Thursday, November 22, 2012

The Downside of China's Clean Energy Push

In its 12th Five-Year Plan laid finalized this past August, China committed about $290 billion to clean energy investments. The goal: to produce 20 percent of the nation’s energy from renewable sources by 2015. The world paid heed. President Obama in his 2012 State of the Union address warned that the U.S. needed to invest more in renewables lest the Chinese ace it out. “I will not cede the wind or solar or battery industry to China … because we refuse to make the same commitment here,” the president declared.

So what’s China gotten for its money so far? Clean power, and plenty of it. The country now has the capacity to generate 6.2 gigawatts of solar power and 68.3 gigawatts of wind, enough to replace the equivalent of about 50 coal-fired power plants. By comparison, the U.S. has 5.7 gigawatts of installed solar capacity and 51.6 gigawatts of wind power, according to trade association and government figures. The downside is that China’s $30 billion solar power industry is overbuilt and heavily in debt. Analysts say even billions of dollars in new government loans may not be able to pull it out of the hole.

Suntech Power Holdings (STP), the world’s largest solar panel maker, announced in September it would cut or reassign 1,500 workers at its photovoltaic cell factory in Wuxi. Suntech is counting on a $32 million loan from local authorities to avoid more job losses. To stay solvent, LDK Solar (LDK), China’s second-largest maker of solar wafers, was forced to sell a 20 percent stake to a renewable energy investor part-owned by the city of Xinyu, where LDK is headquartered. The support comes as the companies prepare to report combined 2012 losses of $987 million. China’s central government has weighed in, pledging 30 billion yuan (about $4.8 billion) in subsidies to keep large manufacturers afloat, says Wang Sicheng, vice director of China Renewable Energy Industries Association. Regional governments are loath to let their local solar panel makers fail. Yet policymakers in Beijing would prefer to consolidate the industry into a dozen large players from about 50.

Job creation has been a secondary goal of China’s renewables program, and the Worldwatch Institute, a global environmental research concern, estimates that about a million people have found work in cleantech, 600,000 of them in solar. The idea of the bailouts is to preserve those jobs, yet clearly thousands have already been lost and more are in jeopardy.

LDK and Suntech both have balance sheets “so egregious” they would be “imminent bankruptcy candidates if they were American or European,” says Pavel Molchanov, an analyst at Raymond James & Associates. The companies didn’t respond to requests for comment. Molchanov believes infusions of government money won’t stop the losses until China grapples with its massive overcapacity—the same glut of panels that cut global prices by half in the last two years and drove U.S. solar panel makers such as Solyndra out of business. “Every province, every city, every bank is going to try to protect their vested interest as best they can,” he says. “That’s why kicking the can down the road has been the dynamic so far.” Aaron Chew, an analyst at Maxim Group in New York, concurs: “The government’s subsidy plan is better than nothing, but I don’t think it will save the industry as it’s still not profitable.”

The nation’s investments in wind power are faring no better. One-quarter of China’s wind farms are not connected to a power grid—a reflection of poor planning, insufficient transmission lines, and technical concerns by regional utilities that the intermittency of wind power can be disruptive to normal operations. Wind-related power failures have caused blackouts in three provinces, while exploding equipment has been blamed in the deaths of several workers, according to local press accounts. China Datang Corporation Renewable Power, a state-owned wind energy developer, saw first-half 2012 profits plunge 76 percent, in part because regional utilities simply don’t have the capacity to accept all the energy it produces.

China’s wind turbine manufacturers, responsible for 40 percent of the world’s output, are suffering a double squeeze, as demand has stalled both at home and abroad. Sinovel Wind Group, the world’s largest wind turbine maker by market value, posted a $45 million third-quarter loss this year on an 82 percent drop in sales—its largest loss since its initial public offering in January 2011.

Few would argue that China, as the world’s No. 1 source of carbon emissions, shouldn’t be moving into clean energy. Even with its problems, the country remains a renewables juggernaut, having wrested control of industries invented in the U.S. and commercialized by Germany. Its solar industry supplies 65 percent of the panels worldwide, according to a European Union estimate, and includes 9 of the world’s 10 largest companies. Chinese turbine makers Sinovel and Goldwind also have been grabbing market share away from large Western players.

China blames at least some of its solar industry woes on a recent U.S. Department of Commerce decision to impose punitive tariffs on Chinese panel imports of up to 36 percent of the value of the shipments. The European Commission has launched an investigation into whether the mainland’s solar companies are benefiting from illegal government subsidies. China has fired back, opening its own dumping cases against the U.S. and EU.

Help from local governments may be the biggest hurdle to making China’s solar industry competitive, says Shyam Mehta, solar analyst at the Boston consulting company GTM Research: “Until they stop supporting the uncompetitive manufacturers, this won’t go away.”

The bottom line: China’s leadership committed about $290 billion to cleantech. The desire to protect jobs is delaying much-needed consolidation.
Bloomberg Businessweek


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