Under the dual impact of national policy support and energy structure adjustments, China's green industries, with the new energy sector assuming the lead, have experienced rapid development. Meanwhile, green finance, which can provide the capital boost needed to support the development of the green industries, has ushered in a gilded age of development opportunities.
On May 27, 2016, the JIC Investment Forum - "Green Finance & New Energy" opened in Beijing. Jointly hosted by JIC and Caixin Media and organized by JIC Leasing, the forum deliberated on the solar PV industry and, on a broader scope, China's energy revolution. Prominent attendees from the government, the industry and the financial circle offered their insight through debates and discussions. With an eye on grasping the future development trends of the green industries, more than 200 participants and media members were present to share their ideas on the outlook of new energy.
China's green industries have experienced rapid growth in recent years. The new energy sector, for example, is in good shape on the whole, seeing improvements in technological sophistication and a decrease in costs due to national policy support and energy structure adjustments. According to first quarter statistics, the total value added of strategic industries, including the new energy, energy-saving, new-energy vehicle, new material, new-generation information technology, bio-tech and high-end equipment manufacturing industries, witnessed a 10% y-o-y increase, leading the sum of above-scale industrial added value by 4.2 percentage points.
Green finance is an important means to fuel momentum in green industries and facilitate economic restructuring and answers the inherent demand for a green economy and ecological civilization, making it a natural choice to ensure steady growth and structural adjustment against the backdrop of the New Normal. The rapid development of the green industries and continuous improvement in industry policies will create immense opportunities for growth and present a rare and exceptional opportunity for institutional investors ready to commit to green finance.
China’s green finance sector is still at a very early stage. The green industry, e.g. new energy, can't take off without subsidies from the state government, but, in the long run, the green economy will deliver economic, environmental and social benefits, with an immeasurable overall return on investment. As a result of technological advances and economies of scale, the investment in green economy will prove increasingly rewarding and cost-efficient, with a higher profit margin and sustainable growth. All of this makes the green industry a magnet for investors.
Under the 13th Five-Year Plan, China set out clear goals in the areas of green development and green transformation. Specifically, in the regard of green transformation of its energy structure, the government called for capacity reduction in high-carbon and high-pollution energy sources such as coal, and specified a set of capacity reduction goals for central government-owned enterprises. The development of clean energy, low-carbon energy and new energy not only focuses on the sum of energy supply, but also covers the areas of energy consumption, including state support for the manufacturing of new-energy vehicles. Our environmental protection plan is also in the works, which clearly dictates a shift from quantity control to quality control.
China’s support and policy towards new-energy vehicles are strong and clear. There are many new ideas and methods with regards to the transformation of development models, green development and energy transformation within the framework of the “13th Five-Year Plan,” but low-carbon and clean development remains the inexorable trend.
The core of green finance resides on the idea of differentiated investment. The best possible rates along with subsidies and new financing avenues should be offered to environmentally-friendly and green industries, especially the green energy sector, because 80% of investment in the new energy sector, especially subsectors such as solar PV, come from green financing.
The lowering of financing costs is a process and the biggest driving force behind new energy development. The entry of green finance into the new energy sector not only offers a boost to infrastructure and our new energy supply capacity, but also generates tremendous job opportunities.
Future trends of the solar PV industry: Firstly, the industry will be heading towards distributed solar PV. Although in the short run China’s total PV installed capacity will continue to be dominated by concentrated PV, distributed solar PV is likely to experience rapid development in the future due to the vicinity of production and consumption and hence lesser pressure for transmission. It also has an advantage in helping to meet the electricity needs of remote regions. Secondly, solar PV distribution will gradually shift from China’s western region to the central and eastern regions. With the wider application of distributed solar PV in the future, the central and eastern regions might catch up to or even surpass the western in terms of total PV installed capacity. Thirdly, development will shift from a model of unbridled extensive growth to one driven by technology.
Main approaches through which financial leasing can serve solar PV plants:
The first approach refers to the provision of financing services to concentrated and distributed PV plants through direct lease and leaseback, which can cover both the period of construction and be extended to the operational stage. The second approach involves the combination of equity and debt financing. Sharing of the power plants’ long-term returns can be achieved through combining financial leasing and investment in equity. However, shareholding withdrawal mechanisms are usually arranged ahead of time within the transactional structure and there usually won’t be substantive involvement in the management of the plants. The third approach involves venture capital. VC in combination with financial leasing further increases the leverage and results in higher returns. Through leveraging the professional and managerial experiences of VC funds, the leasing companies can also better discern high-quality projects. The fourth approach involves an integration with P2P financing. Although there have been prior examples within the industry, the practice is at an exploratory stage and accounts for a small portion. The approach also remains controversial and requires further examination.
