Industry Insights：Impact of COVID, climate change, energy recovery on emerging business opportunities in China Market

·The global energy crisis has greatly accelerated the growth of renewable energy market

·The development and application trend of energy field in China

·How to develope a winning strategy and seize the opportunities

01

—

New practices and societal patterns driven by the COVID pandemic are having an impact on energy demand and consumption, posing huge challenges for the energy sector. Overall, a key issue is the post-pandemic development of new ways for different regions to allocate and identify new energy-related opportunities, and to improve energy efficiency and conservation. IMF research shows that the experience of the pandemic has increased attention to climate change and support for green recovery policies, providing greater scope for policymakers in the world's major economies to implement bolter climate policies. Effective decarbonization actions, including changing the energy mix, improving energy efficiency, and the green transition that increase greenhouse gas absorption, have a strong momentum in different countries and regions. For instance, the UK's carbon emissions reduction target of 78% by 2035 has been written into law.

In 2022, ongoing disruptions to global supply chains caused by the Russia-Ukraine conflict along with the inflationary pressures transformed into high oil and gas prices worldwide.Oxford Business Research shows that with hydrocarbons (natural resources such as coal, oil and gas) unevenly distributed around the world, supply chains are vulnerable to disruption and the financial uncertainty associated with cyclicality and commodity prices, the energy transition is speeding up. The sustained high oil prices could act as an important catalyst to accelerate the shift of the global energy system from hydrocarbon dependence to cheaper clean energy.

Source from: Ember’s Global electricity review 2022, IEA net zero by 2050 report

02

—

The development and application trend of energy field

With the impact of greenhouse gas on the environment and climate change, carbon emissions have become a global issue. The power sector contributes about a third of global carbon emissions, and it is encouraging to see that the global power sector is making great progress in cutting carbon emissions through the adoption of new energy technologies and gradually replacing fossil fuel power generation. The global energy crisis triggered by the Russia-Ukraine conflict has pushed the rapid expansion of renewable power into a remarkable new phase, according to data released by the International Energy Agency (IEA) on December 7th, 2022. Renewable energy is expected to replace coal as the world's largest source of electricity by 2025, according to IEA projections, with solar and wind making up the vast majority of this expansion. This is partly because new large-scale solar and onshore wind farms are now the cheapest way to generate electricity in most parts of the world, and will account for nearly 70% of electricity generation by 2050.

Under the "carbon peaking and carbon neutrality goals” commitment, China is continuously to carry out green transformation, and the new energy industry can provide important support for China's economic development. The growth of wind and PV power, lithium batteries, and the high-profile hydrogen energy, etc., all reflect that China has entered a new energy age. The energy sector has the biggest gain of the capital market in the past year and is expected to have many subdivision opportunities in the future. For instance, with the development of clean technology, the metal and mining industry provide the raw materials needed for the energy transition and will take the core position.

Electrification is driving the demand for sustainable power batteries

Source from SNE research via Bloomberg

The electrification of global transportation is driving the demand for sustainable power batteries along with the development of electrification and intelligence of vehicles. Taking the new energy vehicle(EV) as an example, it has driven the battery, motor and electronic control technology optimization and cost reduction. The primary and secondary Capital markets of new energy battery have been buoyant. From the perspective of domestic enterprises, Tianqi Lithium Corp has become the largest IPO of Hong Kong stocks in 2022, while giants such as CATL, BYD and Ningbo Shanshan have made big profits and strong market value.

Lithium batteries with low cost and long-life characteristics have quickly seized the market, especially in the field of electric heavy trucks, construction machinery and energy storage. In the past 30 years, lithium battery prices have dropped by nearly 98%, investment opportunities segment from the core raw materials, battery production, related charging pile, battery aging modeling, to the safety and recycling of the entire value chain. Demand for the chemical is expected to expand over the next decade as global automakers continue to introduce electric vehicles.

Data source from：xueqiu

Due to the development of EV and other energy industries, the downstream demand continues to expand, and the current lithium batteries market is in short supply. Limited reserves of lithium ore as a precious metal mineral, coupled with the pandemic, global geopolitics and other factors have led to material shortages in the market along with soaring prices, therefore the demand for technological innovation and substitution is rising. The recycling of waste batteries helps to make up for the shortage of resource mining supply, more and more energy companies and investors are giving attention to it.

Implementation of the 14th Five-Year Plan drives energy storage to rigid-demand growth for China energy mix transformation.The lower theoretical cost of the sodium ion battery technology directly attracted attention of capital to the industry. Compared with lithium batteries, sodium ion batteries can effectively solve the problem of low efficiency of energy storage plants in alpine-cold regions. China's wind power generation projects are mainly distributed in Inner Mongolia, Hebei, Ningxia, Xinjiang, Northeast and Yunnan, etc., the lowest temperature in these regions is mostly below -20℃, and the related energy storage system carrying sodium ion batteries may be more suitable for the environment of these regions.

