approved at tric grid system in China, the power that is connected provincial level, often by unscrupulous local officials to the grid suffers from curtailment and transmis- eager to meet and exceed their local economic devel- sion problems. (source – own interviews) This critical opment targets, which meant permits were obtained oversight in the rapid establishment of wind power in quickly and easily. With subsidies arranged according China has rendered its capabilities fruitless. The fact to installed capacity figures rather than grid connected remains that a meagre 1% of China’s electricity is gen- capacity, wind power facilities were erected without erated by wind power. The latest Five Year Plan seeks being grid connected. According to Liu Mingliang, an to address these problems, shifting policy away from analyst from the China Wind Energy Association, this targeting just capacity and towards grid connectivity. led to the construction speed of wind power facilities occurring faster than the network planning, which has Transmission – The majority of the wind power genera- resulted in a serious shortage of grid connected wind tion facilities established in China are in the rural far power. north and west, away from the main demand centres along China’s eastern and southern coasts. Currently, The Chinese government is now attempting to re- China’s transmission lines are not sufficient to transfer strain this kind of growth. In order to have access to the electricity generated at the power facilities to the national subsidies or feed in tariffs, new wind power population centres. The Chinese grid system is very facilities must now receive approval from the central outdated and the transmission lines are not suitable to government. According to a senior project manager at handle the long distance transfer at present. To solve Sinovel, one of China’s leading wind turbine manufac- this, more long range transmission lines need to be in- turers, this has seriously slowed the approval process, stalled, which will be costly and difficult and may carry resulting in the decline in domestic installations. no economic benefit to the power companies them- selves. Until China’s transmission lines are able to However, according to Qiao Liming, the Director for cope with the extra power transmission requirements China at the Global Wind Energy Council, this slow- created by wind energy as well as other renewables, down should be perceived as a positive step, building many projects will be stalled and remain unconnected. a more solid platform from which the industry can continue to grow in future. “This is the time for the Curtailment – Energy supply and energy demand industry to reflect on a lot of issues. The fast devel- coming onto and off from the grid must be exactly opment of the wind industry has diverted people’s equal on a second by second basis. The majority of attention from a number of important issues, includ- wind power is produced at night, when the demand for ing technological, planning and coordination issues energy is lowest, which means other power generating between the grid and the wind farm developers. Now plants must be turned off from the grid to compensate is the right time to slow down and to intensively adjust for this. In China, this usually means that a coal power regulations in order to better drive future growth in plant will have to be turned off, in order to allow the the sector”. wind power to be accepted onto the grid. However, as coal power does not cycle well, turning these plants off is not efficient and is rarely done. Instead, wind power is simply not accepted by the grid. 31
  • 32. Strong and PILOT Smart Grid Plan 2009 - 2010 • Establish Standards • 228 Demonstration Projects RMB 3.8 trillion • 26 Provinces • 21 Solution Ideas investment in 3 main stages: CONSTRUCTION C hinese firms stand to take the lead in smart grid technologies. Stakeholders – government 2011 - 2015 and grid companies – must coordinate activities to ensure effective development and installation • Ultra High Voltage (UHV) lines of smart grid technologies to avoid future • Distribution networks – Urban and Rural compatibility issues. • Remote Monitoring Systems There are 2 key reasons for the slowdown in newly installed capacity – the need for more regulated growth and the need to improve grid connectivity. INDUSTRIALISATION Source: China Greentech Iinitiative China’s Strong 2016 + and Smart Grid Investment Plan Autumn 2011 • Planned implementation 32 www.solidiance.com
