China charges ahead in alternative energy race as investors weigh risks

The news this week that China is to build the world's largest solar power station is a striking reminder of the continued growth potential of clean energy stocks in this country.

"Increasing awareness of climate change, and the desire to improve energy security at a time of high fossil fuel prices, are driving governments worldwide to strengthen their policies on clean energy" said Sophie Horsfall, fund manager of the F&C Stewardship International Fund.

"This is particularly apparent in China, whose government is determined both to improve the energy efficiency of the economy, and to rapidly increase the use of renewable energy. The 100MW, $766m solar project just announced is the most recent example of this trend" , said Horsfall.

Concerns about energy security are driving the Chinese government to look at ways to reduce the oil import bill. Biofuels are a key part of this strategy, and a 10% ethanol blend is already mandatory in several provinces. On the back of this, licenses for ethanol production for road transport fuel blends are expected to be issued by the government shortly.

"China Sun Bio-chem, which we hold in the F&C Stewardship International Fund, has a lot of experience in the ethanol market already, and so is in with a chance of winning licences to produce ethanol for fuels. This gives the stock real upside potential", Horsfall believes.
And Chinese renewable energy companies such as Suntech Power Holdings, the country's biggest solar power producer, benefit from low costs, and are highly competitive in international markets. Horsfall commented: "Suntech is well placed both to take advantage of the growing domestic market, and also to export to major overseas markets such as the US and Germany" .

Reaping the benefits of investment in clean energy stocks is dependent on government policies coming through – and there are some concerns that there is an unsustainable boom.

For this reason, careful selection of stocks to minimise risks is particularly important. Horsfall concluded: "Our investments in this area are based on two key principles. First, we make sure we understand the political and policy risks. And second, we focus on stocks whose value has not been over-inflated by speculation."