By Climate Scorecard China Country Manager Annette Wiedenbach
Geopolitical interests drive creation of solar energy leaders
Over the past 20 years China has emerged as the world leader in solar energy technology. At the end of 2019, China’s total installed capacity of solar PV power made up 204 GW of energy. Government investment into solar panel producers, subsidies, and access to government bank credit helped Chinese solar companies such as Longi, Suntech, Trinasolar, and more develop into leaders of the global solar market. Collectively, they control at least 60% of global capacity for every step in the solar power supply chain.
That being said, the government did not initially promote the solar industry to help China’s low carbon transition. China’s original intention was of a geopolitical and economic nature, both seeing an opportunity to catch up on innovative technology and become a leader in a promising global industry. The solar PV industry (as well as wind power) was supported and promoted with the explicit aim to create a leader in the global renewable energy market and to export equipment made in China to the promising solar markets in Europe and in USA. China’s government wanted to take its export-oriented, “factory of the world” economy to the next level. In the early 2000s, the government set out to strategically use the Clean Development Mechanism (CDM) of the Kyoto Protocol to obtain technological expertise and financing support from the developed world to start building solar panels and wind turbines. China’s advantage here was cheap labor and government subsidies that enticed local entrepreneurs and Western companies to enter into joint venture companies and transfer technology.
It was only when the global financial crisis hit overseas markets that China was not able to sell its solar panels and equipment anymore. Europe and the US imposed tariffs on imports from China and the local industrial landscape experienced a glut of solar PV companies, so the country ultimately started to look at the domestic market. Adopting the broad commercial roll-out of solar energy to a domestic Chinese market – away from the early approach of using solar PV power in remote pockets of the land for poverty alleviation – finally triggered the country’s acceptance of climate mitigation measures during COP ‘15 in 2009.
Government and entrepreneurs teaming up to create national solar champions
Chinese Government support for the solar industry started with programs such as the 1996 Brightness Program, designed to electrify 20 million Chinese with solar power in rural western provinces. The program was given 3-5 billion Yuan from national and local governments and designed as a poverty alleviation program. Installed solar capacities were local and not connected to the grid.
Making the solar industry a strategic development priority gave rise to such Chinese solar superstars as Suntech Power Corporation in Wuxi. Suntech Power has had the strongest impact and role model function on the whole of China’s solar industry development, triggering the formation of a world leading industry sector.
Suntech was founded in 2001 by Zhengrong Shi, a Chinese PhD returnee from the University of New Southwales who returned to China in 2000. He was looking for commercialization opportunities in China for solar technology and believed a lot could be gained from the large-scale manufacturing and improvement of existing technology technology over time. His entrepreneurial partner became the city of Wuxi in Jiangsu Province.
Shi invested 6 million USD in his new company in exchange for 75% ownership. The investment was made through seven administration-connected companies and the city’s former director of Economic and Trade Commission who became the chairman of the board. Shi obtained a 25 percent share. By August 2002, Suntech launched its first 15 MW solar cell production line, assembled in part from pre-owned equipment acquired from solar manufacturers abroad. Suntech also acquired parts and equipment from Chinese, Japanese, and European operations. Aided by a strategy of tweaking imported technology to fit local conditions and taking advantage of cheap energy and lower labour costs, Suntech and other local solar players had a competitive advantage. By the end of 2005, Suntech listed on the NYSE and investors poured 396 million USD into the firm.
Growing a solar power ecosystem
Adittionally, local governments in Wuxi, Changzhou, and Xi’an engaged in building solar industrial parks to support solar panel production and establish the necessary industry ecosystem. In its initial stage, China’s solar industry was dependent on imports for parts and materials from overseas markets while focussing mainly on local manufacturing of the middle stream.
However, labour costs became less relevant over time as China’s solar industry had to continuously upgrade to stay competitive. By the mid-2010s, leading Chinese firms invested in upstream and downstream segments of the solar PV value chain to increase local production and avoid costly imports. They were supported by favourable government policies to encourage local raw silicone production to stop importing expensive raw materials. Developing silicon refinement technology was written into the Ministry of Science and Technology’s 11th Five Year Plan (2006-2010), which also directed funding priorities through national R&D programs. To ensure technology transfer, China’s government required foreign companies interested in investing in their nascent renewable energy industry to enter joint venture companies.
Demand-side policies are imperative for growing a domestic solar market and the Chinese government has used the past two five-year plans and concomitant plans to set capacity targets, carbon intensity targets, and a target of getting 15% of its energy from non-fossil sources by 2020.