  • 33. To try and address the issue of grid connectivity, China’s State Grid Corporation has created plans to build a strong and smart grid. Updating the Grid A s noted by Zhu Shunquan, an analyst from China’s National Renewable Energy Centre, smart grid technologies are still at an early stage of development across the globe. Zhu notes, “it is important that we first recognise smart grid as a concept that is still being developed internationally, with each country now trying to use their own concept to develop their own understanding of smart grid”. China is not the exception to this rule. Generally, it is accepted that smart grid technologies have 2 key characteristics, one being that they are intelligent and connected to IT systems, the second being that they are decentralised and thus reactive to consumer demand. However, the fundamental problem with China’s grid development is that the Chinese electricity grid is monopolised by state owned companies. The lack of a liberal market system means that the Chinese version of smart grid is thus being developed to help the grid companies rather than the consumer. This raises serious questions as to the future development of the smart grid and whether or not the Chinese grid will be radically overhauled to facilitate the acceptance of renewable energies in the long term, or whether a series of small scale developments will be made with only short term applications. This poses a significant challenge for the future development of China’s wind power industry. 33
  • 34. 5GW of offshore wind capacity by 2015 China has around 750 • Southern China’s Guangdong GW of exploitable wind province plans to construct 2-3GW offshore before 2015, and another resources offshore – 3 7-8GW from 2016 to 2020 times that on land • In February 2012, Sinovel announced it would supply 17 offshore turbines of 6MW for the Local governments and first stage of Shanghai Lingang offshore pilot project leading power companies have announced • China Longyuan Power Group offshore wind plans plans to build 1GW of offshore wind farms by 2015 larger than the national plan RESULTS? • 4 projects for 200 MW wind farms in Yancheng agreed by end of 2010 no construction started to date • Delays occurring due to lack of coordination among government bodies and manufacturers Source: Company websites 34 www.solidiance.com
  • 35. Problems Affecting Offshore Wind C hina’s offshore wind targets and plans are extremely ambitious. Currently, there are serious delays in the government entities is severely delaying the development of agreed offshore projects. Last July, the National Energy development of offshore wind and despite the ambitious Bureau and the State Oceanic Administration issued rules government installation targets, the future development for offshore development. Under these regulations, offshore prospects remain uncertain. wind farms must be constructed no less than 10 kilometres from shore, and in waters no less than 10 meters deep. This One problem hindering the development of offshore wind will limit the development of inter-tidal projects - near- is that the technology involved is far more advanced than shore stations in waters less than five meters deep - which that required for inland developments. According to Zhu are taking place mainly in Jiangsu and Shangdong provinces Shunquan, a senior analyst from China’s National Renewable and create further obstacles for developers. According Energy Department, Chinese manufacturers are still learning to Qiao Liming, China Director at the Global Wind Energy a lot from European technology developments and have a Council, the coordination between the different interest long way to go before they will be fully able to develop the groups could take as long as 2, 5 or 10 years, or even as necessary technology to successfully exploit offshore wind. little as only 3 months – nobody is certain. However, until these coordination issues are solved, the future of offshore Secondly, a lack of coordination between different wind development remains uncertain. 35
  • 36. 12.9% 9.4% Who Are The Key 8.8% Players 8.2% 7.9% • 4 Chinese wind turbine manufacturers are included in the global top ten • Each of these follows the general trend of falling revenues and profits in Q1 7.7% 2012 • Domestic competition and revised government policy creating a challenging domestic market 7.3% situation • Chinese manufacturers are seeking growth opportunities internationally 7.1% 6.3% 2.9% Source: Renewable’s 2012 Global Status Report OTHERS 21.5% 36 www.solidiance.com
  • 37. How are the Key Players executing? Q1 2012 Profits fell by 97% compared Q1 2012 profits fell by 87% compared Q1 2012 results ‘sluggish’ - blame Q1 2012 profits fell by 88.9% with Q1 2011 with Q1 2011 national economic slowdown compared with Q1 2011 March 2012 - RMB 9 billion con- Q1 results follow a challeng- Developing 6MW PMDD prototype for $1.2 billion lawsuit with AMSC over tract with Zhoushan government ing 2011 - profits fell by 53% offshore use in Jiangsu copyright infringement - 500 MW offshore wind farm compared to 2010 Launch of North American R&D Expanding globally – Ecuador, Aus- Refocus on Middle East and Southern First international operations – 6 centre in North Carolina, joint tralia, United States Europe – 1200 GW deal in Romania turbines in Texas venture Source: Company websites and press releases 37
