Hidden dragon? China s evolving relationship with the European renewable energy industry
02 Contents About the research...03 Foreword...04 Executive Summary...05 2013 Understanding the China-European deal landscape...07 > > Calmer than expected but still plenty of opportunity > > Blame emerging European markets > > Germany vs UK: winning the battle for Chinese investment > > New markets are also attracting Chinese investors > > Japan currently looks like a better bet > > Solar PV minimum price floor may catalyse deal activity Chinese expansion into Europe: key drivers and opportunities...16 > > Chinese equipment manufacturers lured by European margins > > China is hunting for innovative cleantech > > Growing interest in operating assets > > China is particularly interested in European offshore wind > > But regulatory uncertainty could stymie investment > > Appreciation of the Yuan is a disincentive to overseas investment European expansion into China: key drivers and opportunities...23 > > China s environmental push creates significant technology transfer opportunities > > Partnerships are a crucial route to market > > IP concerns still inhibiting Chinese investment > > China s offshore wind sector presents plenty of opportunities for Europe About us...28
03 About the research The survey and report were written in collaboration with Clean Energy Pipeline, a specialist provider of clean energy news, data and research. Transaction data has been extracted directly from Clean Energy Pipeline s deal databases. Clean Energy Pipeline is a division of VB/Research. The survey was conducted in Autumn 2013 and was completed by five types of respondents: corporates; investors; debt providers; service providers; and government agencies. To supplement the survey, interviews were also conducted with the following individuals: Anne Bräutigam, Manager Renewable Energies & Resources, Germany Trade & Invest Roger Webster, Managing Director Membrane Processes, Modern Water plc Hangyu Zhao, Managing Director, JADE Werke GmbH, a subsidiary of Jiangsu Hantong Group David Cunningham, Cleantech & Renewables Financial Analyst, SgurrEnergy Ltd Paul Reynolds, Senior Consultant Offshore Wind, Strategy and Policy, GL Garrad Hassan Tobias Rothacher, Senior Manager for Renewable Energy, Germany Trade & Invest Kerry Zhou, Director of Strategy and Planning, Goldwind Science & Technology Co Ltd Guodong Hu, Vice President, Executive Director Overseas Investment Strategy, China Datang Corporation Renewable Power Co Ltd
Foreword 04 The question-mark on our front cover is very deliberate. For the last two years this report has been predicting a significant inflow of Chinese investment into Europe s renewable energy markets. The stars appeared to have aligned but, despite the confidence, the investment has so far failed to materialise in anything like the quantity we were expecting. The Chinese dragon remains, well, if not hidden, a little shy and retiring. So what has happened and what are the prospects for the coming years? Are we living in a world of wishful thinking, or is there actually some substance behind our continuing optimism about imminent investment? Our latest study attempts to answer these questions. It is clear that European governments decisions to put a positive renewables policy framework into reverse in many countries has had a detrimental impact on the sentiment of Chinese investors. In the meantime other parts of the world continue to develop their attractiveness as competitive venues for Chinese capital. Nevertheless, our survey results continue to reveal a real desire to build a European capability on the part of China and we discuss the strategic imperatives that underpin this Chinese commitment to Europe. As far as flows from Europe to China are concerned it is a story of no change tentative steps and issues to address, not least the ongoing concerns over the protection of intellectual property. But the needs and the market are there, particularly in offshore wind, so it is largely a matter of time. Taylor Wessing has had a long-term involvement in the cleantech and renewables sectors and provides expert legal advice across the investment cycle, from early-stage fund raising and venture capital through commercialisation to full-scale project development and finance. We advise companies, investors and financiers in the cleantech and renewable energy sectors across Europe. Our longstanding expertise in this field and the breadth of our practice means that we are able to offer our clients practical and commercial advice from the outset. We are very grateful to the large number of participants who have given their time and insights in responding to the survey that underpins this report and to the interviewees mentioned on the opposite page. This report is part of the Taylor Wessing Future Energy Forum in which we set out to stimulate dialogue around developments in the energy sector. We hope that you will enjoy reading it. Key Contacts Dominic FitzPatrick Head of Renewable Energy, UK +44 (0)207 300 4689 d.fitzpatrick@taylorwessing.com Carsten Bartholl Head of Renewable Energy, Germany + 49 (0)40 3 68 03 108 c.bartholl@taylorwessing.com Christoph Hezel Head of Renewable Energy, China +86 (0)10 6567 5886 c.hezel@taylorwesing.com
05 Executive Summary A little calmer than expected Cross border investment and M&A between China and Europe in the clean energy sector was quiet in 2013. During the first three quarters of 2013, Chinese companies and investors announced two acquisitions of European clean energy assets (value undisclosed), which is significantly below the 13 acquisitions valued at $510 million that were announced in 2012. There are good reasons for this. Many Chinese investors have been deterred from investing due to a mixture of subsidy cuts, uncertainty over political support for renewable energy and in certain cases lengthy delays in rolling-out incentive schemes. This is particularly evident in Central & Eastern Europe where some countries, such as the Czech Republic, have introduced retroactive cuts to renewable energy subsidies. Only 22% of surveyed Chinese investors are targeting Central & Eastern Europe and Russia for acquisitions and/or investments in the next 18 months. This compares with 48% two years ago. There is also considerable uncertainty in the more established markets of the UK and Germany. In the UK, Chinese investors might have been dissuaded by the uncertainty surrounding the contract-fordifference feed-in tariff mechanism that will apply to all renewable energy projects from April 2017. A scaling down of the country s offshore wind targets combined with charged political discussions about energy prices have not helped to project a positive image. Europe has also struggled to attract Chinese investment in the face of competition from certain other countries and regions. During the past 18 months, South Africa and Japan have both emerged as high-growth renewable energy markets, while Latin America has maintained its rapid growth. In parallel China has increased its own renewable energy targets significantly, thereby reducing its pool of available capital for international expansion. The argument for Chinese investment in Europe has also been hindered by a 5% and 2.5% appreciation of the Yuan against the Euro and Sterling respectively during the past two years. Further appreciation of the Yuan remains a genuine concern. The comeback kid Despite the past 12 months, there is plenty of evidence to suggest activity between China and Europe will rebound. Over 70% of survey respondents forecast an increase in the number of acquisitions/investments of European clean energy companies and projects by Chinese investors over the next 18 months. While there have been no major recent renewable announcements, significantly, in the weeks leading up to the publication of this report Chinese companies have announced investments in a range of infrastructure projects including the Hinkley nuclear power station and Manchester Airport. Indeed, just as this report was going to press the latest deal statistics from Clean Energy Pipeline revealed a December spike in investments from Chinese power companies in the sector. There are three primary reasons why we expect Chinese investment in Europe s renewable energy sector to re-ignite. Firstly, Europe remains a large market for Chinese solar and wind equipment manufacturers and engineering, procurement and construction (EPC) companies, irrespective of whether other markets are growing faster. Margins are also higher in Europe than in emerging markets. Almost 75% of Chinese survey respondents cited higher margins as an important driver to European expansion, more than the 60% that cited this factor in 2011. In the solar industry, the imposition of a minimum price floor for Chinese exports to Europe means that Chinese exporters can no longer rely on price advantage to secure sales. We therefore expect manufacturers to make equity investments in preconstruction stage projects and bring in debt from Chinese banks to facilitate sales. This is not a new strategy, but the rationale behind it is now stronger than ever. For China s wind turbine manufacturers, European expansion is a necessity due to the slowdown in China s wind market. Less than 13 GW of wind capacity was installed in China in 2012, a 26% decrease on the volume installed in 2011. Unlike its solar manufacturers, China s wind suppliers are reliant on domestic sales, meaning any reduction in domestic demand can have a significant impact on revenues.
