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Widening horizons for new energy investors

A struggle for dominance in the fast-growing electric-vehicle charging business is pitting some of China’s biggest state-owned companies, as a domestic “new energy” movement — from battery-making to wind power — gathers steam.

One battle is being played out in Shenzhen, where China National Offshore Oil Corp. (Cnooc) and Putian Group have teamed up to take on a regional power-distribution monopoly, China Southern Power Grid.

In the northeast, China Petrochemical Corp. (Sinopec) and Beijing Capital Sci Tech Group recently announced a new venture to install charging terminals at Sinopec’s existing refueling stations in Hebei Province, the city of Tianjin, and elsewhere.

Not to be outdone, China National Petroleum Corp. (PetroChina) is in talks with the Jiangsu Development and Reform Commission about building charging stations in that coastal province.

The flurry of activity began even before a call to “actively promote new energy vehicles” was written into a recent government policy report. The growing interest also bears likeness to the enthusiasm for wind power shown by state-owned enterprises after the 2007 release of the government’s long-range alternative energy plan.

Indeed, the vehicle charging industry appears to be growing fast. State Grid Corp., another distribution monopoly, recently announced that a total 75 electric-vehicle charging stations would open in 27 cities by year’s end.

Meanwhile, investment funds are preparing to join state-owned players in the new energy industry.

China Life Insurance Group Co. President Yang Chao presented a plan at meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference suggesting insurance companies take the lead in establishing investment funds for strategic industries, especially new energy.

“New energy, conservation and environmental protection industries need a lot of time between investment and realization,” Yang said. “They also need heavy funding; short-term social capital cannot support them.

“We need that medium- and long-term line of funding that insurance funds can offer.”

Investment risk

As part of the Chinese government’s 12th Five-Year Plan, the National Development and Reform Commission has highlighted nuclear energy, wind energy and new energy vehicles as priorities. Details have yet to be finalized, but China’s commitment to developing a low-carbon economy is clear.

As low-carbon pursuits become an increasingly important area for national strategy, the growth driver for new energy industries is expected to gradually shift to domestic demand from overseas demand, creating huge investment opportunities — as well as risks.

In the past, China’s new energy industry was set up in such a way that state-owned players invested downstream, while a wide range of private investors supported upstream sectors. But this system was not considered sustainable.

Now, as domestic demand for new energy rises, it appears inevitable that state-owned players will enter upstream sectors. As a result, new-energy policy drafters do not need to set artificial limits but can encourage private investment in downstream areas, supporting fair market competition.

Cnooc’s ambition

Cnooc anticipated the latest policy changes three years ago. In the second half of 2006, while the new energy field was still looking for direction, Cnooc decided to move forward with a new energy office. The following year, the company established Cnooc New Energy Investment Co., headed by Zheng Changbo.

The thinking behind Cnooc’s move was simple: China would eventually have to switch to a low-carbon economy, and the oil company had to be ready. The forecast was for change brought about not by the market, but through tax policy and regulation.

Cnooc officials decided they should at least try, since the company is smaller and less competitive than Sinopec and PetroChina in the traditional energy market. The company has approved new energy investments worth more than 10 billion yuan ($1.46 billion) since late 2006.

Cnooc took several steps over the past three years in the new-energy arena, building wind-energy farms in Huade in Inner Mongolia; Yumen in Gansu; Dongfang, Hainan; and Weihai, Shandong. The company also developed a biodiesel business in Hainan and Jiangsu provinces, and starting producing coal gas in Datong, Shanxi province.

Cnooc now faces several new, interrelated challenges following last year’s decision to invest 5 billion yuan in a car-battery venture with the Tianjin municipal government.

For one, electric cars using the joint venture’s batteries were about to come on the market at a time when oil prices were low, rendering gas-powered vehicles more affordable.

Another issue complicating Cnooc’s plan is that the market has yet to choose a system for recharging electric cars. Still unclear was whether the market wanted stations for recharging or replacing batteries.

Cnooc’s ventures began in mid-2009 when the Tianjin municipal government proposed the company invest an estimated 5 billion yuan in the government’s Tianjin Lishen Battery Co. to help build 20 battery production lines. The plan called for expanding the company’s capacity to 200,000 vehicle batteries a year.

