Newsletter January 2011

Global Fund Exchange is a global asset management business which invests across all areas of the New Energy Revolution.
We focus on: • Clean Energy • Water • Agriculture • Traditional Energy • Natural Resources • Carbon & Emissions • Systematic Trading • Hedge Strategies In this issue: • China’s Five Year Plan • U.S. Natural Gas • India’s Solar Power • Bull Rally in Oil • Desertification Risks • Investing in Desalination

China’s 12th Five Year Plan Emphasizes Global Energy Leadership and Resource Efficiency
As China’s 12th Five Year plan (2011-2015) takes effect, lawmakers are focused on transforming China from a net importer of “old” energy such as coal, oil and liquefied natural gas (LNG) into an exporter of “new” energy and efficiency technologies. Chinese investment in clean energy has grown by leaps and bounds in recent years, and the nation has surpassed the United States and other European nations to become the world’s leading clean energy investor. Chinese policymakers are aware that maintaining this high growth will require federal support, favorable policies and more investment into technology R&D. There are three main threads in this 12th Five Year Plan as related to energy, says Wang Yusuo, vice-chairman of the China Chamber of Commerce and member of the Standing Committee of the National Chinese People’s Political Consultative Conference (CPPCC), including: 1. Shift in mentality from “natural resources are king” to “natural resources and technology both are king,” leading to less reliance on foreign resource imports and more tech innovation and clean energy generation at home. 2. Emphasis on efficiency as a source of value for businesses. Production scale is not the only driver of cost savings – efficiency can reduce environmental costs for businesses. 3. Move towards smaller, distributed energy generation, away from large central power hubs to encourage development of regional energy enterprises. China clearly sees itself as a central player in the global emerging energy industry, and will implement policy as necessary to achieve its goals. “In the future, what China exports will not merely be such low-end goods as shoes, socks and lighters,” remarked one official. “Through the export of equipment that manufactures energy, we may become exporters of energy.”

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India Quadruples Renewable Energy Goals
The Indian government has quadrupled its renewable energy targets as part of a national plan to reduce the carbon intensity of its economy. India now aims to install 74.4GW of renewable energy by 2022. This will help to achieve a 20-25% reduction in economic carbon intensity (measured in carbon emissions per unit of GDP) by 2025% of 2005 levels over the next decade. Solar energy is a major focus of India’s plan. India is looking to take advantage of its plentiful sunlight with 20GW of new solar power by 2022. It is also installing 2GW of off-grid distributed capacity, which is important for rural regions currently lacking access to electricity. Last year, India’s Jawaharlal Nehru National Solar Mission was given a mandate to monitor and manage the country’s new solar installations. The Mission is aiming to achieve grid parity by 2022, and by 2030 achieve cost parity with coal, currently India’s predominant energy source.

Wind Energy to Power New York’s Empire State Building

Global Desalination Investment to Double Within 6 Years
Investment in desalination plants around the world is predicted to double over the next six years, says a new report from market research firm Pike Research. By 2016, nearly $87.8bn cumulative capital is expected to flow into the sector. The costs of many key technologies have fallen, making construction of seawater desalination plants more costeffective for many countries and municipalities, especially in water-scarce regions. “Desalination market growth is being driven by a combination of dwindling water resources, population growth and urbanization, and lower desalination costs,” says Pike Research president Clint Wheelock. Because initial construction of desalination plants is especially capital-intensive, Wheelock expects the lingering effects of the financial crisis to slow down the market over the next two years. However, “the outlook for the longer term remains strong, and we anticipate that desalination capital investment will double within six years.”

New York City’s iconic Empire State Building just became “greener” through a major wind power purchase.
The tallest skyscraper in the city recently signed a two year contract with Green Mountain Energy to purchase Renewable Energy Certificates (RECs) to offset the building’s entire energy consumption at nearly 55 million kWh of energy a year. The Empire State Building’s wind energy purchase follows a $500 million energy efficiency upgrade conducted on the building last year. By replacing 6,500 windows, upgrading ventilation and insulation and installing smart meter systems, the Empire State Building was able to reduce total energy usage by 40%. Anthony Malkin, president of Malkin Holdings which supervises the Empire State Building, said it was a “natural fit for us to combine clean energy with our nearly completed energy efficiency retrofit work.”


