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Workers check solar panels at a photovoltaic power station in Chongqing, China, in July 2018. The country installed 53GW of solar power in 2017. Photo: Reuters
Opinion
Macroscope
by David Smith
Macroscope
by David Smith

From natural gas to electric cars, China’s push towards renewable energy should spark investor interest

  • David Smith says investment opportunities lie in companies that stand to benefit from China’s switch from coal to natural gas, its focus on renewable energy and support for electric vehicles
David Smith
David Smith
Why you can trust SCMP
This year will mark the latest milestone in China’s drive to reduce its carbon footprint if it can consolidate its position as the world’s top importer of natural gas, having just overtaken Japan.

The country is simultaneously the world’s worst emitter of carbon dioxide and a leading champion for environmental change. This paradox encapsulates both the breakneck speed of its economic development and its urgent need for modernisation.

A major plank of China’s reforms is the switch from coal to natural gas, to power its industrial and household energy needs. While still a fossil fuel, natural gas emits 50 per cent less carbon dioxide than coal.
China imports the largest proportion of its gas from Australia, although it is increasingly seeking to secure supplies from Central Asia and is busy upgrading its infrastructure and pipeline network.

The growth of the natural gas sector and associated industries that this switch is creating is an opportunity for investors, provided they know where to look.

A worker watches as a digger dumps a load of coal at a mine in Huaibei in central China’s Anhui Province in February 2017. China aims to move away from coal as an energy source and is investing heavily in renewable energy. Photo: AP
China is similarly committed to renewable energy, having invested US$126 billion in 2017 alone, accounting for 45 per cent of the global total, according to a 2018 report by UN Environment, Frankfurt School-UNEP and Bloomberg. It installed 53GW of solar power that year, more than the entire world market as recently as 2014.

Falling costs and record low borrowing rates for project finance have facilitated this. Solar power generation costs fell 90 per cent in the decade to 2017, reports Reuters, with panels springing up in industrial parks and on domestic rooftops across China.

How can China cut pollution and meet its energy needs?
However, the rising cost of such investment, sometimes for poor returns, means that Beijing is moving to withdraw subsidies for manufacturers and developers to reduce the burden on the state. The industry will need to adopt technological innovation and economies of scale to improve efficiencies, while also looking to the private sector for support.

Opportunities for investors also lie in the companies that stand to benefit from the government’s focus on renewable energy.

Electrification is another segment which, while nascent, is rich in potential. China accounted for half of electric car sales of 1.1 million units worldwide in 2017. While minuscule compared with the conventional light-duty car industry, the compound annual growth rate for electric vehicle sales was 66 per cent from 2012 to 2017. Similarly, sales of electric buses grew 30 per cent – and China accounted for 99 per cent of the market worldwide.

Again, the financials have driven growth. The cost of lithium-ion batteries that power electric vehicles has fallen each year since 2010 amid improving technologies and economies of scale among manufacturers. Much depends on the cost of source metals such as lithium and cobalt.

Taking charge: China leaves world behind in electric bus race

At current rates, Bloomberg New Energy Finance forecasts that lifetime ownership of an electric vehicle could start to undercut that of an internal combustion engine in most markets by the mid-2020s. By the late 2020s, electric vehicle prices could even be cheaper upfront. That would see electric vehicles account for more than half of worldwide light-duty vehicle sales by 2040.

This is certain to be a topic of discussion for policymakers over the next year. Policies aimed at promoting the widespread installation of electric charging infrastructure will potentially provide further pointers to investors.

Ultimately, China’s need to resolve its acute pollution problems falls in line with a global narrative. The Intergovernmental Panel on Climate Change warned in October that, at current rates, global warming would decimate coral reefs and crop yields, drive some animal and plant species into extinction and see rising sea levels displace coastal populations by the second half of this century.

Governments are being compelled to take action, and China finds itself at the vanguard of this movement. As with any structural trend, smart investors should be able to take advantage.

David Smith is head of corporate governance, Asia Pacific, at Aberdeen Standard Investments 

This article appeared in the South China Morning Post print edition as: Keep eye on these sectors amid China’s renewable energy push
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