Chinese Investment in Clean Energy

Chinese investment in clean energy in the United States is still small, but its growth may offer benefits for American businesses and US-China relatons.

Apr 26, 2012

The seven bilateral clean energy agreements signed by PRC President Hu Jintao and US President Barack Obama in the fall of 2009 focused on renewable energy, advanced coal technology, energy efficiency, electric vehicles, and many other technologies to promote lower carbon growth. These agreements have propelled numerous public and private sector collaborations, such as Duke Energy Corp. and China-based ENN Group's solar power, smart grid, and energy efficiency projects. But these agreements and new business partnerships have been downplayed as the United States and China have grappled with how to properly compete in the clean energy sector. Strikingly, clean energy was barely mentioned during PRC Vice President Xi Jinping's visit to the United States in February.

As trade tensions rise between the United States and China, energy experts say it is an important time to dig deeper into whether Chinese investment in US clean energy can be profitable and a sound platform from which the two countries can build stable relations.

Recent deals made between US and Chinese companies indicate it should be possible. In early 2012, new clean energy deals targeted manufacturing in the United States. For example, Yingli Green Energy Holding Co., Ltd. agreed in February to purchase materials from E.I. du Pont deNemours and Co. to produce photovoltaic (PV) panels. EmberClear Corp. and China's Huaneng Clean Energy Research Institute agreed to build a coal-to-gas plant that could create more than 1,000 jobs, according to the two companies. And China's Wanxiang (USA) Holdings Corp. invested $420 million in Massachusetts-based GreatPoint Energy to develop technology that converts coal to gas.


Although the costs of wind and solar power have significantly dropped, the US clean energy industry is still in its infancy and many companies are not able to stand on their own without government support. The collapse of Solyndra, Inc. in 2011, which had received $535 million in federal loan guarantees, has made domestic investors and the US government wary of the entire industry. In stark contrast, Chinese policymakers and investors have been pushing ahead on clean energy, both at home—with an ambitious new five-year strategy—and in foreign markets.

Since 2006, China has invested about $6 billion in clean energy projects in the United States. This is a small percentage of what the United States has spent on its domestic clean energy, which according to Bloomberg was $55.9 billion in 2011. However, Chinese investment in the US clean energy sector has risen sharply over the past five years, reaching $264 million in 2011 alone. Over the past two years, Chinese investment in renewable energy has grown at an annual rate of 130 percent.

According to a 2011 report by the Rhodium Group, an advisory firm that conducts research on Chinese investment, the total amount of Chinese investment in the United States in the first nine months of 2011 added up to $4.2 billion. Clean energy investments have been among the fastest growing sectors since 2008. About three-quarters of the total investment was in greenfield projects—new projects as opposed to mergers and acquisitions—and about half of the investors have been private Chinese multinationals. Most of these investments appear to have been positioned to sell Chinese manufactured modules such as turbines or solar panels—which often contain components made around the world—in the United States.

Benefits of Chinese investment in clean energy

Critics argue that Chinese investment in US clean energy results in stolen American jobs and intellectual property. However, clean energy investments in particular are good for the US economy, the environment, and global energy security, argues Derek Scissors, an Asian studies research fellow at the Heritage Foundation, a conservative think-tank. Even if clean energy components are manufactured in China, installation of these systems can result in the creation of American jobs, Scissors says.

Job creation

The question of equity in job creation surrounding clean energy projects came to the forefront in in 2009 when US regulators raised concerns about using stimulus money from the American Recovery and Reinvestment Act to purchase Chinese-made wind turbines for a proposed wind farm in Texas, where China's A-Power Energy Generation Systems, Ltd. would be the largest investor.

Publicly announced job creation projections by three high-profile renewable energy farms built with Chinese investment (A-Power, Xinjiang Goldwind Science and Technology Co., Ltd., and Suntech Power Holdings Co., Ltd.) indicates that about one job is created for every million dollars invested. Multiplied by the total Chinese investment in the sector, this amounts to a modest 6,000 jobs since 2006.

But because US manufacturing is more mechanized than Chinese manufacturing, Chinese factories tend to manufacture and assemble modules, often using American-made components. The industry is complex, and any system will include parts manufactured from all over the world. For example, the polysilicon production for Chinese solar company Suntech is done by US-based MEMC Electronic Materials, according to Bloomberg.

Furthermore, studies have shown that most jobs created by clean energy investment are downstream—meaning they are in the installation and maintenance of solar panels and wind turbines, rather than the increasingly mechanized manufacturing process. For example, a study commissioned by Duke Energy in 2010 estimated that 73 percent of jobs created in US-China partnerships in the power sector would occur where the infrastructure was built, even when much of the capital equipment was imported. According to the Coalition for Affordable Solar Energy (CASE), an organization of American-owned or -based companies in the US solar industry, roughly 52 percent of jobs in the solar industry are in installation, and 17 percent are created in sales, meaning the majority of jobs go wherever the technology is deployed, not where it is manufactured.

