Market Landscape and Policy Analysis

Fly Ash U)liza)on in China

October 2010

1. China fly ash utilization overview 2. Drivers of fly ash utilization and relevant policy development trends 3. Big 5 independent power producers

China fly ash u5liza5on overview: a long history of fly ash u5liza5on 1950s China begins u5lizing fly ash, mainly in the construc5on sector as concrete admixture, and par5cularly in the construc5on of hydropower sta5ons China begins u5lizing fly ash as walling material, including blocks, wallboard, baked bricks, and ceramsite The government starts rolling out a series of incen5ve policies for fly ash u5liza5on in various sectors such as building materials, construc5on, backfill, agriculture, etc. The State Development and Planning Commission1 releases the “China Fly Ash U5liza5on Technology Policy and Implementa5on Roadmap” “Administra5ve Measures of Fly Ash U5liza5on” is released by State Economic and Trade Commission2, Ministry of Electric Power Industry3, Ministry of Construc5on4, Ministry of Finance, Ministry of Transporta5on, and State Administra5on of Taxa5on 1. 2. 3. 4. SDPC was the predecessor of the Na)onal Development and Reform Commission (NDRC) SETC was abolished during government restructuring in 2003, its fly ash related porPolio was transferred to the NDRC and Ministry of Industry and Informa)on Technology (MIIT) Ministry of Electric Power Industry was abolished in 1998, its porPolio is now shared by Na)onal Energy Administra)on (NEA) under NDRC and MIIT. Predecessor of the Ministry of Housing and Urban-­‐Rural Development (MOHURD)

1960-­‐70s 1980s

1991

1994

China fly ash u5liza5on overview: a long history of fly ash u5liza5on 2002 2003 2004 Government publishes the “Law on Promo5on of Cleaner Produc5on” Government publishes the “Regula5on on Levy and Use of Pollutant Charges” Government publishes the “Law of Preven5on and Control of Environmental Pollu5on by Solid Waste” NDRC, Ministry of Finance, and State Administra5on of Taxa5on releases the “Administrative Measures of the Recogni5on and Registra5on of Resources Comprehensive U5liza5on Project Encouraged by the Central Government” NDRC releases the “Clean Produc5on Performance Ranking and Indexes System of Thermal Power Industry” Government publishes the “Law of Circular Economy Promo5on.” NDRC starts preparing to revise the 1994 version of “Administra5ve Measures of Fly Ash U5liza5on” NDRC, MOST (Ministry of Science and Technology), MOHURD, MIIT, MOLAR (Ministry of Land and Resources) and MOFCOM (Ministry of Commerce) released the “Technical Policy Outlines for Comprehensive U5liza5on of Resources in China”

2006

2007

2008

2010

China fly ash u5liza5on overview: government sta5s5cs
Year 2001 2002 2003 2004 2005 2006 2007 2008 Fly ash output (million tons) 154 181 217 263 302 352 388 395 Fly ash u4liza4on (million tons) 97 119 141 171 199 232 260 265 U4liza4on ra4o 63 66 65 65 66 66 67 67 450 400 350 300 250 200 150 100 50 0 Fly ash output (million tons) Fly ash u5liza5on (million tons) U5liza5on ra5o

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In 2009, China’s installed thermal power capacity and the electricity generated by thermal power sta5ons both increased about 7-­‐8%. Although coal consump5on has been reduced by introducing high-­‐efficient generators, fly ash output has s5ll maintained its rising momentum. As fly ash volume steadily increases, the government’s 60% fly ash u5liza5on regula5on has always been considered an impossible goal by some industry analysts; most recently in September 2010, Greenpeace released a report which publicly cri5cized government sta5s5cs: “The biggest misconcep5on is the belief that 60% or more of China’s coal ash is reused—in reality it’s less than 30 percent” (a conclusion of Greenpeace based on its independent eight-­‐month survey of 14 thermal power sta5ons across China).

