Heating May 2008 - BRG Building Solutions · 2012-08-24 · BRG Consult Newsletter Heating May 2008 Czech Republic: Share of Renewables Down to 4.7% in 2007 The share of energy from

Bosnia India's EUROTHERM HEMA to Build €20 Million Radiator Plant in BosniaCzech Republic Share of Renewables Down to 4.7% in 2007Denmark NIBE INDUSTRIER AB acquires Danish company TERMATECH A/SEurope MASCO CORPORATION Announces Sale of THE HEATING GROUPFrance GAZ DE FRANCE-SUEZ Merger Consolidates Renewables WorkPoland STELMET Plans to Begin Wood Pellet Production by the end of JuneRussia NIBE Increases its Holding in Russian Company CJSC EVANSwitzerland Swiss NOK Increases Stake in Wood heating ContractorUK Biomass and CHP FinancingUK DANFOSS Acquires British Heat Pump CompanyUK HAMWORTHY Acquired by ATLANTICVietnam BOSCH Opens Subsidiary in VietnamWorld Oil Price May Go Up to $250

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Heating May 2008

International Market Strategy

International strategic market research and consultancy on building product and related markets

China The Future of the Gas Industry In China

UK Renewable Energy In Scotland And Planning

Monthly Special

BRG Consult NewsletterHeating May 2008

Bosnia: India's EUROTHERM HEMA to Build €20 Million RadiatorPlant in BosniaIndia-based EUROTHERM HEMA Radiators India Ltd. has expressed interest in investing up to €20million ($32 million) to build a factory for radiators and heating devices in Bosnia's Serb Republic, theRepublic's cabinet said on Wednesday.

The factory would employ some 400 and would be located near the motorway connecting the SerbRepublic's administrative centre Banja Luka and the Bosnian-Croatian border in the north, thegovernment said in a statement after a meeting between the Serb Republic Prime Minister MiloradDodik and representatives of several Indian companies.

The statement said the government agreed to secure 50,000 m2 of land for the factory, after which thecompany would start preparations for the construction works. The factory will initially export all of itsproduction.

EUROTHERM HEMA Radiators India Ltd. is a joint venture between Germany-based EUROTHERM,part of global industrial automation, transportation and controls group INVENSYS, and Indianmachine builder HEMA Engineering. It manufactures and supplies heating ovens, bath radiators,steel panel radiators and other accessories used for domestic heating purposes.

The Serb Republic is one of the two autonomous parts forming war-divided Bosnia. The other is theMuslim-Croat Federation.

Source: SeeNews

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Czech Republic: Share of Renewables Down to 4.7% in 2007The share of energy from renewable sources in gross power consumption fell by two percentagepoints year-on-year to 4.7% in the Czech Republic last year, according to preliminary statistics on theIndustry and Trade Ministry website.

Lower production of hydroelectric power plants is the reason, the statistics said.

In 2004, when the Czech Republic joined the EU, it pledged to raise the share of renewable energy ingross power consumption to 8% by 2010. Moreover, the EC wants the share to grow to 13% in theCzech Republic by 2020.

As many as 3.41 TWh, a drop of 3% year-on-year, were produced in the country in 2007 making up3.9% of total gross power production. About three fifths of the green energy were produced byhydroelectric power plants. Last year, they produced 2.09 TWh, a year-on-year fall of 18% due toworse hydrological conditions. Mainly large plants supplied a lower amount of power to the grid.

Power production from biomass rose by a third to 1 TWh in 2007. Over 600,000 tonnes of biomasswere used for power production last year.

Wind power plant production was 2.5 times higher last year, but the share of wind power plants inrenewable energy production is insignificant. It is similar with solar power plants.

Source: www.praguemonitor.com

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Denmark: NIBE INDUSTRIER AB acquires Danish companyTERMATECH A/SSwedish heating systems, products and components manufacturer NIBE INDUSTRIER AB saidrecently that it has agreed to acquire the Danish company TERMATECH A/S for an undisclosed sum.

TERMATECH, based in Malling, Denmark, sells flues, fittings and other components for wood-burningstoves to specialist stores in Denmark and Germany. The company has 10 employees and an annualturnover of DKK 45 million.

NIBE also said that it has signed an option agreement to acquire the Danish wood burning sheetmetal stoves maker LOTUS Heating Systems A/S. The company is currently reorganising itsoperations and NIBE plans to complete the acquisition in 2010.

LOTUS Heating Systems is based in Langeskov, Denmark and has an annual turnover of DKK 80million.