Graph: Oil Production & Consumption in China, 200-2009

Oil Kicks off 2011 with Bullish Rally
Oil prices have kicked off the new year to a fast start with a bull rally, which many analysts believe is here to stay. Signs of increased economic recovery across the globe combined with a fall in U.S. crude inventories for the fifth week in a row have contributed to the run in oil prices.
Barclay Capital analysts see strong oil demand going forward, particularly from China, and expect oil demand in Q4 2011 to break 90 million barrels per day for the first time. They also foresee a slowdown in non-OPEC oil supply, which Barclays says is “slowly grinding to a halt.” Without interference from OPEC, oil prices will likely reach $100/barrel. OPEC’s decision to roll over existing (and often loosely enforced) production quotas into 2011 is indicative that the cartel is unlikely to take strong mitigating action to keep barrel prices in the so-called “comfortable” range of $70-$90. On the contrary, recent trading has brought prices up to nearly $100/barrel. Regional politics will become more important as new resource discoveries are made and exploited in countries such as Nigeria and Iraq. Finally, Barclays predicts continued market volatility due to speculation and a trimming of spare capacity. “In the past, the rough boundary of 5% of spare capacity has often represented the border between highly volatile markets and calmer conditions,” the bank writes. Fund managers are acting on bullish predictions of their own. According to CFTC position reports, hedge fund bets on crude have reached their highest levels in nearly four years. Netlong positions increased by 4.6% in the week leading up to Dec 28th, the largest total since June 2006.

Source: U.S. Department of Energy

”Swimming in Gas,” EIA Doubles Natural Gas Reserve Estimates in the United States
The United States is “swimming with gas,” according to the latest report from the U.S. Energy Information Administration (EIA), which now says total recoverable reserves of natural gas are much more than previously estimated. These gas resources will have a significant impact on the nation’s energy mix over the next 25 years. In its Annual Energy Outlook for 2011 report, the EIA more than doubled its central natural gas reserve estimates; from 353,000bn cubic feet to 827,000bn cubic feet. This is enough to supply entire U.S. gas demand for 36 years. The combination of plentiful reserves, low prices, and high productivity of new drilling techniques such as hydraulic fracturing or “fracking” has catalyzed investment in liquefied natural gas (LNG) production. Exports of LNG to booming Asian markets seeking foreign energy resources, and is poised for growth as demand continues to mount in these markets. Natural gas is increasingly being used as transportation fuel in place of high-priced gasoline. Many vehicle engines are being built specifically to use natural gas, or being retrofitted to accept LNG or compressed natural gas as fuel. Because they burn cleaner than gasoline or diesel, natural gas present an attractive transportation fuel alternative in an increasingly emissions-conscious world.

Chinese Oil Refineries Running at Full Capacity to Meet Demand
Chinese oil refineries have been running at full steam this winter, with the nation consuming 13% more oil this past November than during the same month in 2009, says a report from Platts news service. High demand levels are keeping Chinese domestic refineries churning at full speed. “Sinopec and PetroChina kept refinery run rates high in November after being told by Beijing to ensure sufficient supplies of diesel,” he said in a statement. The surging Chinese economy has “redefined the global energy sector” according to the International Energy Agency (IEA) as China has surpassed the United States as the world’s largest consumer of energy. IEA data shows Chinese energy consumption outpaced that of the U.S. by 4% in 2009. Until that point, the report said, the U.S. had been the largest energy consumer in the world since the dawn of the 20th century.


China Explores Domestic Carbon Market Launch to Boost Energy Efficiency
A carbon exchange may be an effective, market-driven solution to expand energy efficiency in contrast to drastic, state-driven actions.

Analysts predict China will move fast on this issue. “Whatever China decides to do, they do it quickly,” notes Ashok Bhargava, senior energy specialist at the Asian Development Bank. “China has shown a lot of commitments, and interest now in developing domestic carbon trading. We expect something should be up and running about it very soon.”