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China fly ash u5liza5on overview: current status – imbalanced u5liza5on
• The uneven growth of the various regions of China creates an imbalanced fly ash u5liza5on rates. In the developed coastal regions, especially the Yangtze and Pearl River Delta, as well as the Bohai Rim, the u5liza5on ra5o of fly ash could be as high as above 100%: the downstream players most likely compete to secure a fly ash supply, import fly ash from other regions, or use prior fly ash storage. Meanwhile, in the underdeveloped middle and western part of China, the fly ash u5liza5on ra5o could be as low as 30% or below, although, there might be fly ash shortage as well in certain months because of the nature of the building material and cement business. •

Beijing Tianjin Xian Chengdu Chongqing Wuhan

Bohai Rim
Shanghai

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Yangtze River Delta
Guangzhou

Pearl River Delta

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Because all 14 samples (except in Hebei) used by Greenpeace for its inves5ga5on were located in central and western China, the Chinese government blamed Greenpeace for not taking a survey of the en5re country, and defended its official na5onwide fly ash u5liza5on ra5o of 67%

China fly ash u5liza5on overview: current status – main uses
Fly
ash is currently used in China for: • Building materials: such as baked brick and ceramsite, gas ash concrete and cement admixture (or blended material), etc. Road engineering: such as roadbed layer materials, side slope and bituminous concrete admixture. Construc5on projects: concrete and mortar admixture. Agribusiness: used as fer5lizer or used to improve soil quality Backfill: engineering or mine backfill. Others: such as extrac5on of Aluminum, etc. Agribusiness 15% Road Engineering 20%

Volume Segamenta4on Others 5%

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Backfill 15%

• • • •

Building materials 35%

Construc5on projects 10%

China fly ash u5liza5on overview: current status -­‐-­‐ market players
Highly
fragmented market par5cipants landscape Players scakered in different sectors ranging from equipment supply, construc5on, engineering and opera5on / technical services sectors

Limited foreign investment as well as equipment and service providers

Many domes5c firms, research ins5tutes, equipment manufacturers, trading companies affiliated with IPPs, etc.

JCOAL, LASCO, Schloss-­‐ Pfeiffer, Masa-­‐Dorstener, CSIRO ….

China Ashtech Development Center, Xinyuandao, Changsha Derby, Shanghai Huayu, Beijing Power Coal Ash Industrial Co., Nanjing Xinyuan5an, CBMA/ CNBM ….

China fly ash u5liza5on overview: current status – main challenges
① Imbalanced U4liza4on • Uneven development of fly ash u5liza5on in the coastal and inland areas. Uneven u5liza5on ra5o of various grade of fly ash (short supply of high quality fly ash and low u5liza5on of low grade ones). ③ Limited applica4on fields and value added • Fly ash u5liza5on is s5ll largely concentrated in the building materials and construc5on sector. The products are mainly low value-­‐ added.

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⑤ Limited government incen4ves and weak law enforcement • “Administra5ve Measures of Fly Ash U5liza5on” need to be updated and revised Taxa5on and financing incen5ves need to be improved. Law enforcement needs to be enhanced to control fly ash discharge

③ Dynamic of fly ash quality • • Mixed discharge equipment in power sta5ons (wet vs. dry). Increasing desulfuriza5on and denitra5on and its impact on fly ash characteris5cs and quality.

• •

China fly ash u5liza5on overview: Case study– Datang Zhangjiakou Power Sta5on
Ø 8X300MW, one of the largest power sta5ons in northern China and electricity mainly supplied to Beijing, which is 200km away. Ø Phase I (4X300MW) was put into opera5on in 1995 with a hydraulic ash handling system. Ø Phase II (4X300MW) was put into opera5on in 2001 with an ash-­‐slag separa5on system. Ø Upgrade of fly ash discharge system was put into opera5on in 2007 (dry ash removal without sor5ng equipment and grinder included). Ø A new fly ash grinding system was recently (Aug. 2010) put into opera5on to increase the output of high quality fly ash (grade I) for sales. Ø The sales and u5liza5on of fly ash is solely handled by Beijing Tongzhou Gongyun Technology and Trading Company, affiliated company of Datang and established in 2006 for solid waste business.

