Imagine not being able to go outside to go to work or school. Imagine the air so filled with smog that visibility is reduced to just a few blocks.
This isn't a strange, hypothetical situation created by fear mongers trying to push clean energy on the world. It's the reality of some of China's largest cities. Last month, Beijing ordered government vehicles off the roads and told residents to stay inside because fine airborne particulates reached 993 micrograms per cubic meter, 40 times the World Health Organization guideline of 25. As the country grows its spews more particles into the air, filling wide swaths of the country with pollution we wouldn't think of tolerating today in the U.S.
Pollution isn't new in China, it's only getting worse. China is expecting to build 160 new coal-fired plants in the next four years, adding to the 620 already in operation. Those plants will power factories that also spew pollution into the air, compounding the smog in major cities. A similar trend is taking place in India, although it's a few years behind the more advanced Chinese economy. Between the two countries there will be four new coal plants built every week. Pollution isn't getting better any time soon.
The urge to grow at all cost with unexpected side affects isn't a new worldly phenomenon. The U.S. went through a similar phase in the middle of the last century. The Environmental Protection Agency was created by President Nixon after cities like Pittsburgh where covered with smoke (see photos here) and the public demanded better living conditions. China's problem has reached a turning point and now is an opportunity for investors. The country is putting billions of dollars into clean energy and you can get on board.
China's next step
China may not be built upon the same free market system that the U.S. is. But, the Chinese government will respond when its country is in need. It has controlled its currency to help manufacturers stay ahead, controlled the exports of its rare-earth minerals to induce high-tech manufacturing to stay at home, and it is willing to stimulate the economy if even the slightest decline in growth occurs.
These aren't free market actions, but China's government will act in what it thinks are the best interests of the country. We're starting to see that renewable energy will be a big piece of that future, driven by the pollution that coats its cities.
How you can profit
China's energy needs are exploding and that has driven the creation of a lot of the pollution we see in major cities. To combat this China has become one of the biggest investors in renewable energy in the world. A United Nations report released last year said that China invested $52 billion in renewable energy in 2011, more than the U.S., and about one-fifth of the world's total investment.
Wind power has led the early green charge in China. Bloomberg New Energy Finance reported that China installed 15.9 GW of wind power last year, 35% of the global onshore construction. Sinovel, Vestas, and Xinjiang Goldwind Science & Technology Co. are the top three turbine makers, and Siemens (NASDAQOTH:SIEGY) is a big name trying to catch up. The company has been late to the onshore boom, but it may be able to take advantage of its global lead in the offshore market, which provides energy closer to users in many cases.
Wind may have been first, but it's solar that is expected to lead China's green investment in the future. The country expects to install 40 GW of solar by 2015, more than all solar installations worldwide last year. There are a lot of ways to play the solar market in China but investors need to be cautious buying over-leveraged solar companies. Two companies to watch going forward are JinkoSolar (NYSE:JKS) and Trina Solar (NYSE:TSL). Jinko is a small solar maker but it has a better balance sheet than most competitors and it is getting into the systems space in a big way. Trina's balance sheet still holds a lot of debt but this is one of the best brands in Chinese solar, and it's a company that is more likely than other large manufacturers to last through the upcoming shakeout.
What to avoid
Solar and wind may have strong futures in China but there will be losers from all of this pollution as well. An easy target, as usual, is the coal industry.
Coal stocks have been beaten up over the past year but I think China's pollution will only make the industry worse. The first challenge is demand. Coal is one of the big drivers of pollution in China and regulation could impact demand going forward. With wind and solar playing a bigger role in energy I don't think demand will continue to grow the way it has over the past decade.
The second problem for companies trying to export coal into China is that China doesn't like to be a long-term importer of anything. Despite growing demand, a recent survey by Thomson Reuters predicted a 10% decline in coal imports in 2013, which would put even more pressure on coal stocks.
Arch Coal's (NASDAQOTH:ACIIQ) recent results show just how bad conditions are in coal. The company's revenue fell 21% in the fourth quarter despite increased Chinese imports in 2012. Another stock to avoid is Alpha Natural Resources (NASDAQOTH:ANRZQ), which is expecting losses to grow in 2013 instead of getting smaller.
Foolish bottom line
It seems like clean energy is slow to catch on in the U.S., but China is behind it 100%. For China, it's a matter of necessity more than political convenience. If your most visible cities are covered by smog and residents can't go outside it affects everything from public health to business. That's why China is making big bets on cleaner energy, something that will continue far into the future. Even China knows a cleaner future is a better future.
Right now I would say wind and solar will be long-term winners and coal will eventually be left in the dust.