In the December edition of the China Report, author Lou Schwartz writes about a document issued by Jiangxi Province stating that the province currently has China's largest amount of quartz sands, the raw material for silicon. Schwartz highlights 24 projects that are currently in place to take advantage of this supply as well as overall growth trends in the wind, solar and bioenergy sectors.

 
This Month’s Top Story

In mid November 2007 the Development and Reform Commission of Jiangxi Province
issued a document entitled {General Thinking on the Development of Jiangxi Province’s
Silicon Materials and Photovoltaic Industries}, which has three prongs: resources, industry
and supplemental. With respect to resources, the Jiangxi Province document points out that
Jiangxi Province has plentiful amounts of quartz sands, the raw material for silicon materials.
Proven reserves of quartz sands are nearly 20 million MT in Jiangxi Province, the largest
reserves of quartz sands in China. Moreover, the Jiangxi Province quartz sands are easily
recoverable, are high grade and after cleaning yield oxidized silica content that is 99.9% or
better. With respect to Jiangxi Province’s existing foundation for the further development of a
silicon industry, the document points out that LDK already has manufacturing capabilities of
200 MW of multi-crystalline silicon ingot and wafers and there are other companies that either
already have manufacturing capabilities in place or are planning projects. With respect to the
supplemental foundation of this plan, Jiangxi Province’s electric power resources are
expansive and electric power is something that is required in large amount to refine silicon
materials.

The document {General Thinking on the Development of Jiangxi Province’s Silicon
Materials and Photovoltaic Industries} highlights 24 projects which are categorized into six
sections: 1) high purity silicon materials; 2) polycrystalline silicon wafers; 3) mono-crystalline silicon and crystalline spheres; 4) solar cells and systems; 5) silicon-based thin film solar cells and 6) complementary production capabilities. Six of the twenty-four projects that comprise the document {General Thinking on the
Development of Jiangxi Province’s Silicon Materials and Photovoltaic Industries} concern high purity silicon materials. These projects include the following:

a) LDK Photovoltaic Silicon Science and Technology Company’s 15,000-tpy solar
power class silicon materials project, located in the city of Xinyu. The total
investment of this project is in excess of 10 billion Yuan. The first stage of this
project already got underway in August 2007 and is expected to have production
capacity of 6000 MT of solar power class silicon materials by the end of 2008.
When completed the project is expected to enjoy sales of 25 billion Yuan/year. 

b) Shidai (Epoch) Crystalline Silicon Company 2500 tpy silicon materials project
using Siemens technology. This project entails the construction of a
polycrystalline silicon plant in the city of Jiujiang using high purity silicon
production technology provided by the German City Solar Energy Corporation
with investments of $250-300 million U.S. by the Jinsha Jiang (Jinsha River)
Industry Development Company and others. As well, the Degussa Group will
invest in the construction of a plant to produce hydrogen tri-cloride. The
estimated total value of the project is 4 billion Yuan and by 2010 there should be
output totaling 2500 tpy and sales per year of 4 billion Yuan.

c) The $100 million U.S. solar energy class polycrystalline silicon project to be
developed by the Jingzhan (Nanchang) Science and Technology Company in the
city of Nanchang. When completed this project will be producing 1000 tpy of
solar energy polycrystalline silicon and have sales of 1 billion Yuan/year.

d) The 500 tpy polycrystalline silicon project to be undertaken by a joint venture
company---the Jiangxi GE Silicon Materials Co., Ltd.---formed by the United
States’ GE Silicon Materials Company and the Nanchang Ganyu Organic Silicon
Company. This project will be built in two stages, with the first stage
constructing 100 tpy of polycrystalline silicon for a total investment of $12
million U.S. and the second stage building 400 tpy of polycrystalline silicon for a
total investment of $40 million U.S. When all 500 tpy of polycrystalline silicon
capacity is operational, the project is expected to start producing 500 million
Yuan/year in sales. This project will be located in the city of Zhangshu.

