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Nuclear Fallout Casts New Light on China. Investment Leader Shines

May 02, 2011 9:46 AM ET
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It's not too hard to tell the difference between good intentions in Washington and Beijing. Washington honors its words with even more words. Beijing uses a more direct approach. Money.

Investors with a long memory will recall President Obama's last State of the Union address. You know, the one in which he declared a "Sputnik moment" to reduce America's dependence on imported oil. Obama's launch was quickly aborted by a Republican budget proposal that will cut 2012 funds for the Department of Energy's Energy Efficiency and Renewable Energy programs by 35 percent to $1.5 billion.

Some Sputnik moment.

Compare that to the Chinese approach. The China Development Bank agreed last year to lend $35.4 billion to Chinese wind and solar power companies. Upping the ante, state and private interests sank an additional $54.4 billion into Chinese equity and debt instruments for clean-energy companies last year.

Chalk up almost $90 billion dollars for wind and solar power development in China. Over five years, China plans to spend a trillion yuan ($154 billion) to create a world class industry. America's clean energy spending, taken by itself, puts the U.S. in a weak third position behind Germany.

Not surprisingly, the U.S. clean energy industry fears that China will gain an unbeatable lead. And right now, America's Sputnik moment looks more like a launch pad fizzle.

Who's Buying?

A few months ago I was concerned about the future of the clean energy sector, especially solar, because of the trend in subsidies. Even though generating efficiency is improving, clean power is still a lot more expensive than electricity generated by coal-fired plants.

Solar power has thrived in Europe, especially Germany, but only because of generous state subsidies. As the eurozone slides deeper into financial crisis, subsidies for solar power are being scaled back. Germany plans to reduce its subsidies by 15 percent this July. France, Spain, the Czech Republic, and other European countries are reducing their support as well.

The global market appeared to be drying up just as China's industry scaled up its clean energy capacity.

But the biggest market of them all appears to be opening up. China is showing new interest in buying the solar equipment it builds. Japan's nuclear disaster appears to be the reason.

In the wake of the Fukushima disaster, China suspended plans to build a huge array of new nuclear reactors. At one point China had hopes of building as many as 254 reactors to supply the nation's ravenous energy appetite. Although China says it still plans to build more reactors in the future, the number is likely to be cut back.

That's good news for clean energy industries. China now plans to double its target for the solar energy industry over the next five years according to the China Securities Journal. The Journal says the government may set a new target of installed capacity of 10 gigawatts (billion watts) of photovoltaic power by 2015. The existing target is 5 gigawatts.

Total Chinese solar energy demand has been puny so far, amounting to less than half a gigawatt last year. That's why China's solar industry has relied on exports. But Chinese demand is now set to take off.

After the Japanese disaster, the China Electricity Council asked the government to lower its nuclear capacity target for 2020. The Council also asked Beijing to scale back reactor construction in interior regions where water might run short in the event of an accident according to the China Business News. Of course, any cutback in China's nuclear plans will spark greater demand for wind, solar and hydroelectric energy if the country still plans to meet its 2020 clean energy target.

Winners and Losers

The good news for all Chinese clean energy companies is that the law is on their side. Electric grid operators are required to purchase every watt of power produced by clean energy sources.

Boosting the industry even further, China plans to increase the rates paid to clean energy producers by 50 percent. Although the rate increase may be two years away, that's enough time to plan and build a lot of new solar and wind power installations.

Of the three main clean energy sources, solar seems destined to be the big winner. Plans for hydro electric dams are facing increasing opposition on environmental grounds as well as protests from residents who face evacuation to make way for rising water.

Wind power also appears to have hit a ceiling in China.

Beijing is believed to be drafting strict new rules to put the brakes on runaway growth in the sector. China's wind market doubled every year between 2005 and 2009 in terms of total installed capacity. It has been the world's largest market annually since 2009.

But there's a big problem.

Untold numbers of electric windmills are not hooked up to China's power grid. It seems that provincial officials have rushed to grab a potentially lucrative piece of the industry by skirting regulations and building sprawling wind farms, forgetting about extending the power grid to the turbines. According to one estimate, as many as 50 percent of China's new windmills are effectively useless.

Don't expect to see a boom in that sector anytime soon.

Solar is the best bet and China is a huge untapped market on the verge of opening up in a big way.

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I'm a fan of China's big four, JA Solar, Suntech Power, First Solar and Yingli Green Energy. Economies of scale are everything as China strives to drive photovoltaic chip prices down and energy production to new highs.

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