06 Thus far Chinese wind turbine manufacturers have failed to establish a significant presence in Europe. They are now homing in on smaller European wind energy markets where the large European incumbents are less well established. China seriously needs European clean technology The second most important driver for a rebound in Chinese investment in Europe is China s rapidly growing need to obtain innovative technology that can address domestic carbon reduction, pollution and energy efficiency challenges. China is heavily promoting energy efficiency and environmentally friendly technologies to meet its target of reducing carbon emissions per unit of GDP by 40-45% below 2005 levels by 2020. One of its most significant initiatives is a $375 billion investment programme in energy saving and emissions reductions projects through 2015 announced in July 2013. Some 72% of Chinese survey respondents are planning to acquire/invest in innovative European cleantech companies during the next 18 months, well ahead of the 55% that were planning to do so two years ago. This will also create opportunities for European companies. The majority (57%) of European companies planning to expand into China expect to do so through technology licensing. In terms of sector, the greatest opportunity lies in energy efficiency technology some 34% of European survey respondents planning to invest in China intend to export energy efficiency technology, significantly more than the number intending to export energy storage (13%), smart grid (6%) or water treatment (6%) technologies. Operating assets provide a currency hedge China is also expected to ramp up investment in Europe s renewable energy sector as a way of reducing its exposure to the dollar. China is by far the largest holder of foreign exchange reserves, with $3.3 trillion in holdings at the beginning of 2013. Between two thirds and three quarters of this is US dollar holdings. Although not publically stated by the Chinese government, many commentators expect China to seek to unwind this exposure to the US dollar through investing heavily in Europe and other countries. Investing in operating renewable energy assets located in Europe is a perfect way to achieve this, since they provide stable, low risk returns that are linked to inflation. These types of assets are becoming increasingly attractive to Chinese investors 36% of Chinese survey respondents are planning to invest in or acquire operating renewable energy assets in Europe during the next 18 months, more than double the number two years ago. Japan is now Europe s leading Asian investor Japan is frequently ignored during discussions about Asian investment in Europe s renewable energy sector. This is in spite of the fact that Japan has far exceeded China in terms of European renewables investment during the past two years. Since the beginning of 2012, Japanese companies have invested over $3 billion in European clean energy companies and projects, dwarfing the $510 million of Chinese investment during the corresponding period. In the first three quarters of 2013 alone, Japanese investors have acquired stakes in over 4 GW of European renewables capacity. The majority of this investment has come from a handful of companies Mitsubishi, Sumitomo, Marubeni and Innovation Network Corporation of Japan (INCJ). These companies are using their European investments to obtain expertise that can then be applied to the rapidly growing Asian market. China s offshore wind sector is Europe s new big opportunity China has set a target of installing 5 GW of offshore wind capacity by 2015 and 30 GW by 2020 as part of its 2011-2015 five-year plan. This is extremely ambitious given that just 366 MW was operational at the beginning of 2013. China is relatively inexperienced in this sector. To meet these targets it will need to import technologies, sector know-how, and project management expertise. Europe s offshore wind sector is the largest in the world, so there ought to be opportunities for European offshore wind companies in China. European companies Siemens, SgurrEnergy, Husiman and GL Garrad Hassan have all provided essential technology or services to China s offshore wind industry. However, to date the majority of development has been by domestic companies.
2013 Understanding the China-European deal landscape 07 Calmer than expected but still plenty of opportunity For many years China has been viewed as a major potential investor in European energy infrastructure. The country is home to some of the world s leading solar and wind OEMs including Yingli Solar, Jinko Solar and Goldwind. China also possesses some of the most well capitalised energy generators including China Datang Corp, China Guodian Corp and China Power Investment Corp. As part of China s 12th five-year plan, Chinese companies have been encouraged to go out and explore new markets globally. When we wrote last year s edition of this report, China seemed to be finally flexing its financial firepower. During the first half of 2012 Chinese companies announced 10 acquisitions of European clean energy companies and/or power generation assets, the same number of deals announced between 2009 and 2011. With China Three Gorges $3.5 billion acquisition of a stake in Portugal s largest utility EDP and China Investment Corp s $1.1 billion purchase of Thames Water Utilities, Chinese companies also seemed to have developed an appetite for large-scale European utility assets. However, since mid 2012 activity has softened. Chinese companies have only announced two acquisitions of dedicated European clean energy companies in 2013 (value undisclosed), far fewer than the 13 acquisitions valued at $510 million announced in 2012. There have also been no major acquisitions of European energy infrastructure assets as there were in 2012. Despite the lull, survey respondents remain optimistic that deal activity will re-ignite - during the next 18 months survey respondents expect an increase in both the number of acquisitions/ investments of European companies (75%) and projects (71%) by Chinese investors. Notable Chinese investments in European clean energy assets Target Sector Country Deal value Date Announced Acquirer/investor Enemalta Corp Diversified utility Malta $265 million 11 Sep 2013 China Power Investment Corp Engensa Ltd Rooftop solar UK Undisclosed 14 May 2013 Hanergy Holding Group Ltd Energetikos Tinklu Institutas EDP Renováveis Portugal S.A Vestas Wind Systems A/S (towers factory) Saab AB Scheuten Solar Holding BV Electricity EPC Lithuania Undisclosed 10 Apr 2013 North China Power Engineering Co Ltd Wind Portugal $475 million 20 Dec 2012 China Three Gorges Corp Wind Denmark $19 million 14 Jun 2012 Titan Wind Energy (Suzhou) Co Ltd. Green Transportation Solar Sweden Undisclosed 13 Jun 2012 National Electric Vehicle Sweden AB The Netherlands Undisclosed 12 Jun 2012 Guangdong Aiko Solar Energy Technology Co. Ltd Solibro AB Solar Sweden Undisclosed 05 Jun 2012 Hanergy Holding Group Anothen Recycling Company Recycling & Waste UK Undisclosed 03 May 2012 New Oriental Energy & Chemical Corp. Sunways AG Solar Germany $16 million 25 Apr 2012 LDK Solar Co. Ltd. Scheuten Solar Holding BV (certain assets) Solar The Netherlands Undisclosed 03 Apr 2012 Sunway Technology Investment Co. Ltd REN Grid operator Portugal $510 million 02 Feb 2012 State Grid Corporation of China Centre for Integrated Photonics Ltd Thames Water Utilities Ltd Energias de Portugal (EDP) Solar UK Undisclosed 25 Jan 2012 Huawei Technologies Co. Ltd Water utility UK $1,100 million 20 Jan 2012 China Investment Corp Diversified utility Portugal $3,515 million 12 Dec 2011 China Three Gorges Corp