China fly ash u5liza5on overview: Case study– Datang Zhangjiakou Power Sta5on
Opera4ng
data for 2008 Power genera5on Annual u5liza5on hour Coal consump5on Average coal ash content Fly ash output Fly ash sales Fly ash market 13.8 billion kwh 5,760 7.4 million tons 32.34% 1.92 million tons 320,000 tons (17%) * 90%: cement plants in Beijing 10%: local end users

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With the new grinding system in opera5on in 2010, the saleable high quality fly ash (grand I) from this plant could reach 840,000 tons (43%) and above Reference prices of grand I fly ash: CNY 180 / ton

1. China fly ash utilization overview 2. Drivers of fly ash utilization and relevant policy development trends 3. Big 5 independent power producers

Drivers of fly ash u5liza5on: economic growth will s5ll rely on coal Ø While the increases in China's popula5on, economy, and energy usage has prompted 1.03% the Chinese government to encourage the development of other energy resources, coal is s5ll expected to play the most significant role in the na5on's energy future. Ø Nearly 75% of China’s installed capacity in 2009 is from thermal power generators, and an even further 81.81% of the electricity generated in 2009 was from thermal power plants. Ø Although the government plans to reduce thermal power generators to 69.1% in China’s installed capacity mix within the next 5 years, the actual total thermal power capacity could further increase about 56%, from 599GW to 933GW, according to the na5onal development plan.

Installed capacity in 2009 2.01% Hydro 22.43% 74.49% Thermal Nuclear

Year

Installed capacity (GW) 622 900 1,350

Fly ash output (million ton) 352 405 562.5

2006 2010 (projec5on) 2015 (projec5on)

Drivers of fly ash u5liza5on Pull Factor
Promo5on
of circular economy and comprehensive u5liza5on of resources Due to the con5nuous expansion of infrastructure in China, there is an increasing market demand for fly ash for construc5on projects and building materials Rising prices of fly ash in the market Financial incen5ves such as government subsidies and tax break policies

Push Factor

Increasing fly ash output Cleaner produc5on policies and regula5ons Preven5on and control of environmental pollu5on due to solid waste Punishment for solid waste discharge

The development of fly ash u5liza5on policies: policy frameworks China’s regulatory framework creates numerous laws and regula5ons

to restrict solid waste discharge and promote a “circular economy”

PRC Cons5tu5on Laws

Na5onal People’s Congress

Examples of regula)ons relevant to fly ash u)liza)on • Law on Promo5on of Cleaner Produc5on • Circular Economy Promo5on Law • Law of Preven5on and Control of Environmental Pollu5on from Solid Waste

State Council

State Council Regula5ons

• Decision of the State Council to establish a leading group for energy saving and emission reductions • 11th Five Year Plan (2006-­‐2010) Guidance on Resources Comprehensive U5liza5on • Regula5on on Levy and Use of Pollutant Charges • Administra5ve Measures of Fly Ash U5liza5on • Technical Policy Outlines for Comprehensive U5liza5on of Resources in China • Administra5ve Measures of the Recogni5on and Registra5on of Resources Comprehensive U5liza5on Project Encouraged by the Central Government

Ministries

Ministerial Regula5ons and Measures Local Regula5ons and Measures

Local Authori5es

• Shanghai municipal government's Management Regula5on on Fly Ash Comprehensive U5liza5on

The development of fly ash u5liza5on policies: related laws Law on Promo5on of Clean Produc5on (2002) • Defines means of clean produc5on • Sets forth incen5ves for clean produc5on in the forms of tax cuts and subsidies Law of Preven5on and Control of Environmental Pollu5on by Solid Waste (2004) • Comprehensive revision of the original version(1996) by introducing the “Producer Responsibility System” • Expands producer responsibility, and calls for the establishment of a mandatory recycling system Circular Economy Promo5on Law (2008) • Provides a legal framework for developing the economy, raising energy efficiency, protec5ng the environment and realizing sustainable development based on the 3R (reduc5on, reuse and recycle) principles