The investment made sense for the oil company since Tianjin is a major strategic area for Cnooc; the nearby Bohai Sea is the source of 60% of the company’s crude oil.

After researching the electric vehicle market, Cnooc agreed to invest in the battery-maker as well as jointly build recharging stations in several cities. The oil company found new routes to the downstream, new-energy market as well.

Separately, Cnooc and Putian launched a joint venture to build electric-vehicle charging stations in at least two cities this year. Meanwhile in Guangdong Province, Cnooc said it plans to promote battery-powered vehicles by building several demonstration charging stations.

A Cnooc source said the company plans to invest 17.5 billion yuan in new energy areas in the next five to 10 years, focusing on coal gas, wind power and auto batteries.

This amount may be a mere trickle compared to the central and local government funding pouring into the industry, but it underscores the rising commitment of traditional energy companies support for China’s plan to develop an electric-car industry. The Chinese government has announced subsidies in 13 cities for public transportation, public service and electric-car rental industries.

But oil companies can’t afford to sit idly by. In particular, they are anxious about the future possible phase-out of gas stations, and the pressure as power companies are looking to increase their monopolies in new realms.

Cnooc wants to make sure that its next new energy steps follow a winning path. The company had to abandon bioenergy efforts and has remained on the sidelines in the area of photovoltaic power generation.

Photovoltaic power plants are in their infancy in China, and Zheng says Cnooc wants only large-scale projects in the range of 1 million kilowatts. In addition, Cnooc energy experts recently called photovoltaic power a dead end because it relies on limited supplies of polysilicon. The technology won’t be viable over the long term without a technological breakthrough, the experts wrote, perhaps if controlled nuclear fusion can be developed commercially.

Upstream, downstream

Most private entrepreneurs and investors are looking for opportunities in narrow but deep upstream areas of new energy such as wind, solar and bioenergy power generation and equipment. Few dare to compete with state-owned players in downstream sectors, and those that do must be very familiar with government business.

Investors have had limited success. For example, a joint Chinese-British wind power venture called Honiton Energy was eyed by a large Chinese private-equity firm in 2007, two years after it began and built five wind farms across China. After the firm looked at power prices set by the local government and determined the venture would face cash-flow problems, it decided not to invest in the project.

A source involved in the deal said the private-equity firm was concerned about prices and whether the wind farm could integrate with the grid. Honiton’s future is now uncertain.

A battery maker that once planned to build a completely new energy supply chain, BYD Co., recently decided to give up wrestling with a power grid over plans to build their own charging stations. BYD threw in the towel after trying for more than a year to get the necessary permit to connect stations to the grid.

The Shenzhen Development and Reform Commission says the city now has two primary competitors for charging stations: Putian Offshore Oil New Energy and China Southern Power Grid.

As state-owned players move into wind power, investment opportunities in upstream areas of the business such as wind-generator equipment and components are emerging.

Longyuan Power Group and China Huaneng Group, for example, say they are well positioned to compete in the industry, which requires large-scale investment.

“Private equity has no chance downstream, and they’re not willing to invest in wind farms,” said Zheng Yufen, a senior project manager for the consultant firm Zero2IPO. “Integrating with China’s grid is difficult, and the country’s pricing policy makes it hard to justify costs.”

“Considering that wind energy has always lost money,” he said, “private capital has little reason to be enthusiastic about getting involved.”

Upstream businesses can post higher profits than downstream ventures. For example, upstream Goldwind Science and Technology Co.’s 2008 return on equity was 24.5%, much higher than Longyuan’s.

Foreign capital was once active in the wind-energy field before 2005, when the NDRC began requiring that at least 70% of the equipment for wind farms be made in China, squeezing out foreign investors.

Wind power’s development reminds investors that, as domestic demand for new energy rises, the effects will be felt upstream.

Until now, China’s new energy industries relied on European and American demand for manufacturing services. Now that the nation’s new energy policies have come into focus, demand for a domestic industry has room to grow.

Via Caixin Online