Key Take Away This Week:
- the 2019 foreign investment catalog did not make significant changes regarding renewable investment
- upstream material and mining sectors were further opened to foreign investment, of which some are related to renewable business such as carbon fiber and glass fiber manufacturing
- Download list of 2019 Foreign Investment Catalog Energy Sectors (Part-2: Renewable) [wd_hustle id=”DownloadInvestmentCataloguecopy” type=”popup”]here [/wd_hustle]
Foreign investment into renewable power operation and manufacturing has been in China’s “encouraged” list for several editions of the foreign investment catalog already.
The 2019 catalog— 8th edition since Beijing introduced the system—has limited changes regarding foreign investment into the renewable sectors.
Foreign Investment into Renewable Power Production
Foreign companies are “encouraged” to invest in and acquire Chinese renewable power projects.
Renewable power projects (including wind, solar, biomass, geothermal, waste, wave, tidal, and others) do not require a Chinese person or entity serving as the majority shareholder. Wholly foreign-owned, majority foreign-owned, as well as other Chinese-foreign ventures, are all allowed equity structures in the renewable power business.
As a matter of fact, foreign investment and companies are allowed in most power projects in China, with nuclear power plants probably the only area with limitation. International companies could invest in Chinese nuclear power projects but only as minority shareholders. Success examples include EDF, CPI, and Thailand’s Ratchaburi investing in four different NPPs.
There are a bunch of power sectors encouraging foreign investment, which we will discuss further in our future review on the foreign investment in the electricity sector.
“Encouraging” foreign investment in renewable power production has been the case since 2011, as law firm King&Wood Mallesons said in this review made in 2015.
Foreign Investment into Renewable Manufacturing
Foreign investment into renewable manufacturing areas is in general “encouraged,” too. There are no limited or prohibited areas for such investment in renewable equipment making.
Specifically, the incentivized areas renewable equipment for foreign investment, on a national level, are:
- in wind: gearbox, turbine bearings, and turbines of large than 2.5MW
- in solar: photovoltaic, and centralized solar power (CSP) complete sets of equipment
- in others: (general) equipment for geothermal, wave, tidal, waste and biomass power
- in energy efficiency: equipment for residual heat, pressure and gas utilization from industry process and coal production
Most of the items have been tagged as “encouraged” since several previous FI catalogs, too. However, there is a new entry added into the 2019 edition “encouraged” list, which is equipment manufacturing for the utilization of residual heat, pressure, and gas.
The addition signals two things: 1) Beijing hopes to further boost development in broader energy efficiency sectors, by encouraging foreign investment into some previously less-focused areas. 2) support of renewable development remains strong in China—at least on written policy, even against the current backdrop of a regional over-supply renewable capacity.
Renewable in China: Generally A More “Open” Market
The little change speaks a lot about the catalog’s “open” attitude towards foreign investment in the renewable industry—at least paper. And if compared to the conventional energy sector, renewable power’s value chain is indeed more “liberated.” This is due to, in the industry’s budding stage, the limited interests and slow reaction of state-owned energy players towards renewable.
Initially sidelined then by the influential state-owned players, the renewable industry had been developing upon the private sector and foreign entities. The historical background renders a relatively liberated market structure with various players and higher levels of competition.
In the wind manufacturing sector, especially, foreign entities (companies, organizations) and technology used to play a heavy role. Technology, funding, and investment support from Europe (e.g., from Denmark) has been the cornerstone of China’s wind development. Vestas has stepped into China as early as 1986, as the builder of China’s first onshore turbines at Malan wind farm, at Shangdong.
Similarly, government fundings from Germany, Denmark, and others were flowing into China’s yet-to-blossom biomass and geothermal power sectors a few years ago. These areas are with potentials to become tomorrow’s wind industry.
It is, thus, natural to see little things to add to the encouraged list for renewable power and manufacturing.
Spill-over Effect of Mining & Material Sectors
However, the new investment catalog has increased areas in mining and material industry, some of which are related to the upstream material supply to the renewable industry.
The new “encouraged” list, for instance, continue to welcome foreign investment in carbon fiber R&D and production, while added component materials for carbon fiber production and glass fiber production to the list.
Both areas are upstream materials key to blade manufacturing, whose costs have a major price implication to turbine manufacturing and thus wind power.
As another example, the new “negative” list deleted the previous limitation on foreign investment in rare earth processing (in terms of preliminary processing like refining and separation)—no more Chinese-foreign joint venture required.
The further open-up in the mining sector is not aiming at solving issues of the renewable industry, of course. It has a lot to do with Beijing’s eagerness to show commitment of market liberation, and to do with the concerns of the alleged manufacturer “exodus.”
Further open-up in the mining and upstream material sectors may have an indirect effect on the renewable industry. But an overall shifting atmosphere toward foreign investment could lead to positive progress in a longer run—only if such open-ups are sincere and backed up by industry policies.
Industry Policy A Larger Factor
As mentioned in the part-1 of the review [last article: foreign investment], the foreign investment catalog is only a tiny part of the policy package and market conditions that a foreign company need to consider for business decision in China.
An exemplary case is in the turbine manufacturing market, where foreign players used to play a dominant role but had been through a “defeat”—as this article from Huaxia Energy described. To sum, “the market share of foreign OEMs have fallen from 100% to 12% (in 2014) in ten years,” a review of Energy Magazine put it this way.
As below table shows, in 2003, foreign companies have taken six spots in the top-10 OEMs ranking in China. But since 2013, no foreign players show up in the top-10, and only three—Vestas, SGRE, and GE—remained in the top 20.
Last year, the three collectively accounted for only 4.6% of the market.
The fall has little to do with the foreign investment catalog but has everything to do with National Development and Reform Commission’s policy in 2003 and 2005 which require wind power plant to achieve 50% and 70%, respectively, local contents. The policy is a strategy raised by former NDRC vice chairman Zhang Guobao. By the way, his opinion piece is always worthy of reading to understand the mindset of Chinese energy policymaker. This past story shows industry policy, pricing mechanism, as well as risk portfolio is still the determining factors for foreign investment in the Chinese energy sector—this is a topic I will cover in the future.