Two new reports are shining a spotlight on the failure of China’s efforts to promote new energy through the construction of wind and solar power plants, and to put more hybrid and electric vehicles (EVs) on the road. Neither report will come as a huge surprise, since the failure of both efforts has been widely reported this year. But they both highlight how cutting-edge industries promoted by Beijing often attract participants more interested in getting generous government subsidies than actually building anything of value.
The first report proudly proclaims that China now generates nearly a quarter of its power from renewable sources, in what looks like a big accomplishment as the nation tries to reduce its reliance on heavily polluting coal-produced electricity. But the government report also discloses that most of that energy is coming from hydro power, and overeager solar and wind farm builders have created massive amounts of new capacity that are sitting idle due to poor planning.
The second report focuses on new energy vehicles, and has media reporting that Beijing is in the process of crafting new policies to promote the industry. That development is a direct response to previous incentives that led to huge waste and little or no practical development, as numerous inexperienced companies rushed into the sector simply to gain generous government grants and other incentives.
This kind of development reflects Beijing’s inexperience at developing effective incentive programs, and also its obsession with targets that are the legacy of China’s history as a planned economy. The result is that Beijing often creates ambitious and unrealistic targets for developing new industries, and then crafts poorly designed incentive plans that promote waste and abuse rather than anything of value.
We’ll begin our closer look at this wasteful phenomenon with the renewable energy sector, which accounted for about 25 percent of China’s total power consumption last year, according to a report from the National Energy Administration. (English article; Chinese article) Within that total, hydro power accounted for about a fifth of China’s energy output, while solar and wind made up just 0.9 percent and 3.3 percent, respectively.
But most revealing in the report was word that some 39 billion kilowatt-hours worth of solar and wind power capacity in mostly poor interior regions are now sitting idle, the result of poorly planned projects that may never get connected to the grid. This kind of wasteful construction reflects overenthusiastic investment in the sector by inexperienced plant builders, and will make it difficult for Beijing to meet its ambitious goals for building up its renewable energy sector.
Next there’s the new energy vehicle news, which has Beijing reportedly in the midst of crafting new incentives to develop the sector. Incentives under the new scheme would reward companies that actually produce and sell their electric and hybrid vehicles. (English article; Chinese article)
The shift follows investigations that found many participants under previous incentives were simply designing cars and building assembly lines in order to obtain government subsidies, even though they produced and sold few or no actual new energy vehicles. Not surprisingly, those incentives are being rapidly phased out to make way for this new plan.
The new plan would introduce a credit system that rewards companies based on their actual sales of EVs under a quota system. It would also create a secondary marketplace allowing companies that met their quotas to trade their credits to companies that didn’t meet them.
The new system could be rolled out in 6 months to a year, and will replace the older one that was fraught with abuses. The new system is based on a proven model developed and used by the state of California since 1990. As is so often the case, one wonders why Beijing didn’t simply look to this kind of tested incentive system from the start rather than design its own new model that was subsequently full of problems. I suspect the answer is because China thought its own system would help the industry develop faster, even though it ultimately had the opposite effect by leading to huge waste.
Bottom line: New reports detailing big amounts of idle wind and solar plants, and Beijing’s plans for a new EV incentive scheme, reflect wasteful spending under earlier development plans, the result of China’s rush to quickly develop the new energy sectors.
This article was originally published by Young’s China Business Blog and was republished with permission.