Here’s a statistic that probably keeps China’s leaders up at night: last year, China became more dependent on imported oil than the United States.
In the past decade, China has doubled the amount of oil it consumes, but only marginally raised its own oil production. The result is that China now depends on foreign oil for 55pc of its needs.
And the future is not looking rosy. Even though 14m new cars are hitting the roads each year, only 5pc of Chinese are car owners.
There are more than 1bn people still to learn to drive, and even if you assume that only a minority of them will actually buy a car, China’s thirst for petrol is looking ominous. We believe the number of cars on the road is going to nearly triple to 185m by 2020.
Electric cars are one solution, although Chinese companies have had the same difficulties with the technology that have troubled car companies in the West, and biofuels might be another. In Brazil, ethanol is already providing more than half of all motor fuel.
In the US, ethanol is powering almost 9pc of cars, up from 3pc in 2005. In fact, American petrol consumption has shrunk in that period by 121,000 barrels a day.
So far, however, ethanol has not been much used in China, which needs corn to feed people, not to convert into fuel. China is already a net importer of food and does not have any grain to spare. Grain consumption is rising by 2pc each year, and there are questions over whether China will be able to keep meeting its domestic needs, as more and more grain-fed meat becomes part of the national diet.
But what it does have is agricultural waste, almost 1bn tons a year, most of which is currently burned. And the rubbish collected in its cities each year is routinely put in landfill. That could be used to make ethanol and one of our key investments is TMO Renewables, a company in the UK which has patents on turning waste into ethanol.
TMO has signed deals with two giant state-owned companies, COFCO, the country’s largest food importer and a leading food manufacturer, and CNOOC, the China National Offshore Oil Corporation, to provide the technology for a full-scale ethanol plant. If its technology is rolled out nationwide, we think China will be able to meet all of its petrol needs.
Then we have China’s overwhelming reliance on burning coal. It is an often-quoted figure that China depends on coal for 80pc of its electricity needs. But actually the country is making some serious inroads in reducing this dependency.
While countries in the West have scaled back their support for renewable power in the face of the economic downturn, China has accelerated its investment by giving its electricity companies aggressive targets and authorising lending from state-owned banks to support them.
China has been the world’s number one producer of hydropower for some time, but last year it became the leader in wind power, too. It has also now raised its target for solar power to 50GW, a capacity three times as large as the next biggest country at present, Germany.
Precise details of how it will achieve this are only starting to emerge now, but Chinese solar panel manufacturers, like Renesola, one of our early investments, will be the primary beneficiaries.
The challenge then swiftly becomes what to do with all the electricity produced by renewables, which requires significant improvements to the country’s grid. It is no secret that a quarter of China’s new wind turbines, in terms of capacity, are still not connected to the grid and there are difficulties in transmitting power from the windy north to the centre and south of the country. Storage capacity will also be essential to smooth out the fluctuations in renewable generation, and one of the companies we invested in, Ilika, is working on a new thin film battery technology that is cheaper, safer and more durable. It will eventually appear in a variety of applications, but first in electronics and electric bikes.
Over the past five years, China has shown it can match the West when it comes to adopting well-established clean energy technologies by setting firm and specific targets and providing an ample supply of bank financing.
Over the next five years, China will have to start promoting technologies that have not been widely commercialised, but which the country, because of its thirst for energy, will have no choice but to invest in.
Boosting the scale and efficiency of its research and development spending is already a major concern for China’s leaders, and vital to the country’s long-term competitiveness. To fast-track that innovation, China is now trying to build relationships with research labs around the world. And that should provide some interesting commercial opportunities for companies in the West.