New wind in the sails

Active government support may put Chinese alternate energy companies back on the growth trail

In many ways 2012 was a year that Chinese companies, which were ardent supporters of green energy or new energy, would like to forget. Considering the battering that the new energy sector received in the capital markets, it would also be safe to surmise that the sector was severely affected by the ongoing global financial crisis last year.

The anti-dumping and anti-subsidy probes launched against Chinese photovoltaic enterprises by the US and the EU last year has put a big question mark on the future and survival of the sector. At the same time it is also worth pondering whether such battles are of benefit to anyone.

In my opinion, such probes are merely actions adopted by countries to gain trade protection and subsidies for themselves. Countless economic theories have proved that such measures are ineffective practices. Trade frictions should be seen only as temporary disruptions and it is important for everyone to collectively address the challenges confronting the industry and move forward together.

Underestimating the chain effect of the global financial crisis has been the biggest problem for Chinese new energy companies. Starting with the sub-prime crisis in the American real estate industry, the financial crisis of 2008 has led to huge declines in the world economy. The crisis also prompted several developed nations like Germany to reduce subsidies for the new energy industry last year.

Many developed nations were also hesitant in pressing ahead with more concrete measures in the second stage of the Kyoto Protocol. More importantly, there was also no consensus among nations on a global carbon trading system.

Lenders had to curtail the risk exposure of their financial products last year due to the financial crisis, which also led to a decline in carbon trading prices. (By the end of 2012, carbon-trading prices had fallen from 15-30 euros a ton to lower than 1 euro. Carbon trading prices were expected to reach $150 (113 euros) a ton by 2030, according to estimates released in 2008.)

Another problem for the new energy industry in China last year was the extreme imbalance of the domestic and international market. Domestic demand for new energy remained small and the industry was mainly dependent on the international market. The capacity of the global photovoltaic industry during 2012 was estimated to be around 36 gW, while that of China was around 23 gW, or in other words around 64 percent of the global capacity. China accounted for just 5 percent of the global accumulative installed capacity in 2011.

Most of the other new energies remained largely dependent on the Clean Development Mechanism. Even with an imbalanced industry structure, investment in the new energy industry has remained strong in the past few years. Therefore it is fair to say that China has been too optimistic on the prospects for the international market.

Another significant factor that emerged last year was in resources production technology, especially the breakthrough in shale gas. The development of shale gas has led to a significant decline in the prices of oil and gas in North America. According to the International Energy Agency, the US is expected to be the largest producer of oil and gas by 2020, transforming it from being the largest oil and gas importer to a resource-independent country.

Adequate stocks of oil and gas will also skew the resource consumption pattern for most nations, as it would be cheaper than solar and wind energy. As the largest consumer of resources, China's primary energy consumption has only a small proportion of renewable resources. China's future consumption structure will therefore not only affect the country itself but also the rest of the world.

Coming back to the challenges, it would be correct to say that "cliff" is the right word to describe the pressure faced by Chinese new energy companies. After a new round of investment and price wars, many enterprises remain heavily indebted.

Though the wind power industry has seen a fresh round of investment, grid and deficit problems are still a cause for concern, prompting a reshuffle among manufacturers. CDM, which used to be a profit source for many companies, has been changed from a fixed-price mechanism to a drifting price after the first stage of the Kyoto Protocol ended in 2012. This is another major cliff for Chinese companies.

Under the current circumstances, it is clear that the new energy industry in China now more than ever needs active support from the government to make healthy progress. Looking at the policies announced in December, we could safely surmise that most of the policies are rational measures aimed at adjusting the imbalance of the domestic and international market and fostering new domestic growth poles. As far as the photovoltaic industry is concerned, the National Energy Administration has adjusted the goal of installed capacity during the 12th Five-Year Plan (2011-15). The goal of 5 gW set in 2010 has been adjusted five times in the subsequent two years, and rose seven-fold to 35 gW by the end of 2012. Falling photovoltaic installation costs have contributed largely in achieving these goals. Prices of PV modules have dropped from 40 yuan per watt in 2000 to 3 to 4 yuan ($0.64; 0.49 euros) in 2012. The price for solar electricity has dropped from 4 yuan per watt in 2009 to 1 yuan per watt in 2011.

Big power companies are now more motivated to construct photovoltaic projects in China. Considering the cost of photovoltaic electricity and relevant policies, it is possible to develop a healthy operating mode for photovoltaic power stations.

The policy concerning the photovoltaic industry mostly favors distributed photovoltaic power projects. It is difficult for China to solve the problem of transformation between large power grids in the short term. It will take a lot of technology and huge investments to link the ample resources in the western region with the huge consumption in the eastern region. That said, distributive photovoltaic power applications without the need for long-distance power transportation would also help boost power demand in small towns and rural areas.

According to the 12th Five-Year Plan, the installed capacity of distributive photovoltaic power application can be as high as 20 gW, which will be a major incentive to increase domestic demand.

In the wind energy industry, the National Development and Reform Commission has been standardizing the authorization of wind electricity projects, drawing back the authorization right to the national level. The NEA approved 25,280 mW of wind energy projects in December, accumulating about 53,000 mW of wind energy during the 12th Five-Year Plan.

From the newly approved projects, we can spot some new trends.

First, there is now an emphasis on innovation. Among the new projects, 11 are focused on experimental projects like integration of wind energy storage, wind energy heating, cross-provincial grid integration, joint operation of wind and fossil power, joint operation of wind and gas power, and systems combining wind and solar power.

Projects in places like Shandong, Shanxi and Yunnan have been a major highlight. These projects have provided an opportunity for setting up low wind speed, high-power wind turbine equipment inland. It also illustrates that the government will support projects that are helpful for integration with different grids.

On the macro level, the government has put forward some more innovative policies. The 18th CPC Party Congress report mentioned building a conservation-minded society and controlling the amount of resource consumption. Subsequently, a series of policies on natural gas and coal electricity prices have been put forward. All these measures are aimed at marketizing the price of natural gas and coal and the development of shale gas technologies. The policies in the future may necessarily not focus on the production side, but rather on encouraging the use of clean energy through reform of resource consumption.

The main focus of all government measures should be on the adjustment of domestic energy demand. If this happens, we will see that the trade wars will have little impact.

The new policies, on the other hand, will provide the international energy industry with several new opportunities in China, like the European countries' advantages in distributed energy sources and wind electricity technologies. China's new energy industry will hopefully have a soft landing this year and embrace rays of new hope.

The author is a senior partner in Deloitte China's global energy & resources practice. He is also a member of China New Energy Chamber of Commerce. The views do not necessarily reflect those of China Daily.

(China Daily 01/04/2013 page10)