NIBE, headquartered in Markaryd, Sweden, is a leading European manufacturer of wood burningstoves, domestic heating products and electrical heating applications. The group has 5,400employees in 15 countries and reported sales of SEK 5.4 billion in 2007.

Source: Nordic Business Report

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Europe: MASCO CORPORATION Announces Sale of THEHEATING GROUPMASCO CORPORATION (MAS) announced today that it has sold its European based THE HEATINGGROUP for a price of approximately $155 million to an affiliate of VAESSEN INDUSTRIES, headedby Jos Vaessen. THE HEATING GROUP, which has been included in discontinued operations in thefirst quarter of 2008, consists of VASCO, a leading manufacturer of designer radiators, andBRUGMAN INTERNATIONAL and SUPERIA RADIATOREND, leading manufacturers of steel panelradiators. Combined 2007 net sales of THE HEATING GROUP were approximately $177 million.

"We believe this transaction will be beneficial to all involved. It will enable MASCO to concentrate onbusinesses that are core to our growth strategies and should provide THE HEATING GROUP withadditional growth opportunities," said Tim Wadhams, MASCO President and Chief Executive Officer.

Jos Vaessen, President of VAESSEN INDUSTRIES, commented: "Product innovation, energyefficient products and a full line of new radiator products, including aluminum, tubular, electrical, andconvector radiators, will be our highest priority. We intend to create a strong European group forradiators and related products with a particular focus on the tremendous growth opportunities inEastern Europe."

Headquartered in Taylor, Michigan, MASCO CORPORATION is one of the world's leadingmanufacturers of home improvement and building products, as well as a leading provider of servicesthat include the installation of insulation and other building products.

Headquartered in Dilsen-Stokkem, Belgium, THE HEATING GROUP is one of Europe's leadingmanufacturers of designer and panel radiators.

Source: MASCO Corporation

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France: GAZ DE FRANCE-SUEZ Merger Consolidates RenewablesWorkSUEZ chief Gerard Mestrallet and GAZ DE FRANCE head Jean-Francois Cirelli said April 1st that thetwo French energy companies have revamped the structure of the proposed merged GDF-SUEZcompany, including placing their renewable-energy activities under a single corporate office.

Under the new proposal, the Sustainable Development and New and Renewable Energy departmentsare to be attached to the Strategy Department, the companies said in a joint statement. Further, asingle Group Communications and Financial Communications department is to be created under theresponsibility of Valerie Bernis.

The two companies are aiming to complete the merger by June, but GDF still must obtain advice onits plans from staff representatives. The merger must then be authorized by the GDF and SUEZboards before being put to shareholders. Mestrallet will serve as CEO of the merged company.

SUEZ and GDF had previously declined to indicate how the merged company would handle the twoutilities' renewables activities, which include solar thermal heating, hydropower, wind energy andgeothermal power.

Source: Renewable Energy Report

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Poland: STELMET Plans to Begin Wood Pellet Production by theend of JuneThe Polish garden goods manufacturer STELMET plans to complete construction of a wood pelletproducing unit by end-June that is planned to produce 144,000 tonnes of wood pellets annually,the company said in a press release."STELMET plans to begin production of (wood) pellets at the beginning of the 2008/2009 (fiscal yearstarting July 1), " the release reads. "The investment is being carried out at the moment. The unit,capable of producing around 144,000 tonnes of (wood) pellets annually will be situated in the town ofZielona Gora (Lower Silesian region)."

The vast majority of the pellet production will be sold abroad, STELMET Deputy CEO KrzysztofNowosadko said at a press conference.

The company is also mulling over the construction of another wood pellet producing unit in its othergarden goods producing factory located in the Lower Silesia town of Kowary. The unit would produceboth pellets and green energy in the form of the heat that is a byproduct of the production process.

STELMET does not plan to purchase raw material for wood pellet production, but rather to re-use thewaste wood from the manufacture of garden goods.

The company did not disclose the cost of the wood pellet producing unit or the forecasted profits fromthe investment.

STELMET's investments in its 2006/2007 fiscal year exceeded PLN 115 million, the release reads.The investment plan for the period between 2006/2007 to 2009/2010 envisages investing up to PLN440 million and is aimed at expanding STELMET's production capacity. The company's net profit in2006/2007 came to PLN 34.3 million, up 89% year on year, revenues stood at PLN 221.7 million, up62% y/y, and earnings before interest, taxes, depreciation and amortization (EBITDA) stood at PLN54.9 million, up 62% y/y.