e) The 15,000-tpy hydrogen tri-cloride silicon project of the Xinghuo (Spark)
Chemical Industry will produce an essential raw material for the production of
polycrystalline silicon. The investment is expected to total 70 million Yuan and
will generate sales of 200 million/year when fully operational. This project will
be constructed in the city of Jiujiang.

f) The 1000 tpy polycrystalline silicon project of Xinghua Chemical Industry will
involve an investment of 1.5 billion Yuan to construct a facility that will produce
1000 tpy of polycrystalline silicon materials, which will produce industrial value
of 800 million Yuan/year. Among other things this project will utilize the
byproduct of polycrystalline silicon consumption---four cloride---to produce
organic silicon. This project will be constructed in the city of Jiujiang.

There are three poly-crystalline silicon wafer projects that Jiangxi Province is promoting
under the document {General Thinking on the Development of Jiangxi Province’s Silicon
Materials and Photovoltaic Industries}. These three projects are as follows:

a) LDK Corporation’s 1600 MW poly-crystalline silicon wafer expansion project.
LDK, having imported the most advanced machinery and technology that exists
worldwide, and mastered the 270kg cast ingot technology and the 200 micron
slicing technology, both leading technologies worldwide, has formed a
production capacity of 200 MW of poly-crystalline silicon wafers. On this
foundation LDK will expand its capacity to 1600 MW by 2010 with 100 cast
ingot furnaces and a series of other equipment including ingot cutting machines,
wafer slicing machines and cleaning and automated testing equipment. The total
investment for this project is 18 billion Yuan and the anticipated sales income is
30 billion Yuan/year. This project will be constructed in the city of Xinyu.

b) The Jiangxi Gemei Science and Technology Corporation will develop a 2 billion
Yuan poly-crystalline wafer project to be constructed in two phases. The 850
million Yuan first phase (of which total 300 million will be invested in the polycrystalline
silicon wafer production line) will be completed by April 2008. With
the completion of the second phase the entire project will be 800 MW and
produce 15 billion Yuan/year in sales. The Jiangxi Gemei Science and
Technology Corporation’s poly-crystalline silicon project will be constructed in
the city of Fuzhou.

c) A 500 MW solar class poly-crystalline silicon wafer production project will be
built in the city of Shangshao with capital from as yet to be identified domestic
and international sources. The planned expenditure is 2 billion Yuan and the
expected revenue is 6.5 billion Yuan/year.

According to the document {General Thinking on the Development of Jiangxi Province’s
Silicon Materials and Photovoltaic Industries}, Jiangxi Province will support the development
of two mono-crystalline silicon and crystalline sphere projects. These two projects include the
following:

a) The construction of 8” and 12” crystalline spheres production line and
encapsulation plant by the Juren Science and Technology Co., Ltd. in the city of
Jingdezhen. This Taiwanese company will import machinery, equipment and
technology to construct two 8” crystalline sphere plants, two 12” crystalline
sphere plants, 3 peninsular shaped encapsulation and testing plants, two 6” and
under peninsular shaped plants and associated industries. In the first phase of
this project the company will build two 8” crystalline spheres production lines
and related facilities. When completed the first stage of this project will produce
an expected $800 million U.S.D./year in industrial value and when fully finished
output value will reach $4 billion U.S.D./year.

b) A $14 million U.S.D. investment by GE Silicon Solar Power (Hong Kong) Co.,
Ltd. to construct a project that will produce 4 million mono-crystalline silicon
wafers per year. This plant, which will be constructed in the city of Nanchang
will produce sales income of 150 million Yuan/year.

