Challenges Facing China’s Key Low-Carbon Energy Industries – Solar and Wind

The Solar and Wind energy industry provides the main alternatives to coal burning and is essential for a transition towards a low-carbon economy. Therefore, the Chinese government and private sector are making significant investments in it. However, there are some key challenges for the industry to overcome.

The biggest challenge for the industry in the domestic market is known as the ‘curtailment’ problem. Currently, the renewable energy industry does not have enough transmission capacity to deliver the new power to waiting customers.

Because of underdeveloped power markets and regulatory barriers to energy transfers between provinces, China’s renewable electricity is often wasted. In 2016, China wasted 17 percent of its wind energy, compared to less than 1 percent in the US  and Germany, both of which had far higher wind capacity in proportion to total power demand than China. Some Chinese provinces wasted far more – Gansu lost 43 percent of its wind energy in 2016, and Jilin wasted 30 percent.

Factors that contribute to this curtailment include:

Lack of local consumption. As a lot of provinces have large coal plants, they are afraid that switching to renewables will create unemployment.

Price competitiveness. There is little guarantee that renewable power will be purchased; instead, it is often sold at a lower price.

Reliability concerns. Power sectors in China are characterized by long-term contracts and fixed prices. This rigid structure provides no incentive for system operators to accommodate inter-provincial and inter-regional exchanges or for utilities to release capacity. For instance, in the case of Hunan Province, if the system operator decides to purchase power from Gansu Province, she has to sell any surplus power to other provinces, even at a lower price, which is not economically favorable.

Another challenging factor for the industry comes from government subsidies.

The case studies presented in this research paper show that most of the companies in the solar and wind energy industry are highly dependent on government subsidies. They form their financial decisions based on government policies regarding subsidies.

However, all subsidies are, in general, temporary and unsustainable. With the rapid growth of renewable energy, the increasing financial burden will inevitably lead to the reduction and even elimination of subsidies. It is problematic for an industry to plan long-term development with a reliance on subsidies.

Next, technology. Compared to their western counterparts, Chinese renewable energy companies are falling behind in terms of the efficiency of their products. The main factors in this situation are delays in grid connections due to constraints in grid management, suboptimal turbine model selection, wind farm siting and turbine hub heights and low capacity solar panels.

In the meantime, solar panel waste is also a future concern. Oversaturation of the industry and low regulations have led to a growing amount of panel waste. All produced solar panels have an expiry date in terms of their ability to produce energy properly. Currently, most solar panels are guaranteed to last for a period of 20 to 30 years. China alone is set to produce 20 million tons of solar panel waste by 2050, according to a 2016 estimate from the International Renewable Energy Agency (IRENA).

Furthermore, Chinese solar panel manufacturers have faced protests from locals who accuse them of mishandling hazardous waste. In 2011, Jinko Solar apologized for dumping toxic waste following violent protests sparked by the death of large numbers of fish in a nearby river. Therefore, it seems like the western firms have the upper hand in global competition, technology-wise.

Lastly, the US-China trade war is negatively affecting the industry. The US tariffs on Chinese exports are reducing Chinese companies’ market share.

Reaching out to the global market is one of the most important elements for wind turbine and solar panel producers to grow revenue. Although most of the firms reacted to the US- China trade war by diversifying their markets and to operate in various developing countries, it still poses a challenge, as some countries, such as India, have been influenced by the policy and are now considering taking protectionist measures.

In addition, as renewable energy prices have fallen and the central government has grown increasingly concerned about the impact of the trade war on China’s economy, renewable subsidies are being phased out. Wind and solar facilities must now compete directly at auction with other forms of power generation.

While all these challenges seem hard to overcome, there is a big opportunity that will help the Chinese industry, when used wisely.

Moving into the 2020s, the energy industry will see an accelerated shift to renewable energy projects large and small. Renewable energy is one of the most effective tools in the fight against climate change, and more countries are engaged in an effort to switch their energy systems towards renewables. Therefore, in the future, there will be larger room for renewable energy companies to expand their business domestically and in overseas.

Although, technology-wise, most Chinese companies are falling behind their western counterparts, they have a comparative advantage in the market – there are lots of Chinese renewable energy companies producing wind turbines and solar panels at lower prices.

In the future, they can use this market advantage to increase revenues and to improve their technologies, which, in turn, will make Chinese companies more competitive in the West as well.