Source: Poland Business Weekly

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Russia: NIBE Increases its Holding in Russian Company CJSCEVANNIBE INDUSTRIER AB has increased its holding in the Russian company CJSC EVAN to 51% of theshare capital.

NIBE acquired an initial 25% stake in the Russian company in December 2007 and is now investingan undisclosed sum in increasing its stake to a majority holding. NIBE will also acquire the remainingshares over the next three years.

EVAN, based in Nizhny Novgorod, Russia, is Russia's leading electric boilers and large electric waterheaters supplier with 150 employees and annual sales of approximately SEK 70 million. The companywill operate within NIBE's business area NIBE Heating.

"From a strategic point of view, establishing this bridgehead on the large and expanding Russianmarket is absolutely the right move for NIBE Heating to make. The terms of the takeover also enableus to work together with the current owners to continue to develop the company, which will now alsoprovide a platform for sales of our own heat pumps and our entire water heater programme, " saidGerteric Lindquist, CEO of NIBE Industrier.

Source: Nordic Business Report

Switzerland: Swiss NOK Increases Stake in Wood heatingContractorNordostschweizerische Kraftwerke (NOK), Switzerland's leading producer of electricity, has raised itsstake in EASYTHERM, a contractor for wood pellet and wood chip-fired heat installations, from 30%to 60%.

EASYTHERM was founded in 2000 as a joint venture of Centralschweizerischen Kraftwerke (CKW)and HAELG & Co, each of which now has a 20% share. The strategy of NOK and Axpo Grouppartner CKW is to become "the leading producer of energy from new sources in Switzerland, " thecompanies said, focusing on biomass, small hydropower and geothermal energy and investing inselected companies and projects.

NOK acquired 30% in OPFIKON, Zurich-based EASYTHERM in 2006 to build its position incontracting, including planning, building, maintenance, operation and financing.

Source: Renewable Energy Report

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UK: Biomass and CHP FinancingBiomass in the UK has seen a huge surge in the past 12 months. This has been largely due to thedoubling of ROC's (Renewable Obligation Certificates) for qualifying biomass projects. It is alsodriven by the appetite of the utilities and independent developers for a more diversified portfolio ofrenewable generating assets and the need for waste generators e.g. local authorities in respect ofwaste wood, and retailers in respect of food waste, to deal with their waste more effectively. TheGreen agenda is driving this particular part of the sector as is the increasing cost of landfill and thepsychological shift in thinking of waste as a cost to a resource.

The types of project tend to fall into two categories. Large scale projects, that is 40 - 50 MW plus, andproject portfolios where much smaller projects in the 1 to 5 MW range are housed under umbrellaequity and debt arrangements often located on or close to the sites of the fuel supplier. The commonfactor is that these projects are all CHP for ROC purposes.

The smaller schemes are being promoted actively at a local and national political level because theycan be housed on the site of the fuel provider and avoid what some regard as the greatest inefficiencyof renewable electricity from biomass generation - loss of heat. The push towards these types ofprojects is also being driven through guidance and regulations applicable to development of buildingsand local authority actions.

Also prevalent is a more diverse fuel base and technology use. There are a number of gasification /pyrolosis projects being developed principally under the umbrella portfolio structure. These tend to besmaller projects because of the need to ensure consistency of feedstock and the avoidance oftechnology concerns driven largely by consistency of fuel supply. Notwithstanding the maturity ofanaerobic digestion plants on the continent, there are still very few as a proportion of all biomassplants in the UK. This is expected to change dramatically and may represent the biggest difference inthe composition of the technology mix between now and in 2 years time.

Feedstocks now regularly range from virgin wood, energy crops, agricultural residues, straw, foodwaste and animal waste and industrial waste and co products. The providers of feedstock are alsobecoming more sophisticated requiring improved deals but largely in return for more bankablecontracts. The UK has certainly come a long way in a short period of time.

The appetite for equity and bank debt is probably at its highest but developers need to proceed fromthe outset with a degree of caution in structuring any biomass project.

The key concerns for developers and investors, however, are as they have always been - technologyand security of fuel supply. Many technology concerns have been overcome but do still exist with thenewer technologies, particularly where there is a lack of financial covenant behind the technologysupply. This is principally why those gasification projects which are debt financed for example arerarely in excess of 5 MW. Many projects secure fuel supply but not on terms which are bankable. Insimple terms, a bankable fuel supply is one of sufficient duration to cover the debt repaymentcommitment from a secure and financially credible source. There are many fuel supply arrangementsbeing negotiated at the moment with overseas providers which are unlikely to meet a bank's criteriafor credit worthiness. Alternative fuel supply arrangements may also need to be brought into thestructure to enable the plant to run off more than one fuel source type and so provide funders with

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greater comfort on the achievement of availability targets. A common trend is for developers seekingfinancing to take ownership or a degree of control over fuel supply often in other jurisdictions. Thistrend originated with biofuels but has spread into the larger biomass projects where certainty offeedstock is the key concern. Common overseas jurisdictions for this purpose include North America,Asia and Eastern Europe.