  • 38. Industry Trend - Consolidation D uring China’s period of slowed, more coordinated growth in the wind sector, firms have gone through technological development and research capabilities who are being forced out of the market due to healthy market significant restructuring and resizing, resulting in some competition. cases, obsolescence. According to Liu Mingliang from the China National Wind Energy Association, in the past 2 years, Industry consolidation is not only limited to small and market consolidation in the wind power manufacturing medium-sized domestic firms, but is also visible at a higher sector has become more prominent. Liu Mingliang explains level. International firms such as Vestas and Suzlon are that by the end of 2011, there were a reported 80 domestic consolidating their efforts in the China market, with Vestas wind turbine enterprises in the Chinese wind power market, selling a factory in Hohhot, Mongolia and Suzlon selling its with the top 10 enterprises sharing 84% of the market and Tianjin factory. (Source – interview with Sinovel employee) more than 60 enterprises accounting for only 3.5%. In the This shows that at all levels, competition is high and the face of the current industry downturn, it is these small and slowdown in China is beginning to affect strategies and medium-sized wind turbine enterprises that are exiting operations. the market. At this level, it is mostly those firms with poor Industry Trend - Internationalization W hile China remains the largest wind power market in the world, the domestic slowdown in installations Those foreign players who manage to maintain their operations within China are expected to use these factories has caused all the large domestic manufacturers from as a basis from which to expand into China’s neighboring China to try and expand their operations abroad. “The countries where the markets, despite the fact these markets internationalisation of operations really is the big ship right are still in what Qiao Liming describes as “very early stages now for Chinese wind turbine manufacturers, in terms of of development”. trends, this one is really big,” said a Senior Project Manager at Sinovel. He further explained that Sinovel currently has It is worth noting that the Chinese wind power subsidiaries in all major markets, while Ming Yang recently manufacturers were developed with government support to announced plans to establish a joint venture in India and in mostly serve the domestic market, rather than for exports. Q3 of 2012, rumours emerged of its interest in purchasing Now that these manufacturers have reached a certain level Vestas. Many firms in China are using the current European of maturity, it is logical that they would begin to expand crisis as a chance to expand into the European market and overseas. However, Chinese firms are now having to adjust gain market share as well as technological capabilities. to international local content rules, similar problems that foreign firms had when entering China. The Chinese firms The focus on international operations is likely to continue are having to expand their international capabilities quickly even after the domestic market recovers, with the Chinese and learn how to adapt to heavily politicised and regulated market recovery expected to help the Chinese turbine markets. manufacturers in their further internationalisation efforts. 38 www.solidiance.com
  • 39. wind Power Summary O verall, China’s wind power market is entering a very interesting and unique stage. Following years of unregulated growth, the market is entering a period of consolidation and increased regulation. Key industry trends include consolidation and internationalisation, with key domestic players finally taking further steps onto the world stage. Challenges exist for the future development of the wind industry in China in the form of the development of the Chinese grid and the continued delays in successful coordination of government bodies in the development of offshore wind. Opportunities in China’s wind power industry exist in the form of internationalisation for local players. For foreign players looking to involve themselves in the wind market, opportunities exist in the application of advanced technology to assist the predictability and grid connectivity of wind power. It seems that, for the next few years at least, the domestic wind power market will be undergoing an unpredictable period of adjustment, the results of which will determine the future growth potential of the market. While some industry operators have unwavering confidence in the resurrection and continued growth of China’s wind power market, some market observers and analysts appear more skeptical. However, given China’s desire to position itself as a world leader in renewable technologies, it seems unlikely that the market will stall for long, with pressure from industry and the need to support the ‘national champion’ firms leading the development to be undertaken as quickly as possible. 39
  • 40. Industry Analysis China’s solar ENERGY 2 011 was a year in which solar PV installations increased by nearly 3 times in China, following the government’s increased commitment to the development of the industry. Whilst installations are expected to continue a rapid ascent, the starting point of this growth is low. The overcrowded industry is pushing the weaker firms out of the picture, with strong firms suffering from problems of overcapacity, troublesome technological development processes and an international slowdown and struggle for survival. Long term market growth potential is significant, but coordination issues and grid capacity problems will need to be resolved to ensure the continued development in the short term. 40 www.solidiance.com
