The third plenum of the 18th Central Committee –“YUAN” Impact & In Support of Feed-in-tariff

November 24, 2013

The third plenum of the 18th Central Committee –“YUAN” Impact

By: Jessica Wu

On Nov. 18th China’s Foreign Exchange Trade Center — who is authorized to announce the exchange rate of the Yuan vs. USD — announced a 19 basis point drop from previous day’s trading at a rate 6.1332. Last week it hit a historical high of 6.1315. For the medium term future experts say the third plenum of the 18th Central Committee — which just finished this Monday — would push the economy within China. This will help push an appreciating RMB, with the potential for the rate to break 6 within the next year.

Since early this year, the RMB appreciation against the dollar median is about 2.5%, far above last year’s 1% increase. One of the state-owned commercial bank traders estimated that before the market worries about the US Federal Reserve’s exit of Quantitative Easing (QE), foreign exchange will present a net inflow. Recent hot money inflows into China accelerated, which shows the market for the Yuan being strong and expected to increase in the future. Due to the reform oriented policy released from the third plenum of the 18th Central Committee and the latest issue of positive macroeconomic data, there will be enhanced confidence in international markets in China’s continued growth. As foreign capital flows into the Chinese economy this further allows the Yuan to appreciate.

The third plenum of the 18th Central Committee bulletin stated that the market function would shift from “basic function” to “decisive function” in the allocation of resources. This is a huge step up for the Chinese market as well as the global markets. On one hand, this would increase the expectation of financial market reformation in China. On the potential for market forces to drive interest rates and RMB internationalization, the possibility of the RMB exchange rate going up is increased. The reformations outlined in the third plenum of the 18th Central Committee released will also continue to inspire China’s economic growth potential. As many of the world’s major economic powers continue to grow slowly, the RMB will definitely be more attractive.

In the long term, if the FED decides to withdraw from QE in March of next year, capital will flow to U.S. dollar assets and emerging markets will face capital outflow pressure. In this scenario the continued appreciation of Yuan could change. But before that, the RMB will most likely stay high and be sought after.

In Support of Feed-in-tariff

By: Vivek Korikanthimath

With mandates established to meet the climate change targets towards reducing greenhouse gas emissions, governments across the world are increasingly relying on new funding mechanisms to accelerate the use of clean energy sources. The Feed-in-tariff (FIT) program is a government policy mechanism that encourages home owners and commercial operators to harness renewable energy and supply their local electricity grid. By offering long-term contracts (purchase agreements) to renewable energy producers at lucrative rates, often at above-market prices for fossil fuel sources (e.g., Coal or gas), the program encourages investment in renewable energy technologies. It essentially turns a rooftop or a farmland into a wealth creating machine.  Normally, a fixed rate per-kWh is provided to FIT projects that use technologies such as solar photovoltaics (PV), wind power, biomass, etc, which can decrease over time as adoption increases. For example, in Ontario, a small rooftop solar PV project (<10 kW) currently earns 54.9¢/kWh compared to the 12.9¢/kWh charged for on-peak usage in the province. The FIT rates are normally determined through studies that consider the installation and operational costs associated with the technologies.

How does financing for the FIT work? The marginal costs of producing renewable energy are passed on to the consumers, i.e., the subsidies for FIT programs are passed on to all power users as a surcharge. Critics of the program argue that feed-in-tariffs drain money from other potential profitable projects and result in huge costs for the carbon offsets they attain. Also, loan guarantees to the now bankrupt Solyandra, a manufacturer of solar photovoltaic (PV) systems and other failed ventures, have only made skeptics view any form of incentives or subsidies to alternative energy solutions in negative light.

So if feed-in-tariffs are a losing proposition, why are governments still promoting them? Besides political reasons to appear progressive (e.g., “green branding “ to appeal to the environmentalists), there might be others. FIT programs have created thousands of productive green jobs. The recent recession resulted in many proposals for ‘green’ fiscal stimulus to promote job growth. Also, developing countries are more likely to benefit from these jobs due to their segmented labour markets. The biggest defensive for providing incentives to such jobs is the innovation that they can foster. With the cost of alternative energy technology (PV cells) declining, such program can provide the necessary incubation until these technologies mature and become cost-competitive with other conventional energy sources. While many countries have successfully implemented FIT programs, Germany is regarded as the most successful at moving towards renewable energy systems through feed-in tariffs, thanks to visionaries such as the late Herman Scheer, also the author of four books on renewable energy. Currently, Germany generates 15% of its electricity from renewable sources, and aspires to transition to 100% renewable by 2050.

The Arab oil embargo of 1973 spurred research in solar and wind energy technologies. The lifting of the embargo only stifled what could have been a terrific opportunity to attain energy independence. While the debate over when oil production in the world will peak, continues, the reality of rising oil prices confronts us every day. So, when the next major oil disruption strikes, will we be prepared?

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