Sustainability is also an issue in financing as many finance providers will have a concern regardingfuture legislation in this respect and the impact of its involvement in a project which does not tick thesustainability box. Sustainability for these purposes includes not only the source and nature of thefeed stock (palm oil being a good example) but also the environmental cost of shipping and haulagegenerally. Sustainability is also a key factor for private equity. Sustainability increasingly means themoral and social cost of developing renewable energy and in particular the impact on food supply andprice. There is very little movement of private equity funds at the moment in e.g. biofuels because ofthe sustainability debate where the chief concern is the consequence of increased food prices forthose in poorer nations.

Sustainability concerns are not going to be helped by the publication of two recent studies which haveshown that changes in land use to produce crop-based biofuels can actually result in moregreenhouse-gas emissions than burning fossil fuels. The studies, both published in Science (8February), estimate the impact of converting forests and grasslands into cropland for the production ofbiofuels. The studies conclude that the resulting carbon emissions, released through decompositionor burning of biomass, create a ‘carbon debt’ that takes decades or even centuries to be paid backthrough biofuel usage.

This finding goes some way to undermining previous claims that substituting fossil fuels with biofuelsshould reduce or even offset greenhouse-gas emissions because biofuels sequester carbon whilethey grow.

Consequently, projects that utilise fuels which do not infringe on agricultural or forest land (save forenergy crops of short rotation growth) such as waste wood and food, animal and industrial waste aremore likely to be attractive to funders.

The problem with these sources of fuel, however, is a logistical one in terms of coordinating what areoften numerous supplies of smaller amounts from smaller suppliers. The more challenging thelogistics, the greater the concern for both debt and equity providers.

Other options typically attractive for smaller developments will be the provision of grants. There areseveral schemes that offer grants to help encourage the efficient use of biomass for energyproduction, for example, the Bio-energy Capital Grants Scheme and now Defra’s Bio-energy Capitalgrants Scheme for smaller scale biomass boilers (launched on 9 April 2008). However, theapplication time will need to be calculated into the project timescale. In addition, some funders haveconcerns about the proportion of grant funding in a project. Grant providers are more alive now to therisks of providing funds to special purpose vehicles and often require some form of parent companyprotection. This is required to back up any claw back rights the grant provider may secure. Claw backwill often apply if the project is not developed in circumstances where it is proved to be technicallyand/or financially viable. Funders will be looking to isolate their liability in this respect which requiresthe principal developer to be prepared to take this risk.

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Enhanced capital allowances for certain CHP installations will also be available as will interest freeloans such as those made available by the Carbon Trust to eligible SME’s (Small and Medium SizedEnterprises).

What is interesting is the development of more merchant positions on the off take arrangements andfuel supply. Some transactions in this sector are enjoying the ability to take advantage of afavourable market with lenders in some cases abandoning the requirement for fully contracted PPA's(Power Purchase Agreements) and fuel supply arrangements.

Before the credit crunch and the current market conditions, there was a move to a smaller equitycomponent on financing structures. In the new financial environment, the debt/equity mix is back towhat it arguably sensibly was 12 months ago in the 70/30 to 80/20 region. Fuel supply risk will takethe equity component higher. This is likely to continue in the near future. The good news is that thereis still a good degree of private equity available in the market to finance the requisite proportion ofthese transactions. In addition, some specialist banks are prepared to offer mezzanine finance forbiomass CHP projects. This can be helpful for the small to mid size developers with limited access toequity or for the larger developers developing multiple projects.

If the current market conditions prevail as predicted, this could impact on the flow of equity and theUK may begin to see other finance structures emerging but for now the more traditional format lookslikely to continue.

In conclusion, the UK biomass market is growing with financial structures developing to accommodatethe increased confidence in fuel supply security, the technologies used and offtake prices. The newertechnologies are likely to continue to develop with a continued growth in portfolio structures and largerprojects.

Source: www.mondaq.com

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UK: DANFOSS Acquires British Heat Pump CompanyDANFOSS has entered into an agreement to take over the majority of shares in ECO Heat Pumps,Sheffield, England, which markets heat pumps in the British market. The company is among theleading players in Great Britain within its area and in a few years has grown to 30 employees.