  • 41. China Cumulative and Newly Installed Solar Capacity 2005 - 2011 Mega Watts (MW) 3093 Cumulative Installed Capacity Newly Installed Capacity 2200 893 373 520 145 100 68 80 228 45 12 20 4 2005 2006 2007 2008 2009 2010 2011 Source: EPIA Global Market Outlook for Pohotovoltaics Until 2016 May 2012 Global Total Installed Solar Capacity 2011 - Mega Watts (MW) GERMANY 36% FRANCE 4% ITALY 18% BELGIUM 4% JAPAN 7% CZECH REP. 3% SPAIN 6% AUSTRALIA 2% USA 6% REST OF THE WORLD 11% 41
  • 42. Solar Power Government Targets Government Targets and 2015 Subsidies Total Installed Capacity 21 GW 2020 Total Installed Capacity 50 GW Government Subsidies FEED IN TARIFFS THE GOLDEN SUN PROGRAMME National Feed in Tariff (FiT): • Started in 2009 – rural electrification and building projects • Approved before 1 July 2011, Operating before 31 December 2011 RMB 1.15/kWh • Allowed 140 MW installations in 2011 • Approved after 1 July 2011, Operating after 31 December • Around 1GW expected installations 2012 2011 RMB 1/kWh THE GOLDEN SUN PROGRAMME Provincial Feed in Tariff: Subsidy programme – 2009 – to assist • Shandong RMB 1.2/kWh development of building integrated solar PV. • Zhejiang RMB 1.43/kWh Source: : China Greentech Initiative Renewable Energy Finance Autumn 2011 and Center for American Progress 42 www.solidiance.com
  • 43. S olar PV installation targets have been revised again in June 2012, to 21GW by 2015 up from 15GW. This not only shows the determination of the Chinese government to aggressively meet the overall renewable targets, but also demonstrates their belief that the solar industry is ready for growth and a suitable target for investment. Following the Fukushima disaster in Japan, China’s investment in nuclear energy has been reduced and offset by an increase in solar PV investment. China’s solar PV manufacturers have traditionally exported, with around 80% of PV modules and cells produced in China being exported by the end of last year. The government is keen to develop the domestic market quickly, so it’s providing a greater number of subsidies and incentives to private manufacturers, aiming to develop the domestic market. The national feed in tariff (FiT) has stabilised the Chinese solar sector, no longer allowing large SOEs to dominate in the former auction style scheme which created unintentional consequences of underbidding on large scale projects by SOEs in order to capture greater market share. The new national system eliminates such consequences and creating greater and true market competition and dynamism within the sector. However, the FiT figures for 2012 will only incentivise projects in locations away from demand centres, where solar energy is more cheaply produced, meaning BIPV systems, traditionally focused near demand centres, will struggle in the coming year in comparison to the rural based LSPV installations. 43
  • 44. Current Overview C hina is now a multi-gigawatt market, with over 2GW of newly installed solar LSPV (Large Scale PV), moving the market away from rural electrification. PV capacity in 2011. It is also the fastest Despite China’s impressive investment volumes and consistent growth, the growing solar PV market in the world, with global solar PV market is still dominated by Europe with around 75% of cumulative capacity expected to continue the world’s total capacity. However, the EU financial crisis and changing climbing over the next few years. According to EU regulations and installation policies mean European demand for PV is Lu Fang, Secretary for the Solar PV Committee falling and the industry is diversifying across countries, paving the way for of the China Renewable Energy Society, China’s sustained growth. experts have already assessed that in 2012 China’s domestic newly installed capacity will The global value chain for solar PV is suffering from serious overcapacity, be around 5GW, bringing the total cumulative leading to increased competition and consolidation in the manufacturing installed capacity before the end of the year market. Excess components from the value chain are being reinstalled to 8GW. The majority of the new installations domestically, increasing newly installed capacity but limiting will be in grid connected solar PV projects, opportunities for foreign investment. such as BIPV (Building Integrated PV) and How are the Key Players executing? OTHER KEY MOVEMENT Q1 2012 gross profit fell by 99% Q1 2012 profits fell by 87% compared Q1 2012 gross profit fell by 34.7% Overcapacity of solar modules compared with Q1 2011 with Q1 2011 compared with Q4 2011 globally – impacting price Excessive module supply, US anti- Consolidation - mergers and US Anti-Dumping / Countervailing Continued global module price dumping measures and European acquisitions - Jiangsu Shenlong Duties equated to 4.7% of revenues decline impacting profitability subsidy adjustments Hareon Fukushima disaster – China re- Slim frame 60 cell panel – one of the An official sponsor of Brazil 2014 High efficiency ‘Honey Technology’ ducing nuclear targets, offsetting lightest in the industry World Cup – Honey Ultra with solar Source: : China Green Tech Initiative and company websites 44 www.solidiance.com
