Wednesday, March 3, 2010

China’s Second Wind: Asian Superpower Embraces Alternative Energy

China is no longer just a manufacturer of low cost widgets and knock-off designer bags. The Asian superpower has propelled itself into the clean energy market with a fervor, and is now the leading manufacturer of wind turbines, solar panels. China is poised and ready to expand into the construction of other energy infrastructure such as nuclear reactors and state of the art coal power plants. Chinese manufacturers benefit from three big advantages. The first is cheap labor. The second is a booming domestic market. Third, the Chinese government has made energy infrastructure its top priority (not be confused with making climate change a priority).

Just how cheap is Chinese labor? Reliable statistics on Chinese workers are hard to come by, making it difficult to analyze China’s competitive strength. The U.S. Bureau of Labor Statistics estimates that Chinese factory labor costs just 64 cents an hour (workers in the city make about $1.06 per hour while suburban and rural manufacturing workers earn roughly $.45 an hour). This includes wages, employer contributions for benefits and social insurance. Although wages have risen sharply over the past five years, they are nothing when compared with the average compensation of U.S. manufacturing workers at $21.11 per hour. Renewable energy industries in China are creating over 100,000 jobs per year, which need skilled and unskilled labor to keep its massive domestic economy chugging along at a smooth 8% growth rate.

China’s demand for electricity is rising 15% per year, and unlike more developed countries, China does not have excessive legacy infrastructure complicating its investment decisions. According to the International Energy Agency, China will need to add nearly nine times as much electricity generation capacity as the U.S., resulting in huge economies of scale and efficiencies from large production. U.S. companies often need to decide between buying renewable energy equipment or continuing to operate fossil-fuel power plants that have already been built and paid for. In China, power companies are buying new equipment anyways. Thus, alternative energy is particularly attractive and increasingly price competitive.

The Chinese government has put policies in place to steer loans toward renewable energy. Bank loans are available at interest rates as low as two percent, made financially feasible by China’s 40% savings rate and bolstered by further government incentives and taxes. All electricity users are charged a renewable energy fee. The fee increases residential electric bills by .25 to .4 percent and to .8 percent for industrial users. The fee revenue is transferred to companies that operate the electricity grid to pay the cost differential between renewable energy and coal-fired power.

China’s wind and solar industries are clearly making moves, but still need to grow structurally to create a cost-effective and sustainable energy system that will support its vast energy needs. Grid operators are not reimbursed for the cost of building power lines to wind turbines and other renewable energy producers, many of them in remote areas. Transmission losses are high for sending power over long distances to cities, and over 30% of China’s turbines are not yet connected to the national grid. Many of these wind turbines were built in the last year and construction has not caught up.

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