08 Taylor Wessing View Robert Fenner, Partner, Taylor Wessing: There is very substantial appetite amongst Chinese firms to invest in European infrastructure and that includes the energy sector. We have seen the announcement of the MOU between the UK government and China Guangdong Nuclear Power regarding Hinkley. This represents a very large investment by the Chinese into the UK energy sector. It is not wind or solar but nonetheless it is investment into our energy industry. This is of great significance to the UK and is a departure from the nervousness that was shown a year ago in having Chinese investment in critical UK infrastructure. As explained in greater detail later on in this report, this will be driven by: Chinese solar equipment manufacturers more aggressively investing equity in and sourcing debt from Chinese banks for European solar PV projects: The 0.56 per watt minimum price floor at which Chinese solar PV manufacturers can export to Europe, enacted in August 2013, means that Chinese companies can no longer rely on such a significant price advantage to sell to Europe. They are likely therefore to invest in projects to secure sales for their panels. Chinese wind turbine manufacturers seeking profitability in Europe: A 26% annual decrease in wind installations in China in 2012 has resulted in Chinese wind turbine manufacturers making greater efforts to enter Europe. Central and Eastern European countries, where major competitors are not already established, will likely be their initial targets. Chinese industrial companies acquiring innovative European clean technology: China is now more than ever investing heavily in reducing carbon emissions and pollution levels. For example, it announced a $375 billion investment programme in energy saving and emissions reductions projects through 2015 in July 2013. Many Chinese companies are investing in and acquiring European companies that possess innovative clean technology that can address these challenges. Chinese utilities and investment houses acquiring operational assets: Between two thirds and three quarters of China s vast foreign exchanges reserves are currently held in US dollar denominated assets. Operating European renewable energy projects offering stable and inflated-linked returns are ideal targets for Chinese companies seeking to reduce their exposure to the US dollar. Over the next 18 months, how do you expect the following aspects of cross border renewable energy deal activity between China and Europe to change? Number of acquisitions/investments in European companies by Chinese firms Number of acquisitions of European projects by Chinese firms Number of Chinese companies increasing their proportion of total revenues from Europe Volume of finance (debt and equity) allocated to European projects by Chinese investors Number of European manufacturing facilities established by Chinese companies Number of European companies increasing their proportion of total revenues from China Number of acquisitions/investments in Chinese companies by European firms Number of acquisitions of Chinese projects by European firms Number of Chinese manufacturing facilities established by European companies Volume of finance (debt and equity) allocated to Chinese projects by European investors 75% 21% 4% 71% 23% 6% 67% 21% 12% 69% 19% 12% 49% 38% 13% 31% 47% 22% 23% 50% 27% 29% 44% 27% 30% 39% 31% 24% 45% 31% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Increase Stay the same Decrease
09 There are already indications that activity is rebounding. As this report was being finalised news was emerging that the UK government had signalled approval for General Nuclear Corporation (CGN) and China National Nuclear Corporation s (CNNC) minority investment in the Hinkley C nuclear power station, located in Somerset, UK. This will be the first new nuclear plant in the UK since 1995. 100 80 Over the next 18 months, which regions will you seek to acquire/ invest into? Chinese responses European responses 89% 98% 89% Even less transaction activity has occurred in the other direction. To date no acquisitions of Chinese clean energy companies or projects have been announced by European companies in 2013. In contrast survey respondents do not expect this to change 77% expect the number of acquisitions of Chinese clean energy companies by European firms to remain constant or decrease during the next 18 months. As explained later in this report, the opportunities for European companies targeting China revolve almost exclusively around technology transfer, partnerships and the provision of consultancy services in the energy efficiency, smart grid, offshore wind and water treatment sectors. 60 40 20 0 11% 27% Spain 16% 33% 19% 35% 22% 41% 24% 41% 30% 27% Italy France Eastern Europe & Russia India Japan 32% 35% 33% UK South-east Asia 43% 56% Germany 57% 55% North America 59% All of Europe China 48% 27% 17% Other Blame emerging European markets Reduced deal activity between the two regions can partly be explained by lessened appetite from Chinese firms in emerging European markets. Only 22% of Chinese investors are targeting Central & Eastern Europe and Russia for acquisitions and/or investments in the next 18 months, well below the 48% targeting the same region two years ago.
10 Taylor Wessing View Dominic FitzPatrick, Partner, Taylor Wessing: Regulatory uncertainty and declining financial support for renewables have made CEE less attractive to investors. Our survey indicates that Chinese respondents are half as likely to invest in Central and Eastern Europe (CEE) than they were a year ago but this is at odds with China s political ambitions for trade between CEE and China. Wind turbine manufacturers in particular still see strong opportunities in this region due to the absence of European competitors. For example China Ming Yang signed a framework agreement in November 2013 to provide turbines and EPC services to a 200 MW wind farm in Romania. Carsten Bartholl, Partner, Taylor Wessing: Chinese investors are less interested in Central and Eastern Europe than they were three years ago. There have been a number of subsidy alterations and it is not that easy to set up manufacturing capacity in these countries, particularly if you don t know how the market will develop. It is very hard to secure financing for projects in Eastern European countries. I still think there are big opportunities for Chinese renewable energy companies in these countries, but they will have to wait for a stable political framework. In the long run these will be attractive markets but it just doesn t make sense right now. Emerging European markets are no longer enticing Chinese investors due to a series of cuts in feed-in tariffs and unfavourable policy interventions. Some of the most notable subsidy cuts in emerging European markets are described below: In August 2013 the Czech Republic Parliament s lower house voted to end subsidies for new renewable energy projects from January 1, 2014. In parallel, it voted to extend a retroactive levy on solar PV assets. The 1.4 GW of PV plants connected under the Czech FiT in 2010 will now be subject to a levy representing 10% of their revenue for the remainder of their FiT contract. This extension follows a 26% levy on revenues for FIT-linked PV plants that was enforced between 2011 to 2013. In June 2013 Romania s government passed a decree that cut the green certificates allocated to wind, solar and small hydro projects through to 2017/2018. During this period, wind energy projects will receive one green certificate instead of two, solar installations will get two instead of six and small hydro will be allocated one instead of three. At the end of this period they will be issued the balance of all certificates not awarded. The green certificate programme has only been fully operational for one year, and the government s decision equates to a retroactive cut on any projects currently installed under the system. In July 2012 Poland introduced a bill to cut $2.88 billion of state funding for wind and biomass projects between 2013 and 2020. Furthermore, the implementation of Poland s renewable energy act has been continuously delayed in the last 12 months. It now looks likely that it will not be enacted until next year at the earliest. It was originally meant to be implemented in January 2013. Survey data illustrates the extent to which Chinese companies have been deterred from investing in Europe as a result of these subsidy cuts. Only 54% of Chinese survey respondents cited strong government support as a factor driving European investment in clean energy, significantly less than the 70% that cited strong government support in the same survey conducted two years ago.
