Bridges Trade BioRes Review • Volume 3 • Number 2 • October 2009

China’s Promotion of its Wind Industry: Implications for the World Market

by Gordon Y. Liao

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With 70 per cent of its electricity sourced from coal-fired power plants, China has now recognised its urgent need to diversify its current energy portfolio with renewable alternatives. In the past five years, China has doubled its wind power capacity annually, creating substantial business opportunities for international wind turbine manufacturers. Such a windfall for foreign firms, however, looks as though it may be coming to an end.

Foreign turbine producers, while still expanding in absolute sales, have been rapidly losing market share to Chinese competitors-a trend fuelled by both the price gap between foreign and domestic producers and the state’s preference for domestically manufactured goods. But China’s promotion of its domestic wind industry is not unique as many countries have pursued similar planning strategies in the adoption of wind energy.

China’s aggressive plan

China’s wind energy capacity is currently the fastest growing in the world, fuelled by a number of domestic policies. Most prominently, China’s 2006 Renewable Energy Law stipulated a binding requirement for large power conglomerates to generate 3 percent of electricity from non-hydro renewable sources by 2010 and 8 per cent by 2020. And, in addition to devoting US$67 billion of its current economic stimulus package to sustainable energy developments, China is also planning to inject a US$440 billion green stimulus package to catalyse its renewable energy sector over the next two decades.

Chinese turbine producers are expected to seize nearly three-quarters of their domestic market by the end of this year, compared to one-quarter only four years ago. And the scale of the new projects is precedent setting.

”With this Wind Base scenario, we are talking about 10 to 30 gigawatt wind projects,” says Sebastian Meyer, head of research at Azure International, a company specialising in sustainable energy projects in China. “One project is equivalent to the entire installed capacity of Germany.”

A history of domestic preference in wind

While many of China’s industrial development strategies, such as local content requirements, financial and tax incentives, and favourable customs duties have been condemned by critics, such tactics are not unusual.

“The Chinese government has, like every other government, two agendas in this area,” says Steve Sawyer, Secretary General of Global Wind Energy Council. “One is to improve the content of their energy mix, but the other is to build up their own national industry. And like every other government, they play favourites with the local industries.”

A stimulus package with a ‘buy national’ restriction is also unsurprising. Just as the American stimulus package has a ‘Buy America’ clause, the US$486 billion Chinese stimulus, announced last November, also has a strong emphasis on supporting domestic industries. Because China has been delaying the signing of the Government Procurement Agreement that it agreed to as a part of its accession process to the WTO, it currently has no formal obligation to open up its government procurement market to foreign firms.

Redefining ‘Made in China’

Despite the technological leapfrogging that has occurred in Chinese firms over the last few years, it is unknown whether Chinese turbines are inferior in quality to foreign ones. Although there are no accurate measurements of installed wind farm performances in China, an analysis by New Energy Finance, based on rough carbon trade credits, shows that the average capacity factors[1] for Chinese projects using domestic turbines is 22.1 percent, compared to 25.3 per cent for foreign firms.

Many agree that the presence of foreign competitors may not directly result in technology transfer, but it is essential in creating a ‘learning network’ that facilitates the transfer of human capital and knowledge across firms. Some observers have warned that squeezing foreign firms out of the Chinese market may come back to haunt Chinese firms later on.

Industry perspective

Foreign firms say they are dissatisfied with Beijing’s domestic preference, but they have not been left without gains. For one, their market in China is still growing in absolute numbers. For instance, Vestas, the Danish frontrunner in turbine production, unveiled its plan in April to construct a new factory in China, along with increased sales of specialty wind turbines for Inner Mongolia’s harsh winters. Siemens also joined the ranks of other foreign firms, initiating the construction of its first plant in China.

“China’s experience with local content requirement [...] actually worked out pretty well, not only for China but for the industry as a whole,” Sawyer says. “Now there’s a huge supply chain in China, which not only can supply the domestic industry, but is also starting to supply more and more internationally.”

Delicate balance

Localisation of turbine production is essential in the adoption of wind energy. The lowering of costs and the additional perks for the local economy can generate greater acceptance for the technology. However, too strong a push for protectionism can prove to be unhealthy.

“It’s a very delicate balance,” Sawyer says regarding protectionism. “If you do it at an expense of keeping the international firms out of the market, you’ll have either no development at all or very low quality.”

Sawyer says that, ultimately, the route a country pursues depends on whether the primary aim of adopting alternative energy sources is environmental or economic. “At the end of the day, if you care about climate change, you want as many inexpensive turbines as available globally,” he says.

[1] Capacity factor is a percentage measurement calculated by the actual production over time divided by the power that would have been produced if turbine operated at maximum output 100 per cent of the time.