Environment and clean technology: The east is green

As the reality of climate change begins to hit home, it is clear that China's plans have to be driven not by a desire for immediate financial return but by a much more basic requirement: China needs cleantech to stay afloat.

“China is now much more circumspect – it wants to compete, but it wants to survive and thrive in the long run, too,” says Ai-Leen Lim, a partner and IP and technology specialist with Bird & Bird.

“They clearly understand that if they want to grow and develop in the future, they can only do it by being green,” adds Sven-Michael Werner, a partner in the Shanghai office of TaylorWessing.

China desperately needs to improve its energy security as it now relies heavily on oil and gas imports. It is also keen to access new technology to support its rapidly expanding alternative energy industry.

“The central government clearly sees this as an opportunity to get global market leadership,” says Werner. “It's quite obvious they are serious about this.”

The government, at the highest levels, has been working hard to publicise the importance of China's new focus. Taking carbon as just one example, according to the Xinhua news agency, the National People's Congress Standing Committee on August 27 2009 called for new domestic efforts to “make carbon reduction a new source of economic growth, and change its economic development model to maximise efficiency, lower energy consumption and minimise carbon discharges”.

The idea of pursuing green technology and renewable energy in China is not by any means new. For example, the PRC Renewable Energy Law (再生能源法), which took effect in January 2006, defined “renewable energy” as coming from non-fossil sources such as wind, solar, hydropower, biomass, geothermal and the ocean. It also stated that at least 15% of China's energy should come from renewable sources by 2020.

The Law was seen at the time as an important measure in driving industry toward becoming green and clean, but the lack of clear details and implementation measures resulted in many inefficiencies. An interesting example provided by John Leary, managing partner of White & Case's Shanghai office, is that although China boasts plentiful wind farms, many are not yet connected to the power grid. This is partly due to the fact that the Law says power grid companies must buy all the renewable energy that they can – in other words, if they connect to renewable sources, they must buy any energy that is produced.

These deficiencies look set to be fixed by amendments to the Law which are now in draft form but are expected to be published early in 2010.

“The new law tells the grid companies that they must build their grids to connect to renewable energy sources,” says Leary. “[Also,] the new draft amendment says there will be a quota as to how much renewable energy they need to purchase.”

Although these amendments could logically lead to less renewable energy being used by power grid companies, Leary believes this will not be the result. “We don't know what the quota levels will be, but the sentiment in the industry is that they will be high enough for China to continue to demonstrate a commitment to renewable energy,” he says.

Another significant element to the Renewable Energy Law revisions concerns the establishment of a renewable energy fund, or re-formation of the existing fund, to better compensate power grid companies.

“Under the new law it's clear that money will come from national funds and from surcharges that users are paying, and be used to compensate grid companies for the build-out to connect to the renewable energy producers,” says Leary.

Investment opportunities

For a few years, China has been actively encouraging foreign investment in projects involving wind and solar energy, for example. The 2008 version of the Foreign Investment Industrial Guidance Catalogue puts such projects into the “encouraged category” – foreign investors can therefore access privileges both in the approval procedure and during project implementation.

Clearly the government is building on well-laid foundations, and is taking a long term view. But 2010 looks set to be a tipping point. There is already clear practical evidence that companies are taking notice of the trend in government thinking: according to Leary, the number of wind turbine manufacturers has increased from 6 to 70 in just a few years as companies take advantage of incentives and protections for the domestic wind turbine industry.

There is obviously great potential in the year ahead for foreign investors to establish themselves in clean- and green-related sectors, especially for those companies which are developing new technologies. The importance of getting access to new clean technology might lead to the central government to adjust its laws and policies in relation to restrictions on technology import, and even IP. The present system includes burdensome administrative registration and approval requirements and also leaves many foreign companies are wary of licensing their technology to Chinese licensees due to weak IP protection.

Even without significant changes to technology import and export regulation, the rewards will no doubt prove too attractive for foreign investors to ignore.

“There are opportunities to make money because the market is still young, and the industry is still growing,” says Leary. “There's an opportunity to develop technologies that can change the market.”