11 The only exception are Chinese wind turbine manufacturers, which despite subsidy cuts, are still actively pursuing expansion initiatives in this region. [This is explained in the Chinese equipment manufacturers lured by European margins section on page 19 of this report.] To what extent do you agree that the UK s clean energy sector is more attractive to Chinese investors than it was 18 months ago? 4% 6% Germany vs UK: winning the battle for Chinese investment Emerging European renewable energy markets may have fallen out of favour, but the safe havens of Germany and the UK remain attractive. Indeed the proportion of Chinese investors interested in making clean energy acquisitions and/or investments in Germany (43%) and the UK (32%) during the next 18 months has not altered over the last 12 months. 45% Strongly agree Agree Disagree Strongly disagree 45% In fact in many ways Germany and the UK are now competing with one another to secure Chinese investment. For example, a Chinese manufacturer of offshore wind turbines that is considering establishing a manufacturing facility in Europe will likely choose between Germany and the UK, given that these two countries account for over two thirds of the market. Interestingly, while the survey data indicates that Chinese investors are more favourably inclined towards Germany, the UK appears to be gaining ground. The majority (62%) of survey respondents stated that Germany s clean energy sector is less attractive to Chinese investors than it was 18 months ago. In contrast the majority of To what extent do you agree that Germany s clean energy sector is more attractive to Chinese investors than it was 18 months ago? 56% 6% 4% Strongly agree Agree Disagree Strongly disagree 34% surveyed respondents (51%) believe the UK is becoming more attractive to Chinese investors. One possible reason for declining interest in Germany is the uncertainty surrounding the reform of the country s Renewable Energy Act (EEG). Before the election, Angela Merkel and CDU Environment Minister Peter Altmaier both stated that reform of EEG was a priority post election. Worryingly for Chinese investors, the SPD candidate for Chancellor Peer Steinbrück, who will most likely form a coalition with Merkel s Christian Democrat Party, called for a 25% cut to the surcharge that finances clean energy subsidies before the election. In late November, the Christian Democrat Party and the Social Democrats reached an agreement on the country s renewable energy law. Under the draft agreement, Germany will set a target of generating between 40% and 45% of its energy from renewables by 2025, rising to between 55% and 60% in 2035. In addition, the primary subsidy for new renewable energy projects will shift from the existing feed-in tariff system to a flexible feed-in premium, which will offer generators a top-up payment for electricity sold on the wholesale power market. Germany will also trial renewable energy auctions and, if successful, introduce them on a national basis from 2018. Onshore wind subsidies will be cut for new projects and German states will be empowered to implement their own specific restrictions
12 on planning permission regulation. Germany s offshore wind target for 2020 will be reduced from 10 GW to 6.5 GW, rising to 15 GW by 2030. Needless to say, the UK has its own regulatory issues. From April 2017 all new UK renewable energy projects will be subsidised under a new contract-for-difference feed-in tariff. This switch to a completely new subsidy mechanism will undoubtedly make investors reflect before they consider investing further in the UK s renewable energy sector. Regulatory issues aside, the one major advantage in Germany s favour is that it has an established supply chain for multiple renewable energy technologies covering onshore wind, offshore wind and solar PV. This makes it relatively easy for Chinese renewable energy equipment manufacturers who need readily accessible component suppliers. Germany is attractive to Chinese companies since the country already has a well-developed offshore wind value chain that we cannot see in other European countries at this point in time, explained Anne Bräutigam, Manager of Renewable Energies & Resources at Germany Trade and Invest. If Chinese turbine manufacturers came to Germany it would be very easy for them to identify and source components and find partners. Germany also has a large and experienced labour pool in the wind energy industry. Furthermore it has established professional wind energy clusters in Hamburg, Bremerhaven, Husum and Rostock. New markets are also attracting Chinese investors The recent lack of Chinese investment in Europe s clean energy sector is also explained by the emergence of competing high-growth renewable markets including South Africa, Latin America, Japan and China itself. In January 2013 the Chinese government revealed plans to install 10 GW of solar PV capacity in 2013, a significant commitment given that just 7 GW was operational at the end of 2012. In July, the country went one step further by announcing plans to build 10 GW of solar PV capacity each year through to 2015, by which time 35 GW of solar PV will be operational. This is a significant To what extent do you agree that there is no need for Chinese firms to expand internationally as there is ample demand for renewable energy equipment in China? 1% 24% Strongly agree Agree Disagree Strongly disagree 17% 58% To what extent do you agree that Chinese renewable energy companies are increasingly prioritising new high-growth markets such as Africa and Latin America for international expansion over Europe? 13% 57% 0% Strongly agree Agree Disagree Strongly disagree 30% increase on the 21 GW initially targeted under China s current five-year plan. In August 2013, the Government introduced new feed-in tariff rates for solar PV that it hopes will enable these targets to be achieved. China has also taken steps to boost wind and hydro installations. In January 2013 the government outlined its intention to install 21 GW of hydro and 18 GW of wind capacity during 2013. This is a considerable leap on the average annual installed wind capacity of 11.6 GW during the past five years. China is also now a more attractive investment proposition as grid bottlenecks are gradually being reduced through investment in high voltage grid
13 infrastructure. China s antiquated grid previously resulted in wind production being curtailed during times of high production to prevent the grid from becoming overloaded. According to the China Wind Energy Association, China s wind energy industry lost $1.6 billion in profits in 2012 due to curtailment, double the $800 million lost due to curtailment in 2011. Encouragingly, this trend appears to be reversing in 2013. China Datang Corp and Huaneng Renewables, two of China s largest wind farm owners, both reported a more than doubling in profits in the first half of 2013 partly due to a decrease in wind curtailment. Indeed Huaneng s gross power generation increased by 53.5% in the first half of 2013, despite its installed capacity increasing by only 10% over the same period. Despite the growing attractiveness of China, Chinese companies still need to expand internationally. Eight out of 10 survey respondents disagree with the statement that there is no need for Chinese firms to expand internationally Notable investments by Japanese companies in Europe s clean energy sector Target Sector Country Deal value Date Announced Acquirer/investor Deal type Vestas-Mitsubishi joint venture 56MW portfolio of development stage solar PV projects Mainstream Renewable Power National Power 165MW Belwind (operational) and 216MW Northwind (constructionstage) offshore wind farms 42MW portfolio of operating solar PV projects 55MW Tranche 1 of the operational Toul Rosières solar project 129MW Luchterduinen offshore wind farm London Array phase one transmission project Offshore wind Denmark $405 million Sep 2013 Mitsubishi Heavy Industries Joint Venture Solar PV France Undisclosed Aug 2013 Mitsubishi Corp Acquisition Diversified renewable energy Diversified energy Ireland $133 million Aug 2013 Marubeni Corp Equity investment Portugal Undisclosed Aug 2013 Marubeni Corp Acquisition Offshore wind Belgium $128 million Jul 2013 Sumitomo Corp Acquisition Solar PV Italy Undisclosed Mar 2013 Mitsubishi Corp, Innovation Network Corporation of Japan (INCJ) Acquisition Solar PV France Undisclosed Jan 2013 Mitsubishi Corp Acquisition Offshore wind Offshore wind transmission asset The Netherlands Undisclosed Jan 2013 Mitsubishi Corp Acquisition UK $693 million Sep 2012 Mitsubishi Corp Acquisition Global Energy Holdings Offshore wind UK Undisclosed Apr 2012 Mitsui & Co Joint Venture Seajacks International Offshore wind UK $850 million Mar 2012 Mitsubishi Corp, Innovation Network Corporation of Japan (INCJ) HelWin 2 and DolWin 2 transmission projects Borwin 1 & 2 transmission projects Offshore wind transmission asset Offshore wind transmission asset Acquisition Germany $449 million Mar 2012 Mitsubishi Corp Acquisition Germany $318 million Feb 2012 Mitsubishi Corp Acquisition
