Green energy indicates this kind of energy sources which have less negative impact to the environment than traditional energy sources like petroleum, natural gas and coal. The aim of green energy is creating power with less pollution. The demand and importance for green energy is increasing significantly as our traditional sources of energy is decreasing rapidly. So investment in green energy is a wise investment for the investors.
Investment in green energy
Before selecting the investable green energy project in china we must analyze the overall green energy market, demand and profit potentiality. The current situation and prospect of china green energy market are given below:
Since 2009 china has invested around U.S. $50 billion annually into its renewable energy sector. It has expected that china’s environmental protection industry will be top U.S. $317 billion.
For the development of green energy practices and industry, china is planning to introduce a favorable tax and financial policies. It will build a fund raising environment for this purpose.
Chinese green energy companies are in difficulties regarding financing their profitable project for capital markets. They largely depend on the government fund and subsidy.
China set a target to get above 11% total energy production by 2015.
For foreign companies and investors merger and acquisition is a favorable way to do business in green energy sector in china. China are looking and at capitalization of foreign technology and expertise (Lee, Lee and Lee, 2009, Marney and Tarbert, 2009).
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The green energy industry in china is very profit potential and growing. So investor may invest in any of the following 4 major green energy sectors.
Wind power sector
Solar power
Hydro power sector
Biogas
Solar power
In china solar energy is accounted for less than .01% of total domestic production. China is the major player in the international solar power both in terms of consumption and solar power’s absolute production. Under the golden sun program government of china provides subsidies on investment in this sector. China quadrupled a domestic installation goal for sun derived energy projects to 21 gigawatts by the year 2015 (Jeffs, 2010).
Wind power
China wind power is becoming the single largest driver for global wind power development with a total install wind power capacity of 44.5 gigawatts..
in china it has been observed that from 2004 to 2010 the compound annual growth rate of the wind energy sector was 134% this is equal to 13.8 gigawatts additional energy.
China government special attention and favor on this sector. Along with all other tax incentives the china government announced a tax rebate of 50% on self-manufacture electric power generated from wind power. The tariffs are set at RMB 0.51, RMB .54, RMB .58, RMB .61 for per kilowatt hour. Because of regulation it is difficult for direct foreign investment. But growing competition is allowing many foreign investors to involve in this sector through M&A and JVs.
Hydropower
According to market research china has total 213 gigawatts install hydropower at the end of year 2010. It is expected that chin’s installed hydropower capacity will reach at 380 gigawatts by the year of 2020. Foreign investors can invest in hydropower equipment production, construction material and operational support services, improvement of technology, and technology transmission (Jeffs, 2010).
Biogas
In china bio gas is considered to be an important source of renewable energy sources. China needs to build installed biogas digester for utilizing about 500 million of animal waste annually. State government of china has mandated the installation of biogas digester for farms with over 100 cattle, 10000 pigs, or 100000 chickens (Jeffs, 2010).
Geothermal
Investment in geothermal energy sector in china is also a lucrative for investors. China has huge geothermal resources. Recently 49.17 billion cubic meters of underground hot water resources have been identified in the central eastern china. In comparison to other green energy geothermal resources are safe, and stable. Geothermal energy emanates from inside the earth. Every day the earth’s core radiates energy which is equivalent to 100 billion barrels of oil. Current exploitation of china in geothermal energy is 500 million cubic meters. Though over the past years geothermal did not receive much focus because of extensive concentration on solar, wind and nuclear energy. But recently geothermal energy has bee given special attention and this sector is growing at the rate of 10% per year.
Investable project in china
There is a potential investable project of Hebie Shangyi Chaoligai 49.5 MW wind Farm Project. The host party of this project is China.
Description of the project activity
This project is located in Chaoligi Village, Shangyi country, Zhangjiakou City, Hebie Province. The proposed project is undertaken by Shangyi Country Chahaer Wind Power CO. Ltd. Based on the condition of the project site, this project is to install and operate 33 wind turbines, with capacity of 1500KW each. That means the total install capacity of the potential project is 49.5 MW. It is estimated that it will generate 117,018 MWh each year. This outcome will be sold to the North China Power Grind (NCPG) (Jeffs, 2010).
Comparable capacity or electricity generation addition provided by the NCPG, is dominated by the thermal power generation. This potential project will reduce of CO2 by the amount of approximately 104,836 tones per year. Following table represents the participants of the project:
Relevant Indicators for financial assessment
For the proposed project total install capacity will be 49.5MW. Net supplied power to the grid would be 117.018MWh. Static investment is estimated to be 440.43 million Yuan RMB. Estimated Equity would be 88 million Yuan RMB and annual O&M is expected to be 13.77 million Yuan RMB. Free cash flow would be 1.49 million Yuan RMB. The life time of the operation is expected to be 20 years and depreciation ratio is estimated to be 6.47%. The depreciation term is considered to be 15 years. Expected operational lifetime of this project would be 20 years. Interest rate on long-term loan would be 5.94%. Feed- in tariff including VAT is 0.54 RMB/kWh. Value added Tax rate is 8.5% and additional tax rate is expected to be 8%. Income tax rate is 25%. Assumed CER price is 10.5€/tCO2e (Stewart and Ehrbar, 1998, Jeffs, 2010).
A sensitivity analysis can be helpful to asses the financial uncertainty by identifying the cost associated with the project such as capital investment, costs, prices etc., and considering the changes of this cost.
For a wind farm project the factors that influences the IRR of total investment arises mainly from:-
Static total investment
Annual O&M cost
Cost associated with electricity generations,
Feed-in tariff.
The following graph is taken from online sources which have show the sensitivity analysis of the proposed project by considering the 10% deviation of the cost parameters
Conclusion
As a growing market for the green energy industry in china it is expected that investor can invest in china. It will help the investors to make profit as well as to contribute in the global environment. It is recommended that before investing in green energy sector, investor must analyze the overall market and proposed project more details. More importantly investors must take a closer look on the competitive environment and the feasibility of the proposed project.
References
Jeffs, R (2010) Green Energy: Sustainable Electrical Supply with Low Environmental Impact. New York. CRC Press.
Lee, A., Lee, J., & Lee, C. (2009).Financial analysis, planning & forecasting: theory and application. (2nd Ed.). New Jersey: World Scientific Publishing Co.
Marney, J. And Tarbert, H. (2011) Corporate Finance for Business, Oxford University Press.
Stewart, B. & Ehrbar, A. (1998) EVA: The Real Key to Creating Wealth, John Wiley & Sons.
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