The development of fly ash u5liza5on policies: policies and regula5ons AdministraGve Measures of Fly Ash UGlizaGon

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Released in 1994, and currently under revision by NDRC and MIIT. New power sta5on projects need fly ash u5liza5on solu5ons in advance for approval; exis5ng power sta5ons need to upgrade their systems for fly ash u5liza5on. Ban any new solid clay bricks and 5les projects near power sta5ons, ask exis5ng plants as well as new construc5on projects to use fly ash as mixture. Impose penal5es on construc5on projects which could not meet the set target of fly ash u5liza5on. Ask power sta5ons to provide subsidies to large scale direct users of their raw ash; power sta5ons could only sell fly ash auer processing it in line with na5onal standards, and prices should be in the buyers favor and based on actual processing cost and quality. Ask power sta5ons and end users to submit their sta5s5cs of fly ash discharge, u5liza5on and storage status to government agencies on a regular basis. Call for incen5ve financial and taxa5on arrangement for fly ash u5liza5on. Auer the central government released the administra5ve measures of fly ash u5liza5on, the surrogates at the provincial and municipal level started to release their local regula5ons. For example in Shanghai, the municipal government decided to levy a special R&D fee (0.4 RMB per ton of fly ash output) on power sta5ons in order to support the research of fly ash u5liza5on in Shanghai.

The development of fly ash u5liza5on policies: policies and regula5ons 11th Five Year Plan (2006-­‐2010) Guidance of Resources Comprehensive UGlizaGon

l l l l l

Released by NDRC in 2006 Set up a na5onal target of fly ash u5liza5on rate at 75% by 2010 Ask for financial incen5ves, tax breaks as well as technical policies for resources comprehensive u5liza5on NDRC is currently drauing the 12th Five Year Plan (FYP 2011-­‐2015) which might revise the target and add more incenGves Meanwhile, MIIT is also drauing a specific 12th FYP for comprehensive u5liza5on of industrial solid waste

Clean ProducGon Performance Ranking and Indexes System for the Thermal Power Industry

l l

Released by NDRC in 2007 Set up a matrix to manage the clean produc5on prac5ce of power plants and define the target and weight of fly ash u5liza5on in the system l Fly Ash U5liza5on Rate Target: 100% (coastal region), 60% (central and western region) l The weight of fly ash u5liza5on rate in the matrix: 10% (other factors includes coal consump5on, emission, etc.)

The development of fly ash u5liza5on policies: policies and regula5ons RegulaGon on Levy and Use of Pollutant Charges

l l

Released in 2003 by NDRC and Environment Protec5on Authority Defines a 30 RMB per ton of fly ash pollutant charge to levy on power sta5ons who could not meet the environment protec5on standards on fly ash handling and storage

RegulaGon on Levy and Use of Special Fund for

PromoGon of New Walling Materials ApplicaGon

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Originally released in 2002, revised in 2007 by NDRC. Defines a 10 RMB /m2 (might be different in various regions with 10 RMB as a cap) special fund for promo5on of new walling materials to levy on any new construc5on projects without applica5on of new walling materials. Defines a catalog of new walling materials including all walling materials (bricks, 5les, and etc.) made by fly ash (more than 30% raw materials are fly ash) Defines the procedures to apply for financial support from the fund to develop and produce new walling materials

The development of fly ash u5liza5on policies: policies and regula5ons AdministraGve Measures on the RecogniGon and RegistraGon of Resources Comprehensive UGlizaGon

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l l

Released in 2006 by NDRC and Ministry of Finance and State Administra5on of Taxa5on Defines a recogni5on and registra5on procedure for resource comprehensive u5liza5on projects A cer5ficate secured auer the recogni5on and registra5on procedure is a must for a tax break and government financial support