14 as there is ample demand for renewable energy equipment in China. The principal problem facing European countries is that many other markets offer much higher growth potential. South Africa plans to build out 3.725 GW of renewable energy capacity through its Renewable Energy Independent Power Producers (REIPP) programme. Many Latin American countries are also pursuing ambitious renewables build out programmes. It is notable that almost 90% of survey respondents believe Chinese renewable energy companies are prioritising new high-growth markets such as Africa and Latin America for international expansion ahead of Europe. Japan is also emerging as a target for Chinese investors. In August 2012 Japanese Environment Minister Goshi Hosono released the country s new energy strategy, which targets a six-fold increase of renewable energy obtained from offshore wind, geothermal, biomass and marine energy in order to eliminate nuclear power within the next 20 years. Solar is also booming in Japan. Some 2.5 GW of solar PV capacity was installed in 2012 following the introduction of a feedin tariff in July 2012. Virtually no capacity was installed prior to the introduction of the feed-in tariff. One of the big renewable energy investment drivers for Japan is the idled 53 nuclear power facilities following the Fukushima disaster which resulted in 25% of capacity being switched off, explained David Cunningham, Cleantech & Renewables Financial Analyst, SgurrEnergy. Japanese companies are essentially purchasing experience that they can take back to their domestic market. They can also make good margins in the North Sea, where 90% of offshore wind farms worldwide are being installed. So a lot of Japanese OEMs are very keen on European offshore wind. The arrival of Japanese investors means Chinese investors are now facing more competition when it comes to acquiring European renewable energy assets. Solar PV minimum price floor may catalyse deal activity In July 2013 the EU Commission approved a negotiated settlement with China for a minimum price floor at which panels imported to the EU from China can be sold until the end of 2015. Under the settlement, Chinese exporters cannot sell solar PV panels in Europe below a minimum price of 0.56 per watt. The price floor will apply to the first 7 GW of exports per year. Japan currently looks like a better bet While Chinese investment in Europe slowed in 2013, Japanese firms forged ahead acquiring almost 4 GW of European energy capacity in 2013. As shown in the table on the previous page, Japanese investors are primarily interested in large portfolios of operating offshore wind and solar PV assets. These sectors are particularly attractive for Japanese companies because they enable them to gain first-hand experience of technologies that can then be deployed throughout Asia over the next decade. For example, Marubeni Corp and Innovation Network Corporation of Japan (INCJ) announced the creation in June 2013 of a Japan-based subsidiary of their UK offshore wind installation company Seajacks International to service the Asian market. One of the main drivers behind their $850 million takeover of Seajacks in March 2012 was the opportunity to export its sector expertise to Asia. To what extent do you agree that European manufacturers of solar PV equipment will not be able to compete with Chinese imports of solar PV panels at a price of 0.56 per watt? 35% 1% 9% Strongly agree Agree Disagree Strongly disagree 55%
15 This price floor replaces the 11.6% preliminary levy on Chinese panel imports introduced by the EU in June 2013 to counter alleged dumping of panels onto the European market. If the price floor had not been agreed to, these preliminary levies would have risen automatically to 47.6% after August 6, 2013, a rate which would have effectively shut Chinese competitors out of the European market. Overall the settlement was considered a victory for Chinese solar manufacturers. Before antidumping duties were introduced, China was exporting panels to Europe for less than 0.50 per watt. At 0.56 per watt, they are less competitive than before but still significantly cheaper than their European competitors. In June 2013, the last point at which reliable data is available, modules produced in Germany were selling at an average price of 0.77 per watt. It is therefore unsurprising that the majority of survey respondents (64%) believe that European manufacturers of solar PV equipment will not be able to compete with Chinese imports of solar PV panels at a price of 0.56 per watt. In addition, the 7 GW cap on panel imports that can be sold at the minimum price floor was much higher than many European solar PV manufacturers had anticipated. The European Photovoltaic Industry Association s lowest estimation for European solar PV installation in 2013 is 9.7 GW. At this level, Chinese exports would still account for around 70% of the entire European market. A lot of German project developers and EPCs are working directly with their Chinese equipment suppliers to finance projects, explained Tobias Rothacher, Senior Manager for Renewable Energy at Germany Trade and Invest. This has especially gained momentum since the implementation of the EU antidumping measures as a lot of Chinese module manufacturers have been seeking to secure their sales channels in Europe. This should also lead to some M&A activity between upstream Chinese manufacturers and downstream solar installers and project developers. Some pressure on Chinese manufacturers to enter these partnerships has evaporated now that a minimum price floor is in place. However, Taylor Wessing View Carsten Bartholl, Partner, Taylor Wessing: We have seen Chinese module manufacturers start to engage in the development phase of projects and to co-develop or finance projects in Europe. They are doing this in many ways, including equity cashinjections, mid-term mezzanine loans and by simply agreeing to late payment dates for module deliveries. I see this happening all over Europe. They are doing this as they need projects to sell their modules to. The minimum price floor has slightly decreased the urgency for these sorts of deals, but there is still a lot of competition in the market and there is no shortage of modules. The party that offers the best deal to the developer gets the sale at the moment. A lot of Chinese solar module manufacturers are also increasing the spectrum of services they offer from equipment supply to EPC contracting. it still makes sense for Chinese manufacturers to be a bit more strategic in securing their sales channels. Another potential consequence of the minimum price floor is that some Chinese solar equipment manufacturers may think about establishing manufacturing or assembly operations in Europe to avoid paying the minimum price. For example, in September 2013 China Power Investments, one of the big five energy producers in China, announced the acquisition of a minority stake in Maltese electricity supplier Enemalta Corp. As part of the deal, the two companies plan to establish a solar PV module manufacturing facility in Malta. This news followed the announcement in January 2013 that China Sunergy plans to build a 150 MW module and a 100 MW cell manufacturing line in Turkey. Tobias Rothacher, Senior Manager for Renewable Energy at Germany Trade and Invest, is unconvinced: I am not sure whether tier one Chinese solar manufacturers will start to manufacture in Europe to avoid the minimum price floor. The low prices Chinese tier one manufacturers can offer clearly comes from their economies of scale. There may be some opportunistic acquisitions of European manufacturing capacity but above all I expect Chinese manufacturers to focus most of their attention on establishing downstream partnerships.
Chinese expansion into Europe Key drivers and opportunities 16 Chinese equipment manufacturers lured by European margins One of the main drivers for China s investment in Europe s renewable energy sector is its higher margins almost 75% of Chinese survey respondents cited higher margins as an important driver to European expansion, more than the 60% that cited this factor in 2011. This makes it the joint most important reason for European expansion alongside a desire to obtain new cutting edge technology. The quest for higher margins is particularly important to China s wind turbine manufacturers, whose revenues and profitability are suffering from a decline in domestic installation and average selling prices. Onshore wind installations in China totalled 12.96 GW in 2012, a 26% decrease on the volume installed in 2011. China Ming Yang Wind Power s 3x increase in year-onyear net losses of $14.3 million in 2Q13 illustrates the point all too starkly. This also explains why Chinese turbine manufacturer Sinovel reported a net loss of $75 million in 1H13, down from net income of $1.8 million in 1H12. Thus far very few Chinese turbine manufacturers have succeeded in Europe. However, one Chinese turbine manufacturer that has been successful in entering international markets is Xinjiang Goldwind Science & Technology. The company has now established partnerships with international developers in Australia, Romania, Pakistan, Chile and Panama. As a result, international sales accounted for 15.5% of total revenues in the first half of 2013, a significant increase on the same period one year earlier. This also enabled Goldwind to double its wind energy revenues year-on-year to $30.4 million in 1H13 and to increase its net profit by 28.6% year-onyear to $15 million over the corresponding period. Goldwind s success should encourage other Chinese turbine manufacturers to follow suit. Indeed as this report was being finalised news emerged that China Ming Yang had secured a deal to supply EPC services and turbines to a 200 MW wind farm in Romania. This is the largest ever export deal secured by a Chinese turbine manufacturer. The most effective strategy for European expansion is to form a supply partnership with a project developer with a large project pipeline over two thirds of Chinese survey respondents that are targeting European expansion cited strategic partnerships with project developers already active in Europe as their preferred route Which of the following factors are driving you to acquire/invest in European companies? (Chinese responses) Our products are sold at higher margins in this region To obtain cutting edge technology There are gaps that can be exploited in the local supply chain 60% 58% 60% 70% 73% 73% There are strong government incentives in this region 54% 70% There is strong market growth potential 50% 75% We can benefit from lower manufacturing costs in this region 10% 19% 0% 10% 20% 30% 40% 50% 60% 70% 80% Very important/important 2013 Very important/important 2011
