Desalination: Proceed With Caution!
By Tommy Patterson 16 October, 2014
Tommy Patterson from Kreab Gavin Anderson on challenges & considerations for desalination in China, Tommy Patterson from Kreab Gavin Anderson on challenges & considerations for desalination in China, Tommy Patterson from Kreab Gavin Anderson on challenges & considerations for desalination in China
China is a lightweight in terms of desalination capacity. According to the 2013 National Seawater Usage Report of the State Oceanic Administration, by the end of 2013, the country’s 103 desalination plants could produce just over 900,000 tonnes of fresh water. That’s just a small drop in the very large 80 million-tonne-per-day ocean of global capacity assessed by the International Desalination Association.
China is expanding desal at a furious pace. Total capacity has risen 30x in past decade
This said, China is expanding capacity at a furious pace. Total capacity has risen 30 times over the past decade. In 2013 alone, over 125,000 tonnes per day were added. Such rapid growth in such a capital-intensive industry is not accidental. Indeed, a penury of freshwater resources in North China has generated a strong interest in desalination among Chinese policymakers.
On the whole, China is short on water. The country contains one-third of the global per capita average of renewable freshwater resources. For cities in the arid Northwest, such as Beijing and Tianjin, the situation is even more dire. The two municipalities hold just one-third of the per capita average of the Middle East and North Africa.
By 2015, capacity is projected to be >2.2mt/day while energy consumption & unit costs are slated to fall by 20% …
… desal to provide 15% of new industrial water supply in arid coastal areas
Reflecting this fact, at least four separate national-level plans have presented ambitious goals for seawater desalination since a February 2012 State Council directive called for accelerated development of the industry.
By the end of 2015, daily capacity is projected to surpass 2.2 million tonnes per day, while energy consumption and unit costs for desalinated water are slated to fall by 20 percent. Additionally, 15 percent of new industrial water supply in arid coastal areas and half of new supply for islands is to be derived from desalination.
Whether based in China or abroad, firms that supply desalination equipment and engineering solutions should find much to like in these numbers. However, time may prove the need to inject a dose of caution into any optimism, especially for overseas suppliers.
Chinese leaders are keenly aware of the technology and expertise gap that exists between local and overseas suppliers. As the August 2012 Special Plan for Desalination Technology Development under the 12th Five-Year Plan notes, of the 756 domestic desalination-related patents identified at the start of the five-year period, only 15 percent involved Chinese intellectual property. Moreover, the plan laments the fact that foreign suppliers make up roughly half of capacity construction.
Chinese government seeks to address imbalance …
only 15% of desal patents are local but around half of desal construction is by foreign suppliers …
… 12 FYP calls for 70% indigenous equipment
In response, the plan for technology development, as well as a comprehensive plan for desalination industry development published at the end of 2012, call for indigenous innovation of raw materials and equipment to rise to 70 percent by the end of the period as well as the construction of two to three model projects with 75 percent indigenous production.
In itself, these targets might not be room for concern if it were not for two concurrent trends – increasing anti-trust activism among Chinese regulators and persistent high per-unit costs in the industry.
Chinese authorities are increasingly investigating firms for suspected monopolistic practices under the 2008 Anti-Monopoly Law (AML), which, among other anti-competitive activities, aims to curtail pricing violations by firms with a “dominant market position”.
The 2013 National Seawater Usage Report notes that the per-tonne cost of 10,000-tonne-plus plants has fallen to just under 7 yuan on average, with smaller plants averaging 8.15 yuan per tonne. While costs are slowly falling, they are still relatively high. In an atmosphere of relatively light government support for the industry, and at a time where water tariff rationalization is underway, providers of cutting-edge, higher-priced technical solutions might one day be pressured to demonstrate pricing flexibility.
Anti-trust activism among Chinese regulators is on the rise in 2014 with new draft regulations …
…but this does not mean foreign desal will be subjected to unfair treatment
Pricing aside, a June 2014 draft regulation of the State Administration of Industry and Commerce proposes to include abuse of intellectual property rights in the basket of forbidden activities by dominant firms under the AML. Firms with a solid market position and a technological advantage are wise to be wary.
Chinese regulators have been careful to emphasize that domestic as well as foreign firms have fallen afoul of the AML. Despite such reassurances, both the US and EU Chambers of Commerce have recently raised concerns about perceptions of selective enforcement as well as the use of extra-legal methods during investigations. It does not help that the AML allows for considerable flexibility in defining a “dominant market position”, which may depend on the conditions of the relevant industry.
Naturally, perceptions of bias by foreign enterprises and a proposal of tighter regulation under China’s AML do not necessarily mean that foreign desalination equipment and engineering suppliers will be subjected to unfair treatment. High costs, and high per-unit prices, are an industry-wide phenomenon, while the technological advantage of foreign suppliers may simply make them a larger target.
Yet the complaints of foreign chambers are, at minimum, evidence of increasing anxiety among the overseas business community. And, regardless of whether bias in AML enforcement exists, China’s ambitious indigenous innovation targets for desalination do raise risks for overseas providers, if only from the threat of IP theft.
“Firms with a solid market position & a tech advantage are wise to be wary”
More dialogue with government stakeholders is key
Therefore, while the future looks bright for all providers of desalination equipment and engineering solutions in China, it is important for market players to carefully balance risks against returns.
Finally, it is in the interest of all enterprises in the desalination industry to enhance lines of communication with government stakeholders while emphasizing their commitment to mitigating the impacts of water scarcity in China.
Desal in China
- Chinese Desal Policies Reviewed – Dr Guo You Zhi, Secretary-General of China’s Desalination Association shares with us his insights on why desalination targets have not been met and what’s in store for the future
- Desalination: A Technology Driven Market – Amnon Levy, COO of IDE Technologies on the shape of desalination market and the technology challenges ahead. Is this the only way out of China’s water scarcity problem?
- Desal in China: Trends & Opportunities – With targets for desalination remaining aggressive in the 12th FYP, China Water Risk reviews China’s desalination market – its past & future as desalination is expected to become more profitable given rising water tariffs
- 2013-2014 Key Water Policies Review – Haven’t been following China’s Three Red Lines strategy to protect water? Given the war on pollution, check out our summary of key water policies from 2013 to 2014
Local vs. Foreign in China’s Water Industry
- 5 Takeaways from Aquatech China 2014 – How real is China’s war on pollution? Will it translate into a growing domestic water market? See what local & foreign industrial leaders have to say in Shanghai and check out our 5 key takeaways from Aquatech China 2014
- China’s Membrane Rush: Foreign vs. Local – Tom Freyberg, Chief Editor at Water & Wastewater International, reviews the oppotunities for Chinese & Foreign companies in China’s membrane technology market
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