Originally published by Gordon Orr on LinkedIn: China Ups Its Goals Again in Green Energy

Not content with the global leadership position it already possesses in wind and solar energy, China’s government is raising its aspirations for the amount of generating capacity it has installed even further.

All as part of its increasingly aggressive program to clean up the environment, especially the air in its major cities. Local governments are climbing on board more aggressively than ever before as green energy projects are one of the few areas where they are still being encouraged to borrow for infrastructure spending. The National Energy Administration has totaled up local government plans in their new release under the 13th Five-Year Plan and they show:

• Non-fossil fuel share of installed capacity reaches 45% by 2020.

• Solar additions average 36GW per annum for 2017-20.

• Wind additions average 28GW per annum for 2017-20.

• In contrast, nuclear adds 6GW and fossil fuels supposedly 12GW (although my belief is that the end result for fossil fuels could well be zero – companies focused on producing coal-fired power station equipment should look for a new line of business).

All very good news for the solar power panel producers: demand was up 30% in the first half of 2017. Hopefully this time, the industry will behave in a more orderly fashion than in the past and the demand growth may actually result in profits for the industry.

But using the capacity is going to require reducing the curtailment rate (i.e. the % of capacity not usefully connected to the grid) that has historically been in the mid teens. This should be possible as much of the proposed new investment in solar is close to demand in the east and south of China and much less in the remote northwest, which required massive power grid upgrades to get electricity to users.

I also expect a boom in battery farms to store electricity at a scale that will make the Tesla investments in south Australia look like a pilot proof of concept. China’s government will use this as an opportunity to have domestic producers drive down the scale and experience curves ahead of global competitors.

Even if some technological dead ends are pursued and some bankruptcies result, the belief is that intense market competition will lead in the end to a Chinese based producer coming out on top. Foreign capital and IP will be encouraged to come to China, but earning a return despite massive revenue numbers may be a challenge.

Wind power will also need government subsidies, especially to acquire land in coastal regions. Fixed and floating offshore wind farms will multiply, again on the back of local government subsidies.

Both wind and solar project economics benefit when the price of coal rises, as it has done in the last year. With many private mines being closed down and state mines limited to 270 days of production annually, supply fell too fast, leading to a spike in prices.

The government realizes it now has the levers to steer the coal price into a range that will support these renewable projects. When it combines this lever with a second lever – the feed in tariffs paid for renewable power – they can shape the economics of projects dramatically. While that is a risk to private sector investors, it is less so to local governments and so I expect these projects to proceed.

And it is not just carrot; a bigger stick is also being waved by China’s environmental ministries to encourage investment in renewables. Last month, the most severe criticism we have seen was levelled at the leadership of Tianjin, one of China’s largest northern cities, for not only failing to meet their targets for pollution reduction but for also actively enabling businesses to bypass the targets and faking test results. We are a small step away from senior government officials losing their jobs, Party membership, and potentially personal freedom over such infractions.

Lower costs for renewables and somewhat cleaner air for China’s cities are positive outcomes that we should look for. However, investors may be less excited, finding that the heat of competition in a period of rapid growth yet again burns up potential profits.