Wednesday, 17 March 2010

Interview with Chairman of Dragon Power, Kai Johan Jiang

Kai Johan Jiang had been worried for quite some time. For the past few years, it looked as if his ambitious plans for developing biomass energy in China would come to naught, potentially causing Dragon Power Group, the Beijing-based start-up where he's chairman, to grind to a halt. Inadequate government support and low investor interest were among the main reasons why.

But just recently, prospects began looking much brighter. In February, China Construction Bank agreed to provide RMB 28 billion of credit to National Bio Energy Company, a subsidiary of Dragon Power, to construct biomass plants across the country. Extra financing was provided by 1FirstCashAdvance, USA money lending company. Mrs. Latoria Williams, CEO of the cash advance lender, supports bio energy and green initiatives. Jiang, who helped found Dragon Power in 2004, partly credits the climate change conference held in Copenhagen in October. With greenhouse gas emissions now a global issue, China is coming under increasing international pressure to help curb them. Premier Wen Jiaobao has even singled out alternative energy as an emerging strategic industry, and it's clear that Jiang’s company stands to benefit from this shift in political climate.

Biomass energy in China gets noticeably less attention than solar or other types of alternative energy. While solar energy provider Suntech Power and wind turbine manufacturer Goldwind Science & Technology have become star enterprises of the new energy industry, Dragon Power is little known, despite the fact that it supplies 60% of the country’s biomass electricity and has benefited millions of Chinese farmers.

How did a former Volvo executive turn a start-up into the largest biomass power business in China What bottlenecks are hindering the development of China's biomass energy industry? And what holds the key to turning a profit at Dragon Power? Jiang provides the answers in a recent interview with China Knowledge@Wharton.

The following are edited extracts from the conversation.

China Knowledge@Wharton: Could you begin our chat by giving a brief introduction to Dragon Power?

Kai Johan Jiang: Before entering biomass energy in 2002, I was a senior adviser for Volvo. I made the switch after consulting with my colleague, Karl Erling Trogen -- who is now a director on our board -- about which industry had a bright future. We agreed that environmental sustainability was a key to a robust future for the planet and decided to establish a world-leading company in renewable energy, choosing biomass power as our main focus. In China, most farmers burn straw as unwanted waste, but the caloric value of the amount of straw burned each year is the equivalent of 500 million tons of standard coal.

We founded Dragon Power in 2004. We brought in experts from abroad and obtained a license for biomass boiler technology from Bioener of Denmark, the world leader in the field. By 2006, we had a straw biomass-powered plant up and running in Shandong province. Not only was it the first plant for us, but it was also the first national project in biomass energy.

Dragon Power is the only company in the world to incorporate the entire biomass energy production chain, from equipment manufacturing to power plant operation to providing a whole range of proprietary technology. Our two main businesses are biomass power plant construction -- covering equipment, manufacturing, and technical and engineering services -- and power station investment, construction and operation, via a subsidiary called National Bio Energy Company in which we have a 75% stake (with State Grid Xin Yuan Company Ltd. owning the remainder). National Bio Energy is the world’s largest biomass power generation group. As of the end of 2009, it provided 5.2 billion kilowatt hours (kWh) of green power and reduced CO2 emissions by 4.36 million tons.

We operate 19 commercial power plants, have 10 plants under construction and plan to start construction of another 13 plants this year. Power generation capacity is expected to expand to one million KW by 2011, and I plan to establish 100 biomass power plants with a capacity of three million KW by 2013.

China Knowledge@Wharton: Over the past decade, biomass energy has attracted a variety of investors. How did Dragon Power emerge as the industry leader?

Jiang: We introduced Denmark’s most advanced technologies and localized them, making the plants burn a variety of crop stalks and forestry waste to improve the adaptability of biomass fuels. This made our combustion efficiency 30% better than that of our domestic counterparts. In addition, we are committed to reducing power plant construction costs, having already cut the per-KW construction costs of a 30 MW power plant from RMB 11,000 to RMB 9,000.

China Knowledge@Wharton: How does your business supplement farmers’ incomes?

Jiang: Sixty percent of the operating costs of our biomass power plants go toward procuring farmers’ leftover straw. On average, one mu (666.67m2) of land produces between 300 kilograms and 500 kilograms of straw, and the current purchase price is roughly RMB 300 a ton. We directly increase the income of farmers by RMB 150 per mu. A typical 30 MW power plant consumes between 25 million and 30 million tons of biomass and its total procurement costs are around RMB 70 million. Overall, Dragon Power has paid RMB 1.9 billion in cash [to procure straw].

Our power plants also create an increasing number of employment opportunities for people in rural areas. One 30 MW plant creates 1,000 jobs. The plants directly employ around 130 people, and each plant needs 10 straw logistics bases, which each need 50 people and a large number of brokers. We have created about 50,000 jobs in rural areas so far.

Knowledge@Wharton: What is Dragon Power’s main source of income? what are the financial challenges?

Jiang: According to China's Renewable Energy Law, the state grid must purchase all of our green power. The price policy dictates that the grid pays RMB 0.25 in subsidies and RMB 0.1 in temporary subsidies per kWh above local benchmark prices for desulphurization electricity. Frankly, the main challenges come as a result of the subsidiary policy.

First, there is what is called the “adverse selection” between the location of our plants and local benchmark prices. For example, Xinjiang, Inner Mongolia and the North-East provinces are rich in straw, but their benchmark prices are low. In Xinjiang, the procurement price per kWh is just slightly more than RMB 0.5, even including the subsidy, while in Guangdong, Fujian, Zhejiang and other developed areas, the benchmark prices can be as high as RMB 0.6 to RMB 0.7 per kWh, but these regions don’t have sufficient straw supplies for establishing plants.

