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The Chinese economics of renewable-energy supply

Prices of solar energy and wind turbines are dropping world wide. This article in the New York Times highlights the role of China in this market. The bottom line is as follows: China by now is the world leading manufacturer of solar panels and wind turbines. By this is achieves economics of scale and can offer products at a relatively low world market price.

There are two immediate consequences:

1. Installation of renewable energies becomes cheaper worldwide 
2. Manufacturing competitors in other countries have a tough stand competing against Chinese manufacturers

Why could China get into this position in first place? The NYT article delivers the following explanation:

“China’s biggest advantage may be its domestic demand for electricity, rising 15 percent a year […] In the United States, power companies frequently face a choice between buying renewable energy equipment or continuing to operate fossil-fuel-fired power plants that have already been built and paid for. In China, power companies have to buy lots of new equipment anyway, and alternative energy, particularly wind and nuclear, is increasingly priced competitively.”

In other words: in the US and Europe, renewable energies have to compete against existing energy supply, in China they don’t have to: there is enough space for both rapid expansion of coal power plants, and renewable energy. Practically unlimited demand requires expansion of energy supply across the board. Another reason the low prices, of course, is the lower labor costs in China.

An interesting exercise is to consider the consequences of this observation the other way around. If saturated economies decided to phase out conventional power plants - coal and nuclear - rapidly, there could be room for economies of scale in renewable energy supply locally, too. However, such a decision can only be made politically as those who would massively invest into renewable energy supply are the current owners of existing coal plants.

Understanding the dynamics of this game (and the relevance of the argument above) is of high relevance for OECD countries. For example, in Germany the phase-out of nuclear plants is renegotiated, with stakeholder arguing that longer running time of nuclear plants serves as a ‘bridge’ towards a renewable energy future. From a different perspective the nuclear power plants pose a barrier towards economies of scale in renewable energy supply with the two consequences of (a) losing an edge advantage in international economic competition in renewable energy technologies and (b) getting the intertemporal optimization wrong. The intertemporal optimization point is that investing now into renewable helps to get the prices down quicker, and have lower abatement costs in the future (this argument is so central that is deserves another blog).

The debate pro/con nuclear power from the climate perspective is still open. The Chinese evidence of the economies of scale, however, provides some quantitative indication in favor of phasing out conventional plans rapidly. 

Posted by Felix Creutzig on January 31, 2010 2:57 AM | Permalink