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China's Rush Into Renewables: The way The World Turns

30 November, 2011

Ten years ago, the smoggy plains of Baoding were known mostly for producing donkey meat. Today, the city just to the south-west of Beijing has a different reputation – as the torchbearer for China’s solar panel industry, which has grown to become the largest in the world.

On the tidy campus of Yingli Solar, Baoding’s biggest solar company, workers play basketball outside during a lunch break. Inside, the brightly lit machines whirr, click and zap, transforming polysilicon ingots into panels that are shipped off to Brazil, Germany or America.

In an upstairs office, Ma Xuelu, chief strategy officer for Yingli and a former Baoding city official, sketches out a romantic vision of the future of solar power. “We want solar to be the green energy that the common man can use,” Mr Ma says. “It’s not like oil … Solar is a harmonious resource, a peaceful resource.”

This year, however, the international solar industry has been neither harmonious nor peaceful, its tranquillity shattered by falling profits, business failures, political controversy and international trade disputes.

The turmoil is a sign of the wider disruption caused by China’s breakneck drive into renewable energy. Committing huge resources to wind, solar and other “clean energy” technologies, China has remade a global industry that is estimated last year to have attracted $243bn in finance and investment. The result: an upending of business strategies and government policies around the world.

Yet the clean energy industry in China is itself now threatened by a series of challenges, both external and internal. The sector has come very far, very fast. Its future progress looks likely to prove more difficult.

China’s drive to go green began roughly a decade ago, when booming energy consumption and the disastrous effects of pollution began to worry its leaders. In 2007, Beijing issued a blueprint for the development of wind, solar and biofuel activities; its wind power capacity then doubled every year, until this year. Public and private funds together have made China the world’s biggest investor in clean energy, with $54.4bn spent in 2010, according to the Pew Charitable Trusts in the US, which monitor the sector.

For the country’s leadership, renewables are both an antidote to a national energy crisis and a cure for the air pollution – mostly caused by burning coal – that is taking a heavy toll on lives. China is still powered largely by coal, but Beijing has a target of sourcing 15 per cent of its energy from non-fossil fuels by 2020, up from 8 per cent today. That is the equivalent of shifting a country the size of Italy from coal to renewables.

As China’s demand for renewable energy has taken off, its manufacturing capacity has been growing even more rapidly. Two Chinese companies, Sinovel and Xinjiang Goldwind, now rank among the world’s three-largest wind turbine manufacturers by megawatts of capacity sold. (Vestas of Denmark is the other.)

In solar photovoltaic modules – the panels that generate electricity by the effect of sunlight falling on semiconductors – seven of the world’s 10 top manufacturers are Chinese. These include LDK Solar, Suntech Power, Yingli and Trina Solar. In 2007, there were just two in the top 10. Many of China’s wind and solar chief executives are among the country’s richest men.

Growth has been driven by some of the same advantages that power the rest of China’s manufacturing – cheap labour and a large home market – along with support from local governments and state banks.

Baoding moved into solar in 2002, when it christened a new development zone Power Valley, and offered preferential land deals and tax breaks to attract desired industries. Other cities have similar strategies. State-controlled banks have provided some $47bn in credit lines to clean energy companies, although only a fraction of that has been drawn down, according to Bloomberg New Energy Finance.

Analysts say the arrangements were not unusual. “We haven’t seen any concrete evidence of Chinese solar firms getting land for free or getting cheaper loans [than other industries],” says Nipun Sharma at Mirae Asset Securities in Hong Kong. “The main reason behind their lower cost structure is economies of scale, and the flexibility in labour costs and also that of raw materials.”

Whatever its elements, the approach brought about a sea change not just in China but around the world. The “China price” for solar panels and wind turbines has up-ended the economics of renewable energy. The cost of a wind turbine today is roughly one-third of what it was in 2007, while solar panel prices have fallen about 40 per cent in the past year alone.

