The steep road to transition
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A preview of the new number of World Energy (37), "China: The Overtake". Despite the leap forward in the production of green energy, which is expected to cover 15 percent of energy requirements by 2020, Beijing is struggling to define a clear regulatory framework, while investments in the sector have not always paid off.

The energy revolution is an important sign of global industrial development and technological progress. Traditional fossil fuels have driven industrial development while at the same time exposing the world to the limits of energy resources and their contribution to the progressive deterioration of the ecosystem. In the wake of the energy crisis, the global environmental and climatic crisis of the second half of the 20th century and the explosion of the economic crisis, humanity is making tremendous efforts to move from the traditional system based essentially on the use of coal and oil, to a new energy model based on clean and renewable resources, including natural gas, hydroelectricity, wind, nuclear, photovoltaic and biomass energy. This transformation is known as the “new energy revolution” or “energy revolution 4.0.” According to predictions contained in the 2016 Annual “World Energy Outlook” Report published by the IEA (International Energy Agency), by 2035, energy consumption in China will account for 25 percent of world consumption, with a proportional net increase of 32 percent compared to global energy consumption. This clearly shows how China is destined to have even greater relevance in the global energy market and in energy policies.

New energy planning and expansion in China

China may have started to develop and use new energy sources later than others, but growth in the industry has been quite fast and has attracted worldwide attention. Development in the Chinese new energy sectors is mainly focused on sustainable energy, wind, biomass and blue energy. The creation of sustainable energy industrial facilities has many applications. Thanks to greater public awareness, an ever-increasing focus on new energy in national policies and new market requirements, the new energy sector’s development has gradually accelerated and is attracting increasing attention from industry. New energy parks have sprung up all over the country, allowing progress in the shift to renewable energy and enabling further expansion of the market, which has led to giant steps being taken. By the end of 2016, wind farms had an accumulated power of 149 GW, increasing annually by 13.2 percent, i.e., 9 percent of the country’s entire energy production; total photovoltaic energy production had reached 77.42 GW, increasing annually by 81.6 percent, corresponding to 4.7 percent of the country’s energy production capacity; while data for blue and biomass energy production, amongst others, also showed significant growth. Today, China has overtaken other developed countries, including Germany, the U.S. and Japan, reaching pole position in terms of new energy consumption and the production capacity of its new energy plants.

In 2015, non-fossil fuel energy consumption in China was around 12 percent, higher than its consumption in Japan, Belgium, the U.K. and the other leading developed countries. In the same year, the world’s total installed wind energy capacity was 63 GW, 48 percent of which was represented by China. In the first half of 2017, the distributed photovoltaic capacity was 17.43 GW: 17 percent of total installed production capacity. Also in the first half of 2017, production capacity increased by 7.11 GW, around 3 times the amount produced during the same period of the previous year.

 

A rapid and unexpected development

Development in the photovoltaic industry in China has two characteristic features: increasing speed of distribution capacity and a very clear trend toward development in the sector, which is moving toward the eastern regions of the country. The main aspects of the development of new energy in China are the following:

First, a constant increase in the demand for new energy sources. According to the “13th five-year energy development plant,” China’s energy requirement will continue to expand quickly. It is expected to reach 0.5 billion tons of coal equivalent (tce) by 2020. Among other things, the plan includes an objective for photovoltaic energy, aiming for a distribution capacity of 60 GW, for which it is crucial to expand distribution and consumption in the eastern and southern regions of China, in the knowledge that the development of energy resources can improve efficiency in the use of the whole energy system.

Second, the ratio between reserves and production of energy from traditional fossil fuels is far lower than the global average, which is the very reason why new energy sources have become such a significant part of the national energy strategy.

The “13th five-year energy development plan” clearly illustrates how the percentage of renewable energy will account for an ever-increasing portion of overall energy consumption, rising from 8 percent in 2011 to 15 percent in 2020, with a total market value of around 2,000 billion RMB (including 1,000 billion in new energy and 1,000 billion in environmentally-friendly cars).

According to data from the National Bureau of Statistics of China, in the first four months of 2017, clean energy production—excluding blue energy, which is influenced by seasonality—peaked, with solar power, for example, having risen by 31 percent compared to the same period of the same year.

Based on the “China Energy Outlook 2030”, published by the China Energy Research Society (CERS), by 2030, new energy plants will have grown to 14.4 TW, with a total installed capacity of 60 percent, which will contribute to covering 90 percent of the increase in energy consumption in 2020-2030.

