Rhein on Energy and Climate

Within just five years China has established itself as the dominant world manufacturer of solar panels and wind turbines. In 2010, it looks poised to account for about half of global production for what are the key market segments of renewable energies, with a focus on EU and USA, the two major markets.

It has done so essentially by closing market access during the fast learning period, while encouraging its manufacturers to get a foothold in foreign markets, in particular the USA and EU. This has been a conventional pattern of Chinese industrial policy in sectors of “strategic importance.”

The Chinese market for solar panels is completely in the hands of Chinese companies, which, in 2009, had also a share of almost 50 percent in the German and 25 percent in the US market. The prices of solar panels have declined by 50 percent within the last two years.

Helped by financial incentives to domestic utilities, China has increased its installed wind turbine capacity from 0.2 GW in 2005 to 14 GW in 2009. That is a spectacular performance! Foreign manufacturers have practically not benefited from this boom, as the state-run utilities have given preference to Chinese firms.

From a climate perspective the rise of a strong Chinese solar PV and wind power industry is to be welcomed. So are the deployment in China of 14 GW capacity wind power plants and the fall of prices for solar PV and wind power.

They demonstrate that the country has become capable of a massive push in renewable energies. The absence of technologies can therefore no longer be a pretext for the slow transition of its energy system to renewables and higher energy efficiency. China should be expected to make a much bigger contribution to the prevention of climate change.

But from a trade perspective the way China has achieved its breakthrough deserves to be criticised. It has become a dominant player in renewable energies largely thanks to technologies that it has taken Europe 30 years of research and development to develop.

In addition it has systematically protected its “infant industry” by prohibitive – 70-80 percent -local content requirements for imported equipment and purchase practices of utilities in favour of Chinese suppliers. Last not least, it has granted free land and low interest loans to upstart companies.

Add to this, the recent decision by the Chinese government to restrict the export of rare earths, most which are situated in China and which are essential components for PV panels.

It is not surprising that European and American competitors have become increasingly concerned about the aggressive stance with which Chinese manufacturers attempt to conquer the global market. On September 9, 2010 the United Steel Workers Union has therefore filed a case with the US government accusing China to have violated WTO rules. The US government has until October 24 to act.

In view of the mid-term elections, November 2, the USA government is most likely to take protective action. It has done so before in 2009 when imposing high tariffs on tyres coming from China.

In Europe, Chinese manufacturers have fully benefited from the generous subsidies, via feed-in tariffs, for solar electricity practiced in several countries, particularly Germany and Spain.

Wind turbines enjoy a natural protection because of their weight and bulkiness. Chinese companies would have to invest in Europe and the USA to enter the market.

European countries should rapidly define a policy line.

They have largely lost the battle for PV panels where Chinese industry has gained strong a competitive advantage, essentially thanks to economies of scale. All Europe can do is to urge its shaky industry into a massive restructuring and specialisation so as to regain its competitiveness.

In the wind industry the process of concentration is under way with a few big players emerging. Chinese companies are already part of the big players: three of the “global big ten” are Chinese!

Independently of the necessary efforts for raising industrial competitiveness, which are indispensable to maintain a strong European export performance, governments should, without delay, examine practical ways for excluding Chinese solar equipment from the benefit of direct or indirect domestic subsidies on renewable electricity. There is no reason for European taxpayers subsidising Chinese manufacturers susceptible of destroying domestic jobs in Europe.

But government measures by the USA and EU do not constitute a long-term remedy to the Chinese challenge.

Whatever the relevance of subsidies and restrictions, Chinese industry will dominate large segments of the global market, due to the economies of scale resulting from a massive deployment of wind and solar equipment in China.

European and American manufacturers must adapt to the changing competitive situation by stepping up R&D efforts, specialisation, large-scale manufacturing etc. Governments might assist by export credit guarantees, research grants etc. But it is companies that will have to do the hard job.

Brussels 12.09.2010 Eberhard Rhein

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