“Tiger in the tank” – the numbers behind China’s renewable transition

James Smith

Premier Miton Global Renewables Trust plc

James Smith, manager of the Premier Miton Global Renewables Trust, discusses the extraordinary numbers behind China’s transition to renewables and the reasons for such levels of growth.

 

This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of stock market investments will fluctuate and investors may not get back the original amount invested.

In 2022, the Chinese lunar New Year fell on 1st February. The cynic might say that the Chinese people have relatively little to celebrate this year, with the country still enduring Covid-induced lockdowns, a property market with excessive debt, and slowing economic growth.

However, the New Year marked the beginning of the year of the Tiger, often referred to as the king of all the Chinese beasts. The Tiger is thought of as the symbol of strength and bravery, attributes which will be required to tackle not only the country’s health problems, but also its environmental ones.

China industrialised rapidly through the 1990s and 2000s and the energy required to achieve this came from fossil fuels, largely coal. China was blessed with abundant reserves, and utilised them to good effect. This has however left them in a difficult position as the world performs an abrupt turn away from carbon-based energy and towards renewables. As such, their target to reach peak carbon emissions in 2030, with a net zero carbon position by 2060, is somewhat behind the western world. However, even this will require an enormous effort on the part of the Chinese government, its energy companies, and its population. A substantial part of this effort will fall on the electricity sector.

China Electricity Generation, market share by technology

Source: Bloomberg New Energy Finance. 2015/2020 actual, 2025 / 2030 BNEF Economic Transition Scenario

Contrary to the impression often given in newspapers, China has already made large strides in decarbonising its electricity sector. For instance, over the 5 years from 2015 to 2020, the renewable energy sectors of wind, solar, and biomass increased their electricity production by 199% from 288 Terrawatthour (TWh) – a measure of electrical energy – to 861 TWh, in the process increasing market share from 5.1% in 2015 to 11.6% in 2020.

Bloomberg New Energy Finance, a research provider providing data and news on the energy sector, expect this trend to continue, with wind / solar / biomass expected to reach a market share of 29.0% by 2030, with generation of 2,917 TWh, an increase of 239% on 2020, or 13% per year. By 2030, also taking into account hydro and nuclear, the majority of China’s electricity generation is expected to be carbon free.

To put this into some context, by 2030 Bloomberg expect China’s wind energy market to be three times the size of the US, being the next largest market.

What are the key reasons behind the growth?

1) Renewable energy costs have fallen, making them increasingly competitive. China, like most jurisdictions, has in the past, subsidised renewable energy offering fixed feed in tariffs (essentially a Government backed premium price for their electrical output). These are no longer required, and new projects now sell power at local grid tariffs (being the standard regulated price received by all generators, including coal fired producers, in that particular region) and in the free market.

2) Renewable energy is profitable, with tariffs, and now free market pricing, offering attractive rates of return on investment.

3) Policy has been supportive. The central government has been clear in its targets for new renewable energy generation, offering incentives for local grid companies to take renewable power, and imposing penalties for those regions with excessive curtailment (whereby the grid is unable to fully accept renewable power).

4) Investors and banks have been willing providers of capital. Steady and visible returns have proved attractive for investors, allowing companies to finance development at competitive rates.

5) The sector has proved to be robust, with utilisation hours, or levels of productivity, increasing over time.

In summary, while cognisant of the macroeconomic risks, Chinese renewable investments find themselves well placed with government support, increasing efficiencies, and plenty of room to grow. We expect coal, stymied by high costs including the new Chinese carbon market (a market that imposes a cost on the emission of CO2 from fossil fuel based generation), to continue to give up market share to renewables. While China was fortunate in its development to have large coal reserves, it now benefits from a sizable landmass on which to develop renewable energy assets.

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Risks

All types of investment carry a degree of risk. It is possible you could lose some, or all, of the money you invest. The level of risk varies depending on the type of investment.

Typically, you are less likely to lose money over the long term from an investment that is considered low risk, although potential returns may also be lower. Investments considered higher risk typically offer greater opportunities for better long-term returns, though the risk of losing money is also likely to be higher.

When you invest, it is important that you understand the risk to your money and are comfortable with that level of risk. If you are unsure, we would recommend that you consult a financial adviser.

The value of your investment might not keep up with any rise in the cost of living.

You could lose money if financial markets fall.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the content contained within/suitability of the funds mentioned, please speak to a financial adviser.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or fund does not constitute a recommendation to buy or sell the stock or fund. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

All data is sourced to Premier Miton unless otherwise stated.

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Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

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