Academia, government and companies form a trinity for capacity & knowledge building
With the growing ascent of industry competition, prices for solar energy fell. Who would emerge stronger from domestic competition was decided by which company’s solar panels had the best energy conversion rate and who had the least production costs. This encouraged solar companies to engage in research and development (R&D) to find advanced technologies that produced better solar energy efficiency conversion rates as well as reduced costs in the production process. On the government side, R&D into solar energy technology made up part of the total investment for energy research. About 10% of funding to China’s national R&D programs were allocated to energy research (which in 2008 was 6.1 billion Chinese Yuan or 890 million USD). State efforts were matched by local governments providing funds to national programs to not only develop technology, but also commercialize and export it. Therefore, leading solar companies started to engage in their own R&D to upgrade product and production.
Today, one of about four wafers in the world are produced by Longi Green Energy Technology Co., making it the world’s largest producer of solar wafers. Founded in 2000 and originally importing expensive silicon to manufacture solar PV cells, the company made an early visionary business decision to develop its own mono-crystalline wafers production, foregoing short-term and betting on the government’s subsidies for everything solar to spur the market. In 2014 mono-crystalline silicone made up 20% of the market and by 2020 the market had grown to 90%.
Chinese academia became increasingly attracted to the field of solar and their research spurred technical innovation. A number of universities started specialized departments to support the nascent industry. Two major universities in China have dedicated solar technology department: Shanghai Jiaotong University and Xibei University. And overseas overseas institutes like Germany’s Frauenhofer Institut operates in cooperation with the Chinese solar industry.
Financial incentives came in two different forms: market-based tools to spur investment into the new strategic industry, and access to credit when necessary.
When the financial crisis hit, the China Development Bank (CDB) made $43.2 billion available to 15 solar companies in 2010 which supported them despite global uncertainty. State credit was also used to upgrade capabilities through continued capacity expansion or acquisition. A second round of lending in 2012 ensured that such national champions as Trinasolar amd Suntech stayed afloat and in business.
In 2009, China introduced to a feed-in tariff (FIT) for renewable energy. The FIT incentives encouraged many Chinese investors to support R&D and manufacturing of renewables like solar cells and solar modules. Within this mechanism, different FIT rates are set for varied renewable projects based on the different costs to tap into these resources. Prior to 2019, renewable projects were granted a 20-year fixed FIT rate based on their grid-connection time. However, current policies aim at the FITs being gradually reduced as the government deems the industry and market stable and viable enough to exist without subsidies.
Lessons learned, the potential for scaling, and future watch-outs
Within the span of only two decades, a consolidated development approach by government, business, and academia has formed a complete industrial ecosystem for solar power generation and consumption. China today leads the world in solar output and technology. While the original intent was purely export-oriented, the solar energy consumption rate within China has increased significantly. Remarkably, the national average consumption rate of solar power was 98% in 2019. Developments like these have also led to a constant decline of carbon emissions versus productivity, resulting in a decrease of 48.1% of carbon emission intensity between 2005 to 2019.
In summary, the following measures were crucial to establish the world’s leading solar power industry:
- geopolitical interest and the political will to define renewable energy a strategic industry, thus enabling leadership through innovative technology and installed capacity targets;
- central and local government acting as initial co-entrepreneurs to spur the establishment of production, market, and customer base;
- policies setting concrete targets for renewable energy capacities;
- capacity building and policies including national R&D programs for energy research; and
- financial incentives such as feed-in-tariffs, tax levies, and access to state-backed credit.
While distributed renewable energy generation is still the exception, China’s “Energy in China’s New Era” (2020) plan clearly puts decentralized solar and wind power generation on the development agenda. It promised to improve grid access and other services to facilitate decentralized power generation. Recently, the government has called for provincial renewable energy targets to put pressure on local governments to abandon the country’s reliance on coal. New “environmentally-friendly electricity pricing” models to advance green development tout differential pricing, time-of-use pricing, and tiered pricing for electricity and natural gas.
However, renewable energy prices have fallen and reduced subsidies will consequently make it make it harder for wind and solar facilities to compete directly at auction with other forms of power generation. A major issue is the level of curtailment—that is, energy generated but not purchased because it cannot be absorbed by the electricity grid. High solar curtailment rates in the provinces of Gansu, Xinjiang, and Tibet led China’s National Energy Agency to halt approvals for new solar projects in those regions for 2019.
The government will need to tackle a more comprehensive grid and transmission systems and ensure cross-regional coordination to ensure the energy is distributed better across the vast country. Rather than building more centralized super wind and solar farms, a more distributed energy approach enabling regions and local communities to invest and run renewable energy projects may be more advisable. A community-approach may also support coal-reliant areas to wean off from polluting power generation. This would mean a balancing act between handing back some decision-making power to provincial and local governments, incentivizing them to discontinue investing into coal but also monitoring the appropriate use of financial incentives.
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