The China Opportunity
China is in the midst of a low carbon transition. According to the government’s 13th Five Year plan, released on 17th March 2016, China is committed to tackling global climate change by setting ambitious targets. It is encouraging the development and adoption of renewable energy and is also exploring ways of resolving issues inherent to conventional fossil fuel markets. China is thus in the process of increasing the renewable ratio in its primary energy mix. Installed capacity in solar, wind, and hydro-power is set to increase further, while restrictions and challenges for the approval of new build coal power plants are growing.
After a short pause in China’s civil nuclear programme in the wake of Fukishima, this programme is now back in full swing as another cornerstone of China’s low carbon transition.
For wind and solar-power, the issue of curtailment remains, however some provinces have already managed to reduce the volume loss of wind and solar power (in the first half of 2018 the curtailment rate reached 8.7% and 3.6% for wind and solar power, respectively). However, new challenges have now arisen. During the winter of 2017, northern China experienced a shortage of gas, and the 2017 "Coal to Gas" project in Beijing-Tianjin-Hebei area (京津冀地区2017年“煤改气”工程) faced difficulties in a number of areas across China. The central government also announced a policy on 31st May 2018 to reduce the tariff for solar power and put a hold on new build solar plants, which sent a shockwave through the solar industry. The trend of cutting renewable subsidies looks set to continue.
This movement also brings with it new opportunities. The national power market reform that started in March 2015 and the following announcement of Article No.9
signal the government’s aim to open up the electricity retail market and there is fresh demand in China for big data and advanced technology management of power grids, and so on.
On 28th June 2018, China announced a revised ‘Foreign Investment Negative list’
, this document sets out the parameters for foreign investors in China. Compared with the 2017 list, restrictions have been removed for investment in several mining industries, electric vehicle manufacturing, grid construction and operation, and railway construction and operation. Several sectors do however still have great degrees of domestic monopolisation so further advice and information should be sought by foreign companies interested in these areas in China.
For infrastructure, China has slowed down its real estate development and aims to have a soft landing after overcapacity in some provinces. Recently, the Xiong’an New Area
has attracted a great deal of attention from urban planning, designing, contraction, and environmental services. The details for this project are yet to be solidified, however open bidding for international parties has been publicised on a step by step basis. A number of UK companies have been approached by different Chinese partners regarding opportunities for potential involvement. As the Belt and Road Initiative continues into its fifth year, new challenges and opportunities continue to arise for UK companies.
- Energy: Offshore Wind - China is committed to reducing its reliance on coal and increasing the ratio of renewables in its energy mix. Wind energy, as one of the key contributors to the country’s renewables targets, is being developed at a rapid rate in offshore locations. China is currently facing the challenge of connecting the 75GW of installed onshore wind capacity from inland provinces to the energy-hungry eastern provinces. This has led to an increased interest in offshore wind as a potential new source of renewable energy. However, the development of offshore wind supply in China has met with similar challenges as faced by UK developers in the early days of the industry in Europe, and there is increasing demand for expertise in the operation and maintenance of offshore wind supply farms.
- Energy: Coal, Oil & Gas - China’s use of coal was capped at 65% of the country’s total energy use in 2017. Renewable energy sources will not be able to compensate for the difference in demand that will result. As a result, the oil and gas industry is critical to the economic, social, and environmental future of China. Currently the majority of hydrocarbon production in China is in the form of oil, with around 2,670 million barrels of oil either under development or planned, and almost 2,124 million more either possible or probable by 2018. There is however great potential for gas production and the government seems increasingly focused on the use of gas as the cleanest hydrocarbon energy source.
- Energy: Nuclear - Nuclear power accounts for a small but rapidly growing portion of China’s overall electricity mix and is an area that has received considerable attention and effort from the central government. China currently has 38 nuclear power reactors in operation, 20 more under construction, and additional reactors in the planning stage, with an aim to bring the country’s total capacity to 58 GWe (or 6% of the country’s total capacity) by 2020, and 150 GWe by 2030. However, rapid nuclear expansion may bring other problems with it, amongst them potential shortfalls of fuel, equipment, qualified plant workers, and safety inspectors. The UK’s expertise in Nuclear Decommissioning is of particular interest to China. Furthermore, Chinese involvement in Hinkley Point C Power Station and other future projects in the UK where Chinese technology could be used for the first time in a Western market bring with them a host of opportunities for UK companies to engage with this fast developing sector.
- Environment: Water - The Chinese water sector is facing great challenges. In particular, in the north of China shortages are expected to worsen in the coming years, mainly due to the rapid development of the economy. At the same time there is a severe lack of oversight in the water market, which leads to mismanagement and waste. This also makes it very difficult to get a clear picture of the scale of the challenges. In order to meet demand the Chinese government has plans for the water sector to be liberalised, with the hope that foreign technology and expertise can be applied to problems that so far have not been solved either because of inefficient equipment or a lack of incentives.
- Environment: Soil Remediation - The contamination of soil with heavy metals was once a long-held and heavily guarded state secret in China. It took five years for the Ministry of Land and Resources and the National Bureau of Statistics to disclose the results of a land survey done between 2006 and 2009; the results painted a dire picture of the state of China’s soil with more than 8 million hectares of farmland – roughly 25% of China’s arable land - too polluted by heavy metals and chemicals to be farmed. China’s Soil Ten Plan – issued in 2016 – highlights a plan of action to combat this issue, which is a good starting point for UK businesses with expertise in this area.
- Infrastructure: Construction - The construction sector has played a vital role in stimulating prolonged economic growth in China. It accounts for more than 6% of China’s GDP and has been growing at an average annual rate of nearly 10% since the country's opening up began in 1978. Demand in the construction sector is driven by the rate of housing supply, the upgrading of obsolete infrastructure networks to allow for large-scale urbanisation, and the need to retrofit old buildings. Figures from the National Bureau of Statistics illustrate that construction and infrastructure projects are dominated, respectively, by Chinese private and state-owned enterprises. Like many other sectors, China’s construction market is highly regulated, with the government directing activity at the national and provincial level.
China is very keen to bring in expertise and best practice from the rest of the world, thereby attracting more investment and importing more advanced skills in order to strengthen the supply chain. UK companies are highly respected in the Chinese construction sector and can offer a wide range of expertise in priority areas, including green buildings, low-carbon designs, and eco-city development.