17 Over the next 18 months, which of the following initiatives will your company adopt to facilitate expansion into Europe? (Chinese responses) Acquisitions or investment in innovative technology companies 55% 72% Strategic partnerships with project developers already active in Europe 68% 75% Technology licensing Acquisitions or investment in pre-construction stage projects Acquisitions or investment in project developers 45% 48% 45% 48% 45% 56% Acquisitions or investment in established equipment manufacturers 20% 44% Acquisitions or investment in operational projects 15% 36% Establishing a manufacturing base 10% 28% 0% 10% 20% 30% 40% 50% 60% 70% 80% Strong / some interest in 2013 Strong / some interest in 2011 to market. This strategy is preferred to direct acquisitions of or investments in pre-construction stage projects or project developers (a strategy targeted by 48% of Chinese survey respondents). Emerging markets in Europe appeal to Chinese wind developers and OEMs, primarily Sweden, Poland, Romania and Bulgaria, explained Kerry Zhou, Director of Strategy and Planning at Goldwind. There will be some acquisition of projects at different development stages to sell turbines. However, it is unlikely that expansion will take place through the acquisition of local OEMs. Interestingly, the appetite demonstrated by Chinese turbine manufacturers to invest in Central and Eastern Europe is in complete contrast to the general sentiment of Chinese investors that consider the region significantly less attractive than two years ago. This is because Central and Eastern Europe are genuine prospects for Chinese turbine manufacturers seeking to establish a presence in Europe, since they are not already dominated by European competitors. David Cunningham, Cleantech & Renewables Financial Analyst at SgurrEnergy, also expects Chinese turbine manufacturers to be more active in Europe in the future. I can see potential deals where a European developer with a large wind project pipeline might link up with a Chinese turbine manufacturer subject to receiving guarantees on performance. If you can get this and China Development Bank providing financing then I think this type of structure is eminently doable. China is hunting for innovative cleantech Chinese firms desire to access innovative clean technology that can be incorporated into their existing products remains an equally important driver for European expansion 73% of Chinese survey respondents highlighted the need to secure cutting edge technology as a reason for European expansion, slightly more than the 70% that were driven by this factor in 2011. Acquisitions or investments in European clean technology companies are the most frequently selected method for European expansion by survey respondents. Chinese companies are being forced to identify new clean technology in international markets due to the growing demand for cleantech
18 solutions within their own domestic market. China s 12th five-year plan for 2011 to 2015 places a firm emphasis on mass deployment of a number of cleantech and renewable energy solutions, including energy efficiency, smart grid and electric vehicles. For example, the plan calls for the establishment of a network of 2,000 charging stations with 400,000 electric vehicle chargers in more than 20 pilot cities by 2014. It has equally ambitious plans for smart grid deployment, energy storage, water treatment, sustainable agriculture and soil decontamination. According to survey data, Chinese companies are most interested in investing in or acquiring European energy efficiency (39%) followed by energy storage companies (32%). Chinese companies and investors have taken great strides to partner with, invest in and acquire international clean technology companies in the past 12 months. Some notable examples are highlighted below: In September 2013 Chinese alternative asset manager CLSA Capital Partners invested an undisclosed sum in Californian sustainable agriculture group VoloAgri Group through the Clean Resources Asia Growth Fund LP. The proceeds will be used to support the company s acquisition and growth strategy in the vegetable seed market. The company will look to enlarge its activities in Asia. In August 2013 BrightSource Energy, a US-based developer of concentrating solar power (CSP) projects, announced it had signed memorandums of understanding (MOU) with China Power Investment Corp and the China Renewable Energy Engineering Institute to explore CSP in the Chinese market. Under the MOU, BrightSource will act as technology supplier for the first commercial-scale CSP project to be developed under the US-China Framework for the 10-Year Cooperation on Energy and Environment. In July 2013 Chinese industrial group Wanxiang revealed its intention to launch a fresh strategy to push through its acquisition of bankrupt US-based advanced battery manufacturer A123 Systems. In November 2012, Hutchison Water, a water treatment subsidiary of diversified Chinabased conglomerate Hutchison Whampoa, won the tender to operate Israeli cleantech and water treatment incubator Kinarot for the next eight years. It will invest $25.5 million in the organisation over that period. The lease Over the next 18 months, which sectors will you seek to acquire/invest in within Europe? (Chinese respondents) Energy efficiency 39% Energy storage Renewable energy servicing/o&m Wind equipment manufacturers Solar projects Wind projects Grid infrastructure/smart grid technology Wind project developers Water/wastewater treatment Solar project developers Solar equipment manufacturers Hydro Geothermal Biomass 7% 7% 7% 11% 11% 11% 14% 14% 21% 25% 25% 29% 32% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
19 will be taken over from Israeli venture capital fund Aquagro, which had run Kinarot since 2010. In October 2012 Hanergy Holding Group, China s largest independent renewable power producer, announced the acquisition of Californian thin-film solar cell developer MiaSolé for $30 million. A noticeable trend from the above examples is that Chinese companies and investors have historically been much more inclined to invest in US cleantech companies. However our survey data indicates that Chinese companies are poised to extend their investments into Europe in the next 18 months. Growing interest in operating assets Some 36% of Chinese survey respondents are targeting acquisitions of or investments in operating European renewable energy assets. While this is significantly less than the number targeting pre-construction stage projects (48%) and/or seeking strategic partnerships with European project developers (68%), it is a significant increase on the 15% that were targeting operational assets in 2011. Despite the growing interest, Chinese acquisitions of operating European renewables assets during the past three years have been few and far between. In December 2012 Chinese power company China Three Gorges announced the 368 ($487 million) acquisition of a 49% stake in EDP Renováveis (EDPR) Portuguese business. The transaction encompasses 615 MW of operational renewable energy capacity and 29 MW of ready-to-build projects in Portugal. This is the only example of a Chinese company investing in a large portfolio of operating European renewable energy assets in the past three years. On the investment side there has been relatively little interest from the big Chinese investment houses, especially compared with outbound investment from Japan and Korea, confirmed Paul Reynolds, Senior Consultant - Offshore Wind, Strategy and Policy, GL Garrad Hassan. Chinese investors have taken stakes in other UK infrastructure so perhaps the risk-reward ratio isn t quite right for them in renewables. I don t see any particular barrier to China investing in European renewables. Perhaps it is just the case that the right project hasn t come along yet. Growing Chinese appetite to invest in European operating renewable energy assets could be explained by an emerging desire to decrease exposure to the dollar. China has accumulated huge volumes of foreign exchange reserves over the past 10 years, holding $3.3 trillion at the end of 2012. This is significantly more than the next largest holder, Japan, which held about $1 billion at the same point in time. The composition of China s foreign exchange reserve holdings has not been revealed by the Chinese government, but most analysts predict that between two thirds and three quarters are held in US holdings. Many industry observers expect China to invest in non-us assets to unwind this position. China has around $3.5 trillion of foreign exchange reserves, the bulk of which is held in US treasury bills, confirmed David Cunningham, Cleantech & Renewables Financial Analyst, SgurrEnergy. It is fairly evident that China wants to reduce this exposure passively. With this size of holding there is no effective method for the country to trade down this position. We therefore expect to see dividends generated from these holdings being re-invested into other assets. I would be surprised if we did not see a greater diversity of outbound FDI from China simply because of the disproportionate level of its US dollar exposure. Having three quarters of your foreign exchange reserves in one currency is quite a risk. Operating renewable energy assets are ideal assets for large Chinese power companies or investment houses seeking to decrease their exposure from the dollar since they offer stable, low-risk and long-term returns that are indexed against inflation. The growing number of utilityscale offshore wind farms coming online and the portfolios of operating renewable energy assets being put up for sale by utilities also provides Chinese investors with the scale they need to invest large quantities at once.
20 China is particularly interested in European offshore wind A number of industry experts interviewed for this report stated that Chinese offshore wind equipment companies are considering investments in Europe s offshore wind sector. Their motivation is obvious. According to the National Renewable Energy Action Plans of all EU member states, some 43 GW of offshore wind capacity could be operating in European waters by 2020. This is a considerable target, especially given that under 5 GW was operational at the beginning of 2013. Investing in Europe s offshore wind sector provides Chinese manufacturers with vital knowledge and expertise that they can apply to their domestic market. China s offshore wind sector is still in its infancy, with only 366 MW of installed capacity at the beginning of 2013. However, the government hopes to bring online 5 GW by 2015 and a total of 30 GW by 2020. Competition to provide equipment to Chinese offshore wind farms will likely be intense, so any expertise Chinese manufacturers can obtain in Europe may prove vital. Chinese manufacturers are looking at European wind, confirmed Paul Reynolds, Senior Consultant Offshore Wind, Strategy and Policy, GL Garrad Hassan. The turbine side is potentially very interesting. I know that Sinovel has a London office and XEMC Darwind has a 5MW turbine installed in The Netherlands. I don t believe transport costs are so significant that they would outweigh lower manufacturing costs in China. To date examples of Chinese equipment manufacturers supplying components to European offshore wind farms are few and far between. The most notable example is Chinese company ZPMC, which supplied monopile foundations to the Greater Gabbard offshore wind project in 2009. Other examples include XEMC Darwind, which installed a 5 MW test offshore turbine in Dutch waters in July 2011 and Jiangsu Hantong Group, which intends to open a foundation assembly facility in Germany through its JADE Werke subsidiary.
