Liebreich: The Real Story Behind China’s Lead Role in Clean Energy Investment in 2010

By Michael Liebreich
Chief Executive
Bloomberg New Energy Finance

A month ago, we discussed in these pages Chinese solar equipment maker Yingli’s global sponsorship of the World Cup, putting it alongside the likes of Budweiser, Adidas and Sony along the touchlines during the tournament. Did Yingli’s $20-30m spend represent a bold long-term investment in the company’s brand or an act of pure hubris?

Time will, of course, tell (and before we move on, congratulations Spain!) but there can no longer any doubt that China aims to be the dominant player in global clean energy over the next decade. Indeed, our latest figures indicate they are probably half way there already. This year, for the first time, Asia & Oceania (ASOC) will be the global leader in new private capital attracted, surpassing the Europe, Middle East & Africa region and the Americas – largely as a result of a colossal surge in clean energy investment in China in the past three years.

Through the first six months of 2010, investment in China has continued to forge ahead, led by a red-hot project finance market fuelled with low interest loans from state banks. The country saw a record 14GW of new wind turbines installed last year and this year we project – somewhat conservatively – another 18GW to go into the ground. Putting aside the fact that typically one in every three wind turbines installed in China is not connected immediately to the grid, it is truly extraordinary what is taking place in regions such as Inner Mongolia. By comparison, the US congratulated itself for installing 10GW of wind in 2009, an all-time record, but the country will come nowhere close to that this year.

Our latest investment figures suggest China is now stepping on the accelerator and is likely to pull away from the rest of the world. While Western banks seek to shore up their balance sheets and Western governments grapple with record deficits, state-backed Chinese financial institutions are offering easy access to credit and Chinese manufacturers and developers are gladly accepting their largesse.

Let’s look at the raw numbers. Asset financing typically accounts for just under two thirds of all new funds invested in clean energy in a given year. Through the first six months of 2010, it has totalled $58.4bn, compared to $48.1bn in the same period in 2009, representing a 21.4% gain. Last quarter, asset financing globally accounted for $28.9bn of the total $33.9bn in new private third-party funds invested. That represented a slight drop from the prior quarter and a 3.7% decline from Q2 2009.

In Europe, asset financings were down from $6.6bn last quarter to just $4.5bn, far below the $14.9bn in new investment in Q2 2009. Banks were continuing to shy away from long term lending even before Southern Europe treated the debt markets to another turn of the crisis screw. European project finance has fallen consecutively in each of the last four quarters. The US, by contrast, showed further signs of bouncing back from its lows during the crisis, with clean energy asset finance increasing in Q2 2010 to $4.9bn, from $3.5bn in the prior quarter and from $4.3bn in Q2 2009. But even the US’s healthy growth pales into insignificance by comparison with China, where clean energy asset finance attracted $11.5bn of new money in the past quarter – a 9.6% rise over the prior quarter and a massive 72.1% jump from Q2 2009.

This means that over the past four quarters, China has attracted $40.3bn in asset financings, compared to $29.3bn in Europe and $13.4bn in the US. So although we are sticking with our forecast that 2010 will set a new record for new clean energy investment, finishing somewhere in the $180-200bn range, the composition of that funding will look substantially different. While 2009 will be remembered as the year in which China’s investment in clean energy outstripped that of the US, it seems almost certain that 2010 will be remembered as the year in which it overtook the EU. The funding for China’s remarkable push into clean energy has come from a variety of sources, including from Western investors. But Chinese financial institutions are the key players and one in particular has made a major impact in recent months. China Development Bank had issued least 10 loans to Chinese clean energy firms between 2005 and 2009, but those averaged well under $100m apiece. Then in April, the bank began stepping up in a big way. It lent $4.4bn to Changzhou-based PV equipment maker Trina Solar, then $7.3bn to Wuxi-based Suntech Power Holdings. In May, the bank made a $6bn credit line available to Urumqi based Goldwind, one of China’s largest wind turbine manufacturers.

In all, China Development Bank has made no less than $23bn available for Chinese companies in just over six months of 2010. This level of concentrated lending is unprecedented for a single financial institution in clean energy; no private bank in the world could match it, and neither could any provider of multilateral finance. While the exact terms of the loans were not detailed, government-backed banks in China are known to offer loans at about 6%. Not bad, given the country’s current inflation rate of some 3%.

Given its backing by the Chinese government, a more apt comparison might be between China Development Bank and various governments around the world. Even in that context, the size of these loans is staggering. Worldwide, governments have made $188bn in stimulus funds available in support of clean energy. The US government has led the pack by offering $66bn in grants, loans, loan guarantees, and tax credits. But as of May, 15 months after the stimulus bill became law, the US federal government had still only disbursed just $18.2bn of the total. The main reason for the relatively slow roll-out: rule-writing, competitive bidding, and the other inevitable bureaucratic delays that come when democratically-elected governments seek to spend money. Needless to say, China is not troubled by such trifles.

For some time now, we have documented how access to cheap capital has allowed Chinese firms to scale up production and drive down per-Watt manufacturing costs across photovoltaics, wind and batteries. This month, as part of our Insight service, we undertook detailed analysis of the cost of generating clean energy in China, and found that it is lower than in the developed world due to lower equipment costs and, you guessed it, lower costs of capital.

Back to Yingli and its unprecedented advertising spend at the World Cup – a first for any solar company or any Chinese company. Three days before the World Cup final, Yingli disclosed it had secured access to a remarkable CNY 36bn ($5.3bn) credit line from the China Development Bank. The new loan could, on its own, double the world’s PV cell and module production worldwide. The new capital puts the $20-30m Yingli spent on the World Cup look like small potatoes. That might have been the goal of the tournament – at least as far as the Chinese were concerned!

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