The industrial sector, especially the heavy industry such as steel and cement, contributes more than 50% of carbon emissions, and hydrogen metallurgy as a revolutionary technology, is expected to solve the huge carbon emission reduction problem faced by the steel industry. Hydrogen energy has a wide range of sources, high calorific value, good combustion performance and zero emission. More importantly, it can achieve sustainable development of recycling and regeneration. Also, the downstream application scenarios of the hydrogen energy industry chain include transportation, construction, electric power and other fields. The promotion of hydrogen energy infrastructure construction has been included in the "14th Five-Year" Industrial Green Development Plan, result in a sudden rise of the hydrogen energy market. Although facing the problem of low economic efficiency, the storage and carrier technology of hydrogen energy has become mature gradually and is expected to maintain rapid growth under the attention of the capital market.

Picture source from: methanol research institute

China is currently one of the world's largest PV production stations, and the northwest region is vigorously developing PV, wind power combined hydrogen production. Other regions of the world, such as Australia with strong light and wind power, has announced a $150 billion investment in green hydrogen production. Saudi Arabia has the world's longest light time as best PV resources, will have the opportunity to become the world's largest PV hydrogen manufacturing station with cost advantages.

At the automated terminal of Qingdao Port of Shandong Province, the self-developed, integrated innovative hydrogen-powered automated rail crane not only reduces the weight of the equipment, but also improves the power generation efficiency and achieves zero emissions. The throughput of automated terminals increased by more than 50% year-on-year in 2021. Thanks to the support of new energy and innovation of hydrogen storage, the single crane operating efficiency of the wharf bridge refreshed the world record of loading and unloading efficiency for the eighth time.

All regions in the world are actively developing the next generation of energy technology. Since 1990, biomass power generation as a kind of renewable energy has been vigorously developed in many countries in Europe and the United States, such as direct combustion of agricultural and forestry waste, gasification, waste incineration, landfill gas and biogas for power generation. The application case is represented by straw biomass power generation actively developed and promoted in Denmark.

Green ammonia recently became the focus of global attention. Compared with hydrogen, ammonia, as a zero-carbon fuel and hydrogen energy carrier, is expanding from the most traditional agricultural fertilizer field to the energy field due to its obvious advantages in storage and transportation.In addition, the U.S. Department of Energy announced a major breakthrough in December 2022 that scientists achieved the first net energy gain in a nuclear fusion experiment using lasers, that opens our eyes to the possibility of using nuclear fusion reactions to generate clean energy.

Energy and ESG: Leading the evolving future

Today, climate change and sustainable development have become global common issues. In China, new energy investment and ESG have become the two key words in the market. China's "14th Five-Year Plan" set the green transformation of industrial technology as inevitable path, and the 20th CPC National Congress report also indicated to speed up the planning and construction of new energy system, which shows that, investment in Energy is expected to maintain rapid growth in China.

Environment, society and governance (ESG) has become an important evaluation standard of investment value and preferences in the global capital market. ESG are integrated into the company's sustainable development strategy and focuses on carbon emissions. It impacts not only the capital market, but also a wider range of companies and organizations. Energy companies that integrate ESG into their management system, strategy formulation, production and overall business operations will benefit from sustainable business development and access to more investment and financing opportunities.

With China's goal of carbon peak by 2030, large-scale deployment of "renewable energy + long time energy storage" will represent the new energy pattern. Challenges such as high input and low recovery for a long time may come along with the big opportunities, as the upgrading of technology and industrial chain are inseparable from the improvement of national policies, carbon and financial markets.

From the perspective of policies, with superpower of population and manufacturing, China's demand for food and energy resources, industrial and supply chain security, as well as high-quality goods and services continues to rise at a high level. China is optimizing its energy mix, such as accelerating the construction of large-scale wind power and PV stations projects in Gobi and desert areas, construction of domestic mineral resources projects, developing renewable energy such as hydrogen, biomass and geothermal energy. China has also expanded the utilization of overseas energy resources, improved the stable and diversified oil and gas import system, enhanced ability to secure resources, and actively participate in the formulation of international energy standards.

Renewable net capacity additions by country and region 2019-2021.Image: IEA

In 2022, the State Administration of Taxation of China issued the Guidelines on Preferential Tax Policies for Supporting Green Development, which introduced 56 policies, including support for energy conservation and environmental protection, comprehensive utilization of resources, and the development of low-carbon industries. Direct "tax exemption" applies for many green transformation projects. For instance, energy saving & environmental protection batteries and coatings are exempt from consumption tax, EVS are exempt from purchase taxes and Water in sewage treatment is exempted from water resource tax.

