Monday, February 22, 2010

Cleantech: How China Sizzles and U.S. Diddles

The United States is rarely referred to as a silver-medal nation. But that's exactly what we're becoming with respect to the race for clean energy.

There's been progress on domestic soil to be sure. Installed wind capacity has grown over 900% since 2000. Solar installations have kept similar pace.

But there's an unexpected place where clean technology is being deployed at a more rapid rate. A place often condemned for its perverse pollution; a country often decried as the world's biggest emitter of greenhouse gases (GHGs): China.

Enter the Dragon

As the U.S. continues its polarized debate around cleantech policy — diddling with implementing some type of carbon pricing, a federal renewable energy standard (RES), and a way to streamline large projects — the Chinese have quickly lept to a leadership position in the industry.

In 2006, they passed an RES calling for renewables to comprise 15% of the energy mix by 2020. But Shang Xiaoqiang, vice chairman of the country's National Development and Reform Commission (NRDC), recently said capacity could grow to 20% by that time.

Studies also show that by 2020, China could actually install three times its 30 gigawatt (GW) wind target. And they'll meet their 2020 solar target of 1.8 GW next year.

The U.S. hasn't even set national targets, so meeting or beating them is a moot point.

And when it comes to government investment, the Chinese have long pulled away. Our Recovery Act called for $80 billion to be invested in the sector. China has announced $217 billion for the next five years, and could invest upward of $650 billion in the next decade.

One recent report claimed they're spending $12 million per hour ensuring they emerge on top.

For the U.S., 'losing' could quickly turn into 'lost.' Fortunately for investors, stock exchanges are border agnostic.

The Cleantech Arms Race

In a very real way, democracy is hindering the States' deployment of cleantech assets. The infamous Cape Wind project has been stymied because it'll "ruin the view." Massive utility-scale solar installations in southwestern states have been delayed on behalf of reptiles.

And that's without mentioning the see-sawing in Congress as lobbyists on both sides of the issue wield their well-funded swords. A recent Reuters report succinctly noted:

Beijing's top leaders have made clear their intention to have their nation dominate this new industry, up and down the value ladder. And in their quest for the prize, they are not burdened by concerns facing their Western counterparts — such as the impact of wind turbines on landscapes, higher energy prices for consumers, or investor returns.

Our leaders' inaction has not only delayed development of what could be a trillion-dollar domestic market — not to mention energy independence — but they've forced companies within that market to tread water by providing inconsistent incentives and policy guidance.

The evidence of this is abundant. But the issue really came to the fore when a Chinese company, A-Power Generation (NASDAQ: APWR), was selected to provide turbine parts for a $1.5 billion U.S. stimulus-funded wind farm in Texas.

Politicians on both sides cried foul before A-Power announced it would build a manufacturing facility in the U.S. that will employ 1,000 workers while cranking out parts for wind turbines.

So it's not only difficult for U.S. cleantech companies to get ahead, it's increasingly easier for China-based companies to row their boats ashore.

Made by China

China's laser-like focus on cleantech has thrust them squarely into a global leadership position.

Last year, Chinese companies produced about 50% of the world's solar cells. And that's likely to rise to 70% in the next few years, as costs continue to fall more quickly there than in Europe or the U.S. In fact, firms based in Germany — the cradle of the modern solar industry — have been finding it's cheaper to buy from the Chinese than it is to make their own solar cells.

And they're not just ramping up production; solar installations are also on the upswing. China will meet its 2020 target of 1.8 GW next year, and Greentech Media is forecasting installed solar capacity could actually hit 10 GW in the next decade, implying a 450% expansion.

Wind energy is witnessing a similar scenario. The Global Wind Energy Council (GWEC) has reported that China "doubled its entire installed capacity each year since 2005." Last year, they became the largest wind market in the world, installing 13 GW compared to 10.5 GW in Europe and 9.9 GW in the U.S.

That growth is largely due to a booming Chinese wind manufacturing market. Producers like Sinovel and Goldwind are already top ten globally, and could soon threaten companies like GE and Suzlon that currently inhabit the top five.

