China Solar Subsidies Address Economic, not Environmental, Problems

Last week’s news of a sizable and unprecedented subsidy for solar installations in China generated noteworthy commotion in the market, as Chinese solar companies’ share price soared as investors’ rush to snatch up solar stocks, followed by confusion over the terms of the subsidies, disenchantment at the likelihood of eligibility restrictions, and finally malaise as analysts concluded, having clarified the arcane wording of the measure and considered the time lag likely involved, that it was not the golden ticket for which they had hoped.

Having ridden the wave of enthusiasm and dismissiveness that permeated the news, I wondered whether the plan was going to an environmental golden ticket: considering both its catalytic ability to improve the market for solar technologies in China, as well as whether it will induce significant enough deployment of renewables to make a dent in China’s growing energy security and emissions concerns.

Find out what the plan entails, its aims, and what it will not do.

What it is:

• A cash grant of RMB 20 ($2.90) per watt, or between 50% and 60% of the costs associated with the installation of solar photovoltaic (PV) projects in China that meet the minimum 50kW capacity (or roughly 353 170-watt Suntech solar panels covering 4,500 square feet) and advanced efficiency eligibility requirements.
• Qualifying projects will receive 70% of funding from the central-level Ministry of Finance (which will draw from a marginal end-user electricity surcharge collected from all residential and industrial consumers) and 30% from provincial level authorities
• Priority areas: Building-integrated PV applications (as opposed to simple roof-top PV mounts), grid-connected building applications (in order to capture excess electricity), and public building (schools, hospitals, government agencies) applications

While some analysts suspect the program will be capped at around 180 MW, a figure only marginally higher than the standing industry demand estimate of 100 MW in 2009, the wording of the measures in no ways suggests a cap. Rather, as Julian Wong from China eco-blog Green Leap Forward has astutely suggested, mandatory (and historically cautious) ministerial approval of all projects, as well as the strict efficiency and capacity eligibility requirements, will likely substitute for maximum deployment limitations.

What it intends to do:

• Boost local manufacturers, which flooded the market when solar prices were at a premium and the world faced a supply shortage, and have since found themselves with a glut of production capacity and inventory and weak international and domestic demand.
• Stem a portion of the growing unemployment in factories due to a slump in export demand (though it is unclear exactly if any new jobs will be created, and the measures do not include skills training needed to help China’s labor-intensive workforce transition into the solar installation industry)
• Promote technological improvement by encouraging adoption in rural and urban markets

When seen through the lens of the central government’s growing unease over energy scarcity in much of the country, the measures appear less a strategy for reducing conventional power generation at all, and more a strategy for bringing additional power stream online. Just how much of an impact it will make, then, is reflected in some of the things the plan will not do.

What it won’t do:

• Boost solar power deployment enough to offset even one of China’s many coal plants
• Encourage more extensive benefits from grid connectivity, which would require feed-in tariffs (the combination of feed-in tariffs and subsidies is largely credited for the EU’s success in creating a market for and increasing deployment of renewables)
• Give utilities an incentive to improve energy efficiency, since utility-scale parks are not covered in the measures (the fact that Chinese utilities’ cannot profit from energy efficiency – an arragement commonly referred to as decoupling and explained here by Bill Clinton – but can only profit from generating and selling more electricity is believed by many to be the biggest barrier in greater deployment of building-scale renewables)
• Because restrictions on simple roof-top applications make retrofits more difficult, the subsidies will not realize the full potential to incorporate solar technologies in existing buildings (which, given that the economic downturn has halted almost all new construction, and the subsidies are not guaranteed past 2009, makes us wonder who will be able to use the subsidies)

What makes the plan elegant is that it addresses current problems, including a shortage of jobs, weak domestic demand for renewables, and excessive solar manufacturing capacity. However, while clear incentives for solar manufacturers and energy consumers may fill part of the economic hole that lagging foreign demand has created, the “greenness” of the plan is less assured.

Drawing only a tenuous connection between deployment of renewables and a low-carbon mode of development, the plan signals strong support for China’s current manufacturing-based economy. More extensive deployment of renewables here offers the convenient means by which to ensure domestic widget demand for China’s widget-making machine.

Without matched government support for utility-side energy efficiency improvements and better demand-side management, these subsidies will do little to help China reach its target of 20% improved energy efficiency by 2010. The measures at hand will, at best, create a temporary market for the surplus of solar technologies being manufactured in China, and marginally reduce unemployment from export-oriented manufacturing industries.

If that sounds somewhat grim, you will take little solace in the idea that the plan may be just the insurance policy China’s solar magnates, who occupied 10 of the 45 spots on the Hurun Report’s “2008 China Energy Rich List“, need to weather the current financial storm. Shrouding corporate-oriented kickbacks in environmental language, Chinese propaganda greenwashing scales new heights.

Nevertheless, it’s only fair to acknoweldge the plan as an important first step in overcoming existing cost barriers to deployment of renewable energy technologies domestically.