China Renewable Energy – ShanXi

Interesting venture. Worth taking a look. The second / 3rd tier cities are heeding Central Govt's call to invest in clean tech infras play.

China Renewable Energy – ShanXi

(Waste to Energy)









Prepared by YGR Corp Pte. Ltd.
June 2009




IMPORTANT NOTICE:

All material and information contained in this document are the property of YGR Corp Pte Ltd and shall not be reproduced, copied or disclose without consent from authorized representative of YGR Corp Pte Ltd.




YGR Corp is a Singapore registered company, incorporated in 2004




Executive Summary

China’s demand for energy is projected to grow in line with continuous economic growth of greater than 8% year on year for the next 10 years. This puts a large demand on energy production and increasingly China is looking at renewable energy to meet this demand. China is already one of the top renewable energy producers in the world. The current five-year plan (under the National Development and Reform Commission NDRC) calls for renewable energy - wind, solar, biogas and hydro power to account for 10 percent of the country's energy consumption by 2010 (up from 7.5 percent in 2005, the last year of the last five-year plan) and 15 percent by 2020.This is to reduce the dependence on and the pollution from burning coal. China’s target is to double Renewable Energy in the next 5 years to 205,875MW by 2012.


The plan states: "Developing and utilizing renewable energy shall be an important part of building a new socialist countryside," It also calls for the development of 50 entire counties including Shanxi province to be built by 2010 that get 50 percent of household energy from renewable sources.

In March 2008, NDRC 11th Renewable Energy 5 Year Development Plan set a target to achieve 5,500MW of Biomass produced electricity. In line with this directive China has enacted laws and economic incentives to encourage the use of biogas as a source of renewable energy, especially in the rural areas where there is a abundant supply of animal and agricultural waste as the feed source of biogas production.

Taking advantage of the increased demand for renewable energy in the rural areas, we have laid the foundation to design, build and operate a total of 7 biomass plants in the Shan Xi region. Our projections show a positive cash flow in the first year of operation (after construction) and a payback of after the 7th year based on worse case basis with a revised goal to be cash flow positive on the 5th year. At this time, work on securing support for the project has already started on land use, environmental and investment permits as well as securing the input (animal waste as feedstock) and off takes (electricity and fertilizer). This project meets the needs of the Chinese consumer, government and environmental demands for energy production, producing a consistent stream of revenue while enjoying the economic incentives and security offered by the Chinese government.

A 5year plan for the development of the venture is in 2 phases:

1. Year1 to Year 2:
1. Design, Build and Operate 1 biomass plant of 15MW capacity
2. Begin discussions with local government authorities ShanXi to identify and qualify 6 biomass plants, each with a capacity of 15MW. We want to have an execution plan to hit this additional 90MW in order to bring generate interest in the market.
2. Year 3 to Year 5:
1. Build and Operate 7 biomass plants identified in the previous 24 month period
2. Scale up the deployment by identifying other prefectures in ShanXi and beyond ShanXi province to build additional biomass plants with a total capacity of 200MW



When this is completed, we will be a significant player in the biomass renewable energy in North Eastern China. Going further, we have the option to further expand beyond these prefectures in Shanxi to other neighboring prefectures (within Shan Xi) and other provinces(eg Inner Mongolia, Sichuan, GuangXi,HeiLongJiang) that have a strong agriculture and diary farm base. There is a large upside in leveraging on the biomass plants to build up other forms of renewable energy in these provinces like biogas, biofuels, solar, wind and waste recycling management, all within areas of great strategic interest of the Chinese government, especially where they impact the lives of the rural population. We have the opportunity to be the largest renewable energy provider in China.

Business Overview

The planned biomass plants are located in Shan Xi, a north-western province of the People's Republic of China, Shanxi Province is located to the west of Taihang Mountain and east of the Yellow River. Shanxi neighbors on Hebei, Henan, Shaanxi and Inner Mongolia & Autonomous Region. This region holds the majority of China’s dairy farms. Shanxi occupies an area of 156,000 square kilometers (about 60,000 square miles) and has a population of over 32 million, including its minority ethnic population. Its capital is Taiyuan City. Many of China’s large diary farms and more than 13 Million diary cows are found in Shanxi and the surrounding province, providing ample supply of feedstock (waste) to power the biomass plant.