  • 45. 5.8% 5.7% Top Ten Global 4.85% Wind Turbine Manufacturers 4.3% 2011 - Market Share % 4% • 6 Chinese wind turbine manufacturers are included in the global top ten 2.8% • Domestic and global trend of falling revenues and profits in Q1 2012 2.8% • Extreme overcapacity at all stages of the solar PV value chain – future consolidation 2.7% • EU financial crisis and adjusted energy policies impacting Chinese manufacturer 2.7% 2.5% Source: : Renewable s 2012 Global Status Report OTHERS 61.9% 45
  • 46. Industry Industry Trends Opportunities W hilst growth is expected in installed solar PV capacity in China, the manufacturing industry C learly then, opportunities for growth and development exist within the solar PV industry. has been suffering from serious overcapacity and profit Solidiance analysis has identified 3 chief opportunities for reduction. According to a solar technology developer at growth within the Chinese solar PV sector – 1. domestic 3M, around half of the domestic module companies have development, 2, new technology research and development disappeared in the last year and only large companies and 3. cost reduction. with strong technological capabilities survive. Industry consolidation is rampant, the consistent fall in the price The change in EU subsidies for solar PV creates a huge of silicon and the increased availability of domestically opportunity to reinvest excessive capacity into the produced silicon in China (at 70% in Q3 2012 according domestic market. China has an abundance of potential to the Solar PV Committee of the Renewable Energy for solar PV installations, with 1 GW of installations in Society of China), small manufacturers who only focus on Qinghai province alone, a figure exceeding the entire assembly are struggling to remain competitive and falling solar installations of the UK and over half of the total out of the market. According to a senior diplomat at the US installations of France in 2011. Qinghai is also home China Embassy Department of Energy, this is now causing to the world’s largest PV plant with 200MW capacity, a large number of SOEs to enter the solar industry. Until the equivalent of 6 times Brazil’s cumulative installed now, the industry has been dominated by private firms, but capacity in 2011. In 2011, PV shipments from China shared following the consolidation of the solar market, combined around 50% of the world total PV shipments, suggesting with the Chinese government’s push for increased solar a significant availability of technology for domestic PV installations, SOEs are becoming increasingly involved installation within a compressed time frame. in the solar industry. This could increase competition and serve to drive the market, but the long term impact Chinese companies have gained strength in terms remains uncertain. of production quality and cost on a global scale in comparison to market developments of the last 2-3 years. Following the global financial crisis, many Chinese According to Lu Fang, Secretary for the Solar PV Committee companies are now focusing on domestic orders to of the China Renewable Energy Society, Chinese firms are survive. In comparing some of the chief local players, now developing technologies and efficiencies of their industry experts explain that Yingli Solar are surviving solar cells on a ‘world class scale’. Suntech is researching the industry consolidation period well due to the skillful technology that will improve the efficiency of their mono and aggressive push on developing domestic demand, and poly crystalline solar cells, with Trina Solar also whereas Suntech are struggling to maintain profits with reported to be increasing the efficiency of their solar cells the reduction in their core enterprises abroad. According at extremely fast rates. According to a senior electricity to a solar technology developer at 3M, survival at this analyst from the US Energy Information Administration, point seems to be the key goal, “the manufacturers are opportunities for technological innovation in the solar just trying to survive through this hard time. Some of the sector are continually emerging, The analyst explains, really big companies have a lot of loans and a lot of money “if someone were to come out with an inexpensive solar borrowed from the banks, which means that even if they cell that is actually cost competitive with other electricity sell a lot of modules, they can’t even balance their books”. generation technologies, that would change the story of solar all over the world, not only in China – of all the companies with opportunity, the Chinese seem most likely to access such technology first”. 46 www.solidiance.com
  • 47. with the falling price of silicon expected to increase Prices for solar module components are continuing the market share of thin film technologies by as much to drop, allowing manufacturers to produce solar as 10% within the next 2 to 3 years, according to the modules in greater volumes for more cost effective National Renewable Energy Centre. installations. For example, one component, called E.V.A, vital for manufacture of solar modules, has The drop in demand from the USA and Europe for fallen by around 5RMB (US $0.80) per square metre in solar PV exports presents a challenge for many high the last 2 years. At the same time, manufacturers are level Chinese domestic solar module manufacturers. continuously putting vendors under pressure to lower In Europe, Spain and Germany in