Can China’s entrepreneurs help meet the nation’s ambitious energy targets?

By Thomas

With our recent class revolving around environmental issues in China, it is clear that in addition to waste and water, energy is of paramount importance to the government and its continued GDP growth. This blog post will lay out a few of the issues in this area and make a case for entrepreneurs to take advantage of future government support and increasing demand for energy.

On a recent class trip to Beijing with my Harvard classmates, we experience the worst air quality readings in recent memory: an “extremely hazardous” 800 micrograms per cubic meter of particulate matter (PM 2.5) compared to a World Health Organization recommendation of 25 micrograms. Although car exhaust does play its part, the main cause of these hazardous PM levels was the ring of coal-fired power plants dotted around the capital. With continuing public anger at this health issue, the Chinese government has its feet to the fire to diversify away from coal-fired power plants in order to appease the public and continue their quest for “harmonization” at all costs. Most recently, the Chinese government has doubled down on investments, announcing 2013 renewable energy development of 49 gigawatts, above and beyond the impressive last few years. In the medium term, non-fossil energy use is set to reach 15 percent of total consumption by 2020.

With this in mind, China’s energy targets will require support from both State Owned Enterprises and entrepreneurs.  Although caps on acceptable IRR’s in this space might hinder investment, there is talk that these laws may loosen as pressure continues to mount for the government to meet their targets.

Apart from  principal investments in hydropower, wind farms, and solar photovoltaics, billions of dollars will also be invested in supporting technology, including electricity storage, transmission improvements, and demand side management. In addition to this push for renewable energy and related technologies, the government has set its eyes on their huge shale gas reserves, potentially the largest in the world, to reduce reliance on coal plants.  However, China may be holding back on development due to the following:

1/ Reservoirs are smaller / more technically difficult than in the United States

2/ Most of the resources are in arid regions and may not have enough water for fracturing processes

3/ Lack of rig / service providers in China

4/ Lack of natural gas pipeline infrastructure

5/ Wariness of allowing foreign oil companies control of reserves and no subsidies or free market mechanisms to spur investment

In both the renewables and shale gas cases, I see this as a great opportunity for entrepreneurs to collaborate with the government on this quest for diversification and improvement of the environment. To encourage the private sector on taking on this challenge, incentives need to be further developed. This could include continuing electricity Feed-in-Tariffs for renewable and natural gas electricity production, tax holidays for firms investing in this space, or speeding up the permitting / inspection mandates when breaking ground on new sites. In addition to incentives, we have seen in the most recent round of shale gas acreage auctions that the government is still not doing enough to bring foreign companies onboard.

In my personal opinion, most of the required innovation and entrepreneurialism will need to occur organically, within China. This point of view is largely due to China’s continuing disregard of upholding international IP law, limiting foreigners from bringing novel technology and processes to help solve China’s problems. At the end of the day, this could be the “decade of the Chinese entrepreneur” in the areas of waste, water and energy. Both the government and the world’s climate scientists will be watching closely how this develops. After decades of mistrust, the government must embrace these individuals as well as large companies if they are serious about meeting their energy mandates and continuing GDP growth.

Main sources:

Geopolitics of Shale , Talk at Harvard Center for Government and International Studies, March 26th, 2013


One Response to “Can China’s entrepreneurs help meet the nation’s ambitious energy targets?”

  1. Interesting ideas. I was also on the trip to China and found the air quality to be very indicative of a major environmental problem but I’m not sure about an opportunity. I came away from my visits with Chinese companies and entrepreneurs with only a vague understanding of how the private sector can compete in capital-intensive and politically sensitive industries such as energy. In fact I did not hear any first hand examples of this taking place.

    First, I think ultimately there are very few companies that can access the necessary capital for significant investment in R&D. The capital markets are extremely underdeveloped and tightly controlled. For a clean-tech start up to access bank financing, for example, is not impossible, but it’s unlikely. The government does invest directly in businesses, or for example in venture capital funds that in turn invest in businesses, but the number of these funds is limited. This leaves most entrepreneurs to access informal financing channels, which are extremely costly so not conducive to cleantech investments that take years to generate cash.

    As an entrepreneur I would also be reluctant to disrupt the status quo in an industry that is considered vital to national security. As you point out development of renewables is a strategic priority for the government so there may be a place for entrepreneurship although I don’t believe it’s clear specifically what kind of innovation the government anticipates and will permit. I don’t think it would be clear to most entrepreneurs either.

    I hope I am wrong but I had a very clear impression that entrepreneurship in China only succeeds in certain non-strategic industries that do not require large amounts of capital. China’s strength is implementation but I am not convinced it is innovation.

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