U.S. Carbon Market Transforms as CCX Closes and California Market Opens
Voluntary carbon trading in the United States is undergoing a major change as a flagship exchange closes, while another upand-coming market gains approval from California voters.
The Chicago Climate Exchange (CCX) and its founder Richard Sandor announced it has concluded operations and will not ring in a new trading cycle for 2011. Launched in 2003, the CCX was hailed as a progressive, market-driven method to provide profit incentives for businesses to become more efficient and reduce emissions. It was the first such exchange in the United States to allow companies to buy and sell Carbon Emission Reduction credits (CERs) and ushered in a revolutionary introduction to the carbon trade already underway in Europe.

As part of a nation-wide drive to reduce energy usage and boost business energy efficiency, China is seriously considering launching a domestic carbon emissions trading program.

Since 2005, China has been a part of the United Nationsbacked Clean Development Mechanism (CDM). By undertaking various emissions reduction projects, China has Despite the CCX’s close, voluntary carbon trading is alive and been eligible to earn emissions credits which can then be well in the United States. California’s new mandatory traded on global carbon exchanges, most prominently the emissions trading program and the Regional Greenhouse Gas European Union Emissions Trading Scheme (EU ETS). Initiative (RGGI) in the Northeast present new avenues for expansion of the carbon trade. However, many European purchasers are moving away from investing in China-based projects and towards sponsoring projects in lesser-developed nations. Although it is not subject to the same standards as other industrialized nations in the existing Kyoto Protocol, China is the world’s second largest economy. For this reason, many doubt the long term viability of China’s role in the CDM, and advocate instead for the launching of a domestic exchange. A China-based carbon exchange may also catalyze energy efficiency initiatives among Chinese businesses. Officials say increasing energy efficiency will help keep Chinese businesses competitive on the global stage, and also help China achieve its pledge to cut the carbon intensity of its economy 40%-45% by 2020. China’s energy use is sky high because nearly 70% of energy needs are met with coal, a high-emitting fuel. Last summer, Beijing shut 2,000 inefficient factories across the country, a decision which did result in energy savings, but came under fire from a social and employment standpoint.

Many policy analysts are optimistic that state governments will move ahead with various carbon regulation or trading programs. Although establishing a federal trading system is the ultimate goal, state legislatures are not waiting around to begin their own regional initiatives.

These new state programs are perhaps stronger as a result of the initial CCX experiment. “The point was to get companies familiar with allowances and trading, and how to do that and how to use offsets and exchange them on a platform. And that has all been accomplished, so with the advent of mandatory programs like RGGI and now California… the sort of experimental value of CCX as it was is over,” noted Lisa Zelljadt, an analyst at Point Carbon. “Definitely the businesses that participated in CCX have gained some valuable experience.”


Advancing Desertification Puts Chinese Water and Crop Supplies at Risk
China’s desertification crisis is straining national cropland and putting the populous nation’s food and water supplies at risk. About 1.73 million sq. km – nearly 25% of all land in China – is currently desert land or land that is becoming desert. A small portion of that land can be treated to reclaim soil fertility, but thus far investment has been insufficient.
Liu Tuo, head of Chinese anti-desertification efforts, estimates it would take 300 years to roll back the advancing desert in China, which could worsen further as a result of climate change. “Climate change could cause extreme weather, such as drought, which will have a very serious impact upon desertification,” he said. China has struggled with sky high food prices, and as industrialization grows and standard of living improves, these problems will likely worsen with time. Ensuring China’s population has access to secure water and agricultural resources is essential. Without sufficient attention, creeping desertification in China may become a real crisis with significant impacts on food and water supplies.

We regularly gather information from the following reputable sources, including but not limited to: Bloomberg New Energy Finance Financial Times Energy News Green. – The New York Times New Energy World Network Scientific American U.S. Energy Information Administration (EIA) The Wall Street Journal Streetwise Reports: The Energy Report Thomson Reuters Climate Change Business Journal Commodity Futures Trading Commission


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