ECO Heat Pumps is DANFOSS’ sixth acquisition within heat pumps in less than three years. Thegoal is to be among Europe’s leading players within the hydronic segment, i.e. heat pumps thatsupply hot water for households and central heating systems.

”The potential is enormous, but competition is also tough. We expect an annual market growth inEurope of approx. 30% in the years to come. It is essential to establish ourselves in the key markets,while the market is still emerging, and this is the rationale behind the agreement with ECO HeatPumps”, says Nis Storgaard.

Sales Organization for Danfoss in Great Britain

DANFOSS already delivers heat pumps to ECO Heat Pumps, which in the future will be positioned asDANFOSS Heat Pumps’ sales organization in Great Britain.

”The British heat pump market is still new and relatively small, but we expect that also here we willexperience substantial growth in demands in the coming years. The agreement with ECO HeatPumps helps us strengthen our opportunity to take a leading position and get our share of futuremarket growth,” says Division President Nis Storgaard, DANFOSS Heating Division.

ECO Heat Pumps’ previous owner Phil Moore will continue as Managing Director of the company.

”We are very pleased that DANFOSS wanted to take ownership of our business. We have expandedrapidly during the last years, and with DANFOSS behind us, we are ready to accelerate even further”,says Phil Moore.

Source: The KBZINE

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UK: HAMWORTHY Acquired by ATLANTICNBGI Private Equity (“NBGIPE”), the buyout firm focused on established small to medium-sizedbusinesses across the UK, has sold HAMWORTHY Heating (“HAMWORTHY”) to French engineeringconglomerate ATLANTIC Sfdt (“ATLANTIC”). HAMWORTHY is the leading UK specialist in thedesign and manufacture of innovative commercial heating equipment.

HAMWORTHY, which has an annual turnover of approximately �20 million, specialises in deliveringand supporting total heating solutions for commercial and light industrial premises as diverse asleisure facilities, schools, hospitals, hotels, factories, offices, retail and catering outlets. It iscommitted to the integration of renewable energy technologies and recently the strength of its offerhas been recognised in successful PFI and PPP projects. HAMWORTHY has also recentlydeveloped a network of distributors to provide overseas markets with a tailored service for buildingservices projects.

NBGIPE led a �11.2m buyout of HAMWORTHY in January 2002, providing the business withoperational and financial support to grow the business. Since then, HAMWORTHY has increased itsfocus and investment in product development to meet growing demand for environmentally friendlyboilers. The commercial boiler market is well positioned for further development and has strongdefensive qualities, primarily driven by the stable replacement spend on products, and by theGovernment’s recent legislation regarding energy efficiency in buildings.

Richard Morley, NBGIPE Director, said:

“This exit is another example of NBGIPE’s outstanding track record in backing successful high growthcompanies. During our ownership HAMWORTHY has enjoyed significant growth both in the UK andabroad. Our investment in the company has helped it become a world class manufacturer ofinnovative commercial heating equipment, and a pioneer of best practice in renewable energytechnology. As well as providing top class commercial heating products for the home marketHAMWORTHY now exports abroad to parts of Europe, the Baltic States, Asia, Australasia and thePacific Rim countries. The business is very well positioned for the next stage of its developmentunder new ownership.”

Source: NGBI Private Equity

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Vietnam: BOSCH Opens Subsidiary in VietnamThe BOSCH Group today marked the official set up of its subsidiary ROBERT BOSCH Vietnam Co.Ltd. located in Ho Chi Minh City. The company also announced its first investment in Vietnam into ahigh tech production facility for push-belts used in vehicles with Continuously Variable Transmission(CVT). By 2015, the Group's total investment in Vietnam is expected to reach €55 million with a totalof 800 associates. After the introduction of favorable laws and regulations for foreign investors inVietnam, BOSCH is the first German company to establish a wholly-owned subsidiary to carry outimport-export activities in Vietnam.

"Vietnam is an increasingly attractive market providing excellent opportunities for BOSCH products",said Dr. Rudolf Colm, member of the Board of Management and responsible for the businessactivities in Asia Pacific, who officiated the opening ceremony of the BOSCH subsidiary.

The BOSCH Group has been present in Vietnam since 1994, through its two representative offices inHo Chi Minh City and Hanoi and received the license to set up Robert BOSCH Vietnam Co. Ltd. inDecember 2007. With the establishment of the BOSCH subsidiary in Vietnam, the Group will be ableto further expand its business activities in the country.