According to the document {General Thinking on the Development of Jiangxi Province’s
Silicon Materials and Photovoltaic Industries}, Jiangxi Province will support the development
of four solar cells and systems projects. These four projects include the following:

a) The development of a 210mm x 210mm large scale solar power cells at a
cost of 2 billion Yuan, which by 2010 will have the capacity to produce at
the scale of 800 MW and produce output value of 10 billion Yuan. No
company is cited for this project, which may be built in the city of Xinyu,
Nanchang, Shangshao or Fuzhou.

b) One billion Yuan solar cell module encapsulation projects to be built in the
city of Xinyu, Nanchang and/or Shangshao by unnamed companies.
Because the investment is relatively modest, the construction period brief
and the technological barriers low, this part of the PV industrial chain
primarily relies on China’s comparative advantage in labor costs. These
plants primarily will produce 80-300 watt products and by 2010 will have
scale of operations of 800 MW/year.

c) A production line to produce solar powered lighting will be developed by the
Yubo Huasheng Solar Energy Co., Ltd. and the Shanhai Boneng Solar
Energy Science and Technology Development Co., Ltd. The company will
produce solar cells, modules and solar powered streetlights, solar lawn lights
and other such products. In the first phase of this development the company
will develop a 15 MW/year solar cell production line and in the second
phase it will develop a 50 MW/year solar cell production line while at the
same time the company will build 6 production lines to manufacture solar
energy street lights, solar lawn lights and other light products.

d) A 100 million Yuan, project to construct a factory that will produce ten
thousand water pump systems per year using a solar powered photovoltaic
process. These systems are especially useful in remote farming villages that
do not have electric and in desert regions. There is no specific company
designated to develop this project. The anticipated industrial value per year
is 300 million Yuan and the project will be constructed in the city of
Nanchang.

According to the document {General Thinking on the Development of Jiangxi Province’s
Silicon Materials and Photovoltaic Industries}, Jiangxi Province will support the development
of one silicon-based thin-film solar cell project. This project is as follows:

a) The Jiangxi Energy Joint Stock Company and the Huaji Photovoltaic Power
Development Co., Ltd. (an its publicly traded parent, the Huaji Photovoltaic
Power Sources Co., Ltd.) will cooperate on the construction of a 50 MW/year
non-crystalline silicon thin-film solar cell project. The total investment is 1.2
billion Yuan, with the first stage investment of 150 million Yuan to construct
a 5 MW/year non-crystalline silicon photovoltaic thin film solar cell line.

This project will be built in the city of Nanchang.
According to the document {General Thinking on the Development of Jiangxi Province’s
Silicon Materials and Photovoltaic Industries}, Jiangxi Province will support the development
of seven projects that are complementary to the other core projects. These projects include the
following:

a) The Yuetu Silicon Materials Science and Technology Joint Stock
Company will build a high purity quartz powder project. The
project will entail constructing a 10,000 tpy high purity quartz
powder production line and reaching silicon dioxide purity of
99.99% to 99.999%. The cost of this project is 150 million Yuan,
the anticipated sales income is 600 million Yuan/year and the place
where this project will be constructed is the city of Shangshao.

b) The Zhongcai High Technology Materials Joint Stock Company’s
quartz crucible and nitrogenous silicon project will involve an
investment of 500 million Yuan. The first stage of this project,
which will be the quartz crucible production, will be completed and
operational by the end of 2007. When the entire project is
completed at the end of two years, the company will realize 1
billion Yuan/year in sales. This project will be constructed in the
city of Xinyu.

c) Poly-crystalline wafer cutting paste project will have an investment
of 50 million Yuan to build the capacity to produce 8000 tpy of
cutting paste for the cutting of poly-crystalline silicon wafers. The
projected yearly income to be produced by this project is 120
million Yuan and the project is to be constructed in the city of
Xinyu.

d) A silicon carbide abrasive material for the silicon wafer cutting line.
This will be an import substitution project that is projected to cost
100 million Yuan and build capacity to produce 20,000 tpy of
silicon carbide abrasive materials. Annual sales are projected to
reach 150 million Yuan and this project may be constructed in
Xinyu, Yichun or Ganzhou.

e) A solar cell face sheet glass project, which will import ten 500,000
square meter glass production lines. The total investment in this
project is 120 million Yuan and the capacity that will be constructed
is 5 million square meters of solar cell face sheet. The projected
revenues from this plant are 400 million Yuan/year. The city of
Pingxiang will be the location for this project.