The products generating revenue stream from the biogas plants are:

* Electricity to be supplied to the provincial electric grid
* Carbon Emission offset credits
* Raw material for fertilizer and compost



Using the latest in gasification technology, heat is reused by the biomass plant and majority of the electricity will be sold to the local provincial grid. China’s 2006 renewable energy law provides for a premium of 0.25Yuan per kWh above the prevalent price paid to electricity providers.

With China as a signatory to the Kyoto Protocol in 1998 and an active participant of carbon emission offset via the Clean Development Mechanism [CDM], renewable energy especially biogas is advantages as the methane produced by the diary farms are rated at 21 times CO2 emissions, making the offset credits larger in value. By trading Certified Emission Reductions, China has developed an additional revenue stream to fund local emission reduction projects. According to the World Bank, China obtained 62.5 percent of the total UN-certified carbon credits in 2006. This amounted to US$3 billion

Summary of Financials

1. Operational profits over 10 years (15MW capacity and taking 1 year to construct and be ready for production) will reach U$23M with a revenue of U$65M
2. The most pessimistic scenario is to reach cash flow positive at 7th year but we are confident of bringing this down by 1 to 1.5 years to between the 5th and 6th year with more detailed cost analysis.















Joint Venture Structure and local partner role

The structure of the proposed project is based on:

1. Joint venture between He Qing Agricultural (a China registered company) and Investor, with He Qing Agriculture holding a majority share of 51%. The exact majority share is determined concurrent with the JV agreement discussions.
2. JV is registered in Hong Kong with its own board and financial reporting and governance.



He Qing Agricultural is the local Chinese partner, committed to these tasks:

1. Provide 100 acres 3rd Class industrial land (currently the cost of land is RMB1,230 Y/m3 in the Shanxi province). This land is available at no charge to the JV for 30-year use.
2. To secure and procure waste effluent (feedstock), agricultural waste products, compliance with local government laws for design, build and environmental approval, to secure all revenue streams: electric feed in tariffs, fertilizer off take and to register and approval for carbon credits
3. Expansion of additional biogas and incineration plants at other sites – to secure land for each biogas and incineration plant and feed stock, right to operate, obtain all local Government approvals and business support (E.g.: electric tariffs, water etc)
4. Secure renewable energy investment incentives for the JV company in the form of:
* favorable rates for any loan by JV
* lower value add tax (13% vs. 17%) and income tax (15% vs. 33%)
* direct subsidies from local/central government for renewable energy investments by foreign investors
































Role of Investor and Funding milestones

There are 2 partners in this venture: Investor and He Qing Agriculture Limited. The investor shall:

1. Provide the initial equity of U$8M to be used in combination with bank loan of U$13M a start up the venture. The proceeds shall be used for:
1. Design, build and operate the first biomass biogas plant, including but not limited to: manpower, consultancy, equipment, administrative charges for the necessary permits
2. Securing the feedstock and the transportation to the plant
3. The investor’s risk is mitigated with the following safeguards:
1. No substantial sum is committed to the procurement of assets until relevant local and central government bodies have approved all permits. These include: transfer of land lease to the JV, securing the long term commitment of the feedstock,
2. Explicit support and commitment from the local authorities on availability of attractive loans, direct incentives for renewable energy and preferential tariffs for in take as well as the long term expansion of more biogas plants in the province
2. Raise another U$4M to build and operate additional 2 biomass plants. This expansion phase also take 24 months. This will bring the total number of plants to 3, which is the projected capacity to handle most of the animal and agricultural waste in the province. The building of the 3rd and biomass plant (and subsequent 3 plants) is conditional upon:
1. Financial success of the 1st pilot plant. In general this means that the plant has proven itself to be viable in the logistics and provision of feedstock, the revenue streams to be reliable and predictable and the general investment climate to renewable energy is conducive to expanding the project
2. Availability of financiers and market capital resources to raise the required amount. This amount may change due to new technology that may be more cost effective, availability of feedstock or land available for lease as well as the ongoing relationship with the local provincial authorities.
3. Once the 3rd biomass plant in the province has been proven successful (financially successful and general investment climate is conductive) the investor shall (together with He Qing) proceed to raise the 3rd round, U$63M to build and operate 3 biomass plants of equal capacity. The phase will take up to 24 months. This will bring the total number of plants to 6. Again, this phase will start to kick in only if:
1. Financial success of the previous 3 biomass plants, that they generate profits and the long-term outlook for such waste to energy projects are promising in the long term and over a larger area.
2. Funds are available to finance the 6 combined plants.


















