Tristan Edmondson
Tristan Edmondson is founding partner at Mint Research, a business intelligence firm concentrating on China's clean technology sector.
Alternative investments in a country hooked on coal
The Chinese government is now keener than ever to play up its alternative energy credentials and investors are just as eager to lap up the good green news.
Shares in China's solar power manufactures, for example, leapt recently after the government said it would launch a generous new subsidy for solar panels. A recent press report said China would have 100 GW of wind power capacity by 2020, more than three times the government's original 30 GW target. Wind shares jumped.
At first glance, China’s alternative energy investment seems considerable, and appears likely to make a large impact on carbon emissions and energy security. But scratch beneath the surface and you find that it is tiny compared to the persistent and ever-growing domination of coal.
In order to continue China's rapid economic growth, the only scale-able and economic option is more coal; renewable energy simply cannot compete.
The chance of a shift to gas-powered plants is remote given China's lack of substantial domestic natural gas reserves and the inherent instability of the international wholsale price of gas.
The large initial investment and safety considerations of nuclear plants, together with a total lack of domestic of uranium reserves, makes adding substanial amounts of nuclear power an unlikely prospect.
Like it or not, China's coal industry will have to keep expanding if the country is to meet its rate of economic growth.
China has 13 percent of the world's coal reserves, and the world's highest rate of coal production. Its economic success is built on cheap coal and it is unlikely to willingly give up that advantage.
At current trends by 2020 China will be using 2.17 trillion tons of coal per year, up from 650 billion tons in 2000. This itself will require massive increases in production, transportation and emissions.
Railways will have to be upgraded and extended, new coal mining technology implemented and efficiency in electricity production and consumption radically improved.
But the investment opportunities surrounding the coal industry become even more apparent when the extensive environmental, social and economic costs of current coal extraction, distribution and burning are taken into account.
From the pollution which blights China's cities, to the carbon emissions warming our planet, the external costs of the world's largest coal industry are catastrophic. The Chinese government recognises the challenges and is encouraging the development of cleaner coal, more efficient coal power plants and energy efficiency.
The first step is cleaning up coal mining. Mining releases large amounts of methane stored below the earth's surface, a greenhouse gas 20 times more harmful than carbon dioxide.
Enviro Energy International Holdings Ltd. (HK:8182) is partnering with with PetroChina to develop the capture of coalbed methane in Xinjiang province, which can then be burned to produce relatively clean energy.
Green Dragon Gas (AIM:GDG) collects coal bed methane from four projects in Shanxi, Jiangxi, Anhui and Guizhou provinces and distributes it as copmressed natural gas (CNG).
New Smart Energy Group (HKG:0091) has recently acquired coal methane gas operations in Anhui province.
Energy service companies (ESCOs) are also homing in on China's coal addiction. ESCOs identify and finance building energy efficiency retrofits and use energy savings to pay back the initial investment.
US-based Honeywell International (NYSE:HON) has an active ESCO arm which implemented energy saving solutions at Tsingdao-Asahi’s brewery in Shenzhen, ultimately resulting in 17 percent annual energy savings.
China Energy Recovery, Inc. (OTC:CGYV) designs, manufactures and installs waste heat energy recovery systems which provide facilities with greater energy efficiency. This month the company won a US$1.42 million contract to design and manufacture two waste heat recovery systems for Chinese fertiliser company Hubei Yangfeng Group.
To satisfy growing demand for safer, cleaner coal, new mining technologies will alo have to be developed or imported.
According to Chen Jiagui, vice-president of China's top think-tank the Chinese Academy of Social Sciences, only 43.5 billion tons of coal reserves can be extracted immediately using current mining methods, which means the immediate reserves can only sustain 15 years of China's coal consumption, if no further exploration or mining technology efforts are made.
One technology that is already allowing much greater extraction rates is the long wall top coal caving (LTCC) method, used for extracting seams thicker than 4.5 m.
Yanzhou Coal Mining Co. (HK:1171) operates six underground coal mines in the Shandong Province of China using LTCC technology. Combined, they produce approximately 40 million metric tons per year.
Bucyrus International, Inc. (NASDAQ:BUCY) is one of the world's largest manufacturers of mining equipment with particular expertise in longwall and room and pillar coal mining. The company has a backlog of orders, inculding many from China. Bucyrus has supplied equipment to China's third largest mining company Datong Coal Mine Group Co. Ltd (SH:601001) for more than thirty years.
Coal can also be put to use as a liquid fuel.
Shenhua's (HK:1088) 24.5 billion yuan ($3.58 billion) coal-to-fuel (CTL) complex located near the city of Ordors, Inner Mongolia, has its own coal-fired power plant, gasification plants, and two massive reactors where coal will be liquefied.
Shenhua is rapidly expanding its operations - eight liquefaction plants are planned to be operational by 2020, producing, in total, more than 30 million tons of synthetic oil annually, enough to displace more than 10 percent of China's projected oil imports.
Shenhua also announced this month that it is to build China's first commercial carbon capture and storage (CCS) facility at the company's plant near Ordos that will be in full operation within two years.
The Yitai Group (SH:900948) operates a smaller 160,000-tonne CTL facility in Ordors, producing quality diesel oil and naphtha. The company has an annual output of 100 million tonnes of coal and claims its CTL facility will eventually produce 480,000 tonnes per year. The project began operation last year, with an investment of nearly 2.7 billion yuan (395 million U.S. dollars).
