The Answer, My Comrade, Is Not Blowing in the Wind

Soon after Beijing announced ambitious goals for natural gas in early July, it also renewed its commitment to renewable energy, publishing seemingly robust targets for new solar and wind capacity it wants installed by 2020 (see Map). It would appear that, post-peak coal, competition between natural gas and renewables to be Beijing’s clean energy of choice is indeed heating up.

Provincial Solar and Wind Installation Targets Through 2020 (GW)
Source: National Energy Administration.

However, there’s less to Beijing’s enthusiasm for renewables than meets the eye. In fact, China’s renewables industry has entered something of a political purgatory, with Beijing keen to clean up the excesses that have riddled the industry with waste and inefficiency.

Both China’s wind and solar industries came from nowhere to become world leaders after an intense period of stratospheric growth. Just take solar. Initially, China’s solar industry was built around exports, with, at one point, about 95% of all Chinese solar panels destined for Western markets. But after Western countries launched trade suits and levied tariffs in response to what they perceived as Chinese dumping, Beijing changed tack in 2013, announcing policy support and subsidies to get domestic consumption to soak up the large supply of solar panels being produced by the embryonic industry.

The policy shift ignited an explosion in solar installations, supercharging a trend that had already begun a few years earlier. Between 2010-2015, newly installed solar capacity increased by more than 150% on average annually.

Figure 1. Solar Bonanza During the 12th Five-Year Plan (GW)
Source: National Energy Administration.

Wind, too, had its heyday. The sector took off earlier than solar because the Chinese government unveiled a feed-in-tariff (FiT)—a typical price subsidy for renewables—for wind in 2009. No surprise, then, that wind power installations skyrocketed in 2010 (see Figures 1 and 2). Although the government has since intervened to slow the pace of the sector’s growth, China today still gets more power from wind than from nuclear.

Figure 2. Wind Power Galore in the 12th Five-Year Plan (GW)
Source: National Energy Administration.

Yet for all of wind’s and solar’s successes, each has left in its wake a litany of problems. Without heavy subsidies, the economics of solar and wind still can’t compete with coal, hydro, or even natural gas in some instances. According to China’s National Energy Administration (NEA), wind and solar are still about 1.5 times and 2.5 times, respectively, more expensive than coal-fired power.

That’s putting pressure on Beijing’s finances. At the end of last year, the central government found itself needing to dole out about 60 billion yuan ($10 billion) in subsidies for the renewable sector that it hadn’t budgeted for. It is no surprise, then, that Beijing is now contemplating reducing subsidies by adjusting the FiT for solar power. Cutting subsidies could force Chinese solar firms to dramatically improve efficiency, and thin the herd of companies that aren’t able to lift their game.

Some thinning is vital. While steel is the posterchild of China’s overcapacity problems, renewables aren’t exempt from over-investment either. Idle renewable power—meaning wind turbines and photovoltaic panels not connected to the grid—has been a problem since 2011 or 2012. Since then, it seems to have gotten worse. In 2015, nearly 30% of renewable power capacity in Gansu and Xinjiang—among the worst offending provinces—didn’t generate any power; in some provinces, nearly half of all wind and solar capacity was idle in the first half of 2016, according to the central government.

As the charts above clearly show, the Chinese government is intent on applying the brakes to the pace of renewables expansion in order to deal with existing waste. Officials say they want “healthy, orderly development,” which is basically code for reining in a renewable sector that has become yet another emblem of irrational exuberance. In practice, that means that provinces such as Gansu and Inner Mongolia, where over-investment and idle capacity are already severe, have been omitted from Beijing’s latest installation targets. The central government sees no value in them expanding renewable power capacity when they already face a surplus.

Moreover, the renewables industry also faces political contraints to growth. It is perhaps no coincidence that the anticorruption campaign first swept into the NEA in 2014, around the time that the explosive growth enjoyed by renewables began to peak. One of the earliest victims at the NEA—which institutionally was perhaps the single strongest champion of renewables in the Chinese bureaucracy—was an official that headed the renewable energy department.

The purging of the NEA suggests that the wild expansion of renewables was possibly linked to malfeasance and corruption on the part of certain officials tasked with regulating the industry. Since the anticorruption purge, the NEA seems to have been sidelined on renewables policymaking, with the National Development and Reform Commission, which oversees the NEA, having taken a more decisive role.

None of this is to say it’s the end of renewables in China—far from it. Relative to other markets, China will still be a major leader, and installed renewable energy capacity will likely continue to grow at double-digit rates.

But if there’s a winner in the renewables industry shakeup that has yet to conclude, it’s natural gas, which for the time being looms as both the more practical and politically more palatable clean energy option.