particular have costs, according to 3M. The falling cost of silicon been reducing their incentives for solar installations cells has also contributed greatly to the falling cost owing to the recent EU financial crisis, whilst the of solar modules, making lower cost, higher efficiency USA is now focusing financial incentives towards modules one of the leading market opportunities. consumers, rather than importing businesses. Further, following the bankruptcies of some high profile US However, despite being at a prime development solar manufacturers, such as Solyndra in 2011, the stage ready for investment and rapid development, USA has imposed countervailing duties between there are a number of challenges being faced by the 2.9% and 4.75% on all Chinese made solar panels Chinese solar PV market which can not be ignored. starting in 2012. For Chinese firms, this creates a unique challenge and will require them to adjust their business models away from international exports and toward domestic installations and technology development. Industry Given the variability in energy production cycles of CHALLeNGEs solar PV, the challenges facing the Chinese electricity grid will increasingly also serve to create difficulties for the development of the solar industry. It is irstly, overcapacity issues within all stages of the expected that LSPV systems, installed in western F solar PV value chain will present a short term challenge to the future development of deserts where the solar radiation is highest, will struggle to be connected to the grid, and according key solar manufacturers in China. Whilst Chinese to Lu Fang, “a lot of the solar electricity produced in manufacturers dominate the export market, with an LSPV plants will be wasted”. However, the issue of grid existing trade US trade surplus of US $1.6 billion, connectivity is potentially less serious in the solar overcapacity issues are creating a difficult operating industry than in the wind power industry as solar environment for smaller, assembly focused plants. power is much better at load following than wind. These plants are mainly exiting the market or When the solar power generated is at its highest being bought by SOEs which creates a new level and supply is high, the electricity demand on the of competition for the established, high level solar grid is equally high, which enables more power to be module manufacturers. Whilst the precise role of the accepted by the grid. SOEs in the market remains to be seen, it is clear that competition is building within the market. High cost of technology – Solar PV technology remains comparatively more expensive than hydro or wind power, with many technologies dependent on subsidies and feed in tariffs for economically viable installation. If the solar industry is to witness continued growth and development, the technologies will have to rapidly fall in price and match grid parity. However, this problem appears to be gradually easing, 47
  • 48. Solar Summary T he Chinese solar PV market shows future potential and is earmarked for concentrated government investment and development. Solar PV is China’s next big renewable sector. However, the global solar situation is causing short term development issues, with many Chinese domestic module manufacturers struggling for survival amid growing competition and shrinking international demand. Grid problems also cause concern for the immediate future of solar technology, with grid capacity and transmission problems affecting solar development and installation. Given China’s increasing technological capabilities and determination to quickly develop their domestic industry, it seems that solar PV growth will continue unabated despite these concerns, although questions of regulation and coordination must be raised and addressed in order to guarantee the solar industry does not reach industry slowdowns as has been affecting the wind industry. 48 www.solidiance.com
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  • 50. Biomass and Biofuels B iomass and biofuels represent a key potential future growth area for renewables in China, with opportunities in second generation biofuels, ethanol and energy produce from feed stock sources. Despite their future potential, it is important to recognise that these areas are just getting started in China and currently have very poor supporting infrastructures. In biomass, China has strong existing understanding and knowledge of the required technologies as well as understanding of how to build and operate the power plants. According to discussions with experts in this field from governmental energy departments, the main restriction for development of biomass is currently the lack of supportive infrastructure. China is currently investing in a small number of test projects for biomass, which are expected to lead the way for further research and investment before 2015. The focus for Chinese biofuel development has been in two areas – ethanol production and second generation biofuels. Ethanol production remains a small area of investment for China, who lacks processors and matching infrastructure as well as knowledge on the right mixture to create a suitable power source. However, as the production of such energy would likely use stocks that will compete with food, some experts believe that investing heavily in this area would be “a negative thing for them to do”. Second generation biofuels (non food sources that can be generated into biofuels) offer potential to China, who are now placing emphasis on the use of jet fuel in a bid to try and create a national source of price stable biofuels to reduce the impact of external geopolitical situations which could impact fuel security. According to China’s Civil Aviation Administration, China is expected to use 12 million metric tons of aviation biofuels by 2020, accounting for around 30% of the country’s total use of jet fuel. 50 www.solidiance.com