The falls have been particularly steep in solar because the increase in Chinese capacity has come on stream just as austerity programmes brought subsidy cuts for solar power in several large markets, including Spain, Italy, Germany and now the UK. The resulting drop in demand has left the world with enough capacity to produce about twice as many modules as will be sold this year.

Cheaper panels have been a gift to renewable power generators, bringing their costs down to the point where they can compete against coal- or gas-fired plants in some parts of the world. Wind turbine makers have also benefited from sourcing components in China. “Today our end products are getting cheaper, thanks to China,” says Wolfgang Jussen, the China chief executive of Repower, a German turbine maker. “China was a game-changer.”

For some companies in the US, however, China’s rise in renewables is a threat. The collapse of Solyndra, a manufacturer of innovative light-catching tubes that went bankrupt in August with the loss of 1,100 jobs, has come to epitomise the failure of the Barack Obama administration’s attempt to create “green jobs”. Solyndra, backed by a $535m federal loan guarantee, was always a risky bet. But the chances of its success were weakened sharply by Chinese competition. Fears for the future of US solar panel output have led to the formation of a lobby group, the Coalition for American Solar Manufacturing, which has filed anti-dumping petitions against Chinese imports. Beijing has hit back with a probe of its own into US subsidies, raising the prospect of a trade war.

Yet the dispute is just one of the many issues facing Chinese clean energy companies. In solar, global overcapacity and falling prices have hit companies in China just as they have in the US and Europe. This month, Suntech, LDK Solar, Trina Solar and Yingli all announced that shipments would be lower than they had predicted. In the past six months, their shares have all more than halved.

Quality concerns and overcapacity have also made 2011 a difficult year for Chinese wind companies, as a glut of manufacturers with little or no experience have sought to enter the industry. Wu Jialiang, chief executive of Sany Electric, a subsidiary of Sany Heavy that makes wind turbines, says the quality risk is tremendous. “Some manufacturers are only looking to make a quick buck. I know what these companies are like. When the products come out of the factories, there is not even an inspection table,” he says.

Beijing has been trying to set this right with regulations, a process that has slowed the pace of wind farm installations. The ageing electricity grid meanwhile acts as a bottleneck as it struggles to absorb new capacity. According to the China Wind Energy Association, as much as 27 per cent of turbines were standing idle at the end of last year, not yet connected.

Some say the flood of state-directed capital has led to inefficiencies in the same way that its steel and cement sectors ballooned under state support several decades ago. The biggest wind companies are closely linked to the state – Goldwind’s two largest shareholders are state-owned – and political connections sometimes help to enlarge market share. Premier Wen Jiabao’s son Winston co-founded a fund that was a significant investor in both Sinovel and Goldwind, China’s two largest turbine makers.

One wind farm developer describes how the bidding process for some wind farms works: “Quality is not really a concern when choosing a turbine manufacturer, it’s more about guanxi and who you know who can give you loans.”

As Chinese groups expand overseas they will face ever greater scrutiny, making the US trade probe a mere taste of things to come. “We have to take the fight to their backyard before they take the fight to Europe,” says the China head of a western turbine maker.

Although turbines are bulky and hard to transport, Chinese manufacturers are beginning to build beachheads in export markets. Goldwind, for example, is investing in a $200m, 110 megawatt wind farm in Illinois as a showroom for its products. General Electric, the US market leader in turbines, is worried enough about the competitive threat to have addressed it head-on in a recent presentation to analysts, using photographs to show what it said was the poor quality of some Chinese production.

Li Junfeng, a senior energy policy official and deputy director of the Energy Research Institute at the National Development and Reform Commission, acknowledges there have been difficulties but says these will be resolved with time.

“Our industries are still very young,” he says. “A child will stumble as he walks, because he’s still young. But eventually he will grow up.”

(Additional reporting by Gwen Chen)

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China's Rush Into Renewables: The way The World Turns

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