21 At present concerns over the sophistication and reliability of Chinese offshore wind technology may prove too large an obstacle for them to secure a foothold in Europe on their own. Chinese offshore wind turbine manufacturers are seeking to improve their technology first before they compete with established European manufacturers, explained Anne Bräutigam, Manager of Renewable Energies & Resources at Germany Trade and Invest. They can do this by forming partnerships with European technology companies and research institutes. Using engineering consultancy services is also a viable strategy. Some Chinese companies have engineered prototypes but not all of them have been water-tested. The focus on engineering and technology is therefore quite strong. A Chinese manufacturer could acquire a preconstruction stage project to deploy its turbines, continued Bräutigam. They would likely be assisted with credit financing from China. Many offshore wind turbine manufacturers are stateowned so access to financing is a lesser issue for them. We have had discussions with turbine manufacturers that are considering this strategy. Chinese power companies are also interested in European offshore wind investments. We went to Germany and the UK to explore offshore wind opportunities in 2011 and built some good relationships with potential partners, explained Guodong Hu, Vice President, Executive Director Overseas Investment Strategy, China Datang Corporation Renewable Power. We are interested in investing in ready-to-build offshore wind projects and hope to acquire majority stakes. This type of collaboration with local companies is advantageous to us as it brings us a partner that can assist in the operation of the project and communicate with all of the relevant local authorities.
22...But regulatory uncertainty could stymie investment Despite the obvious appetite amongst Chinese companies to invest in European offshore wind, regulatory uncertainty remains a major barrier. In Germany, offshore wind farms have faced major delays in the past three years due to setbacks in securing grid connection. To address this, new laws were passed in December 2012 that clarify the obligation of the offshore grid operators to connect offshore wind farms to the grid and the liability of the offshore grid operator in the case of delayed or uninterrupted grid connection. However, there is still uncertainty that grid connections will be delivered on time. As Hangyu Zhao, Managing Director, JADE Werke GmbH, a subsidiary of Jiangsu Hantong Group, explains, these delays have already impacted Chinese investment in European offshore wind. We have established the company here in the north coast of Germany and plan to establish an offshore wind foundation assembly workshop as well as a base port to import pre-fabricated parts that can be assembled into a final foundation product and shipped out to customers, he said. In the last 20 months we have secured approval for the project and also issued tenders to construct the plant. But there is a big but. The offshore wind industry in Germany keeps getting postponed. A lot of projects have started but have been Taylor Wessing View Dominic FitzPatrick, Partner, Taylor Wessing: The UK requires huge investment into its ageing energy infrastructure and for many years China has been viewed as a major potential investor in this. However, this has yet not happened. Chinese participation in the Hinkley Point C nuclear project is based on a UK government backed guaranteed return significantly at or above current prices and should not be seen as a bellwether. Regulatory changes have already resulted in many investors waiting to see what will happen. Uncertainties about UK energy policy, questions about the government s commitment to renewables and plain party politics have affected the appetite to invest in UK renewables. delayed. At the end of 2012 the UK had installed 11.2% more real installations than was targeted according to their National Renewable Energy Action Plan (NREAP). But this figure in Germany is -64.6%. So we are suffering from a very bad situation in Germany. The Hantong Group, our parent company, has prepared everything for procurement, manufacturing and overseas transportation to meet orders, but currently everything is idle. All is not rosy in the UK either. UK government officials have for many years stated that up to 18 GW could be operating in UK waters by 2020. However, earlier this year National Grid provided 11 energy scenarios to the UK Department of Energy and Climate Change, 10 of which predict 8-10 GW of UK offshore wind being installed by 2020. Appreciation of the Yuan is a disincentive to overseas investment Another reason for the lack of Chinese investment in Europe s renewable energy sector is the appreciation of the Yuan against the Euro and Sterling. The Yuan has appreciated 5% against the Euro and 2.5% against Sterling in the past two years. For Chinese investors, depreciations in currencies in which international projects are based can have a significant impact on their Yuan denominated returns. We have been tracking overseas renewable energy project investment opportunities for a couple of years, explained Guodong Hu, Vice President, Executive Director Overseas Investment Strategy, China Datang Corporation Renewable Power. But we have not yet undertaken a transaction because of the appreciation of the Yuan. The Yuan has been appreciating against other currencies and is expected to continue to do so. A depreciation of a currency in which an overseas project is based can have a significant impact on our Yuan returns. For example, we were considering investing in an Australian project in 2011 when the Exchange rate between the Australian dollar and the Yuan was approximately 1:6.7. Now, the current exchange rate is 1:5.8. This sort of movement has a big impact on our returns.
23 European expansion into China Key drivers and opportunities China s environmental push creates significant technology transfer opportunities In the past 12 months China has unveiled a series of energy efficiency and environmental initiatives to help curb pollution, energy use and soil contamination. Most significantly, China s State Council approved plans in July 2013 to allocate CNY 2.3 trillion ($375 billion) to energy saving and emissions-reduction projects through to 2015 to reduce severe pollution throughout the country. This investment is being made to achieve the country s plans to reduce its carbon emissions per unit of GDP by 40-45% below 2005 levels by 2020. While this planned investment has grabbed the headlines, China has also announced a series of other environmental initiatives and subsidies. For example, in September 2013, China s Finance Ministry introduced a new subsidy system for electric vehicles that will be implemented through 2015. A subsidy of up to $9,800 will be available for buyers of plug-in electric cars, while hybrid electric vehicles will benefit from a subsidy of up to $5,720. Given China s significant planned environmental investment it is unsurprising that European survey respondents most frequently cited strong market growth potential as the driving factor behind Chinese expansion 73% of European survey respondents planning to invest in China mentioned this as an important driver (78% in 2011). What makes China especially compelling for European firms is that the demand for new technology cannot be met domestically. Indeed 54% of survey respondents stated they are targeting China as there are gaps that can be exploited in the local supply chain, compared with only 22% in 2011. European clean energy companies that possess high-end technology that is not readily available in China have the greatest chance of success. Companies with value added services to offer should view China as an opportune market for commercial returns, explained David Cunningham, Cleantech & Renewables Financial Analyst, SgurrEnergy. There are opportunities for European companies to export expertise to China in high-end complex engineering areas such as offshore wind, smart grid and energy
24 efficiency. However, commercial returns from lower end engineering are much more difficult. Vestas, GE and Gamesa have all struggled to gain traction in an over-supplied Chinese market where local suppliers have continued to hold market dominance. Organisations must be at the high end of the intellectual property curve to get access to the Chinese market. Given China s focus on energy efficiency, it is no surprise that this is the most attractive cleantech vertical for European investment 34% of European respondents targeting China plan to invest in the energy efficiency sector, slightly more than the number targeting solar equipment companies (31%), but significantly ahead of any other cleantech vertical. That is not to say that there are only opportunities for European energy efficiency companies in China. Roger Webster, Managing Director Membrane Processes, at Modern Water plc, which has formed a joint water project development partnership with Chinese firm Hangzhou Water, describes China s growing demand for innovative water technology. In China 400 cities out of 668 face the challenge of water scarcity and the Chinese Government has, in its latest five year plan, specified investment in desalination as a key focus in addressing the water shortfall, he said. The current five-year plan also puts emphasis on companies to develop their own technologies to help reduce water shortages in China, so there really is some impetus behind the market right now. China wants to bring in outside technology and expertise that can assist it in meeting its water desalination objectives while also developing its own capabilities in the sector. Taylor Wessing View Christoph Hezel, Partner, Taylor Wessing: European companies may have opportunities in China through supplying high tech components. If you have a specific component of a whole product that can make the difference then there are opportunities in China. Also, anything to do with grid connection is highly sought after in China. A new regulation came out in China in August called Opinion of the State Council on Accelerating the Development of Environmental Industry. This flags some industries and cleantech sectors they really want to promote further, such as new water treatment technology, garbage disposal and electric automobiles. These directives certainly create opportunities for European cleantech companies. This is a very high level regulation and implementing rules are still missing. Once this is available there will be a clear picture of what the playing field is for foreign investors. Which of the following factors are driving you to acquire and/or invest in Chinese companies? (European responses) There is strong market growth potential We can benefit from lower manufacturing costs in this region There are gaps that can be exploited in the local supply chain 22% 39% 44% 54% 65% 65% 73% 78% There are strong government incentives in this region 39% 38% 44% To obtain cutting edge technology Our products are sold at higher margins in this region 11% 17% 16% 30% 39% 0% 10% 20% 30% 40% 50% 60% 70% 80% Strong/some interest in 2013 Strong/some interest in 2011
