China's aggressive push to "green" its economy and become the world leader in renewable energy is admired by many commentators in the West. Those admirers need to look again.
The country's solar panel industry, which went from zero to become the world's largest in five years, has crashed, with most producers now suffering from negative profit margins, soaring debt levels, and idle factories.
Solar panel manufacturer Suntech, a national champion which became the world's largest thanks to lavish state subsidies, filed for bankruptcy in March after it defaulted on payment of $541-million of bonds. The government is scrambling to tidy up the mess by offering tax breaks to all solar companies that acquire or merge with their competitors. One state-owned company recently tabled a $150-million lifeline to Suntech as it works its way through bankruptcy proceedings.
Likewise LDK Solar, another leading Chinese producer, was forced this year to turn to both provincial and local governments for protection from its creditors. The brainchild of the local Communist Party Secretary, LDK received millions of dollars in state subsidies and cheap financing, land, and electricity in 2005. The local government is now funnelling funds into the company to keep it from sinking, without complete success; the company has shed 20,000 of its 30,000 employees and its shares are 98 per cent below their peak in September 2007.
Yet China's solar panel sector remains massively overbuilt. According to Bloomberg, if all of China's solar producers were to run their factories at full speed, they could produce 49 gigawatts of panels annually -- a ten-fold increase from 2008 and 61 per cent more than global installed capacity last year. But demand for those panels has been shrinking as governments in the West cut many of the subsidies that made solar power attractive.
China's experience with wind power is little different. Sinovel, one of the world's largest wind turbine manufacturers , went from earning hundreds of millions of dollars in profits in 2010 when the renewable energy industry was booming to millions in losses that grow by the day. Revenues are now just a fifth of what they were in 2010. The company has closed its overseas offices and recently laid off thousands of employees.
All told, in 2012 17 per cent of all windmills lay idle, their power too expensive to connect to the grid. In some regions, 50 per cent of all windmills remain unconnected to the grid.
China's green crash is a textbook example of what happens when central planners substitute their economic decrees for the complex supply and demand decisions of a market. Compounding the missteps of China's green planners was a belief that the West's love affair with green power was here to stay, despite its higher cost and unreliability. Believing that it could meet the world's surging demand for solar and wind power, the Chinese state -- from the supreme planning agency, the National Development and Reform Commission down to city governments and state-owned banks -- gave Chinese manufacturers near-monopoly powers and all-but-free money.
The torrid expansion of manufacturing capacity saw wind turbine capacity doubling every year until 2010. According to the China Renewable Energy Society in Beijing, half of China's 600 cities have at least one factory producing photovoltaic products. The ensuing flood of solar panels and wind systems on the global market caused prices for those panels to plummet and, in turn, negative profit margins for many of the world's largest producers. Those in the West almost all failed; those still standing, if tottering, are now mostly based in China. The worldwide renewables collapse left China's renewables industry looking supreme only because it is the last corpse to fall. It is only by default that China makes seven out of 10 solar panels across the world and is home to eight of the 10 largest panel producers, many of which are on government life support. The combination of too much supply from years of over-expansion and too little demand produced low prices that have left most producers in China on the ropes.
Their prospects are likely to get even worse. The Bank of China, one of the country's largest state-owned commercial banks, says that 21 per cent of its solar loans are in or near default. By Bloomberg's calculation, the country's 10 largest solar manufacturers hold $28.8-billion worth of liabilities, most of which is owed to government-backed institutions. The average debt ratio of those companies -- the amount of debt as a percentage of total assets -- is 75.8 per cent.
The wind industry fares no better, as seen by the consequence of its wind turbines not being plugged into the grid. The 12.3 billion kilowatts of power wasted last year by windmills amounted to $1.73-billion in lost revenue -- nearly double the amount in 2011.
Many solar companies in China are resorting to cutting corners in production to try and make themselves profitable. According to a New York Timesreport, many producers are turning to cheaper, untested materials. Some solar power generators now say that some of their panels are under-performing or failing prematurely.
To save the renewables industry, and to save face, China's central planners have changed tack. The state is now switching from subsidizing suppliers to subsidizing demand by mandating local power producers to meet green targets in the domestic market. With a market the size of China's, and the power of government fiat to force Chinese consumers to buy solar, this industry-on-life-support may yet be resuscitated. If it is, it will be another grim green victory. Chinese power consumers will pay the price in more expensive and less reliable power.
This article appeared in the Financial Post December 9, 2013