China's Renewable Energy Growth Isn't as Good as It Seems

You've probably read at least a few headlines in recent years that gush over China's incredible investments in renewable energy. In 2017, the nation added 50 gigawatts (GW) of solar capacity and ended the year with 289 GW of installed wind and solar capacity. The United States owns just 121 GW combined, including only 33 GW of solar. These numbers seem to suggest the country is dominating the United States in the energy industries of the future. But China's renewable energy growth isn't what it seems.  

That's because most headlines and articles focus on installed capacity (power), as I did above, where the only metric that really matters is the amount of electricity generated (energy). So although China had 139% more installed wind and solar capacity than the United States last year, it only produced 38% more electricity from the renewable pair.

In fact, China is one of the least-efficient renewable energy generators in the world. That might often get overlooked, but that detail matters greatly for climate goals and to energy investors interested in both renewable energy and the country's energy future.

Image source: Getty Images.

China isn't getting a good bang for its buck

It's true that in 2017, China boasted 164 GW of installed wind power. But those assets generated just 305,700 gigawatt-hours (GWh) of electricity. By comparison, last year the United States had just 88 GW of wind capacity -- just over half China's number -- but those turbines spun their way to generating 254,254 GWh of electricity, or more than 80% of what China produced. The production efficiency numbers are even worse for solar.   

So, what's going on? It all comes down to something called capacity factor, which is a measure of how often installed power sources operate at their rated capacities. Higher values indicate more electricity is being generated from a given amount of power. Consider how capacity factors in the United States and China stack up from last year:   

Data sources: U.S. Energy Information Administration, National Bureau of Statistics of China 2017 Report, and National Energy Administration preliminary data. *Note: Last year available is 2015. 

China is simply not very efficient at generating electricity from its renewable assets (or any power sources, for that matter) compared to the United States. Why not?

A combination of factors are at play. That includes the inferiority of Chinese wind turbines and solar panels, poor site selection or geography (wind turbines being installed in locations with weak winds), a lack of adequate transmission lines, and the distance electricity has to be transmitted to population centers. Some factors can be solved for existing assets (better grid connectivity), while others are locked in once steel is in the ground (inferior tech or poor site selection). 

While improving technology and grid connectivity will boost electricity output from renewable assets for both countries (the latest wind farms in America can achieve capacity factors approaching 50%), China is expected to remain a global laggard in capacity factors for the foreseeable future and may never match the United States, which benefits from better geography for wind and solar installations.

It has major implications for China's ability to replace coal-fired capacity with renewables in the near term. For instance, replacing the electricity generated from 1 GW of coal power in China would require 2.3 GW of wind capacity or 4.5 GW of solar capacity, based on last year's data. The United States needed just 1.4 GW of wind capacity or 2 GW of solar capacity to do the same. 

Unfortunately, climate policies won't bear the burden alone. China's inability to turn its renewable power into renewable electricity also has major implications, both good and bad, for energy investors.

Image source: Getty Images.

How does this affect investors?

There are two areas in particular that concern investors: technology providers and renewable asset owners. For instance, there could be opportunities in superior technology designed by American (and non-Chinese) companies. While it might prove difficult to crack the fast-growing Chinese market with much success, as it favors home-grown wind and solar products, there could be advantages internationally.

In wind power, 39% of all onshore turbines sold globally last year came from Vestas, Siemens, and General Electric (GE 1.81%). While not the pioneer in offshore, the latter has found some success in China as the country explores the potential to develop ocean-faring wind farms. GE recently installed three enormous 6 MW offshore turbines in a demonstration project involving three different suppliers. If successful, then the industrial conglomerate could gain access to even larger contracts in the future -- in China or elsewhere. It could prove to be an important testing ground for other markets, especially the United States, which is just beginning to warm up to offshore wind power. 

Similarly, more efficient solar modules from the likes of SunPower and First Solar could eventually gain an edge in winning global utility-scale installations over less efficient Chinese counterparts. The former boasts a world-leading 24.1% efficiency for its X-series lineup, while the latter offers the most efficient and economical thin films in the industry. That advantage hasn't translated to more business just yet, as Chinese panels, though less efficient, are generally cheaper. But that could change as the American solar leaders boost manufacturing capacity to boost volumes and lower prices, especially if solar farm developers continue prioritizing efficiency. After all, a panel with 21% efficiency will generate 50% more electricity than a panel of the same size that has 14% efficiency.

Image source: Getty Images.

While more efficient American tech could become a opportunity for investors, there's the potential for a fast-growing Chinese market to pose risks as well. For instance, provider of solar power optimizers and inverters SolarEdge Technologies (SEDG +6.97%) owns a 42.5% market share and boasts gross margin of 37.9% today, but that has caught the attention of others in the industry, particularly Chinese competitors. Whether or not they match the quality of existing products or meet the strict standards of American and European markets remains to be seen, but more competition could bring the company's profit margin and growth rates crashing down in the next several years.

There may be more direct risks to renewable asset owners, especially as they begin investing in China's wind and solar farms. That's because these companies generate profits and cash flow based on the total electricity generated and sold to the grid. As demonstrated above, Chinese renewable power isn't as efficient at generating renewable electricity as the North American assets investors may be used to these companies owning.

For instance, Brookfield Renewable Partners (BEP 1.48%) has been keen to gain a foothold in China for some time, and recently announced 50-50 joint venture to deploy rooftop solar with the country's largest warehouse owner. The initial rollout will include 300 MW of solar, with the potential to expand up to 1,000 MW. But whether or not that comes close to matching the electricity generation of an equivalent deployment of solar in the United States depends on a host of factors. All data available today hint unitholders may be sorely disappointed with the returns on that investment. Perhaps the companies should order some American-designed X-series panels from SunPower. 

Image source: Getty Images.

Power isn't energy -- and that matters quite a bit

Sure, China has installed more renewable power capacity than the United States, but it's still far behind America when it comes to sending electrons to the grid. To be blunt, what good is installed capacity if it's not generating electricity? That's why many headlines and articles touting Chinese renewable energy dominance are misleading.

Of course, investors that take the time to understand the nuances -- and the technological advantage of American companies -- can position themselves for success and avoid failure. Simply put, the much-talked-about idea that Chinese renewable energy represents an amazing investment opportunity in and of itself, whether through technology providers or asset owners, isn't necessarily supported by the data available to date.