• 2009 Chinese Cleantech VC market-1
  • Sept 25,2009

     

    For Cleantech investors in China, the future is bright. There is a perfect positive storm of government policy, consumer awareness, capital, land, engineers, and entrepreneurs lined up to create and sustain a very long run of successful investments. This is fortunate, because regardless of what industry one examines in China, when it comes to energy efficiency and other cleantech principles, there is much work to be done.

     

    China’s government policy rapidly evolved over the last several years. The new mantra from Beijing is one of increasing penalties for non compliance and one where officials at provincial, district, and city levels will see their career prospects dim if they do not meet numerous pollution and energy efficiency goals. Water treatment is one example. In several cities (not named for obvious reasons), water treatment facilities were inoperable as designed and constructed. Experts had to be brought in to ameliorate these problems. In the past, the cities would have continued to insist on self management of the water treatment plants, but in the emerging environment where waste water measurement is being actively monitored and reported back to Beijing, many 2nd and 3rd tier cities have admitted they do not have the expertise to properly manage these facilities. They engaged professional firms to operate and maintain the treatment plants.

     

    This is a great step forward. While Beijing and Shanghai and other major cities have established sophisticated expert teams to manage their energy and environmental facilities, most cities in China have not developed their own capabilities at a high enough level. Therefore, increasing the outsourcing of facility operations and maintenance to private or state owned experts is to be commended.

     

    The same trend is emerging in coal fired power plants. Emissions targets were widely ignored until 2005, but now there is high scrutiny applied to both sulfur dioxide (SO2) and nitrous oxide (NO2) emissions as well as grams of coal required to generate a watt of power. This has created a market opportunity for both existing firms and start ups such as LPAmina to upgrade existing coal fired power plants with modern technology and state of the art processes. These firms increase the efficiency of an existing coal fired power plant by at least 1% and reduce emissions by up to 70%. The efficiency increase of 1% improvement in a 300 MW coal fired power plant reduces the coal required by 13000 tons per year, or over 20 million tons per year over China’s installed coal plant fleet. This alone reduces CO2 emissions by over 40 million metric tons annually. Economically, the payback is well under 2 years.

     

    The sheer scale of the coal power industry in China demands investors and entrepreneurs attention. It is an area in which new technologies for emissions sequestration and efficiency improvement can have an immediate, major impact.

     

    Improved coal efficiency and emission reduction has another major benefit for China. It facilitates the migration from gasoline and diesel based vehicles directly to electric vehicles. Many of the interim technologies available today (biofuels, hybrid drive, fuel cell) are not needed if there is electricity at the appropriate scale. This improves efficiency. Every part of this value chain represents a great investment opportunity.

     

    Specific programs in partnership between NGO (non government organizations) and the Chinese government are having an impact. JUCCCE (Joint U.S.China Cooperation Clean Energy) has launched a mayoral training program with the support of the Chinese government. Beginning in 2009, mayors from cities across China will receive JUCCCE training on how best to develop their cities and communities and manage their energy and environmental resources. Given that many of these mayors are the future leaders of China, this initiative promises to have a significant impact and further expand business opportunities for suppliers who can meet what will certainly be the higher expectations of this group.

     

    Other cleantech investment opportunities in China are emerging rapidly, but they also present challenges. Investors must develop expertise to properly evaluate these opportunities. This is not the software or internet industry, where many of the great companies were able to distribute products for virtually free with little if any real “cost of goods sold.” Cleantech’s world is the physical world of biology, chemistry, and physics all rolled into one unwieldy term. Investors in China’s cleantech companies need to examine diligently the technical competence in any prospective investment. Very few people in legacy VC firms can thoroughly evaluate a cleantech investment. This is opening doors for many in the physical sciences to enter the venture capital industry.

     

    EFFICIENCY should be the focus of VCs in China for the next few years. China’s energy intensity (amount of energy needed to create one unit of GDP) has dropped 75% over the last 20 years, moving China into the middle range of energy efficiency among the world’s largest economies. China has set specific national and local level policies to further improve energy intensity.

     

    Highly speculative technology investments in China will prove increasingly difficult to finance, certainly before the technology is at a commercial stage. However, technology exists today in lighting, building materials, and smart power grid management that is scalable and investable.

     

    Cleantech is now one of the global sectors for VC investment with over $10B invested since 2000, and $6B or more invested in 2008 alone. Cleantech in China is now one of the 4 pillars of VC in China, along with IT, Healthcare, and Consumer Products. Innovation will accelerate with the combination of government policy, entrepreneurship, capital, and consumer awareness now supporting the cleantech sector in China.

     

     

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