Source: www.bosch-presse.de

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World: Oil Price May Go Up to $250Crude oil prices continue to baffle analysts and pundits. With the $100-era a well established fact inour daily life, there is now a growing chatter within the energy fraternity that $200 a barrel may not bea far fetched idea altogether. Is another global oil shock now gathering pace?

With limited additional supplies, alternative fuel still some decades away and demand far fromcollapsing, Deutsche Bank is pointing to a “huge risk” that oil prices would continue to rise in the nearto mid-term. “There is a huge risk that the oil price simply continues to escalate until it gets to somelevel (possibly $250) when demand finally collapses because ordinary people can no longer afford toburn as much energy as they are burning now,” Adam Sieminski, Deutsche Bank’s chief energyeconomist, wrote in a report last Friday.

Pointing to the reasons behind the analysis, Sieminski underlines, “Oil supply growth in non-OPECcountries is struggling at a time when OPEC has been cautious with its production policies.”

In order to analyse the situation further, we need to look at historical facts too. In the early 1980s, oildemand collapsed only after nominal oil prices rose by a factor of 10 between 1970 to 1973 and 1980to 1983, from about $3.50 a barrel to $35. Based on the empirical example of factor of 10, Sieminskideduces that since oil averaged about $25 a barrel from 2000 to 2003, prices would have to increaseto $250 a barrel in 2010 to 2013 to have the same effect on oil users this time around.

Sieminski continues to argue that strengthening of the dollar would take time to stem the flow ofinvestment into commodities, and alternative energies, such as solar power or biofuels, are at least adecade away from contributing to energy supply.

A Bloomberg report also quoted information provider Global Insight as projecting that crude oil couldpeak in the US at $135 a barrel in the next two months. Oil might rise to $135 as the declining dollardraws investors seeking a currency hedge, before new supplies see prices fall, Global Insight’s SimonWardell was quoted as saying.

Source: ww.arabnews.com

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Monthly Special: The Future of the Gas Industry In ChinaChina is the world's largest developing country, the third-largest importer of oil and the largestproducer of coal. Its energy needs are met mainly by coal (approximately 70%) and oil(approximately 21%), but demand for cleaner fuel has resulted in a steady increase in its use of gas.

It has long been recognised that China's current energy policies and strategies do not adequatelysupport the country's strong energy demands, economic growth potential or environmentalresponsibilities – and proper management of China's energy industry is critical to secure its economicgrowth over the next two decades.

To address these shortcomings, China released a new draft Energy Law on 1 December 2007 and itsfirst white paper on energy, entitled "China's Energy Conditions and Policies", on 26 December 2007(White Paper). Together, these provide some insight into how China will manage its energy industrygoing forward and encourage the use of cleaner fuels as alternative energy sources.

The Draft Energy Law and White Paper

China has separate energy laws dealing with coal, electricity, energy conservation and renewableenergy, but no principal law for oil or natural gas. Moreover, its energy industry is managed by anumber of government departments and agencies, with different management systems for each ofelectricity generation, nuclear power, oil and gas, coal mining and renewable energy.

The main aim of the new draft Energy Law is to develop a unified management system for the entireenergy industry. To this end, the draft Law proposes setting up a national 'Energy Department', whichwould be responsible for managing energy prices, allocating energy resources and coordinating state-owned and private sector energy reserves.

Importantly, however, neither the draft Energy Law nor the White Paper includes detailed policies thatcan be implemented immediately. The draft Law contains a set of guiding principles for China'senergy industry while the White Paper provides a high-level overview of energy strategies andpolicies going forward.

The Energy Law is not expected to come into force until 2009. Nevertheless, taken together, the draftLaw (as it is currently drafted) and the White Paper do provide some insight into how China willmanage its energy industry in the future.

One area that could undergo significant growth as a result of the new unified energy policies is thegas industry.

Gas Demand in China

As China's energy supply is heavily dependent on coal, the draft Energy Law attempts to encouragethe use of cleaner energy fuels, such as gas and other renewable energy sources, to meet thecountry's energy demands. For its part, the White Paper notes that while one aspect of China'senergy strategy will be to continue to develop its coal industry, it will also continue to implement apolicy of "simultaneous development of oil and gas" in order to boost the country's recoverable

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reserves.

China's Long Term Energy Development Plan sets a target of 12.5% for gas use by 2020.

As it turns its attention towards gas as one of the fuels of the future, China has taken steps in recentyears to develop its natural gas market to meet the forecasted demand. While domestic natural gasproduction is increasing, however, it will not be enough to meet total demand, and this means thatChina will have to rely on imported gas to fulfil its future energy needs.