China's Wind Power Industry
On December 11, 2007 the Timken Co. entered into joint venture agreement with the Xiangtan
Electric Manufacturing Co., Ltd. to manufacture ultra-large bore bearings for the main rotor shafts of
megawatt-class wind turbines. While the bearings will be manufactured in China, some of the
materials and components for the bearings will be manufactured in the United States and exported to
China, resulting in potential exports of ~$100 million U.S.D. The new plant, which will be located in
Hunan Province, will be constructed beginning in 2008 for a cost of $38 million U.S.D. Timken will
have an 80% interest in the new venture. Timken owns a number of other ventures in China,
principally bearing manufacturers for industrial customers; the company had more than $300 million in
revenues from Asia (principally China and India) in 2006 and in the third quarter of 2007 Timken
reported increases in sales from Asia of 37%. The Chinese government's goal is to build wind farms
with a total capacity to generate 30,000 megawatts of power by 2020.
Construction has been completed on the first stage of the Beijing Guanting Wind Farm project and
after the project has been checked and accepted it will begin to generate clean energy for Beijing. The
33 windmills have a total capacity of 50MW, which can produce 100 million Kwh/year. Based on
average consumption by Beijing residents of 1000 Kwh/year, the Beijing Guanting Wind Farm will be
able to provide power to approximately 100,000 households. This level of clean energy output is
equivalent to the consumption of 50,000 tpy of coal or 20 million cubic meters of natural gas and will
bring about a reduction in emissions of 100,000 tpy of carbon dioxide and 782 tpy of sulfur dioxide.
After the second phase of the Beijing Guanting Wind Farm is constructed (by 2010) the project will be
generating 100 MW in clean wind power.
Hainan Province has drafted a plan to encourage the development of 13 wind farms to be located
primarily in the Eastern, Northwestern and Western coastal areas of the province. The anticipated total
capacity of wind power to be developed in Hainan through this plan is more than 1200 MW; of this
total Hainan Province anticipates having between 4 and 6 wind farms operating by 2010 with total
installed capacity of 250 to 300 MW at a cost of approximately 3 billion Yuan. By 2015 Hainan
Province’s installed capacity to produce wind power will have grown to 400 MW and by 2020 will
grow again to 600MW.

China's Bio-Mass Energy and Bio-Fuels Industries
When the grain ethanol industry in China began to take shape in 2004, there were four
companies involved: the Jilin Ethanol Fuel Company, the Henan Tianguan Group, the Anhui Fengyuan
Biochemical Co., Ltd., and the Heilongjiang Huarun Ethanol Company. Of these four companies, the
Henan Tianguan Group used wheat as a raw material while the others used corn. In 2005, China
produced 1,020,000 MT of ethanol fuel, third behind Brazil and America and in 2006 China produced
1,440,000 MT of ethanol. Ethanol production in China has relied on subsidies from Beijing to promote
the industry, including an exemption from a 5% consumption tax, receipt of a tax refund and a subsidy
on grains, and preferential prices for grains used as inputs. Data made public by Anhui Fengyuan
Biochemical Co., Ltd. shows that the subsidies to the grain ethanol industry are declining from 1883
Yuan/MT in 2005, to 1628 Yuan/MT in 2006, to an anticipated 1373 Yuan/MT in 2007-2008. The
subsidy will be abolished after 2008. In 2006, China produced and consumed 13,500,000 tons of corn
to produce ethyl alcohol, while in 2007 the amount of corn used for ethyl alcohol production is
expected to reach 14,000,000. Of that total, 4.75 million MT of corn was used to produce 1,444,000
tons of ethanol fuel. There are not expected to be significant increases from 2007 levels because of
production limits. Beginning in 2006 Beijing placed a moratorium on the creation of new grain ethanol
businesses, and the central government began to strongly encourage the development of non-grain
ethanol.

