China secures first-mover advantage in the market for renewable energy
China wants to become a world leader in renewable energy technologies and is already staking its claim, writes Conal Walsh
THE COMMERCIAL potential of green energy may partly explain the gradual softening of China's stance on carbon emissions. Having once resisted Western calls to cut greenhouse-gas emissions, the country has placed renewable energy at the heart of its industrial policy, with the aim of selling its expertise to the rest of the world.
Aware of the economic opportunities global climate-change consensus could bring, China has quietly used a combination of subsidies, protective tariffs and direct funding to overtake the competition in several renewable technologies.
It is the clear leader in hydro-electric power; with an installed capacity of over 18 gigawatts, the Three Gorges Dam will be the largest hydropower project in the world. China's solar cell industry is also the world's largest. The country is overtaking the US as a market for wind turbines. And Chinese clean-coal technology is attracting foreign customers.
These advances have not gone unnoticed in the US, where the Department of Energy forecasts that around $2.1 trillion and $1.5 trillion will be invested in wind turbines and solar panels respectively across the world by 2030. Steven Chu, the US energy secretary, warned Congress in October that the US' share of solar-cell production had fallen from 40% in the mid-1990s to 7%. Much of this market share has been lost to China, which, Chu said, is spending $9bn a month on clean energy, while "the US has fallen behind".
In the coming decades, he added, "there will be a vigorous effort to limit carbon pollution that will require a massive deployment of clean-energy technologies. The only question is: which countries will invent, manufacture and export these clean technologies, and which countries will become dependent on foreign products?"
At present, China is making significant progress as a supplier. Under its National Action Plan on climate change, it already derives almost 10% of its energy from renewable sources and aims to raise that figure to 16% by 2020 (see Figure 1). China overtook Germany, a long-term champion of renewables, last year in the volume of wind energy it produces and is now second only to the US in the wind energy sector.
China also overtook Japan to become the biggest manufacturer of photovoltaic components – silicon cells that convert sunlight to electricity and are the main ingredient of solar panels. The country now hosts around 100 solar-power companies, half of the world's total, and accounts for one-third of global solar-component production – the overwhelming majority of which is destined for foreign markets, although domestic demand is also growing.
The country's formidable manufacturing base also promises to give it an advantage in the manufacture of wind turbines. In their modern forms, these are made up of more than 8,000 component parts, many of which can be assembled far from their end markets – Vestas, the world's largest turbine manufacturer, opened its largest production unit in Tianjin, in October.
China has been careful to establish an attractive taxation environment for these developments. Under its Renewable Energy Law, the government offers "particularly privileged" treatment to wind-generation projects, according to KPMG. Operators receive concessions on customs taxes and value-added tax, the right to enter long-term purchase agreements with power grids and, sometimes, central-government funding. Hydropower, meanwhile, is supported by the exemption from tax of all equipment used in projects.
For all that, China's sponsorship of renewable energies has created a number of market distortions and left unresolved some questions surrounding the industry and its outlook. In the case of wind and solar, many regulations relating to feed-in tariffs have yet to be clarified, which leaves energy producers uncertain about the economics of new investments. That in turn may have created substantial overcapacity in manufacturing wind turbines and solar panels. China's State Council estimated in September that the manufacturing capacity for turbines was now double the likely wind-power generating capacity.
Many Chinese enterprises may also have been unduly sustained by protection from competition. Only in October, for example, at a bilateral trade summit with the US, did China agreed to remove its local-content requirement in tenders for wind-power equipment.
Meanwhile the price of polysilicon fell sharply during 2009, as more than 100 solar suppliers took advantage of government support to ramp up production, despite an overall softening of demand as a result of the global economic downturn and falling fossil-fuel prices.
Elsewhere, government support has yet to prove decisive. In the auto sector, there is strong backing for firms developing electric vehicles, such as BYD. But, so far, domestic demand for alternative cars has been almost non-existent. A greater degree of sponsorship may follow – including pilot projects for electric cars in cities where the government has committed to building charging-points – but, for now at least, the future of hybrid vehicles in China is uncertain (see Figure 1).
But in the long term, structural growth in this and other renewable technologies seems almost certain. Most forecasters believe gasoline- and diesel-fuelled vehicles will be replaced by some combination of battery, hydrogen and advanced biofuels later this century. There is also widespread expectation that wind and solar power will be more firmly connected to national grids and that most coal-fired power stations will devise ways to capture and store their carbon emissions.
That outcome has moved closer during the recent months of diplomatic horse-trading, with the likely introduction – albeit probably not at this month's UN climate summit in Copenhagen (see p4) – of a global framework to reward investments in emissions reductions, probably in the form of a carbon-trading system.
Such a system will put a price on emitting carbon, creating a cost for companies that create emissions, gains for those that cut their carbon output and a plentiful supply of customers for the makers of renewable-energy technologies. China has moved nimbly to take advantage of the opportunity.