In 2009 and 2010, China was the largest investor in clean energy in the world but, so far, there has been little investment from China in clean energy outside the country. However, a recent report, Enter the Dragon: How China will impact Europe's renewable energy landscape, indicates that this may be about to change.
Almost 80% of those surveyed (including 120 senior executives in the renewables and cleantech sectors in Europe and China) anticipated that cross-border acquisitions by Chinese investors in Europe would increase in 2012.
At a time when subsidies have been cut in Europe and finance is constrained, this sounds like a promising outlook. Yet it would be wrong to think that Europe can look to China to plug the funding gap for renewables. Chinese investment is likely to focus on a few areas that support its domestic businesses and environmental policies.
China is the world’s largest manufacturer of wind turbines and solar photovoltaic (PV) cells. Substantial reductions in European tariffs have resulted in falling demand and, as a result of manufacturing overcapacity, there has been a large build-up of inventory. This has led to a 50% decrease in PV panel prices over the last twelve months. China’s expansion in this sector has been achieved by displacing competitors’ market share rather than acquisition of companies.
China’s investment in wind has been mostly domestic – largely carried out by Chinese entities deploying Chinese turbines. However, technical issues with some turbines resulted in power outages in northern Gansu in 2011, leading to the introduction of a number of new technical requirements. This, coupled with constraints on grid access, slowed its growth of wind power deployment. In response to falling demand and increased competition, Chinese turbine manufacturers are looking to more lucrative markets in which to sell their products.
The ability of Chinese manufacturers to offer vendor finance can be attractive to international customers. Strategic partnerships with developers are providing a pipeline for their sales. The majority of respondents to the recent survey expected to form alliances with project developers rather than acquiring pre-construction projects or project developers.
So where are the main investment opportunities likely to be?
In its latest five-year plan, published in 2011, China set ambitious targets for clean energy, energy efficiency and environmental protection, including reducing the carbon intensity of its economy by 40% to 45%, quadrupling renewable energy generation to 200GW (from 2005 baselines), deploying five million electric vehicles and achieving water usage and pollution reductions.
In order to achieve these targets, and to increase the attractiveness of its export products, China needs to invest in new technologies in energy generation, efficiency and pollution control. While in the past the focus of Chinese manufacturing may have been scale and cost, technological innovation has become imperative. Some technology acquisition will take the form of licensing of intellectual property, but acquisitions of technology companies are expected to increase.
Chinese outward investment in renewables is expected to focus primarily on wind and solar in developing markets. Although a smaller sector, biomass is also viewed as an attractive technology for investment. Central and Eastern Europe, where European original equipment manufacturers are less established and there are numerous development opportunities, are seen as more attractive than mature markets. However, there is competition from other developing economies and the United States for Chinese capital.
While much of the focus for renewables may be export, a small number of Chinese utilities has declared an intention to acquire construction-ready or operational assets. How many of these will be acquired from Chinese sponsors remains to be seen.
Dominic Fitzpatrick is a partner at Taylor Wessing.
©2012 funds europe