Some Chinese companies are adapting to increasing concerns over trade by hiring more employees locally. Goldwind, for example, opted to establish local manufacturing in the United States before local-content disputes became a threat, says Joanna Lewis, who is a fellow at the Woodrow Wilson International Center for Scholars researching China's wind power sector.

Goldwind's project in Shady Oaks, Illinois is expected to use 60 percent locally manufactured materials despite importing the turbines from China. The A-Power project in Texas was successfully negotiated in 2011 and appears to be proceeding with American steel components.

Investment incentives to rise

The outlook on Chinese investment in the US clean energy market despite recent tensions is positive. China's stockpile of foreign reserves and under-diversified portfolio has Beijing searching for higher-yield returns in more asset-based and infrastructure-related projects. Following major investment losses in places like Sudan and Libya, China is also looking to invest in stable markets such as the United States. China's 12th Five-Year Plan (2011-15) emphasized environmental mandates, with low-carbon measures topping the priorities. Chinese solar energy companies have overproduced in the domestic PV market, deepening the need to look abroad for sales. Furthermore, wages in China are rising 10 to 25 percent a year, driving up the cost of manufacturing and encouraging Chinese companies to consider manufacturing elsewhere. US companies are increasingly seen as a safe and affordable option for Chinese investors.

Barriers to Chinese investment in US clean energy

An uncertain market and lack of supportive national policies are two of the most significant barriers to Chinese investment in clean energy in the United States. The US federal government is sending mixed signals to the clean energy market by claiming it is dedicated to clean energy, while at the same time continuing to support the oil and gas industries with subsidies and allowing support mechanisms for clean energy to expire. Many of the US stimulus incentives for solar and wind power, such as tax credits, will expire unless Congress acts to renew them. "Both US and foreign financiers are looking for positive signals from the government," says Tom Weirich, vice president of membership and corporate relations at the American Council on Renewable Energy, a nonprofit member organization.

Recent events have added to uncertainty in the US clean energy market. SolarWorld Industries America Inc., a founding member of the Coalition for American Solar Manufacturing (CASM), filed an antidumping and countervailing duties case with the US Department of Commerce and International Trade Commission in 2011 that accused China of dumping silicon solar PV cells in the US market. A report by the Coalition for Affordable Solar Energy, which opposes CASM's case, argues that nearly 50,000 American jobs could be lost if these tariffs are enacted.

The role of local governments

Chinese companies, particularly smaller firms that want to invest in the United States, find it very difficult to navigate a system of 50 states with different regulations and incentives, says Weirich. Local US governments are increasingly trying to facilitate Chinese investment by setting up offices in China and organizing business delegations to China. In some cases, states are competing with each other for international investments in clean energy by offering local-level policy incentives. For example, Illinois and California, the top two recipient states of clean energy investment from China, have offered local incentives to support clean energy. For example, both states have set up regulations—such as Renewable Portfolio Standards, which mandate that utilities steadily increase energy from renewables—guaranteeing returns on clean energy investments and ensuring its long-term growth.

Both states have also actively engaged China in seeking clean energy investment. California, in particular, established formal relations with Jiangsu—a province promising to be a clean energy leader in China—in the hopes of enhancing cooperation on energy and reduction of greenhouse gas emissions. Both states have indicated high-level support for the relationship by sending their governors to China to highlight trade deals.

Still, US local governments are in the beginning stages of attracting international investment. Most of the experts interviewed for this article have been approached by local governments seeking basic advice on Chinese business etiquette. In many cases, Chinese firms and local US governments are equally unfamiliar with international trade and investments, though they are both improving, says Scissors of the Heritage Foundation.

 

Opportunities and alternatives

The energy and economic challenges that the United States and China face provide a nexus for opportunity and cooperation. Renewable energy offers more opportunity than traditional energy for Chinese investors because it is not as politically sensitive, says Ken Su, a partner at PriceWaterhouseCoopers in Beijing. China can bring investment and an enormous future market, and the United States can reciprocate with innovation and current clean energy demand. "If we are serious about being a leader in clean energy and building out substantially, China is an important partner," says Thilo Hanemann, research director at the Rhodium Group. For the US clean energy companies that do manage to get Chinese investment "the benefits are more than just cash," says Ashok Sinha, CEO of Sunpreme, Inc., whose investors include Tsing Capital's China Environment Fund. "They promote collaboration between portfolio companies, leading to nice synergies and more value to all partners."


 

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