For China, the answer is simply blowing in the wind
They say the global climate is warming, but climate change has nothing on political change.
Less than two years ago, the alternative energy sector looked wonderfully promising. Panicked governments were in a Keynesian frenzy to throw as much money as possible at the world's collapsing economies - but of course they tried their best to stimulate the 'good' sectors. And what could be better than 'green' companies that clean the air, save us all from global warming, and even dilute the power of those thuggish oil-producing nations?
Common sense would indicate that this trend is at major risk of changing. In the United States the growing power of the 'tea party' is leading to a backlash against government spending, and in Europe the cost of the Greek bailout is forcing the EU to make members finally adhere to agreed debt ratios.
Basically, the West is broke. Governments are facing a scenario where they will be pushing back retirement ages, cutting benefits for teachers and civil servants, squeezing pension plans, and paring down many popular public programmes.
Who can expect that the subsidies for green programmes will escape unscathed?
Of course, the world still needs to at least partially meet its climate-change goals. So what is the likely future? Well, here is a very possible scenario for a green future: 1) the 'cheaper' green technologies will dominate; and 2) Asia, whose governments are not bankrupt and whose pollution problems are greater, will dominate clean-energy investment.
Now, which alternative energy source is the cheapest? The answer is wind, which also explains why it is one of the most prevalent alternatives. As Deutsche Bank explained in a recent report: 'Compared to other renewable energy technologies, wind energy is the most cost-competitive technology with generation cost close to traditional fossil fuels.'
Now let us take a place like Europe, where nearly half of the world's windmills are currently installed. Eventually Europe will run out of land spots that are blowy enough to put up windmills - but then they can move offshore, and Europe has a lot of shoreline. This is still cheaper than throwing up more nuclear plants, or even solar installations.
Because Europe is not sunny enough, there is an ambitious project to import solar power from North Africa - the 'Desertec' project would involve planting mirrors across the Sahara and then hooking all this up to a grid in Europe that would reach all the way up to Iceland!
A glorious vision, but unfortunately an expensive one. It is unclear at this point if the financing for this project will ever get off the ground.
If Europe's wind industry continues to expand, then the Chinese's fast-growing wind manufacturing industry might be one of the beneficiaries. A number of Chinese companies have been expanding their global sales. One example is China High Speed Transmission Equipment Group (CHSTE), which makes gear boxes used in wind turbines.
The company previously had no international sales - but last year it saw 737 million yuan (HK$839 million) in global sales, of which 540 million yuan came from Europe. Deutsche Bank has a 'buy' on this company, saying that it foresees CHSTE maintaining its leading position in China and 'moving into the global league through rapid capacity expansion planned well in advance'.
Other China-based wind firms listed in Hong Kong include Longyuan Power, China Windpower Group and China Power New Energy. These are basically wind-farm developers, and of the three, only Longyuan has made any substantial global sales. Only one of China's top three turbine manufacturers is listed in Hong Kong - Dongfang Electric, which is No3 but has no global sales. The second-largest Chinese turbine producer, Xinjiang Goldwind Science & Technology, is looking to raise HK$9.1 billion in a Hong Kong initial public offering. It told investors in a pre-IPO marketing blitz that it would spend 24 per cent of the proceeds for overseas expansion. (The shares already trade on the mainland at 28 times future earnings - not cheap!)
Besides the potential growth opportunities in Europe, there is also the US, which has more wind capacity installed than any other single country. In the windy, dry lands of Texas, salesmen from Chinese wind power companies are apparently more common these days than tumbleweeds.
But the greatest - and most reliable - growth opportunity in wind, and in other alternative energy sectors, is in Asia. The Global Wind Energy Council forecasts Asia will add a total of 109 gigawatts of installed wind capacity over the next four years, or 45 per cent of the total new capacity globally. By 2014, with an expected 149 GW of total wind installed capacity, Asia is likely to surpass Europe as the largest wind-powered continent.
And that is not just wind - Asia, which does not have the debt burdens of the West, is in a much better position to spend on alternatives. It also has a lot of motivation.
The World Bank estimates that China will be importing some 75 per cent of its oil needs by 2030. It also estimates China and the Asean countries will need to collectively spend US$80 billion a year for the next two decades to meet its 'sustainable energy' goals!
More than a third of this investment would likely be in the transport sector - that is, electric cars. This might explain why stocks like BYD have been so bouncy lately (although Korea's Samsung SDI is probably a much more viable player in the electric car battery market).
China will also continue to pursue hydropower alternatives - there is basically only one stock in this sector, Yangtze Power, but it is listed on the mainland only. Then there is solar - China stocks in this sector include GCL-Poly, Comtec, and US-listed Yingli Green Energy. As to nuclear plays, Shanghai Electric has some nuclear-related revenues. Most of the region's best nuclear firms are listed in South Korea - but these guys are more exposed to the global market whereas China might prove to be the only big spender in alternative energy investors can really count on going forward.
China is really the only major country where one can reasonably hope that ambitious alternative energy goals will not be dispatched to the waste bin. There are two reasons for this. The first is that China spends aggressively on infrastructure. The second, as the 'factory of the world', China is under pressure from Kyoto and other environmental treaties to cut pollution levels.
Plus, as China becomes richer, its populace will increasingly protest the dirtiness of its environment, just like Westerners cleaned up the smog and soot that used to hang so thickly over their major cities.
In a nutshell, based on current dynamics: wind is probably the safest alternative energy sector; and China is probably the safest alternative energy country to invest in.
Amount China and Asean have to spend each year on sustainable energy, in US$: $80b
Percentage of total new wind capacity coming from Asia in next four years: 45%
Last year, wind-power firm CHSTE had overseas sales of, in yuan: 737m yuan
Xinjiang Goldwind Science & Technology plans Hong Kong listing to raise, in HK$: $9.1b
