Investing in Dragons and Tigers: The Allure of China and India

India

India’s population is 1.2 billion and is on track to surpass China by 2030. The Indian government set an ambitious policy goal of providing electric power to every Indian citizen by March 2012. Now, only a few months before the deadline, nearly 300 million Indians still don’t have access to electricity.

In a recent issue of the Economist, the magazine argued that India’s future still lies primarily in coal. There are seemingly endless reserves of coal, it is cheap, and with an estimated 8 percent annual average growth, India has an insatiable appetite for energy.

However in this case the esteemed British publication is shortsighted. India’s coal is of poor quality; state-owned monopolistic Coal India is riddled with inefficiencies; supply chain issues impair the extraction and distribution of coal; and alternative energy solutions will only get cheaper over time.

Civil unrest is also a major concern. Although India is a democracy, the government fears protest from citizens  who lack access to clean air ,water and arable land.

According to a study by the environmental research centers at Yale and Columbia, released during this year’s World Economic Forum in Davos, India now has the worst air pollution in the world, beating China, Pakistan, Nepal and Bangladesh. The report goes on to say that levels of particulate matter are nearly five times the threshold where they become unsafe for human beings.

Unfortunately, the situation is likely to get worse, before it gets better. According to a report by McKinsey and Co., carbon emissions in India will rise by about two-and-a-half times by 2030. Although the leadership has signaled that it does not care much for the Kyoto protocol or the Durban climate change conference, going so far as to say that India “will never be intimidated by any threat or pressure,” there is still likely going to be pressure from Indian citizens who would like to take deep breaths of fresh unpolluted air and drink clean water. Arable land area is declining as demand for food rises. The country’s future growth and prosperity depends on its human capital believing in the government and in a better tomorrow. For that to happen, the air and water need to get cleaner — fast. Burning more coal isn’t going to get them there.

Government policy

The Indian government has already made strong signals in the right direction. In 2009, the cabinet approved a plan that would increase its solar capacity from practically zero to 2 gigawatts in the next ten years. The cabinet approved an initial investment of $922 million with the total cost assessment through 2022 of $20 billion. That was a very ambitious goal at the time, considering that in 2009 the United States had only 9 gigawatts of solar installed, it shows the government’s commitment to large scale projects. 

Today, about two years later, India has only about 140 megawatts installed, but as the price of renewable energy drops, analysts still believe that the goal is achievable.

“Prices came down and suddenly things were possible that didn’t seem possible,” Tobia Engelmeier, managing director of Bridge to India, a research firm, told the New York Times. The increased production of Chinese panel makers such as Suntech Power have reduced the cost of silicon panels by about 35 percent to less than $1 a watt. Solar is now being sold to the grid at 16.5 cents per kwh, about twice the price of coal, but 27 percent lower than a year earlier. Interestingly, this price is lower that the government planned to pay. Solar project auctions have been oversubscribed and the price of solar power is plummeting, and eventually will reach grid parity.

Investment is also an important factor. A recent report by Bloomberg New Energy Finance shows that cleantech investment in India grew by 52 percent in 2011 to $10.3 billion, with $9.5 billion going to asset financing for utility-scale projects.

The trends are clear. India’s future is in renewable energy. The people want it, and the government needs it. 

China

Like India, China has over a billion people and it is growing rapidly. Although India might have uncrowned China as the country with the dirtiest air in the world, China is still a close fifth. In a 2010 report on pollution, Li Ganji, the vice minister of environmental protection said: “The overall environmental situation is still very grave.” 

To curtail this dirty trend and to fuel China’s 15 percent annual growth in electricity demand, China has turned aggressively towards renewables, and it doesn’t appear to be slowing down. 

China is now the world’s dominant producer of solar panels with nearly three-fifths of global production capacity. According to GTM Research, Chinese companies has become the benchmark for the price of solar, and China’s three biggest solar companies — Suntech, Yingli and Trina have all had explosive growth during 2011.

Yet for all of this dominance in production, China has less then five percent of globally installed photovoltaics, but this seems likely to change. China invested $34.6 billion in renewables during 2011 surpassing the United States as the world’s biggest spender on alternative energy. The Chinese government has stated that wind, solar and biomass will represent 8 percent of its electricity generation capacity by 2020. Over the past decade China’s installed wind capacity grew exponentially from just 0.3 gigawatts in 2000 to 42.3 gigawatts in 2010. China now accounts for 22 percent of the world’s total wind power capacity and is the world leader in wind energy. 

My Money Is on the East

China and India are leapfrogging the west on clean technology because they have a problem to solve — they must clean up their air, water and land; and they need electricity to fuel their tremendous growth. I believe that business can only thrive when solving a clear problem. If the incentives aren’t naturally there, governments have a hard time creating them.

I still believe that great technology and disruption will come out of the United States and Europe. But I’m betting that those technologies need to be sold to China and India. That is why I am now consulting the Aum Clean Energy Group, a fund whose goal is to commercialize clean technologies from around the globe in India and other Asian markets.

It’s telling that President Obama devoted his 2010 State of the Union speech to the United States losing its competitive edge to China. It’s happening right before our eyes, and that’s why I’m spending my money and time in the east.