China’s Need For Energy-Saving Technology

In an interview with Alex Dumortier of The Motley Fool in 2008, I was asked which industries I thought had good future prospects in China. I mentioned several growth areas, but Alex focused on my third suggestion: “any technology that has anything to do with the environment.”

With China having now surpassed the United States as the world’s largest energy user, Alex remembered my comment, and in his article last week, recommended six Chinese companies: JA Solar; Suntech Power (NYSE: STP); Yingli Green Energy (NYSE: YGE); Trina Solar; LDK Solar (NYSE: LDK); and Solarfun Power (Nasdaq: SOLF). His reasoning was simple, “China’s growing appetite for energy in a world of finite traditional energy sources also creates an enormous opportunity for alternative energy solutions.”

China’s continued economic growth is one reason why it is now a larger energy consumer than the United States. Another, though, is the fact that the country has a long way to go in terms of energy efficiency. Fatih Birol, Chief Economist at the International Energy Agency, said last week: “In 2000, the U.S. consumed twice as much energy as China, now China consumes more than the U.S.” He went on to note that the U.S. had improved its energy efficiency by 2.5 percent annually during that time, while China managed only a 1.7 percent annual improvement. Energy inefficiency is the reason it takes more energy to power a Chinese economy that is only one-third the size of the United States.

Greater energy efficiency comes from more highly developed technology and better energy management and conservation practices. U.S. companies that have this know-how have large opportunities in China, as we are finding with BPL Global, a Pittsburgh-based “smart grid” company that we are helping to expand in the country. A smart grid is an intelligent electricity network that integrates the activities of all of the connected users and generators to deliver sustainable, economic and secure power supplies. China’s rapidly growing energy usage makes getting access to this type of know-how critical to the country’s sustained development.

The China market is indeed big, as demonstrated by the recent figures, but it is also a difficult one to crack. In my years in China, I have learned that there are only two rules. Rule Number One is “Everything is possible,” but Rule Number Two is “Nothing is easy.” It’s certainly possible to build a large clean energy business in China, but don’t expect it to be easy.

How to penetrate the huge China market was the subject of my presentation at the recent Smart Grid Conference in Shanghai. Because the China electricity market is dominated by a few, very large state-run organizations such as the State Grid and the South Grid, different approaches may need to be taken than in other industries. Nonetheless, if a company’s technology and know-how is truly world class, it will find a receptive market in China, and ways can be found to penetrate the market.

For China, becoming more energy efficient is not a matter of political correctness, it is a matter of economic life and death. China needs to continue to grow so that more Chinese can benefit from economic reform. Despite the substantial progress that has been made since 1978, hundreds of millions of Chinese still have not had the opportunity to participate in a meaningful way in this progress. China’s emergence as the world’s largest energy consumer underscores the fact that there are now real limits to how fast its economy can grow if energy efficiency can’t be improved. If the country cannot find solutions quickly, there is a danger that an unacceptably large number of Chinese will continue to be left behind.

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