China takes world lead in clean energy as others fear to finance

Soaring energy needs, volatile oil prices and an increased focus on curbing global warming have spurred investments in clean energy, or “green financing”.

Governments, financial institutions, investors and businesses are pouring money into technologies that will help the world address its energy requirements with a minimal impact on the environment.

Green financing: A roller-coaster ride so far

Global clean-energy investments surged during 2004-2008 from $33 billion to $173 billion. However, the global financial crisis threw a monkey wrench into the works in the second half of 2008. By the first quarter of 2009, the impact of the meltdown was more visible, with clean-energy investments more than 50% below the peak reached just over a year ago.

However, the clean-energy industry showed its resilience, highlighting the fact that the global economic crisis could not deflect attention from another crisis-in-the-making, the energy crisis. Helped by the rapid growth in wind-energy installations in China, investments in some big offshore wind farms in markets such as the UK, and a steady revival of the financial markets, the year 2009 ended with total clean-energy investments of $162 billion, a drop of only 6.35% from the record investments in 2008.

Asset financing – funding to build wind farms, solar projects, biofuels plants and the like – accounted for $100.9 billion of total investments in 2009, with China as the leader with investments of $26.3 billion in wind farms and solar parks. While many companies canceled their public offerings in view of the tough market conditions, strong IPO activity in late 2009 in China broke the drought. Globally, equipment manufacturers and technology companies raised $14.1 billion from the public markets and an additional $6.8 billion from venture-capital and private-equity investors.

In addition, governments around the world allocated more than $436 billion in “green stimulus” programs, most of which will flow into the clean energy industry this year and the next. Another positive factor was the fall in the cost of renewable energy technologies, making the sector more cost-competitive and hence, more attractive to potential investors.

The growing energy challenge

At the same time, the world’s energy needs are growing at a feverish pace. According to projections by the International Energy Agency (IEA), in the absence of an overhaul of regulatory policies by governments worldwide, demand for primary energy will increase by 40% between now and 2030. Non- OECD countries will account for over 90% of this increase, and China and India together for over half.

As per the Chinese government’s forecasts, the country’s electricity use will grow 10% a year until 2012, while demand for electricity is expected to double by 2020. The IEA estimates that China will overtake the United States around 2025 and become the world’s biggest spender on oil and gas imports to meet its burgeoning energy needs.

Compounding the energy challenge is China’s rapid pace of urbanization. According to projections by the consulting firm McKinsey & Company, China will have 221 cities with more than 1 million residents and 23 cities with more than 5 million by 2025, with its urban population expected to touch the 1 billion mark by 2030. This rapid growth in China’s urban population requires these cities to invest in energy-efficient infrastructure and tap sustainable and eco-friendly solutions to reach their own climate goals and those of the country, while addressing the needs of their growing populace.

China: Clean energy takes center stage

Understanding that the power needs of its growing economy need to be met without endangering the environment, China is not only embracing renewable energy sources as an alternative to fossil fuels but is also fast emerging as a clean-energy powerhouse. In 2009, its investments of $34.6 billion helped it replace the United States and emerge as the leader in clean energy finance and investments for the first time. Last year, the country passed Germany to become the world's second-largest producer of wind power behind the United States. It is already the world's leading renewable energy producer in absolute numbers, with an installed capacity of 152 gigawatts (GW). In 2007, the National Development and Reform Commission announced a new plan with the targets of renewable energy accounting for 10 percent of primary energy consumption by 2010 and 15 percent by 2020.

China has also recently amended its Renewable Energy Law to require power grids to purchase a set percentage of renewable power each year and created a streamlined mechanism to fund these incentive programs. In addition, the country has also set ambitious goals for developing sustainable infrastructure such as green buildings.

China aims to cut energy use of buildings in all cities by 65 percent by 2020, using the average energy efficiency of Chinese buildings in 1980 as the base point. Beijing, Shanghai, Tianjin and Chongqing – the four largest cities in China – are working on cutting building energy use by 65 percent by the end of this year.

Financing the green movement

China requires massive investments to meet its energy-efficiency goals and to build sustainable infrastructure. For instance, increasing the share of renewable energy in the country’s power mix to 15% by 2020 alone will require an investment of $200 billion. Similarly, the Chinese government estimates the total cost of retrofitting existing buildings with energy-saving systems will be $193 billion. This work is to be completed by 2020.

China holds out a great growth potential in the area of project finance. However, financial institutions and the Chinese government remain the key backers of project financed-infrastructure projects, and this trend has only grown in the wake of the global economic slowdown with the government infusing funds into the economy.

Chinese banks have both huge amounts of cash and the appetite to lend. According to analyst estimates, the first two weeks of January alone witnessed lending of as much as 1.1 trillion renminbi ($161.76 billion) in new loans by these banks.

However, China’s private sector is increasingly assuming a larger role in financing projects. While the country’s leasing market is currently under-developed, it has entered into a stage of fast development, with total business value expected to have exceeded 280 billion renminbi ($41 billion) last year from 155 billion renminbi ($22.7 billion) in 2008. It’s further expected that the market will grow 20% in 2010 to 336 billion renminbi ($49.2 billion). More importantly, there appears to be a good fit between lease-financing solutions and energy-efficiency projects. The costs for the lease are typically lower than the saved energy costs, so the investment pays for itself and creates additional cost savings, producing a win-win for customers and the environment.

China has more than 100 small and large financial leasing companies, but only a few are actively engaged in the business. The large potential in this area is evidenced by the successful projects in the country. One such project is the Beijing Chaoyang District Government’s initiative to promote energy savings and emission reduction in public buildings and other sectors. Under the first project, diagnosis, retrofitting and upgrade of selected government buildings will take place and set a “green” role model for energy saving in infrastructure and construction in China. Once completed, energy consumption of the government buildings is anticipated to fall by at least 12%, saving the equivalent of around 1.5 million kWh power of electricity per year. In addition to energy-saving technologies, the project is being realized through an equipment-leasing solution that allows project costs to be met wholly from the savings achieved through reduced energy consumption and better operational efficiencies.

Realizing the twin goals of growth and sustainability

Green financing offers the right answers to the challenges of rising global energy demand, limiting the use of fossil fuel and depletion of natural resources. By tapping renewable energy sources and other environmentally-friendly technologies, it not only facilitates sustainable socio-economic growth but also offers an attractive opportunity to investors around the world. Increasing environmental consciousness across the globe and government support will keep the spotlight on clean energy, driving it into the mainstream in the foreseeable future.

In line with China’s unswerving focus on sustainable growth, the theme of the World Expo 2010 in Shanghai is “Better City, Better Life.” In addition to showcasing China’s economic might, the event will also highlight Shanghai as an example of an urban center based on sustainable and harmonious urban living. However, implementing environmentally-friendly technologies and solutions requires specialized integrated financing solutions. China, which can offer the world a lesson or two in deploying renewable-energy sources, could also lead the way in creating new investment opportunities around clean energy.

Roland W. Chalons-Browne
President and CEO, Siemens Financial Services GmbH;Munich