At present, China has one operating LNG terminal, located in Guangdong province and operated byCNOOC (China National Offshore Oil Corporation). This facility has an annual capacity of 3.7 milliontons and currently receives shipments from Australia's Northwest Shelf project. CNOOC also hasagreements to import LNG from Indonesia and Malaysia to supply LNG terminals under constructionin Fujian and Shanghai.

Current plans are to have up to nine LNG terminals as part of China's coastal import network. At fulloperation, these terminals will have a total annual capacity of approximately 28 million tons.

So, while coal will continue to be used in China for the foreseeable future, from an environmentalperspective it is encouraging to see that China is implementing polices and strategies through thedraft Energy Law and the White Paper to reduce its reliance on polluting coal as a primary energysource and that favour cleaner energy sources such as gas.

Pricing Challenges

China has started securing more long term LNG supply arrangements to meet the country'sforecasted gas demand. One of the key factors that will contribute to China achieving its 12.5% gastarget by 2020 – as well as the policies set out in the draft Energy Law and White Paper – will beensuring there are sufficient economic incentives to promote continued growth in gas demand.

China's domestic gas pricing structure does not, of itself, support growth, and consequently is abarrier to increasing the supply of gas into the country.

Residential customers pay higher prices for gas than industrial customers. Given the tight supply ofgas, this is an incentive for energy companies to supply residential customers in preference toindustrial customers, which means an unreliable supply for industry. This uncertainty and unreliability,together with the high cost, has resulted in industrial customers choosing to rely on coal as theirprimary energy source.

With industry accounting for over 70% of the country's final energy consumption, China will need tomake further changes to its gas pricing model and regulatory system to give industrial customersconfidence in using gas as a reliable energy source. This, in turn, would support the country's desire(which is underpinned by the draft Energy Law and the White Paper) to rely less on coal as an energysource.

The draft Law states that China will adopt an energy pricing system under which prices will largely bedetermined by a combination of market forces and government control. The draft Law also states that

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pricing should reflect "the degree of rarity of resources and the cost for environmental damage".

What is not clear, however, is to what extent these new pricing principles will encourage ongoinginvestment in China's gas industry and whether they will have an effect on reducing the pricedifferential between coal and gas. Much is left to be said.

Conclusion

China's draft Energy Law and the White Paper are positive steps in encouraging the use of cleanerfuels like gas as an alternative energy source.

While there are a number of projects underway designed to increase the supply of natural gas into thecountry, pricing models that encourage continued growth in gas demand will be needed to achievethe Energy Law's objectives. Currently, the gas industry in China does not adequately support growthin gas demand because of the high costs associated with the supply of gas.

The ongoing challenge for China in implementing its new energy policies and strategies, and inparticular achieving its 12.5% gas target by 2020, will be to ensure that the pricing mechanisms betterreward investment in the country's gas industry.


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Monthly Special: Renewable Energy In Scotland And PlanningUntil recently, the renewable energy debate has mainly focused on large scale projects including windfarms and wave energy projects. However, two significant documents have been published aboutdevelopment rights for domestic micro generation equipment and the need to reduce carbonemissions. Both indicate that the whole development industry will urgently need to address the issuesraised.

Scotland, both in policy terms and the provision of sources of renewable energy, has to a very largeextent sought to lead the UK in relation to renewable energy. Two further documents have emergedwhich are significant in that context. The first of these is a discussion document about permitteddevelopment rights for domestic micro generation equipment while the second is a planning advicenotice (PAN84) on reducing carbon emissions in new developments (which is intended to supplementthe guidance in SPP6 on Renewable Energy published in March 2007).

The discussion paper confirms the commitment on the part of Scottish Ministers to promote a greateruptake of micro generation in real terms. It is intended that there should be a review of permitteddevelopment rights generally as part of the changes in the planning regime. The discussion paper inrelation to that wider review probably will not emerge until the latter of 2008 or early 2009. The earlyappearance of this paper seems to reinforce the importance that Scottish Ministers attach to thispolicy area.

The consultation paper identifies the principal types of domestic micro renewable energy equipmentas:

1. Solar water heating

2. Solar electricity (photo-voltaic)

3. Small wind turbines

4. Biomass boilers

5. Heat pumps

6. Combined heat and power systems

7. Hydro electric generators

Planning Permission And Issues

Under the current regime, most, if not all, types of micro generation equipment require planningpermission. This is seen as a disincentive both in terms of costs and unnecessary bureaucracy.However, the consultation paper recognises that there are real issues which need to be addressed inrelation to the installation of micro generation equipment and their potential impact upon townscapesin particular. Issues are likely to arise in areas which are subject to specific policy designations suchas conservation areas.

