September 23,2009

China's New Energy Gold Rush Frothing, Or Not

By CSC staff, Shanghai

China's emerging new energy industry is being warned by the government against production surpluses. As a result, as many as 17 provinces and municipalities are deferring their new energy plans to conduct further research.


The new energy industry in China has ridden a roller coaster over the past year. First the central government published in May its policy supporting new energy and energy savings. Then in August came the State Council's warning against overheating in the wind power and polysilicon industries. Now it seems that that what looked like promising new energy investment could be turning into a bubble.


23 polysilicon plants are at present in full production, with annual capacity of 35,000 tons, and the capacity may increase to 48,000 tons including factories at half production. Another 60 firms have shown interest in entering the industry, and capacity could reach 150,000 tons per year. Most of this is being driven by local government investment. The supply of complete wind power appliances in the global market this year is over the demand.


But government warnings and intervention are being questioned. The upcoming new energy development plan may significantly increase the original goal. Installed capacity of new energy will reach 290 million kilowatts by 2020, accounting for 17% of the total, with installed capacity of wind power, solar photovoltaic generation, and biomass power generation reaching 150 million kilowatts, 20 million kilowatts, and 30 million kilowatts, respectively. Their current installed capacity is only 10 million kilowatts, 14,000 kilowatts, and 3 kilowatts.

There is a huge market space ahead. The current surplus is in low-end sector capacity, while main technical and core components rely on imports at costly prices. The room for developing new energy enterprises with independent intellectual property rights is huge.


At present, China's venture capitalists and private equity fund investors are still very optimistic about new energy, but they are avoiding low-end production and paying more attention to firms with core technology.


Li Junfeng, vice-deputy of the Energy Research Institute of the National Development and Reform Commission, believes the total capacity of China's new energy is not in surplus, but that the current market is too small. He points out the development of new energy to address climate change and solve the energy crisis is a general trend and that it should rely on market mechanisms rather than government support and regulation.


Han Xiaoping, vice-president of the China Energy Network (, thinks a bubble may breed an effective environment for full competition and surpluses can create excellent businesses.


The central government is concerned, though, about the congested development approach by local governments, especially their excessive expansion into low-end capacity. Shi Lishan, deputy director of the New Energy Department of the National Energy Administration, says the "gold rush" model is not recommended, and development should maintain a measured pace.


Local governments have high expectations for new energy, but it won't develop into an economic mainstay in the short-term. The current photovoltaic production capacity of more than 20 million kilowatts is less than 1% of the millions of megawatts of thermal electricity.


More than 17 provinces have in the first half of 2009 expressed interest in "building a new energy base." Many production lines have started operation, with wind and photovoltaic power stations being set up.


But local governments soon discover that tax revenue from new energy manufacturing and power generation companies is very limited, with many projects yet to make a profit. The construction of wind farms and solar power stations does not play a key role in local employment, due to their high tech nature and limited staff, and they pose big challenges for local network access systems. 30% of the wind farms are idle due to lack of a grid connection.


But new energy is a real driving force for local governments. It has become a viable way to attract investment and establish industrial bases, and is attractive under the pressure from the central government for energy-saving and emissions reductions.



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