Third, national policies will support expansion in the new energy sector. The government will support this strategic sector to make it profitable, attracting big investments, while also dealing with issues relating to the uniform production surplus. In future, industrial policies will be aimed at promoting innovative efforts and making demand grow in the new energy sector.

 

Constantly evolving legislation

In terms of organic legislation, China has consistently innovated its regulatory framework and policies to stimulate new energy production and eliminate traditional energy sources. This framework includes the “People’s Republic of China Law on Renewable Energy,” the “Medium and Long-Term Plan for Renewable Energy,” and the “Energy Conservation, Creation and Distribution Code (undergoing testing).” The country has also supported wind power policies with great commitment through the “Provisions for the Development of Decentralized Access to Wind Power of the National Energy Agency (NEA), the “Provisions for tax relief policies on new energy vehicles for the period 2016-2020,” and the “Management and warranty provisions for the full acquisition of wind and solar energy.” Furthermore, based on the information contained in the 2017 “Government Activities Report,” the objectives set to regulate the energy produced from coal by eliminating, canceling or suspending plants with a production capacity of 50 GW upwards will lead to a cascade analysis of these objectives in 2017, with a view to defining and implementing stricter legislation to guarantee that each objective is actually met.

Finally, continuous innovation in energy storage and the use of IT tools in the field of new energy sources. China is currently the world leader in the CAES (Compressed Air and Energy Storage) sector. Technological innovation introduced by thin-layer solar cells has gradually entered the energy distribution market and its use by companies is growing steadily. Over the next 10 years or so, the requirement for energy storing solar panels can be estimated to grow to 8.5 TW, demand in the market for lithium ion batteries for next-generation vehicles is expected to reach 50 GW, while the value of the market for energy saving batteries is estimated to grow to several thousand billion.

Risk factors and adapting the development model of energy sector companies

According to the ”13th five-year plan for the development of renewable resources,” by 2020, new wind farms will be able to deliver 80 GW, based on an investment of around 700 billion Yuan, while 100 billion Yuan will be invested in different types of photovoltaic energy plants. This shows how China now has a historic development opportunity in the field of new energy sources. However, despite the rosy development prospects, the current data show uneven growth that will require the sector to deal with a variety of risk factors and problems:

1. The number of patents has fallen rapidly. Both innovation by existing companies in the new energy sector and the growth of new companies have decreased. Between 2006 and 2008, China filed the highest number of patent applications in the wind, photovoltaic and blue energy sectors (followed by Japan, the U.S. and the U.K). However, following the acceleration of the industrialization and urbanization process, along with an increased interest in traditional sectors, the innovative vigor of companies in the new energy sector has decreased in recent years, leading China to fall behind Japan and other developed countries.

2. The financial capacity of companies in the new energy sector is insufficient. Indirect financing has encountered problems. The origin and most important channels for this kind of financing are commercial banks, which primarily concentrate their investments in medium to large state-owned companies, given that there are restrictions on granting credit and loans. The requirements that companies have to fulfill to be granted loans are fairly stringent, which means that most companies operating in the new energy sector do not fulfill the minimum requirements set by banks for credit financing. Only around 10 percent of financial support for the sector comes from direct financing, a much lower percentage than in other countries. There is little confidence in making venture capital investments as there is little specialization in most risk capital investment companies. Difficulty is often encountered in understanding the industrial model of projects and the effectiveness of investing in new energy sources, leading to a cautious approach to investments in the sector.

3. A development model that depends on political rigor. The new energy sector is currently at an initial stage in many respects. The industrial model and financial valuations are difficult to interpret and, in many circumstances, there is a need for preferential policies that provide for State contributions, without which it is difficult to achieve a financial balance and continue with the venture.

4. The credibility of companies is weak and legal disputes are increasing. Between 2007 and 2014—a period of 7 years—legal disputes due to the credibility of companies increased from 6 to 640. Some Chinese companies are facing big challenges related, for example, to international intellectual property and to an inability to sell their products effectively.

5. Development trends in the energy sector and resulting pressure on the transformation of its model. Development trends in the energy sector are putting a lot of pressure on the new energy sector. There are two aspects to consider: first, the difficulty of maintaining the traditional energy model, which does however have an advantage in price terms, and second, the fact that development in the new energy sector is struggling to keep pace with the development of demand.