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The proposal in the consultation paper is that permitted development rights should be granted for anumber of types of renewable energy equipment. As with other permitted development rightshowever, the rights granted are subject to certain derogations to take account of potential impacts. Inparticular protections are embodied for conservation areas and World Heritage sites. There are alsolimitations upon the extent of roofs (for example) which can be covered by solar panels.

Possibly the most controversial issues are likely to be the installation of wind turbines either ondwelling houses or as free standing installations – an issue that David Cameron has had difficultywith! If a turbine is to be installed on a dwelling house, there are size limitations and planningpermission will be required if any part of the wind turbine would be within 100m of a neighbouringdwelling house. In effect, that means that planning permission will be necessary for most, if not all,wind turbines in towns. There is a similar restriction in relation to free standing wind turbines albeitthese are also subject to further and additional restrictions.

It is quite clear that the Executive is genuinely exercised by how to implement micro energy projectswithout having an adverse reaction which may be counter productive. It may be of course that theapproach is an incremental one in the sense that as people become more used to (for example)domestic wind turbines, the restrictions on their installation may be relaxed. The extent that they areused may equally depend upon economic issues – at the present time, the cost/benefit ratio is notthat attractive, though obviously their use potentially brings other environmental benefits.

Reducing Carbon Emissions – Challenges For Developers

PAN84 builds on SPP6 by setting out the specific means by which carbon emissions in newdevelopments will be reduced. There is a degree of ambiguity about how this obligation actuallyarises. Paragraph 36 of SPP6 (and of course it has to be recognised that both SPP6 and PAN84 areonly material considerations in determining planning applications) identifies that Development Plansshould set out policies on the provision of on site low carbon and renewable sources of energy. Thesame paragraph however seems to indicate that in relation to developments with a cumulative floorspace of 500 m2 or more, all future applications (i.e. those after March 2007) should incorporate onsite zero and low carbon equipment. There appears to be a tension between that and the expectationthat this should be dealt with as part of the Development Plan process.

Be that as it may, there was no clear guidance about how this should be done and PAN84 seeks to fillthat gap. In fact it does not appear to refer to the Development Plan process in any great extent at allother than in the context of whether the Development Plan should seek to require reductions beyondthat 15% threshold.

This is likely to be an area of some controversy and/or concern. A number of property organisationshave already indicated they have concerns about the costs and practical benefits that result fromthese sort of proposals. Renewable energy and carbon reduction comes at a cost. PAN84 appearsto be suggesting (following SPP6) that cost may not be a legitimate barrier to fulfilling the policy. BothSPP6 and PAN84 recognise that technical constraints may affect the ability to meet the relevanttargets on site but the proposal is in that event there should be some "off setting arrangement" tosecure carbon savings elsewhere in the area. PAN84 also recognises there may be other policyconstraints:- "Whilst not specifically referred in SPP6, constraints may also be imposed by other

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material considerations, such as designations which require stricter management, for example builtheritage designations; listed buildings or conservations areas".

It is interesting to note that this paragraph does not make any reference to other materialconsiderations which may have a financial impact such as developer contributions, affordable housingand planning gain generally. These may mitigate against the ability to secure carbon reduction oncost grounds. It appears likely there will be interesting debates about whether, or to what extent,development can actually accept further and additional costs, particularly having regard to all theother issues which developers are now expected to address.

It has to be remembered that SPP6 and PAN84 are only material considerations. Paragraph 48 ofSPP1 records that development proposals which are in accordance with the Development Planshould be expected to receive planning permission. If all the other boxes are "ticked", shouldplanning permission be refused simply as a result of a failure to meet the requirements of either ofthese documents? That may seem unlikely but clearly as and when specific policies are included inDevelopment Plans, the requirement to secure carbon reduction principally by the provision ofrenewable energy will become much more robust. In the meantime, the use of SupplementaryPlanning Guidance is identified as a possible interim solution.

To date, the "debate" in relation to renewable energy has largely centred on large projects such assignificant wind farms, wave energy projects and biomass plants. The thrust of the emerging policyguidance is to seek to make the need to reduce carbon emissions and provide micro generation amuch more immediate issue for all developers. Given the other changes which are likely to comeabout (including further changes to the building regulations and the need to achieve acceptable andsustainable environmental buildings) clearly the whole development industry is going to have toaddress the issues identified in SPP6 and PAN84 as a matter of some urgency. For those who arebrave, there may even be commercial advantages in this.


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Documents

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