China used ‘chaos’ and lots of cash to dominate renewable energy competitors

Source: John Fialka, E&E News reporter • Posted: Saturday, September 23, 2017

China has spent or loaned $30 billion to $40 billion to establish its current position as the world’s leader in both solar and wind turbine technologies, according to the author of a groundbreaking new study.

Jonas Nahm, a political scientist who teaches energy and environmental policy at Johns Hopkins University, says his interviews with more than 100 executives in China’s fast-growing renewable energy companies show national and local support went far beyond research and development programs typically used by other nations.

Starting from scratch in the mid-1990s, China built its industries with benefits in the form of subsidies, low-cost loans, tax reductions, and generous support for buying land and building factories. The exact amount of government aid may never be known.

“There is no transparency here,” Nahm said in an interview. China also helped its companies target the advanced technologies they wanted from abroad. Some of the aid was used to help companies buy licenses for advanced foreign equipment, sometimes even buying ownership interests in foreign firms to get them, according to Nahm, an assistant professor at Hopkins’ School of Advanced International Studies in Washington, D.C.

The efforts accelerated in 2006 with a central government strategy rewarding “indigenous innovation” and discouraging companies that relied on selling imported technologies. Meanwhile, local governments, hungry for jobs and an increased tax base, helped recruit Chinese scientists educated at the world’s top universities and laboratories abroad to come home and run new companies.

“The technological skills of foreign-trained returnees obviated the need for licenses and joint development agreements common in the wind industry, but solar firms still tapped into global technology networks to buy advanced production equipment,” according to Nahm’s study.

At the same time, China’s environmental regulations helped develop a strong domestic market for renewable energy, including feed-in tariffs to subsidize the costs of wind and solar-generated electricity. All of this was underway, according to Nahm, when “financial markets in Europe and the United States had become reluctant to lend to emerging green energy industries.”

Among the victims were some 200 to 300 U.S. solar startup companies, many of which had received government help to invent alternatives to silicon-based solar cells. “A lot of them went bankrupt,” Nahm said, not because their technologies were terrible, but because they couldn’t “figure out how to make these technologies at a cost that would be competitive.” Venture capitalists were interested in quick returns, not in building factories, he added.

By 2009, low-cost Chinese-made solar panels and wind turbines had begun to drive down world prices and saturate global markets, beating competition from Japan, Germany and the United States, which had dominated world markets for decades. But China’s subsidies and their unusual applications continued to accelerate. “At least implicitly, the creative use of government resources was tolerated,” Nahm’s study concludes.

Nahm, who spent a year and a half tracking renewable energy companies in China, said the result was a kind of creative “chaos.” There were conflicts between central and local governments that helped Chinese entrepreneurs find money to build factories. “Neither central nor local governments have stepped in to prevent the repurposing of existing institutions and policies for innovative manufacturing,” his study says, asserting that “the behavior of the Chinese state has contrasted sharply” with that of other East Asian developers, including Japan and South Korea, that followed national policies.

Whatever China’s intended policy was, the result radically changed markets. “By 2013 more than 60 percent of the world’s solar panels were manufactured in China, a country that had virtually no domestic solar industry just ten years prior. In the same year Chinese manufacturers produced a third of the world’s wind turbines making China the largest manufacturer of wind energy technologies by a factor of two,” Nahm’s study notes.

One development that Nahm found “surprising” was the emergence of superior technologies, not just low-cost wind turbines and solar panels. He credits local governments for pushing companies hard to redesign foreign technologies and substitute material. That helped result in earlier mass production of new products like more efficient solar panels and gearless, more compact wind turbines.

While foreign bankers saw emerging “green” industries as risky and China’s central government tried to restrict loans for companies selling into solar and wind markets that seemed glutted, local governments became “critical brokers” in promoting loans from local banks to rapidly get the new hybrid products into production.

“So when solar engineers were coming back to China from abroad, they were able to benefit from the same local development programs in industrial parks as, say, either the chemical industry or the people making cigarette lighters enjoyed. That opened the door for them to get started,” Nahm explained.

The result was a race. The city of Wuxi bought an equity interest in Suntech, its solar company, and began recruiting its supplier companies to relocate in Wuxi’s industrial parks. Sometimes, as in the case of Baoding, cities found the money to build engineering centers for wind turbine blades and other renewable energy test facilities that fledgling companies could not afford. And some companies, such as Trina Solar Ltd., relocated from one city to another to get more generous tax breaks.

While this mix of policies was “unintended,” Nahm describes the net result as a massive shortcut: “Chinese wind and solar firms engaged in learning and industrial upgrading, but they did so without having to develop the full range of industrial capabilities required to invent, commercialize and produce green energy technologies.”

China’s moves have generated calls for trade dumping sanctions in the United States, but Nahm thinks that a more effective alternative would be to promote more cooperation among companies in the United States, Europe and Asia to use different skills to jointly develop greener energy products. While the United States has focused on invention, the Europeans, led by Germany, have specialized in designing production equipment, and China has developed quick ways to get prototypes into mass production.

One sign that joint collaboration might be a path to more innovation came in Paris in 2015, when most of the world’s nations agreed to cut future greenhouse gas emissions. Nahm asserts that China’s “unexpectedly constructive role” in these talks was the payoff for hatching a jumble of conflicting policies that had begun to work.