During the 11th 5-year plan period, China plans to produce 6,000,000 tons of bio-fuel, of which
5,000,000 tons will be ethanol, with the rest bio-diesel. By 2020, the target is 20,000,000 tons of biofuel,
of which 15,000,000 will be ethanol. Given demand for corn in other industries, there will not be
enough corn to supply the ethanol industry.

China's Geo-Thermal Industry
According to the China Geological Survey Bureau’s Shallow Geothermal Power Research and
Promotion Center, through September 2007 Beijing already had in place a total of 10.5 million square
meters of buildings that use shallow geothermal energy to supply heat and produce cold air. Based on
the Beijing Energy Plan and the Geothermal Plan, during the 11th Five Year Plan Period Beijing will
continue to spread the use of geothermal heat pumps and anticipates that the coverage area for shallow
geothermal energy will increase to 35 million square meters by 2010. Each square meter of land can
supply 200-300 watts of power and the cost to build geothermal heat pump systems are generally 200-
300 Yuan/square meter.

Regional Developments in China's Renewable Energy Industries
China’s largest energy ‘base’ will be constructed in Jiuquan, Gansu Province by 2010. The
44.3 billion Yuan project will have wind, hydroelectric, coal, solar, natural gas and nuclear power
concentrated in Jiuquan. Beijing already has approved six 50-100 MW wind farms and by 2010 there
will be a total of 1000 MW of wind power operating in Jiuquan. With respect to hydropower, Jiuquan
will construct 12 projects by 2010, having total installed capacity of 1000 MW. As for coal fired
power plants, the Jiuquan region will be investing 2.6 billion Yuan to develop 600 MW class coal fired
power plants and anticipates that 2800 MW of coal fired power will have gone on-line by 2010. By
2010, Jiuquan hopes to have obtained approvals for the construction of 4000 MW of nuclear power, 20
MW of natural gas fired power and 10 MW of solar power. The city of Jiuquan anticipates distributing
some of the power to be generated from all of these project to Tianjin and Beijing via a 750 kv high
tension transmission line.

Business Opportunities in China's Renewable Energy Industries
A 354 million Yuan waste to energy facility, which is in the planning process in Guguantun
Village, Cangzhou city, Hebei Province is seeking investors. The 2x6MW power plant, which will be
fueled by 800 MT/day of garbage, plans to be constructed in the 2008-09 period.
A 262 million Yuan, 2x12 MW power plant fueled by agricultural waste stalks is preparing a
feasibility study and seeking investors. The project, which is located in Qiu County, Handan City,
Hebei Province will use 143,000 MT of straw to produce 132 million Kwh of power. The plant is
expected to be construction between February and September 2008.
Beijing is now estimating that China’s renewable energy sector will attract ~ $700 million
U.S.D. in foreign investment in 2008 and that by 2010 the annual foreign investment in China’s
renewable energy sector will grow to $2 billion U.S.D.

Laws and Policies Governing Renewable Energy and Sustainable Development in China
At the Second International Summit on China’s New Energy Resources, which
convened on December 11, 2007, Huang Mengfu, Deputy Chairman of the China National
Political Consultative Committee said that the National People’s Congress already had made it
clear to the State Council that Beijing must increase its support for new energy resources and
renewable energy. The main topic for the conference, which was sponsored in part by
Suntech Power and the government of the city of Wuxi, Jiangsu Province, was “Worldwide
Climate Change and the Responsibility of New Energy Resources”. Deputy Chairman Huang
said that Beijing might increase the financial support of China’s new energy resources and
renewable energy industry by allocating an additional 20 billion Yuan over the 10 billion Yuan
already funded. Also in attendance was Chen Deming, a Deputy Chairman of the National
Development and Reform Commission, who re-stated China’s official policy pronouncements,
as set forth in the {Mid to Long-Term Development Plan for Renewable Energy} that Beijing
is aiming for 10% of its energy to be derived from renewable energy by 2010 and 15% of its
energy derived from renewable energy by 2020. However, given the pace of development of
renewable energy in China, Huang Mengfu stated that there was a possibility that these goals
would be “greatly exceeded”.