Key risks associated with solar PV plants:
Firstly, there is the risk of wasting electricity. In the past two years, China’s western region have been plagued with cases of abandoned electricity generated from solar power plants, and the country’s northeast and southwest have also seen increasing risks in this regard. The National Development and Reform Commission has devised a solution of long-distance transmission & consumption in the immediate vicinity, with the latter being the bigger emphasis. However, it will still be some time before the measures take effect.
Secondly, there is the uncertainty of the subsidies for electricity generation. According to estimates, from 2016 to 2020, the annual demand for solar PV subsidies stand at 76.2 billion yuan, placing a heavy strain on government finances, which can provide roughly 60 billion yuan in renewable energy subsidies annually. In 2016, subsidies available for solar power generation stood at a mere 18.6 billion yuan. Therefore, the lack of subsidies for solar PV plants is evident and will likely remain so in the short term.
Thirdly, there is the risk of variance in construction costs. There is substantial room for variation in the costs of solar power generation equipment in the future. Decreases in assembly and installation costs alone may reduce the overall costs of solar power plants by 5-10% annually. As a result, the returns on investment from newly-built solar PV plants may exceed those of existing ones, leading to a decline in liquidity.
Fourthly, there is the risk of inferior quality. In recent years, solar PV manufacturers have taken a slew of measures to lower costs, and the surge in the number of solar plant installations have also been quite demanding, resulting in inferior quality at times and thereby increasing the operational risks of the plants.
Fifthly, there is the risk of liquidity. Due to the lag in subsidies and prevalence of electricity abandonment in many parts of the northwest, some enterprises have already begun liquidating their solar plant assets, which will result in lower liquidity for newly-constructed plants.
Sixthly, there is the risk of incomplete permits. Some local governments have relegated the granting of permits to lower levels of government to encourage a “first come first served” approval basis. As a result, some plants may face the problem of incomplete permits and will not be able to be granted subsidies down the road.
(VP of China Jianyin Investment)
(Director General of China
(General Manager of JIC Leasing)
The new-energy vehicle sector serves an important aspect in China's auto industry transformation. By saying "important aspect", I do not believe the traditional automobile industry is seeing the end of its day, instead, I think the new-energy and traditional automotive industries will be developing head to head in the future. New-energy vehicles became a highlight in the history of China's auto industry development last year. From 2009 to 2015, there were a total of 497,000 new-energy vehicles manufactured, less than 500,000. Last year of the number was 370,000.
As for the technical routes of new energy development, firstly battery technology, especially the energy density of battery will witness tremendous progress in the coming 5 to 10 years. Moreover, China has achieved remarkable progress in the R&D of core components such as electronic and motor control boards and integrated power electronics systems. In the next 5 to 10 years, driven by strong market forces, I think electric cars will achieve breakthroughs in the areas of chassis electrification, car body lightening and intellectualization. The issue of which technical route is optimal should not be of top priority right now. The new way of thinking involves a shift from government-led to market-led development, so that the market plays a decisive role in the allocation of resources and “forming a new technical route amid competition”.
New-energy vehicles and intelligent and connected vehicles will make strides together. In fact, when we talk about new-energy vehicles, we are concerned more with how the vehicle is powered, but intelligent and connected vehicles are the products of a new round of technological and industrial revolution, which has resulted in new concepts and models. At present, there are mainly two categories of intelligent and connected vehicles-- intelligent drive and connected vehicles, both of which will develop and innovate synchronously in the area of new-energy vehicles in the next decade.
The supply of infrastructure, innovation of business models and policies will assume increasingly important roles in the development of the new energy sector. If we can continue to promote technological innovation, institutional reform and create a better market environment, China will retain its title as the world's biggest new-energy vehicle market in the next 5-10 years and the industry will add new growth momentum to China's automobile and manufacturing sectors.
The new energy industry, whether solar PV or the industry, is a behemoth in my opinion, and there will be more big enterprises established in this industry. The new energy age also represents a new economic era. In the future, the adoption of new energy, whether in new-energy vehicles or power generation, will become an integral part of our lives.
We need to deal with the new models created in the new economic era. All kinds of financing needs to locate their target products and assets. We need to promote standardization within the industry to get ready for the entry of large stocks of social capital.
We need to build a green financial ecological chain and each end can be the building block of it. We have already begun building such eco-chains which will be able to receive funds in the future.
When social capital is ready, we will come to see if we are ready to allow more people to join in. The question of how to transform it from an endeavor of exclusive and limited scope into a public one and entice more people to join the industry is of the utmost importance. We also need to foster cooperation among countries.
(Director-General of Research Department of Industrial Economy, Development Research Center of the State Council)
(CEO of China Merchants New Energy Group)