China's Energy Solution: Ignore the Cost

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Perhaps you've heard the argument that the world needs to move from coal to renewables at any cost. China now appears to be applying this idea quite literally.

In an amendment to a 2006 renewable energy law, the Chinese government has mandated that state-owned electric grid companies buy all of the renewable energy produced by generators, regardless of the price.

Wow. And I thought U.S. refiners were getting a rough deal with the pending U.S. climate legislation. I would not want to own Huaneng Power (NYSE: HNP  ) in a world where the price for electric generation is suddenly irrelevant. No wonder the company trades near a multi-year low.

Meanwhile, A-Power Energy Generation Systems (Nasdaq: APWR  ) and other wind players are likely to have a field day. Wind accounts for just 0.4% of China's power supply at present, but the country is doubling this capacity every year, like clockwork.

Yingli Green Energy (NYSE: YGE  ) , Trina Solar (NYSE: TSL  ) , and other solar players should benefit from this legislation as well, although utility-scale solar is still in its infancy. In October, Suntech Power (NYSE: STP  ) hooked China's first such project into the grid, and it was all of 10 megawatts. Really large solar projects, like the one First Solar (Nasdaq: FSLR  ) is planning in Inner Mongolia, only exist on paper at this point.

As the country throws up more and more wind farms (with some in more rational locations than others), there are going to be some serious intermittency issues to deal with. That will require more baseload power. While nuclear and hydro can meet some of this demand, coal remains the go-to backup source. Even with this legislation in place, I would not expect coal-fired generation in China to decline any time soon.

I also wouldn't expect other countries to copy China's legislation. Unbridled subsidization of renewable energy can both strain a country's finances, and overwhelm transmission infrastructure. China is in a pretty unique situation to be able to throw this much cash at sub-economic energy generation. Few other countries could shoulder the rampant waste and inefficiency that will inevitably result. I'm not even convinced this will work out well for China, which has the money to burn.

First Solar and Suntech Power are Rule Breakers picks. Huaneng Power is an Income Investor recommendation. Power up your portfolio with a free 30-day trial of any of our premium newsletters.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (19)

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  • Report this Comment On December 28, 2009, at 5:03 PM, TicoHombre wrote:

    May not work out well for China??? They've got money to burn.

    It is, however, working out well for APWR holders. ;-)

  • Report this Comment On December 28, 2009, at 7:31 PM, JaysRage wrote:

    This is a great article. The larger picture is finally coming into focus. Wind and Coal in the short term macro picture in China. Yep.

    Solar will have its time in the sun, but it will have to wait. There will be consolidation, and there will be kinks to work out in the grid infrastructure to make it work. It will happen, but wind will have a nice 2-3 reign in between.


  • Report this Comment On December 29, 2009, at 11:02 AM, sailrick wrote:

    "As the country throws up more and more wind farms (with some in more rational locations than others), there are going to be some serious intermittency issues to deal with. That will require more baseload power."

    There are threee misconceptions here.

    You stated that China has about 0.4% wind energy. Intermittency doesn't become a problem until intermittent sources account for about 15% of energy generation. We and China are a long way from that.

    More baseload power? Not necessarily.

    As the following article shows, a grid with substantial amounts of intermittent power would work better with less base load power, or a smaller percentage of the grid. This requires more dispatchable power like solar thermal with heat storage can provide. China has huge solar potential in it's western desert areas.

    And harping on subsidies for renewables is about as bad an argument against them as I can think of.

    Why? Because it's the massive subsidies to fossil fuels and the cozy relationship they have with government (at least in the U.S.) that distorts the market place. How do you compete with the biggest economic enterprize in the history of the world, with all it's financial power to buy political clout?

    Anyone who doubts the political power the oil industry wields in the U.S. should read the book,

    "The Tyranny of Oil". The U.S. govt. has been doing the bidding of oil companies since the 1880s.

    Oil gets over $200 billion annually in subsidies on a global scale. According to Koplow, the leading expert on U.S. energy subsidies, oil, coal and gas get $49 billion a year in U.S. subsidies. Oil has been subsidized since 1918.

  • Report this Comment On December 29, 2009, at 1:26 PM, Fool wrote:

    Over the decades, China has built significant number of big hydraulic power stations along Yangtze River and may be other rivers for generating electricity that can supply many cities near by.

  • Report this Comment On December 29, 2009, at 4:27 PM, SentiFool wrote:

    Funny. It seemed to me that the Chinese, and the Americans, and the British and everybody else, have long been ignoring the cost of energy. Hence the smog in Beijing and LA, etc, etc, the wars in Iraq, Darfur, etc, etc. Maybe, just maybe, the Chinese are the first ones to really understand the cost. Wouldn't that be a kick in the teeth?

  • Report this Comment On December 30, 2009, at 12:22 AM, Chinastocks55 wrote:

    LPIH: Longwei Petro

    This is a China energy blue chip in the making.

    Here is their stock page in the NY Times.

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