One of the many new programs supporting the development of
renewable energy in China is a “New Energy Development Industry Investment Fund” which
recently was reported to the NDRC. The New Energy Development Industry Investment
Fund, which borrows its structure from the industry formation investment funds found in the
West, will be another means for new energy enterprises to directly raise funds. The New
Energy Development Industry Investment Fund will take an equity interest in the weakest
segment of any industry---mid-sized to small enterprises in the renewable energy sector
(larger companies, including companies that already have gone public, are not the focus of
this fund). In addition to funding, the new investment fund will provide operational and
management services to help these enterprises grow to a certain size to enable them to develop
further on their own.

On December 3, 2007 the State Energy Office publicly issued the {Energy Law}
(Discussion Draft). The {Energy Law} (Discussion Draft) has been referred to as a “Mini
Constitution” for the administration of energy policy in China. According to Chao Shaoping
an energy expert, the {Energy Law} will be the “overture” to the various laws concerning
energy policy that have been enacted or will be enacted, including the {Electric Power Law},
the {Coal Law}, the {Energy Conservation Law}, the {Renewable Energy Law}, the {Oil
Law}, and the {Natural Gas Law}. Overall the {Energy Law} is designed to guarantee
China’s energy security and energy reserves so that China will not experience an “oil panic”.
It also is the means by which Beijing brings to center stage the task of reducing greenhouse
gas emissions in China. The {Energy Law} provides for the development of an energy
reserves system, which will standardize the development and administration of a national
energy reserves system that will be regionally located. There will be both a governmental and
an energy company component to the national energy reserves system. When the {Energy
Law} becomes law one change that will be noticeable right away is that a number of energy
conservation behaviors that have been proposed will become mandatory. It is also hoped that
the {Energy Law}, when enacted, will have a positive effect on China’s system for setting
energy prices and that overall the market will guide the price of energy; one exception is
pricing by companies that possess monopoly control, in which case the government will set
the price or direct the setting of the price.

The {Energy Law} when enacted will provide further impetus to the process of pricing alternative energy to encourage more development and pricing energy for companies or products that are heavy polluters and users of energy to restrain their development. Because of the nature of the current system in which domestic
refined oil prices lag behind international refined oil prices, many Chinese oil companies have
suffered losses. Experts anticipate that the discrepancy between foreign and domestic refined
oil prices will narrow to nearly zero under the {Energy Law}.

Tax policy also will be used to encourage the development of alternative energy projects as will Customs policy. Under the {Energy Law} imports of machinery, equipment and technology related to clean energy will
be encouraged, while the export of products with a high energy consumption component will
restricted. With respect to land use and clean development, the {Energy Law} will encourage
the rationale use of margin land that is not suitable for growing edible crops to be used to
cultivate bio-energy crops. One of the issues that will be hashed out in the near term is how to
create an Energy Bureau from the disparate centers of responsibility for energy policy in
China. At present, energy policy is made by departments within the National Development
and Reform Commission, the Commission on State Owned Assets, the Department of State
Owned Land, the Water Conservancy Department, the Electric Power Regulatory Commission
and such state owned enterprises as Petro China, Sinopec, China National Offshore Oil
Company, the Shenhua Group, the State Electric Grid and other large state owned energy
companies.

