Carbon Pledge increases inventories of wind and solar energy in China

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Chinese renewable energy stocks recently soared, with investors believing the country’s drive to become carbon neutral will fuel heavy investments in wind and solar farms.

Big moves in Chinese stocks are often tied to government plans and this is the latest example, as investors try to anticipate the winners of policies included in the country’s next five-year plan.

In the month to October 22, Daqo New Energy, listed in New York Corp.

surged 59.9%, while Hong Kong-listed Xinyi Solar Holdings Ltd.

and Xinjiang Goldwind Science and Technology Co.

002202 2.23%

, grew by 17% and 31.5% respectively. Daqo New Energy manufactures polysilicon, a key raw material for solar panels, while Xinyi Solar 968 -0.15%

manufactures solar glass. Xinjiang Goldwind is China’s largest wind turbine manufacturer.

A wind index of 40 renewable and clean energy companies whose shares trade in Shanghai or Shenzhen gained nearly 5% in the past month, compared with a 2.2% increase in the larger CSI 300 index. .

Last month, President Xi Jinping told the United Nations that China’s carbon emissions will peak in 10 years and that it will strive to achieve carbon neutrality by 2060. Becoming carbon neutral means that China’s emissions of this key greenhouse gas will be zero, once offsetting measures such as tree planting are taken into account. Achieving this will require reducing emissions through the use of cleaner energy sources and carbon capture technologies.

This commitment has fueled the hope that green energy will be privileged in the next five-year plan. Leaders of the ruling Communist Party will meet later this month to clarify details of this medium-term economic plan, which will cover 2021 to 2025.

“The speech sent a very strong message and renewable energy companies are the main beneficiaries,” said Patricia Yeung, research analyst at DBS Group. “But we have no idea how they’re going to do it. It is a major uncertainty. “

In addition, Ms. Yeung said solar stocks are already trading at very high levels, with the stock prices of companies such as Xinyi Solar already above 20 times expected earnings.

The long-term goals are bold for a country that is the world’s largest emitter of carbon dioxide. Citigroup analysts estimate that China would need to use more than 12 times as much solar power – and more than seven times as much wind power – by 2060 to become carbon neutral, requiring an investment of 6,200 billion dollars over 40 years.

Analysts call it a golden opportunity for clean energy and say electricity produced from coal, China’s main fuel source, will need to shrink by nearly three-quarters.

Yet Evan Li, HSBC‘s

head of research on utilities and conglomerates in Asia, said the market may have gotten ahead of pricing the likely financial benefits.

Li said investors were encouraged by reports of aggressive government targets, which may require an increase in national wind and solar capacity of 100 gigawatts per year over the next five years. But he said the market could be faced with reality as early as November, when details are likely to emerge.

“The 2030 and 2060 goals will support the growth of wind and solar power,” Li said, referring to target dates for peaks in emissions and carbon neutrality. “But the significant and immediate change in the next two to three years remains in question and will depend on the development of the network infrastructure.”

While China has the resources to aggressively expand its alternative power generation capacity, he said, it faces a series of short-term challenges. These include connecting wind and solar companies to the grid and minimizing waste, storing electricity and transmitting it from remote regions where most alternative energies are generated to energy-intensive industrial and urban poles of the region. China.

Adding 100 gigawatts per year of new green energy would be a step forward. Last year, China added 26 gigawatts of wind power and 30 gigawatts of solar power, bringing generation capacity to 210 gigawatts and 204 gigawatts, respectively, according to data from the National Energy Administration.

Hundreds of wind power companies recently proposed at a conference in Beijing that China should add more than 50 gigawatts per year to wind power until 2025.

As tensions run high, Washington and Beijing have pushed to decouple technology and commerce. But US financial firms, including JPMorgan and Goldman Sachs, are investing in China and increasing their workforce. Composite Photo: Cristal Tai

Dennis Ip, an analyst at Daiwa Capital Markets in Hong Kong, said the solar sector has a comparative advantage as its costs have fallen faster than those of wind and wind farms are taking longer to build.

He said that there would also likely be another round of mergers between manufacturers of solar components and that only the leaders in each sub-segment are expected to survive. This would benefit investors by reducing competition and making those market niches less volatile, he said.

Write to Chong Koh Ping at chong.kohping@wsj.com

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