The Chinese cleantech production model is so robust that it's now being exported around the globe, in much the same way that other Asian countries have taken automobile manufacturing abroad.

A-Power — the company awarded part of a U.S. stimulus-induced wind project — is already setting up manufacturing on U.S. soil. Yingli Green Energy (NYSE: YGE) has announced plans to build a solar manufacturing facility on U.S. Turf; so has Suntech Power (NYSE: STP).

And, in the most revelatory example of all, the Wall Street Journal has reported that "Duke Energy Corp.(NYSE: DUK) is in talks with State Grid Corp., China's biggest electricity distributor, over a joint venture that may involve cooperating on power transmission lines in the U.S."

While we were distracted by health care, Tea Parties, and executive pay, China quickly pounced on what is proving to be the most vital and valuable industry of the 21st century. They've mastered the production side and, as the Duke example highlights, they're moving on transmission as well.

Our energy assets of tomorrow may not be made in China, but it looks like they'll made by China. And, as you can imagine, Chinese cleantech success is also apparent in public markets.

Rated to Outperform

Here in the States, First Solar (NASDAQ: FSLR) is by far the most recognizable solar name. The company still boasts one of the lowest costs per watt and highest efficiencies for thin film solar. But First Solar, too, is losing ground as Chinese firms continue making inroads. The best stock to buy is down nearly $200 from its 2008 high over $300.

The same holds true for Germany's Q-Cells, one of the largest solar cell producers in the world. The growing Chinese advantage in both cost and scale have led to a huge discrepancy in prices for top stocks that share the same peer group, as companies like Trina Solar (NYSE: TSL) and Canadian Solar (NASDAQ: CSIQ) have pulled investors away from traditional solar stocks.

China Solar Stocks 2010

That trend is being mirrored in the wind industry, where protectionism has forced billion-dollar development costs to remain on the balance sheets of Chinese companies. Though industry stalwarts like Vestas (COP: VWS) and Gamesa (MCE: GAM) are knocking hard on the door, failure to penetrate the Chinese market has caused investors to look elsewhere for wind-blown returns.

Chinese Wind Stocks 2010

Most analysts and industry insiders — myself included — don't see this trend abating anytime soon. Feed-in tariff (FiT) cuts for cleantech in Europe, though a sign of industry maturation, are driving sales higher in China as installers race to buy turbines and panels at the lowest cost before subsidies are cut later this year.

And the lack of long-term policy guidance in the U.S. is forcing cleantech companies here into a holding pattern, hesitant to invest in new manufacturing capacity or asset deployment with uncertainties still rampant with respect to the tax code and incentives. With price parity still not reached, renewable energy developers sometimes don't even know if there will be an end buyer for their electricity.

China, on the other hand, passed a law last year requiring grid operators to buy all the electricity produced by renewable resources. What's more, the Chinese cost advantage is leading to rebranding, wherein a company like GE buys solar panels from a second-tier Chinese company and sells them as their own.

This is paving the way for many companies you've never heard of to emerge as global players. Yingli, JA Solar (NASDAQ: JASO), Renesola (NYSE: SOL) and others are already becoming household names. Yingli is even sponsoring this year's FIFA World Cup.

The initial public offering (IPO) market is also flooded with Chinese entrants. Blade maker HT Blade, polysilicon producer Daqo, and wafer maker JinkoSolar have all already filed.

Indeed, it looks like the global cleantech game will be dominated by Chinese players for the foreseeable future. And that's a vast departure from standard practice, where China has typically trailed European and U.S. companies in entering nascent industries.

In a recent talk at an industry conference in Washington D.C., President of GCL Solar Energy Hunter Jiang didn't mince words about his country's position. His company is now the third largest producer of polysilicon in the world. After ruminating on China's laggard position throughout modern history's industrial revolutions and commenting on how automobiles and computers were cradled elsewhere, he said, "Today we are the leader."

No comments:

Post a Comment