It may seem an irony that China, often labelled the world's top polluter, has also become its leading spender on clean energy. Mainland investment in clean energy topped US$35 billion last year, well ahead of Britain's US$11 billion and the US$18 billion spent in the United States. It has now also overtaken the US as the most attractive market for investments in the renewable energy sector, according to a September ranking released by accounting giant Ernst & Young. Ratings were based on factors such as access to capital, regulatory environment and planning barriers. The mainland's green surge is driven both by the enormous power needs of its economy and the central government's resolve to diversify energy supplies while reducing pollution and carbon emissions. Some 15 per cent of Beijing's US$586 billion stimulus package announced last year went to eco projects and clean technology programmes. And in the five-year plan that begins next year, new energy and environmental protection feature strongly in the nine key industries earmarked for support through tax cuts and subsidies. In the drive to develop renewable energy and curb pollution, says analyst Rajesh Panjwani of investment group CLSA, one of Beijing's main priorities is to break the country's reliance on coal. Currently, nearly two-thirds of the mainland's energy supply comes from coal, making the country one of the biggest greenhouse gas emitters in the world. As a result, he expects dependence on coal to decline from the present 70 per cent to 59 per cent by 2020. The contribution of greener sources - natural gas, and nuclear, wind and solar power - to the overall supply is forecast to rise from eight per cent to 15 per cent over the same period. At the same time, growth in the country's average annual energy consumption is tipped to fall from the 8.9 per cent of the past decade to 3.8 per cent over the next decade. The slowdown in energy consumption and change in energy mix could have an impact on equities, says Panjwani, CLSA's regional head of power research. Companies focused on renewable energy and technologies are likely to benefit while those involved with coal-related technologies are likely to be adversely affected. 'A lot of people wonder if the Chinese government is serious about curbing energy growth and protecting the environment,' says Panjwani. 'From our analysis of energy policy over recent years and the country's efforts to get to grips with environmental issues, we would say that China is very serious and will be successful.' As indication of the political will, Panjwani cites the latest environmental plan to evaluate the performance of local governments, in which 24 out of 47 indices are related to green energy. Promotion of local officials has also been linked to achievement of environmental goals set for their administrative region. At Bank Sarasin, Matthias Fawer of its sustainability research team notes that expansion of China's capacity in renewable energy continued at a brisk pace last year despite the challenging global environment. Excluding large hydro projects such as the Three Gorges Dam, renewable energy has grown at a faster than expected pace over the past few years and gained market share. 'The overall contribution is still low. However prospects are very positive and political will to support renewable energy sources is huge,' says Fawer. To develop its renewable energy sector, he says, mainland companies have forged joint ventures with foreign companies to gain access to equipment and manufacturers' production lines. There has also been a significant increase in the number of mainland companies carrying out their own research and production. Already half of the world's 10 largest makers of photovoltaic cells are Chinese, with Suntech Power leading the pack. Chinese manufacturers are making great advances in the wind turbine business, with equipment that often costs 25 per cent less than American rivals'. And three Chinese companies are now among the world's top 15 wind-farm operators - Longyuan Electric Power, Datang Corporation and Huaneng. Only one other Asian company, Eurus Energy Holding of Japan, makes the list. Among the Chinese listed companies that have built a significant presence in the global renewable energy sector are Suntech Power, Trina Solar, Xinjiang Goldwind Science and Technology, and China Highspeed Transmission, Fawer says. The rush into China's new energy sector has raised concerns that it could mirror the fate of the tech bubble in 2000, but Fawer says a similar meltdown is unlikely. 'So far, we believe that stock growth has been backed by real sales and business expansion. While the risk of a tech-like bubble cannot be ruled out completely, the scenario looks doubtful.' Beijing-based energy specialist Terry Chu concurs. 'The mainland renewable energy business is being propelled by sound fundamental drivers including high oil prices, environmental and climate change concerns,' he says, pointing to the government's commitment to close about 1,000 small coal-fired power plants by 2015 and switch to cleaner sources. A partner in accounting consultancy KPMG, Chu says the mainland's plan to develop a 'smart' grid would go a long way towards solving bottlenecks in the energy supply. This would allow power from different sources - from nuclear and hydro plants to solar and wind farms - to integrate seamlessly into the main electricity network, and make energy distribution more cost-effective for such suppliers. The State Grid Corporation is expected to invest 300 billion yuan each year over the next 10 years to develop the so-called smart grid. Analysts suggest that potential investors should look closely at the management experience and business operations of clean and new energy companies proposing initial public offerings. Those looking to ride on China's renewable energy boom should also check if companies are developing their own technology or working in partnership with overseas firms with more experience. Further consideration should be given to the type of new energy being produced and proximity to end-users. Connecting electricity to the national power grid has been one of the problems encountered by Chinese wind-power companies. 'Depending on the type of energy production and in different geographical areas, companies receive different subsidies and tax holidays, which can have an impact of the operation and sustainability of a company,' says an HSBC energy analyst. Investor interest in the mainland renewable energy sector has tended to be fickle, says Tuan Huynh, senior portfolio manager for Asia-Pacific at Deutsche Bank Private Wealth Management. 'We see some people holding their investment for the long term, but others tend to pull out because they see the sector as risky or lacking opportunity,' says Huynh. For the average investor, interest is often sparked by a new policy or major announcements such as China's stimulus measures at the onset of the global financial crisis and targets for lower carbon emissions during the Copenhagen climate change meeting. Despite the fluctuations, Deutsche Bank's view of the mainland's renewable energy sector remains positive. Consensus among analysts is that investments in renewable energy companies tend to suit a long-term strategy rather than quick profit-taking. Performance from Hong Kong-listed companies has been relatively lacklustre, including China Windpower and China Longyuan Power, the mainland's largest wind-power producer that raised HK$17.5 billion in an IPO in December last year. Since its Hong Kong listing, the stock has hovered around its HK$8.00 debut price. Datang and Huaneng have been in talks about floating their renewable-energy arms in a Hong Kong listing, but analysts remain cautious. CLSA analysts say Datang has huge coal reserves in Outer Mongolia to support its coal, chemical and gas projects, but 40 per cent of the resources have yet to be granted production permits They say Huaneng Power may benefit from movements in Chinese coal prices and electricity tariff hikes. But, on the downside, the company is operating in a highly regulated environment. Without control over the two most important profit determinants, tariffs and coal prices, the company remains at the mercy of government policy. At Deutsche Bank, Huynh says opportunities exist through direct investment through public listings, private equity opportunities and funds that include renewable energy components. While investors should keep in mind that much of the mainland growth in renewable energy is being driven by state subsidies, he does not doubt the Beijing government's commitment to developing the sector. 'China is moving in the right direction while juggling the wider needs of the economy with new energy targets and environmental targets,' he says.