In October of same year, the NDRC of China issued a number of policies and measures to promote the expansion of Foreign Investments in manufacturing, focused on encouraging foreign investment in the fields of clean energy, key green low-carbon technology innovation and application. Such as green manufacturing, technology development, product design, factory construction and supply chain development projects. And support foreign-invested entities to participate in the formulation and revision of relevant standards.

Successful foreign company cases include Brookfield, the world-renowned Canadian MNC, which has invested more than 22GW of renewable energy such as wind power, PV, hydropower and energy storage around the world, and manages assets of US $13 billion in China.Brookfield shows great confidence in the investment opportunities and business growth of clean energy, commercial real estate and real estate logistics in China market.Today, their renewable energy business has expanded to many regions of China and maintained a rapid growth momentum as their second largest market.

05

—

Environment and trend of Chinese energy companies going global strategy

With the rapid development of energy industry, governments of many regions, especially in Europe, successively implemented subsidy policies, and greatly promoted the continuous growth of sales demand for EVs with low tariffs, relatively complete charging infrastructure and high consumer environmental awareness. Since 2021, China's exports of EV have shown a rapid growth. According to statistics from the General Administration of Customs of China, in the first eight months of 2022, China's automobile exports reached 1.91 million, ranking second in the world, of which about 20% came from new energy vehicles. From business globalization to brand globalization, China's EV independent brands, such as SAIC, FAW, BYD, NIO, etc., have accelerated their overseas expansion. In addition to the European market, BYD and NIO have also aggressively entered Southeast Asia and other markets to provide system services.

China is in the leading position in the field of power batteries, the core of EV, coupled with the rapid progress in automotive intelligence, which has become the foundation for brands to go global. The power battery market is growing, Germany, France, Hungary, Poland and other European countries, as well as the United States with preferential tax policies are regions favored by Chinese battery companies. Since September 2022, CATL's Hungarian factory project has been officially launched, which is the company's second battery factory in Europe. In the context of global carbon neutrality, there is a huge space for the development of EV in the mid and long term. China's automobile export, especially the exports of EV, will remain a highlight in 2023. In the mean time, a number of European automobile companies have recently increased their investment in China.

06

How to develop a winning strategy and seize the opportunities

International cooperation is of great significance to the development of global clean energy. Successful cases of China include the Russia Yamal LNG project jointly implemented with Total Energy of France; Brazil GNA gas project jointly implemented by State Power Investment Group Co., LTD., and Siemens Energy AG,; Guinea Keleta (Keleta) hydropower Station Project by China Three Gorges Group Co., LTD.,; Laos 230 kV Northern Power Grid and other projects by China Southern Power Grid Co., LTD. They have played important roles in promoting energy transition, high-quality development, employment, and environment protection of the cooperation countries.

Energy industries are expecting a broader space for development. Although supply chain disruptions and financial turmoil bring short-term challenges, they also shape the future energy structure and provide great opportunities for clean technology. IEA analysis points out that "the dawn of a new industrial age" has arrived, by 2030, the global market for clean energy technology manufacturing will be worth up to $650 billion a year, more than tripled from today's level. According to McKinsey, all the evidence suggests that the long-term energy storage market is a large and attractive new industry for investors, requiring investments of $1 trillion to $3 trillion by 2040 and earning competitive returns.

It is worth noting that the Russia-Ukraine conflict will not only bring a short-term increase in energy prices, but maybe also deeper and longer-term changes in the global geopolitical pattern.Sino-US economic and trade friction will be long-term between the two countries, and also bring more development, application and innovation opportunities to information technology industries. Geopolitical conflicts have brought a series of restrictions in the fields of economy, finance, science and technology, and also make security increasingly important. Under the new development pattern, opportunities for international cooperation in China, are focused on securing food, energy and important industrial chains and supply chains.

Along with the expansion of China's consumer market, economic pressures are driving consumers to be more selective on the quality and function of products. By building a strong supply chain to cope with an increasingly volatile and uncertain business environment, brands are able to respond quickly to changes and outperform competitors while inspiring, influencing and converting consumers.China is stepping up financial support for the development of the real economy, especially in scientific and technological innovation and green transformation, for instance, the climate resilience infrastructures. It is time to take action to seize the opportunities of investment and international cooperation in the field of energy, consumer, manufacturing and supply chain industries.

With rich experience, Sirmione Consulting Group China-based team can provide market analysis and insights, assist you from your virtual market presence, build your China business, establish partnership for you to accelerate sales and expansion, eventually achieve your sustainable growth in China. Click here for more information on investment and development opportunities in China's green economy.