“Achieving carbon neutrality may need trillions of yuan in investment and decades of continuous effort,” Zhang Lei, founder of Hillhouse Capital said during a speech in mid-March (in Chinese).
Zhang was speaking at the China Development Forum in Beijing, an event attended by high-level officials from China and abroad. It’s a pretty big deal, and the first major international conference that’s held after the conclusion of the Two Sessions, China’s biggest annual political meeting.
“…As a VC/PE organization, we have to be involved in something this big,” the investor and entrepreneur said, referring to China’s push to cut carbon emissions—a major theme at the event.
Hillhouse Capital, the venture firm Zhang founded in 2005, has invested in some of China’s biggest tech firms, including JD.com, Tencent, and Meituan. It’s the kind of investor most startups dream of attracting.
Chinese investment in carbon-reducing technologies is set to explode. Over the next 40 years, Goldman Sachs expects China to invest $16 trillion to reach the goal of carbon neutrality set by President Xi Jinping in September. So where is all this money going to come from?
Typically, the Chinese government has been the largest driver of cleantech investment. For years, it has implemented massive subsidy systems for clean energy generation, including solar and wind, to drive adoption of these power sources.
As the government pushes carbon neutrality, venture capital firms are increasingly setting up cleantech-focused funds to back novel companies trying to solve the emissions puzzle.
It’s a common pattern—the state goes in first, and the market follows. It works, but at a cost, leading to wasteful investment as investors pile into the latest hot industry.
Government takes the driver’s seat
In the past, China’s government has put its own money behind promising low-carbon industries. The investments act as a seal of approval, leading to a flood of private funding.
In 2016, China’s investments in renewable energy and energy efficiency reached $167 billion. This accounted for 55% of its total spending on energy, higher than the global average of 33%, according to a report by researchers at the Energy Foundation China and the University of Maryland.
Last year, the country’s first public fund dedicated to investing in green projects and companies raised RMB 88.5 billion ($13.84 billion). In July, China’s finance and environment ministries set up the fund, which aims to support the transformation of the country’s economy and increase the role of the market in fighting emissions, though it has not yet formally launched.
The planned National Green Development Fund’s 26 mostly state investors include some of China’s biggest banks, companies, and several provincial governments. The fund is preparing to start business rapidly. It is setting up an investment management unit and plans on making a “sizable” number of hires as it prepares to launch later this year, AsianInvestor reported, citing sources close to the matter.
China’s banks have typically been major financiers of cleantech projects, specifically those involving energy generation, energy efficiency, and waste management.
One example is China Industrial Bank (CIB). According to a report by German environmental consultancy Adelphi, CIB was the first bank in China to “embrace sustainable development and green finance.” The company has focused on financing renewables, clean transportation, as well as water and wastewater management.
In 2017, the bank’s green financing portfolio reached more than RMB 674 billion.
Venture capital funds have taken note. Globally, cleantech startups raised a record $17 billion in venture capital funding in 2020, with the US and China making up the bulk of that total, according to a report by BloombergNEF.
“The majority of this investment was in late-stage startups from a variety of new climate-tech funds, resident clean-tech funds and corporate venture capitalists,” the report said.
The bulk of cleantech investments in China during 2020 were focused on the transportation sector, according to PwC. “One reason for the significant imbalance here is the Chinese automotive sector is relatively young, so much of the investment is made in entrepreneurial firms,” the company said in a recent report.
It ain’t pretty, but it works
China’s method of funding has built the world’s largest electric vehicle and solar energy markets.
For just over two decades, large portions of the government’s cleantech funds were directed at the clean energy sector, driving down the price of solar panels globally and making China a world leader in panel production. Now, photovoltaic cells are seen more as a commodity than a technology.
The government made similar moves with electric vehicles, a cornerstone of the country’s low-carbon economy. China was late in producing gas-driven cars, putting it behind the US, Japan, and Germany. In 2009, China introduced subsidies for EVs in the hope that these vehicles could take the lead in the next generation of cars.
After spending RMB 60 billion in subsidies over ten years, China now has the largest EV market out of any country in the world.
But this method of investment comes at a cost: It can be inefficient and wasteful.
In the renewables sector, the state hasn’t always been able to keep up with the rate at which the market has expanded. The government has a backlog of missed subsidy payments. The deficit is huge—reaching RMB 328 billion at the end of 2020, according to Credit Suisse.
The problem stems from China’s tendency to promote and then regulate. The state relaxes regulation to encourage innovation, the market booms, and the officials impose regulation and pull back on support.
As a result of subsidies, China’s renewable energy capacity eclipses actual demand for the power that these sources produce. The government is now encouraging these firms to fend for themselves, as the cost of renewable energy reaches parity with fossil fuels in some areas in China.
In China’s EV sector, preferential treatment resulted in overinvestment and ill-spent funding. Government support for the sector triggered a rush into the industry. Investors threw money at entrepreneurs with little to no experience in the auto sector. They lost billions of yuan after the bubble burst.
At the height of the bubble, there were nearly 500 EV companies in China. Now, just a few survive, including Nio, Li Auto, Xpeng.
Rise of the cleantech VC
In September, China’s President Xi Jinping laid out plans to reach peak carbon emissions by 2030 and carbon neutrality by 2060.
The speech served as a call to arms, and venture capital firms and corporate VCs have already set up several multi-billion dollar cleantech-focused funds, pointing to the start of a possible rush into the sector.
- In March, cleantech company Envision Group and venture capital firm Sequoia Capital China set up a carbon neutrality tech fund worth RMB 10 billion. “The fund will cooperate with enterprises and governments to create a carbon-neutral technology innovation ecosystem,” the companies said in a statement.
- Also in March, GCL Energy Technology and CICC Capital, an arm of China Capital Investment Group, launched a RMB 10 billion fund. The fund will focus on decarbonizing the auto sector and will raise around RMB 4 billion in its first phase, China Daily reported on March 31.
These amounts are small compared to the government’s promised RMB 88.5 billion green fund, but represent a significant push from the private sector to heed to government’s calls to invest in the sector.
Zhang Lei’s Hillhouse Capital is also pushing into the cleantech industry. Earlier, this month, the company led a RMB 50 million funding round for carbon emissions management firm Carbonstop, in what could be the beginning of a new wave of founding rounds for cleantech startups in China.
Hillhouse has a significant number of cleantech companies in its portfolio. These firms include Longji Solar, solar power station operator Xinyi Energy, and battery maker CATL.
Another venture investor is Tsing Capital. The firm has backed a slew of startups that have become household names in cleantech, including drone maker eHang, China Hydro, and US-based Lucid Motors.
These government and private funds represent just a drop in the ocean when compared to what China is going to need to spend to meaningfully reduce its emissions. But given the amount of attention cleantech in China has received in the past few months, it’s likely just the beginning.