6. The new energy sector is hampered by a lack of fair market-driven competitiveness. China’s lack of vision regarding the new energy development process and the lack of scientific and rational technological innovation have so far prevented it from implementing a far tax policy that will allow the new energy sector to serve the country’s energy security.

New development prospects in the sector.

1. Improving energy sector regulation and promoting strong and healthy development of the new energy revolution. The government must devise policies and measures aimed at supporting the energy sector, enticing companies in all sectors to undertake an energy revolution and encouraging them to replace technologies which use traditional forms of energy with green production. Beijing should also further improve protection for intellectual property rights and introduce a system that rewards innovation,, supporting the creation of new energy products with the help of grants for environmentally sustainable technologies, green taxes and other measures.  Environmental protection legislation will have to be further improved. Technical standards need to be set for industrial energy storage and for cutting emissions, establishing a threshold for carbon emissions, encouraging companies in different sectors to implement measures for innovation and improvement in the field of energy, while also improving the exit mechanism for companies, establishing a plan for the elimination, within the established period of time, of uncompetitive companies that have a high environmental impact, low productivity and high levels of pollution.

2. Adapting the industrial structure and the energy consumption structure, promoting the green transformation of industry. The Chinese industrial fabric, which is dominated by heavy industry, has long maintained a structure based on the use of fossil fuels. A green transformation of the Chinese industrial sector is needed, involving adapting the production structure and forcing a structural reform of energy consumption. The adaptation of the production structure should aim to reduce environmental costs for greater energy efficiency. For these reasons, it is necessary, first of all, to redirect drilling and mining activities relating to coal, oil, natural gas, ferrous metals and other heavy industries toward the healthy development of key industries in fields of energy conservation and emission reduction. Furthermore, the lever of the high-tech industry must be used to focus on the development of modern services and manufacturing, using the development of production to transform and redirect the industrial structure, optimizing and improving the energy structure, thus creating a mechanism that will encourage the green transformation of industry. Finally, more in-depth work needs to be done on factors that can reform the market and play a fundamental role in reconfiguring the energy product, focusing on investments driven by economic efficiency rather than being government-led, further defining the endogenous strength of green industrial transformation.

3. The new energy sector needs a massive injection of venture capital funds, state investments, share capital and financial support in every respect, so that diversified capital can flow into the industrial development of new energy sources. This involves intensifying the use of share capital, replacing the technologies commonly used in the sector with recently patented technologies and continuing to plow the technological revolution and innovation furrow.

4. Increasing investments in technological innovation, growing the green economy of companies in the energy sector. The margin for improvement of Chinese green technology companies is enormous, but investments in R&D and the plan to expand the green technological transformation are still hampered by the lack of support for the production structure of companies. The technological reform of traditional technologies must therefore be boosted, promoting new energy technologies and expanding the use of new manufacturing processes, improving the efficiency of energy recycling, constantly moving the frontier for industrial production further and improving the competitive strength of companies, stimulating and promoting a green economic approach by companies.

5. Improving the path toward internationalization and international cooperation. The New Silk Road (One Belt One Road Initiative) is a national strategic initiative promoted at a high level to ensure that countries along the same line focus on common needs. The initiative has created new and better opportunities for development, liberalization and complementarity. All along the New Silk Road there are many countries with a wealth of traditional and innovative energy resources, which are developing coal resources destined for Chinese companies, for which the expansion in the coal trade has been beneficial. China is a world leader in coal extraction and processing technology, coal mining machinery, engineering services and other aspects, with a considerable competitive advantage internationally. The countries along the New Silk Road are, for the most part, emerging and developing economies with a high demand for infrastructure, a big market for coal and a great deal of room for investments. By the end of 2012, China had 65 coal mining projects abroad, involving investments of over USD 7 billion, and controlled 40 million tons of coal resources.

6. The Internet as a means of involvement. With increasingly in-depth research being done into e-distribution (energy distribution via the Internet), renewable energy could supplant fossil fuels on a large scale, thus creating ample space for the development of e-distribution, giving new impetus to a reform of the energy system.

In general, between 2017 and 2022, renewable energy could grow globally by a margin of more than 40 percent, increasing in total by around 8.6 TW, with photovoltaic energy increasing by around 3.8 TW, overtaking wind power for the first time. China remains the global leader in the market for renewable energy, making a 36 percent contribution to future photovoltaic energy production. It is therefore reasonable to assume that the content of the Chinese “13th five-year plan” for renewable energy could give rise to a new definition and environment for development.