Innovation

GLOBAL INVESTOR FOCUS Innovation — 45
China’s incremental oil demand
Energy cost comparison for one barrel of oil equivalent
Mbd
1000
800
600
400
200
0
–200
Domestic production (mbd) Coal to oil Imports (exports)
01 02 03 04 05 06 07E 08E 09E 10E 11E 12E 13E
Cost of 1bbl oil eq energy (USD)
70
60
50
40
30
20
10
0
1990A 1992A 1994A 1996A 1998A 2000A 2002A
Crude oil Converted coal-NEW Natural gas
Converted coal-OLD Coal (FOB)
2004A 2006A
2008E 2010E
LT
technologies, with the target of generating 15%–20% of total consumable
energy from alternatives by 2020.
There are understandable reasons for diversification. The development
of alternatives lowers China’s reliance on imported
crude oil, and thus contributes indirectly to an improvement in
national security. Alternatives also offer one more way of slaking
the thirst for energy created by primary industrial growth and subsequent
consumer demand. On 16 June 2006 the Ministry of Finance
announced the “Management Rules for Funds Dedicated
to the Development of Renewable Energy” as well as the “Directional
Instruction for the Development of Renewable Energy Resources.”
These two instructions are the most important guidelines
mapping out China’s alternative energy future. Various forms
of subsidies, interest-free loans and consumption-tax exemption
are being provided to encourage development and innovation in
various categories of alternative energy, including wind, solar, biomass,
geothermal, ocean and hydropower.
Coal-to-oil conversion: The parent of China Shenhua Energy,
the largest coal producer in China, has pioneered the development
of coal-to-oil (CTO) conversion technology. It intends to inject
these CTO projects into the listed company when the business
matures. For more details on coal-to-oil projects in Asia, please
refer to our Research Weekly Asia: “Coal-to-oil conversion bodes
well for long-term coal prices” dated 2 November 2006.
Wind: China’s wind power capacity grew at a robust CAGR of
32% between 2000 and 2005. The National Development and Reform
Commission (NDRC) plans to further increase the capacity
from 1.3 gigawatt (GW) in 2005 to 5 GW in 2010. Together with
their parent companies, Huaneng Power, Datang International
and China Shenhua are three of the active participants in this
area. Shanghai Electric also has plans to go into the wind turbine
manufacturing business.
Solar: China is the fifth-largest solar photovoltaic (PV) market
in the world. The government has three major programs to promote
the use of solar PV, namely the Brightness Program, the
National Township Electrification Program and the Renewable Energy
Development Program. As the largest solar cell manufacturer
in China, Suntech Power will be a key beneficiary.
Nuclear: The Beijing government is focusing mainly on the development
of 1 GW-class nuclear units with a view to increasing domestic
content to 60%. Currently China is capable of producing
300 megawatt (MW) nuclear units with 95% domestic content,
but 1 GW units with only 50% domestic content. So far, Datang
International is the only Chinese Independent Power Producer
(IPP) looking to aggressively diversify into nuclear power generation
over the next decade. It has already invested in a joint venture
in a 2 x 1 GW nuclear plant in Fujian for estimated completion
in 2013. Equipment providers such as Shanghai Electric will also
benefit as they start to diversify into the nuclear turbine manufacturing
business.
Biofuel: China is the third largest ethanol fuel producer in the
world, after Brazil and the USA. In its 11th Five-Year Plan, the
government is targeting a rise in ethanol fuel production from the
current 2% of gasoline consumption to 3.3% by 2010E and 10%
by 2020E. China Agri-Industries, a spin-off from China Food,
controls two out of four licensed ethanol fuel players in China.
China Petroleum and Chemical and its parent hold interests in the
other two licenses. Cheuk Wan Fan, Timothy Fung
Source: Credit Suisse, industry sources