  • 51. C hina is also beginning to invest in energy that can be produced from feed stock sources such as corn stocks, wheat stocks and gutter oil. They are also investigating the use of different grasses and algae and other fast growing plant materials that can be used a feed stock that is not competing with food sources. Biofuels using algae are already more advanced than in other countries, according to the US Department of Energy at the US Embassy in Beijing, China’s the scale of China’s investment and existing capabilities are already greater than those of the US in this area. Sinopec and Sinoc, as well as other Chinese oil companies are beginning to recognize the potential value of this area for future development. They see that if they can generate aviation biofuels in China and export them globally, they would quickly rise to a position of global leadership. Which is why entities such as the China National Petroleum Corporation announced plans this year to build a refinery capable of producing 60,000 tons of biofuel annually by 2014. Although these areas remain underdeveloped in China, compared to solar, wind or hydro technologies, biomass and biofuels could be described as the next generation of renewable energies in China and are the key growth markets to watch over the course of the 12th and 13th Five Year Planning periods. 51
  • 52. SUMMARY China’s ever growing demand for energy necessitates the use of Energy Demand sustainable production methods Government Clean energy as key investment sector - $51 billion invested in renewables 2011 Priority China’s most well developed renewable energy sector, set for Hydro Power short term investment boost but ultimately an industry in decline sustainable production methods Challenging market undergoing domestic adjustment causing Wind Power leading Chinese firms to seek international expansion sustainable production methods China’s grid system is in need of complete overhaul, investment Smart Grid in smart grid systems vital for future growth of renewables in China Chinese market set for long term growth after period of global Solar Power and domestic consolidation Underdeveloped infrastructure limiting short term growth, Biofuels industries at early stages of development, being investigated for future development potential 52 www.solidiance.com
  • 53. Conclusion R enewable energy is undoubtedly of vital importance to China. Owing to China’s increasing energy consumption, its need to restructure a coal-dominated industry and the need to meet greenhouse gas reduction targets, renewable energies application in China and indeed globally, are gaining significant attention on the global energy platform. However, despite ambitious government targets and investment into the sector, a lack of coordination between concerned stakeholders in the development of China’s renewable energy industries is the key barrier to the future growth of renewables in China. With China’s main source of renewable power (hydro) entering its final flourish and with its designated successor (wind) entering a period of consolidation and uncertainty, China will need to invest heavily in sectors marked for growth (solar PV and biofuels) to ensure its own national growth remains sustainable. Renewable energies are here to stay in China, but it is not without significant coordination and continued investment that the reliability on alternative energy sources, in the manufacturing center of the world, becomes a reality. 53
  • 54. Solidiance is a dedicated B2B marketing and growth strategy and consultancy firm focused on the Asia Pacific Region. 54 www.solidiance.com
  • 55. about solidiance What We Do We help multinational clients understand the Asian market landscape by profiling industries and competition, sizing the markets, segmenting customers, analyzing distribution channels, determining the best locations, preparing investment feasibility studies, identifying suppliers, reviewing potential joint ventures or acquisitions, and delivering market entry and growth strategy in Asia. What We Are Focus On Our industry experience is centered on industrial applications, green buildings, cleantech, technology, and healthcare. Our Asian market entry and growth strategy services provide the required insights and the necessary roadmap to capture a profitable market share in the region. Additional Details Solidiance has offices in China, India, Indonesia, Malaysia, Singapore, Thailand, Myanmar and Vietnam. We are fast expanding and always on the lookout for exceptional people. 55
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