Exit

He Qing intends to exit its shareholding either by a Public Offering or a vendor sale of its share subject to the regulations that govern sale of Chinese owned stakes in a JV renewable energy company. The partner investor will have the first right subject to agreements on price and terms. A Public Offering is expected to offer a larger quantum but will take a longer period (we estimate 3 to 5 years depending on market conditions and financial success of the project at that time) and requires more resources to be deployed. He Qing, as a partner will take into account the desires and needs of the investor when approaching the issue of divesting its stake holding. He Qing will also consider, with the investor to fully divest the JV should this option become attractive and available.

Current Situation

He Qing Agriculture Company Ltd has actively engaged the local and provincial Chinese government and authorities for the last 6 months and has achieved the following:

* Identified 100 acres of land for the first biogas plant over a 30-year lease. This site is:
o About 1 km off main highway (4 carriage ways) via good 2-lane asphalt road.
o 6km away from the provincial electric grid distribution infrastructure.
* Agreed off take of fertilizer for He Qing plantation (or to other buyers)
* Support from local and provincial investment officials who want to start this project to be the first to implement a project under the NDRC “Renewal Energy Program and Policy”. He Qing has started official discussions with the local authorities on their commitment and support for biogas projects.



The immediate task is to form a legal JV entity (registered in Hong Kong) in order to engage the local provincial authorities in getting formal support as well as to assign the 100-acre land to the JV. With this, the JV can secure the feedstock via agreements with the various farms with support from the local authorities. At the same time, we can start to submit building plans for approvals and engage the investment divisions for incentives and loans.


Next Steps

We propose the following timelines and milestones:

* Immediate (1-4 weeks)
o Sign Non Disclosure Agreement and document due diligence scope of work for both parties. This sets the agenda for the next 8 weeks of discussions and agreements.
o Meet with local and provincial party officials, He Qing and site visit in Shanxi as part of due diligence to investigate the permits for land use, environmental issues, structure of government incentives as well as confirm commitments of local authorities
o Formalize partnership with MOU
* Next (4-7 weeks):
o Project funding commitment, project governance structure and responsibilities
o Complete and sign project agreements and commitments from both parties
o Incorporate legal JV entity (structure, accounting and financials) in Hong Kong











Detailed Summary of Financial Sizing



Per Plant Revenue (Yearly):

1. Electricity:
1. U$6,500,000
2. Carbon credit:
1. U$700,000 CERs at U$10/ CER from Biomass.
3. Fertilizer:
1. This is not used for our financial model as the value is uncertain at this time
4. Total Revenue Yearly: U$6.48M




Per Plant Cost (Yearly):

1. Feedstock and Logistic Cost: U$2,000,000. This is estimated to be very conservative.
2. Salary and Benefits for manpower = U$302,000
3. Support and Maintenance: U$478,000
4. Total Yearly Recurrent: U$2,780,000

Amortization, business tax etc not included.


Dependencies for the profit and revenue streams:

1. Low cost of feedstock and no escalation of these prices.
2. Able to maintain electrical tariffs for the electricity feed in
3. Government provides infrastructure to connect to grid (8km away)
4. Necessary government approvals and permits to operate the plant
5. The carbon offset credits can be justified
6. The financing cost of capital is not included.






















Diagram of a typical Biomass plant


Your browser may not support display of this image.