Technical Policy Outlines for Resources Comprehensive UGlizaGon

l l l

Newly released in 2010 by NDRC, MOST, MIIT, MOHURD, MOLAR and MOFCOM Defines all of the technology supported by government in the resources comprehensive u5liza5on sector including various kind of fly ash u5liza5on technology Summarizes the preferen5al taxa5on policy for the comprehensive u5liza5on of resources

The development of fly ash u5liza5on policies: policies and regula5ons VAT exempGon

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Released in 2008 by Ministry of Finance and State Administra5on of Taxa5on Specific building materials such as bricks, 5les, etc., made by fly ash (more than 30% of raw material is fly ash) could enjoy VAT exemp5on, but the manufacturer needs to secure a cer5ficate from the local DRC to be qualified for the exemp5on NO VAT exempGon for direct sales of commercial fly ash or balloon / bead, etc.

Corporate Income Tax ReducGon based on the CIT Law released in 2007

l l l

The revenue generated from sales of building materials made by fly ash (more than 70% raw materials must be fly ash) could be reduced by 10% when calcula5ng taxable income The revenue generated from direct sales of commercial fly ash or balloon/bead could also be reduced by 10% when calcula5ng taxable income If the manufacturer could be qualified as a “New and High-­‐tech Enterprise,” it could enjoy a CIT reduc5on from 25% to 15%

The development of fly ash u5liza5on policies: standards l l China has introduced a series of standards for fly ash u5liza5on since 1979, most of them are related to its u5liza5on in the building materials and construc5on engineering sector

Most power sta5ons sell their fly ash by a descrip5on based on the GB/T 1596-­‐2005 “Standard of Fly Ash Used for Cement and Concrete”

Technical Specifica4ons Grade I Fineness (residue on sieve 45um) ≤ Water Requirement Ra5o ≤ Loss of Igni5on ≤ Moisture Content ≤ SO3 ≤ f-­‐CaO ≤ Type F Type C 12% 95% 5% Grade II 25% 105% 8% 1% 3% 1% 4% Grade III 45% 115% 15%

The development of fly ash u5liza5on policies: overview Early stages (1950s-­‐2000) • The Chinese government started to promote fly ash u5liza5on technologies in 1950 for hydropower projects • Extended u5liza5on to the building materials sector in 1960s and 70s • Started to introduce resource comprehensive u5liza5on polices in 1980s • Started to introduce incen5ve policies for fly ash u5liza5on in 1990s Rapid development (2000-­‐2010) • Sustainable development, energy saving, and emission control became fundamental na5onal policies • Sped up the legisla5ve process by introducing a set of laws related to fly ash u5liza5on • Started to draw up na5onal plan, guidance, recogni5on and registra5on administra5ve measures as well as technical policy outlines. • Introduced specific tax incen5ve policies Review, improve and intensify enforcement (2010 and beyond) • Increasingly focused on environment-­‐friendly development as well as technology upgrades • Reviews exis5ng regula5ons and policies, draws up specific na5onal plan on industrial solid waste u5liza5on and revises the out-­‐dated administra5ve measures on fly ash u5liza5on • Further enhances law enforcement and introduces more incen5ve policies

The development of fly ash u5liza5on policies: trade barriers • There are no major trade barriers, and foreign firms are encouraged by China’s government to be involved in the fly ash comprehensive u5liza5on sector -­‐-­‐ from equipment and technology supply to direct investment of fly ash u5liza5on projects However, there are some invisible trade barriers such as: • • • • • Chinese government’s policies to promote indigenous innova5on Rising na5onalism Government procurement process that favor local companies “Trading market for technology” policies Opaque market and policy environment

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The development of fly ash u5liza5on policies: gradual progress in IPR • China’s laws and regula5ons compliant with WTO’s TRIPS • However, there are enforcement problems • Some prac5cal steps: • Register your IPR with the relevant bureaus • Include IPR clauses in your business contracts • Communicate all relevant corporate IPR policies to your staff • Confiden5ality agreements for staff with access to key technologies • Understand China’s (ouen quickly changing) laws and regula5ons, and different possible ways of redress.