Why China is leading the green revolution and taking the rest of the world with it.

US Secretary of Commerce Gary Locke and Energy Secretary Steven Chu returned from China last July with a sober understanding of the degree to which China had advanced in green technology. Sino-US clean energy cooperation reached a milestone later in 2009, when the two presidents signed various bilateral agreements, including the establishment of the US- China Clean Energy Research Centre in Beijing to improve research and development in the field. But clean energy was caught in the political firestorm of the health care debacle. As the recent New York Times article on China’s advancements in green technology reinforced, the Chinese have made exceptional progress in this field and are the leaders of our green revolution.

But more than a desire to compete with the rest of the world, China is looking for collaboration with foreign powers like the United States. In the few weeks I spent in Shanghai speaking with various individuals in academia and renewable – mainly solar – energy, I discovered that expats of various professional backgrounds and nationalities have become ensconced into the Chinese green economy. Solar, more so than other energy sources – hydro, wind, nuclear, biomass – has attracted not only high-salaried expats to serve as executives for Chinese companies, but also eager entrepreneurs who presciently identified the market potential in China during the financial crisis.

As the reality of China’s prowess continues to worry some and impress all, we may have to embrace China as a centripetal force in green energy and find our point entry for further collaboration in the coming years. What needs to be understood is that China’s energy goals are simple: to secure energy supplies for its burgeoning population while trying to ease the carbon emissions. And to realize this goal, the country has a strategic interest in collaboration, rather than competition, with the rest of the world.

Here Comes the Sun – Why Solar

The entryway to the Portman Ritz Carlton is deceptively subtle. But upon venturing into the dimly lit semicircular, cobblestone driveway, the hotel quickly reveals its true grandeur. Known by the cab drivers as Pohtahman and home to everything from a California Pizza Kitchen to the US Consulate, the Portman Ritz Carlton is the expatriate heaven of Shanghai.

I met with Yaron Glazer, Director of the solar advisory firm Clean Energies at the Paul Café, a Victorian style restaurant wedged in the corner of the rectangular Portman exterior. The Israeli-born Yale and Harvard Law graduate has been involved in the energy sector for many years, but only recently – for the past 8 months – in solar.  Glazer explained that “China is at a nexus in the solar industry, with already 30% of the market is here, because the cost of producing in China is so competitive.” Because the government has been generous with subsidies, he said, “There now is also a domestic market [since the government] knows subsidies and wants to protect manufacturing.”   According to Glazer, other forms of renewable energy, especially wind and hydro, are near or have reached full potential, while solar and nuclear have room to grow. Wind energy must be harnessed and used in a given radius, but solar can be integrated smoothly into rural areas – especially the underdeveloped Western region – that are otherwise predominantly non-electrified.  The other advantage of solar is that it produces electricity during the peak time of consumption – from about 11 am to 5 pm – while wind energy is harnessed as the wind comes, throughout the day.

Coal dominates China’s energy mix, at about 70% of the total, while oil and gas make up a more modest 20%. The Chinese government outlined in its 2006 renewable energy law, and the recent amendments in December 2009, its  goal to increase energy from renewable sources to 15% through a gradual investment of about $180 billion until 2020. This investment is not limited to state-funded projects, but has been designed as well to promote growth in the private sector. Even so, some analysts are not optimistic about China realizing these goals. According to the Business Monitor International oil and gas report on China, the country will still be 69% dependent on coal with solar and other non-hydro renewable responsible for only .5% of consumption in 2013.

Solar’s long-term growth depends on two factors: cheap maintenance costs and a huge capital investment. Dylen Liu, the Vice President of JLM Pacific Epoch, a research firm centred around Chinese economic issues, worked for a non-profit before joining JLM, to do, predominantly, equity research on solar in China. Liu explained that “China has a huge cost advantage for producing solar power. So in terms of cost, there is no need to expand capacity in the USA. But [Chinese companies] can benefit from local policies [in the US]…by setting up a branch in the US, or creating a subsidiary.” Solar is an unexplored territory for the Chinese government. “Currently there are no constraints on the industry,” Liu said to me, “since it is pretty new for the government and they still don’t understand the costs. They need some time to understand the real cost and return of solar.” And what makes China distinctive from the other countries that are unsure of how economically unviable technology is, of course, the ease with which they can put forth the initial capital.

Foreign Opportunities: Expat Entrepreneurs

“In 2006 and 2007,” CEO of Senergy Corp Alexandre Minuzzo explained to me in his sun-soaked office in downtown Shanghai, “there were only about 7 major manufacturers [of polysilicon] in the solar industry. There was a huge demand which led to a shortage. Prices of polysilicon went up 600-800%.” With the financial crisis came quick-thinking entrepreneurs like Minuzzo who were eager to influence the costs of the parts of the value stream where government subsidies could not help or did not suffice. Minuzzo had been employed by one of the largest Chinese solar companies, Trina Solar, but left to start his own company to cut costs in the first part of the value chain: polysilicon, the core ingredient in a solar module. “There are very low barriers to entry. And it’s not that complicated to handle,” he told me, which is why there were people like him who had a solar background, but also individuals who, for example, had worked for textiles before they spotted a good market opportunity with solar.

Minuzzo is approving of the initiatives the Chinese government has taken, but is not particularly impressed by the way in which regulations are enacted and modified capriciously. One piece of legislation that has had marked impact on Minuzzo’s company was a ban on about 300 materials deemed harmful to the environment, including a particular type of silicon upon which several of his customers rely. How the customers reckon with this ban can range from compliance to bribery at customs. Minuzzo explained that in order to ensure that his customers stay within the boundaries of the law, his company maintains an open line of communication with its clientele. He reflected for a moment on business deals gone awry and said, “You really go by the saying ‘seeing is believing’ here. You don’t trust anyone.” The native of France touched upon a seemingly banal reality for any businessman: any technology – no matter how green – is only as good as its profit margin. And like oil, gas, and coal, renewable energy is first and foremost a business, as susceptible to corruption and collusion as are fossil fuels, especially when laws are involved.

China’s cheap labour can be disheartening to aspiring green energy entrepreneurs in other countries. While Minuzzo’s company operates on a much smaller scale for only one aspect of the value stream, Suntech, China’s largest solar company handles large-scale production of solar modules. Rory McPherson, Suntech’s Director of Investor Relations, met with me in the company’s Shanghai office. We sat across from each other at a glossy mahogany table in the middle of a conference room with a view of the city by night. McPherson explained to me,   “Everything that goes into a panel can be made in places all over the world. It’s a very interdependent system; various countries have strengths in different areas,” he explained to me. Solar offers a plethora of job opportunities throughout the value stream. And while it is cheapest to produce in China, because of its financial might, Suntech involves other countries in the production process. In fact, they get polysilicon from the US, among other countries, including Korea, the United Kingdom, and Japan.   To this end, “protectionism would be counterproductive for the industry and countries,” Sydney native McPherson made clear. The solar industry is highly integrated, but China is still the centripetal force and protectionism will have severe repercussions for all parties involved.