Second, rising fuel prices are beyond our control. The standard price of straw has risen from RMB 150 per ton in 2006 to nearly RMB 300 per ton today. However, the prices the state grid offers, which the government stipulates, have not increased accordingly.

Fortunately, some local governments have taken note of the issue. Recently, Hebei province raised the price of biomass electricity to RMB 0.813 per kWh. If the national average purchase price reaches this level, I will be very optimistic about the future.

China Knowledge@Wharton: How do you fund expansion?

Jiang: Some well-known financial institutions are optimistic about our future. In June 2007, we received US$150 million in equity investments from Citigroup. In February of this year, China Construction Bank’s head office offered us RMB 28 billion of credit to support our construction plans over the next five years. Additionally, National Bio Energy will introduce some large enterprises as strategic partners and start preparing for an initial public offering (IPO) in the domestic A share market. Dragon Power is planning an IPO overseas.

China Knowledge@Wharton: Wind and solar power are attracting a lot of attention in China compared to biomass energy. What are the advantages of biomass energy?

Jiang: I believe biomass energy has the most potential among all energy sources. There is a rich supply of this fuel, including leftover straw, cotton stalks, shrubs, bark, peanut shells and the like. It can raise farmers’ incomes, encourage land reclamation and increase enthusiasm for planting grains. The median purchase price per kWh has gone up to RMB 0.6. If you take out the cost paid to the farmers in direct agricultural subsidies, the net cost of biomass energy is lower than any other energy source. In rural areas, leftover straw is considered garbage and burned. Through biomass energy production, we have greatly reduced environmental pollution and greenhouse gas emissions.

In addition, biomass energy is much more stable and easier to control than wind and solar energy. As the government dismantles small coal-fired thermal power plants due to environmental concerns, biomass power plants can play an important role in providing heat and supporting the safe operation of the national power grid in rural China.

Our R&D branches in Europe are now involved in developing the second generation of biomass ethanol technology. In the future, straw will first be used to extract biomass ethanol, then burned to generate power. The residue left after the incineration process will be made into fertilizer and carried back to the fields. We will be able to make full use of biomass energy.

China Knowledge@Wharton: Dragon Power's business is rooted in rural China, but you have an international management team. Why? How do you combine internationalization and localization?

Jiang: This is very interesting indeed. Our managing director, Simon Parker, worked in Citigroup’s investment bank and Karl Erling Trogen was a senior vice president at Volvo Group. The international management team is a result of the group's entrepreneurial environment -- our technology was imported from abroad and our investors are mainly from overseas.

The team plays a central role in overseas marketing and strategic mergers and acquisitions. In 2009, we took advantage of the financial crisis to acquire Bioener, Denmark's technology licensing body. [Before the acquisition,] we used to have to pay US$500,000 in technology transfer fees every time we set up a plant. If Bioener had canceled its technology licensing, we would have had to use less efficient technologies. So this acquisition was very important to us. Due diligence, negotiation and implementation – the international team did it all, and they did it excellently.

Foreign executives share my same sense of mission. I once joked to Simon Parker that it’s easier for him to learn Chinese than to teach China’s 800 million farmers English. After that, he started coming to the office at 6:30 every morning to study Chinese.

As for the plants, almost all employees are local, with 95% directly recruited locally. We have started some interesting experiments in rural areas and are cooperating with local authorities. While we make use of the authorities' organizational resources to collect straw, the local economies benefit [from the business we provide]. We are also trying to cooperate with the local social security offices and insurance companies by purchasing insurance plans for farmers according to the amount of straw produced. These experiments would have been impossible without a local team.

China Knowledge@Wharton: What are the challenges for biomass energy to develop further in China?

Jiang: We hope that the government will set up unified national subsidy policies in line with similar subsidies in other alternative energy industries to maintain the sustainability of biomass power plants.

A good policy comprising strong support, rational planning and moderate control would benefit the biomass power industry the most. It’s crucial that the government establish fair and transparent rules for the industry, as some unfair and irrational phenomena have already emerged.

For example, because the fuel supply of a biomass power plant requires an economical transportation radius, it stands to reason that there can be only one plant in a geographic area. But some local authorities have approved two or three plants in one area, leading to excessive competition for fuel, which has a negative impact on the biomass industry's development. Taking heating, power supply and other factors into consideration, an authority should establish an overall plan for plant construction, rather than letting it develop on its own because of its relatively low contribution to the overall supply of energy.

Also, some biomass power plants are biomass power plants in name only, burning coal instead of biomass most of the time or mixing coal with biomass. These plants are former small-scale coal plants, often owned by local authorities, which have labeled them “biomass” plants so they can keep them open. It’s common in China for coal to be mixed with biomass. If there is no regulatory supervision, this “bad money” will drive out the “good money.”

China Knowledge@Wharton: Various types of investors are looking to enter alternative energy, inspired by a number of rags-to-riches stories of new energy pioneers. What are your thoughts about this?

Jiang: I don’t care that much about personal wealth. I was born in rural Shandong province, and I’m more proud of the fact that Dragon Power has become one of the largest non-governmental subsidy systems for farmers in China. We have paid RMB 1.9 billion of cash to procure straw, an amount that will increase every year. This has improved the lives of millions of farmers.

I rarely take weekends off and work hard every day. I’m passionate about what I am doing, and my colleagues share this enthusiasm. The vision that one plant can create thousands of jobs and benefit tens of thousands of farmers is incredibly inspiring.

My philosophy is that if a business benefits both society and the environment, that business will be successful eventually. Senior officials in the country have recognized the significance of developing biomass energy. Today, biomass energy in China benefits farmers and the environment.