GLOBAL INVESTOR 3.06 Basics — 26 Use of New Energy by Electric Utilities,” covering new energies including wind, solar, biomass, small hydro <strong>and</strong> geothermal. It is also noted that many Asian governments are starting to provide incentives <strong>for</strong> alternative energy (see table 1). China’s renewable energy potential China is both the world’s second largest consumer of energy <strong>and</strong> the second biggest emitter of greenhouses gases, behind the USA. The International Energy Agency claims that, by 2020, China will be consuming more energy than the USA today, <strong>and</strong> its GHG emissions will have more than doubled. Figure 4 shows China’s renewable energy capacity, based on Credit Suisse Investment <strong>Banking</strong> estimates. In the 11th Five Year Plan (FYP), the Chinese government increased its commitment to promoting renewable energy by including two measures enhancing energy efficiency <strong>and</strong> promoting the use of renewable energy. The National Development <strong>and</strong> Re<strong>for</strong>m Commission (NDRC) asserted that up to RMB 1.5 trillion (USD 184 <strong>billion</strong>) would be invested in renewable energy by 2020. Feasibility <strong>and</strong> technology in China, Japan <strong>and</strong> Asia We believe China’s renewables sector is likely to display rapid growth in the areas of solar energy, wind power <strong>and</strong> biomass. However, there are also opportunities in the electricity sector, as China is estimated to require over 30 GW of new generating capacity every year to sustain its booming economy <strong>and</strong> growing population. Dem<strong>and</strong> from the residential <strong>and</strong> service sectors continues to surge as living st<strong>and</strong>ards improve, with industry accounting <strong>for</strong> around 75% of electricity consumption. Combined heat <strong>and</strong> power (CHP) can make a major contribution to energy efficiency in China <strong>and</strong> help meet its soaring energy dem<strong>and</strong>. This will create a huge potential market in China <strong>for</strong> <strong>for</strong>eign equipment manufacturers, system integrators <strong>and</strong> operators, as well as investors. But the opportunity is now, as major new hydroelectric power <strong>and</strong> other power schemes come on stream toward the end of the decade, <strong>and</strong> then the energy saving potential of CHP will no longer be an issue. Thus, the count of beneficiaries can be exp<strong>and</strong>ed to include both <strong>for</strong>eign <strong>and</strong> domestic electricity power generation companies. As China tackles its environmental woes, other potential beneficiaries will include Japanese providers of environmental services <strong>and</strong> equipment. The rationale is that Japan will be well positioned to provide China with the world-class expertise it needs, given that Japan faced a similar environmental pollution problem in the 1970s. Companies that can potentially benefit from new environmental regulations in China include Mitsui & Co. (BUY). As one of the largest trading firms in Japan, Mitsui & Co. trades GHG emission credits based on the Kyoto Protocol <strong>and</strong> captures business opportunities from CDM projects, which help developing countries fund technology transfers to reduce their GHG emissions. A number of Asian companies with renewable energy policies, technologies <strong>and</strong> solutions are also well positioned to benefit from the coming “renewable energy revolution,” such as Shanghai Electric (BUY) – electricity/ wind; Sharp (HOLD); Kyocera (BUY) – solar; Kuala Lumpur Kepong (HOLD) – biomass; Toyota Motor (BUY); <strong>and</strong> Honda Motor (HOLD) – hybrid cars. Table 3 Figure 4 Source: NRDC, Credit Suisse estimates Generation of renewable energy in China China’s renewable energy will reach 530 <strong>million</strong> tons of st<strong>and</strong>ard coal equivalent (mn tce) by 2020, according to CSIB estimates. Renewable energy is likely to be the next booming sector. in <strong>million</strong> tons 600 500 400 300 200 100 0 2004 2005 2006 2007 2008 2009 2010 Non-hydro renewable energy 2011 2012 2013 Hydro 2014 Source: EIA, IEA, IGA, AWEA Leaders in renewable electricity Icel<strong>and</strong> is a world leader in renewable energy, with over 99% of the country’s electricity derived from renewable sources. A country’s success rate of using renewables is based on geographical viability. Hydro Geothermal Wind PV Solar* Canada USA Germany Japan USA Philippines USA Germany Brazil Italy Spain USA China Mexico Denmark Australia Russia Indonesia India Netherl<strong>and</strong>s * 2004 figures 2015 2016 2017 2018 2019 2020 1 Daniel Gilbert, “If only gay sex caused global warming”, Los Angeles Times, July 2, 2006 2 NR: non-rated. Note that we do not rate these stocks <strong>and</strong> make no recommendations on them as investments.
GLOBAL INVESTOR 3.06 Basics — 27 Diversification benefits of REITs As investors become increasingly aware of risk, REITs are becoming attractive again. REITs have a relatively low correlation to bonds <strong>and</strong> equities <strong>and</strong> can thus enhance the risk-return characteristics of investment portfolios. Although rising interest rates have a negative impact on REITs, we still see upside potential <strong>for</strong> REITs, especially in those markets with strong fundamentals. Zoltan Szelyes, Global Real Estate Analyst
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