Of the more than 140 articles in the {Energy Law} (Discussion Draft), there are no less
than 20 articles that address energy conservation and renewable energy development. The
{Energy Law} (Discussion Draft) declares that the “State, on the basis of protecting the
ecology and environment, encourages the development of hydropower, nuclear energy, natural
gas, coal-bed methane, wind power, bio-mass energy, solar power, geothermal power, ocean
wave energy and other clean, low carbon power sources to increase the proportion of clean
energy within the energy structure”.

CDM Projects and Other Foreign Participation in China’s Renewable Energy Sector
According to the Office of Energy Efficiency and Renewable Energy of the Department
of Energy (DOE), the United States and the People's Republic of China signed a
Memorandum of Understanding (MOU) last week to promote further research into and greater
use of biomass. DOE and the U.S. Department of Agriculture signed the MOU with China's
National Development and Reform Commission (NDRC) on December 12, 2007. The MOU
outlines a variety of tasks for cooperative efforts between the two countries, focusing on the
exchange of scientific, technical, and policy information on biomass production and its
conversion into biofuels and biobased products and chemicals. The three agencies will form a
Joint Working Group to oversee the effort, and one of its first tasks will be to establish a
consistent method of assessing biomass resources in both countries. The United States is the
largest consumer and producer of vehicles in the world, and in 2006, China became the
second-largest consumer of vehicles and the third-largest vehicle producer. China currently
has about 31 million passenger cars on the road, a number that is expected to increase to 200
million in 20 years. To address both current and future fuel needs for both the U.S. and China,
the new MOU is mainly intended to advance the research and development of biofuels,
particularly cellulosic biofuel. It follows two other MOUs signed in September 2007, when
the DOE and NDRC agreed to promote the large-scale deployment of next-generation vehicle
efficiency technologies in both countries and to increase cooperation on industrial energy
efficiency in China.  On November 30, 2007 the Science and Technology Office of the Inner Mongolia
Autonomous Region and the Spanish Technology Innovation Association entered into a {Memorandum
of Understanding between Inner Mongolia, China and Spain on Cooperative Development and
Utilization of New Energy}. Among other things, the cooperation will entail assisting Inner Mongolia
to establish a renewable energy technology transfer center and assisting Spanish and Inner Mongolian
companies to pursue renewable energy projects.

In consultations conducted by the Chinese and U.S. governments in mid December 2007
under the auspices of the Third Sino-U.S. Strategic Economic Dialogue, the parties reaffirmed their
desire to reduce or eliminate customs duties and non-customs trade barriers to trade in environmental
protection products and services between the two countries. It is anticipated that enhanced cooperation
in the realm of environmental protection will present a significant business opportunity for U.S.
companies.

Developments in Environmental Protection and Energy Conservation in China
According to the Discussion Draft of the recently released {Energy Law}, the governments of
areas where energy development is to occur will be required to draw up pollution remediation and
ecology restoration plans and related companies will be required to assume responsibility for
pollution remediation and environmental protection.
In early 2008 the Electric Power Regulatory Commission and the NDRC will formulate and
issue an opinion governing a plan to provide compensation for power plants that conserve energy
(either because they use renewable energy or their technologies are sufficiently advanced). In the
present system, those power plants which have lower costs (because they have not installed
advanced technologies to reduce emissions) have a cost advantage over other plants which have
higher fixed costs, but are more environmentally sound. By providing an economic subsidy, the
power plants that are more environmentally conscious would be better able to compete with the
lower cost, higher polluting plants. Once formulated and announced, five provinces will be used
as demonstration districts for the implementation of this new policy and all power generating units
will participate. Those five provinces are Guangdong, Guizhou, Sichuan, Jiangsu and Henan. In
August 2007 the State Council approved the {Trial Measures for the Management of Energy
Conserving Power Generation}, which provided for preferentially sending wind, solar and other
clean energy onto the power grid and with respect to coal fired power, sending its power onto the
grid based on coal consumption per unit of energy so that those power plants whose per unit
consumption of coal is low is allowed to put more on the grid and those power plants whose per
unit consumption of coal is high is allowed to put less on the grid or in the case of very high per
unit coal consumption is prohibited from gaining access to the grid.
A national sulfur dioxide emissions trading project for the power industry in China will be
formulated and implemented by Beijing in the near future. This initiative was discussed at the 3rd
meeting of the U.S.-Sino Strategic Economic Dialogue recently held in Beijing.