25 Partnerships are a crucial route to market Partnerships with companies already operating in China are the most favoured method of expansion for European companies 68% of European survey respondents planning to invest in China during the next 18 months intend to do so by forming partnerships with developers of environmental/renewable energy projects already active in China, while 57% are planning to licence technology. This is significantly more than the 38% that are planning to establish manufacturing operations in China. Roger Webster, Managing Director Membrane Processes at Modern Water plc, explains the advantages of forming partnerships. Chinese companies are keen to provide their own solutions to their country s environmental problems, so a business strategy focussed on technology transfer and technology partnerships is generally much better than going to China and setting up shop, he said. Language barriers can be an issue, particularly when you get outside the big urban centres, so local partners are very important particularly if you don t have local Chinese staff or Chinese Taylor Wessing View Christoph Hezel, Partner, Taylor Wessing: It takes a lot of time to enter China. You normally need a joint venture partner. There are lots of state-owned enterprises and ministries to deal with and forms to fill in. It can be very hard for European firms to establish joint ventures in China as the Chinese partner will often want to retain a majority stake and management control for tax purposes. You also need people on the ground in China otherwise you will always lose out to the big Chinese firms. speaking staff. It can be very difficult to make an impact in China if you don t embrace doing business by involving Chinese partners and Chinese staff. IP concerns still inhibiting Chinese investment IP protection still remains the major concern for European firms considering licensing technology to China. Some 87% of survey respondents believe concerns over IP protection are a major factor in dissuading European firms from licensing their technology to China, exactly the same number as last year. Over the next 18 months, which cleantech sectors will you seek to acquire/invest in within China? (European respondents) Energy efficiency 34% Solar equipment manufacturers 31% Energy storage 13% Renewable energy servicing/o&m 9% Wind equipment manufacturers 9% Grid infrastructure/smart grid technology 6% Water/wastewater treatment 6% 0% 5% 10% 15% 20% 25% 30% 35% 40%
26 Over the next 18 months, which of the following initiatives will your company adopt to facilitate expansion into China? (European responses) Strategic partnerships with project developers already active in China 68% 72% Technology licensing 50% 57% Establishing a manufacturing base 33% 38% Acquisitions or investment in innovative technology companies 22% 30% Acquisitions or investment in established equipment manufacturers 6% 24% Acquisitions or investment in pre-construction stage projects 22% 39% Acquisitions or investment in operational projects 16% 28% Acquisitions or investment in project developers 6% 16% 0% 10% 20% 30% 40% 50% 60% 70% 80% Strong / some interest 2013 Strong / some interest 2011 This is an issue that China now appears to be addressing head on. In September 2012 China s former Premier Wen Jiabao said the government will strengthen intellectual property protection to attract foreign investment and that China must work closely with foreign companies that have advanced technologies in the fields of electric To what extent do you agree with the statement that concerns over IP protection are a significant factor in dissuading European firms from licensing their technology to China? vehicles, new energy sources, new materials and bio-medicine to ensure the sustainable development of the country s economy. I have said on many occasions that foreigninvested enterprises established in China in accordance with the law are Chinese companies, he said in September 2012. Their products are made-in-china products and their creation is Chinese creation. I want to tell you that we will strengthen intellectual property protection and give foreign companies the same treatment in government procurement. 11% 53% 2 % Strongly agree Agree Disagree Strongly disagree 34% China s offshore wind sector presents plenty of opportunities for Europe China s offshore wind sector is the one industry that European technical consultancy and highend technology firms ought to be able to enter. China has grand plans for offshore wind. It hopes to install 5 GW of offshore wind capacity by 2015 and a further 25 GW by 2030. These targets are extremely ambitious given that just 366 MW was operational at the beginning of 2013. Europe s offshore wind sector is much more advanced, with just over 5 GW currently installed.
27 Given the significant experience many European companies have in designing, constructing and servicing offshore wind farms, there should be opportunities to export this expertise to China. There are certainly opportunities for European firms in China s offshore wind sector, explained Paul Reynolds, Senior Consultant Offshore Wind, Strategy and Policy, GL Garrad Hassan. Although one has to bear in mind that Chinese companies are very keen on doing things themselves and building their own capabilities in the design and manufacturing side of things. There is very high local content in Chinese onshore wind projects and I would expect to see this replicated offshore. But there are opportunities in helping companies and institutes in China to develop and build their own capabilities. In China the design institutes have quite a significant role to play. Each state has its own design institute which has a key role in designing the wind farms. We are currently assisting some of these with their designs and building their capabilities. There are also opportunities in the development phase of offshore wind farms although these are perhaps more niche than most people might think. Many European companies are already making headway in China. The products and services European companies are supplying to China include turbine technology, foundation design and environmental impact assessments. Some of the most significant examples are outlined below: In June 2013, Scottish offshore wind consultancy SgurrEnergy signed a contract to provide advice on the design and development of the first offshore wind farm in Guangdong province. Under the contract, SgurrEnergy will advise on wind farm layout, site selection and design and ocean hydrometeorology. It will also conduct an environmental impact assessment. In August 2013 Dutch marine firm Huisman secured a contract to supply cranes for installing offshore wind turbines in Chinese waters. The cranes will support work conducted by the UK firm Seajacks Scylla vessel. Offshore wind consultancy GL Garrad Hassan has signed a contract with the Guangdong Electrical Design Institute to supply design support services for offshore wind turbine foundations and to evaluate their suitability for various offshore wind projects. UK renewable energy organisation The Carbon Trust is running, in collaboration with Chinese Wind Energy Association and CECEP Wind Power Corporation, a 10-month project that aims to identify collaborative programmes or initiatives that could reduce the cost of offshore wind in China through adoption of existing technology available overseas or by developing new technology within the country. In 2011, Siemens and Shanghai Electric Group Co established a joint venture to supply offshore wind turbines to China. The joint venture, called Shanghai Electric Wind Energy Co, hopes to capture 30% of China s offshore wind sector by 2030.
28 About us Taylor Wessing is a full-service international law firm, working with clients in the world s most dynamic industries. We take a single-minded approach to advising our clients, helping them succeed by thinking innovatively about their business issues. Our focus on the industries of tomorrow has enabled us to develop market-leading expertise in: Technology, Media and Communications Life Sciences Private Wealth Energy At Taylor Wessing we are proud of our reputation as a forward-thinking firm. We support clients wherever they want to do business. Our 23 offices around the world are not token presences - they blend the best of local commercial, industry and cultural knowledge with international experience to provide proactive, integrated solution for our clients. The Taylor Wessing Future Energy Forum microsite aims to stimulate debate around important issues facing the energy sector and those who are dependent on it. The site provides a succinct overview of the legislative framework in place for renewable energy projects in a number of key jurisdictions. You can download the latest Taylor Wessing Energy report, Hidden Dragon, as well as the previous reports produced by the Taylor Wessing Energy Group. www.taylorwessing.com/futureenergy Law Firm of the Year The Lawyer Awards 2013
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