China’s Energy Production and Consumption
In 2007 non-renewable energy output is expected to reach 2.37 billion MT of coal
equivalents, a 64.6% increase over output in 2002. Of that total coal output will have
increased 75.2% to 2.54 MT and crude oil output will have increased 28.9% to 187 million
MT. Total installed capacity to produce electric power will have exceeded 700,000 MW by
the end of 2007. China’s capacity to produce alternative energy and clean energy will have
reached these milestones as of the end of 2007: output of natural gas: 68 billion cubic meters,
double output 2002’s output; nuclear energy installed capacity: 9000 MW (a 200% increase
over 2002); installed capacity to produce wind power: 4500 MW (a 300% increase over
2002); hydropower capacity at the Three Gorges Project alone will have reached 13,400 MW
(with 19 units operating) and many bio-mass and solar projects are now operating.
With increases in oil costs, since September the government of Beijing has given
subsidies of 18 Yuan/mu to wheat and corn farmers located in the outskirts of Beijing to lessen
the financial costs of higher energy prices.

In 2007 to date, the Chinese electric power industry has closed 11,000 MW of small
coal fired power plants that were heavy polluters, saving 14.5 million MT/year of coal
equivalents, reducing sulfur dioxide emissions by 247,000 MT and reducing carbon dioxide
emissions by 29 million MT. This has contributed to a concentration in the coal fired power
industry; there are now 51.7% of all coal fired power plants with capacity of 300 MW or
greater, an increase of 10% compared with 2002.

The Chinese Institute of Science recently issued a report in which it set out strategic
objectives for China’s energy development in the year 2050. By 2050 China should be
making the transition from a reliance predominantly on petrochemical products to a
predominant reliance on sustainable energy, says the report. In 2050 the increase in
petrochemical energy consumption should not be more than 50% greater than petrochemical
consumption was in 2005; that energy consumption per unit of GDP in China should be equal
to that of mid-level developed countries; that hydropower and nuclear power should account
for 20% or more of total energy produced and have non-hydropower renewable energy

account for ~25% of total energy produced in China in 2050. The report emphasizes that if
these objectives are to be attained it is necessary to “immediately” get to work developing a
renewable energy system; continue to work on making coal use cleaner; further develop
domestic sources of oil and natural gas to ensure their supply; fully develop hydropower and
safe, reliable and advanced nuclear power; develop non-hydropower renewable energy on a
large scale and foster development of research into new energy technologies. The Chinese
Institute of Science report also suggests establishing a State Energy Fund, using tax policy to
encourage renewable energy, implementing a system of subsidies to support the development
of alternative energy, strengthening research into renewable energy science and technology
issues, encourage the development of sustainable living, cooperate with the international
science and technology community and encourage the transfer of relevant technology to
China.

On December 6, 2007 the State Energy Experts Consultative Committee of the State
Energy Leadership Group was established in Beijing. Xu Dingming, the chairman of the State
Energy Office has been appointed chairman of the Energy Experts Consultative Committee.
The Energy Experts Consultative Committee is comprised of 40 well-known experts,
including Zhang Deguang, Li Jinghai, Zhou Dadi, Bai Rongchun, Lu Ming and Zeng Hengyi.
The Energy Experts Consultative Committee is organized into six sub-committees, including
the coal specialty committee, the electric power and nuclear energy specialty committee, the
oil and gas specialty committee, the renewable energy specialty committee, the energy
conservation specialty committee and the energy economics specialty committee. Wang
Siqiang has been appointed the Secretary of the Energy Experts Consultative Committee,
which will be located in the State Energy Office.