Taking Friedman to Task on China’s Green Edge

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Tom Friedman spent most of 2009 beating the China-is-winning-the-green-race-drum, and he has started 2010 with the same focus.

In Sunday’s New York Times, the news side of the house joined their editorial page colleague, writing in a front page story that Chinese “efforts to dominate renewable energy technologies raise the prospect that the West may someday trade its dependence on oil from the Mideast for a reliance on solar panels, wind turbines and other gear manufactured in China.”

To his credit, Friedman’s push has been all about policy. He wants the United States to go all-in in a space-race-like push to match Chinese innovation in energy technology (“E.T.,” as he has glossed it). But, what has eluded his attention – and is absent again in Sunday’s news piece – is the recognition that in order to match Chinese innovation, the policy changes that would be required in the U.S. electricity markets would necessarily have to go far beyond decoupling, one of Friedman’s personal causes.

China may be a leader, but it cannot be a model for the United States (nor can Europe, where a long-standing “welfare state” mentality and shrinking population and electric demand confound comparisons with the United States).

The Sunday New York Times only alluded to several reasons that China has an edge, now and for the foreseeable future. Below are three of the most important, all having to do with social, economic and policy considerations that go far beyond “E.T.” and the analyses of Friedman and his Times colleague Keith Bradsher:

1. Currency, Subsidies and Capital – “Green premiums” are a common feature of renewable energy policies worldwide. The money ratepayers cough up goes to utilities to offset the increased cost of buying renewable power. In turn, more renewable power is sold, and the subsidies pass directly through to the independent power producers who own renewable facilities. And, because they have to harvest the wind or sun, the trickle continues on to the manufacturers and fabricators of blades and panels.

According to Bradsher, China’s premiums are from .4 percent on the residential side to .8 percent commercial. U.S. lawmakers and business interests balk at increasing the cost of electricity to subsidize green power – whether it is done through a cap-and-trade program, national renewable portfolio standard, or otherwise. But, Chinese industry is running on such high margins when compared with Western competitors that the Chinese can afford a steep premium and still remain – and excel – in global competition.

The United States does not have the benefit of a political climate that can tolerate premiums at the level that could actually drive market-based growth in renewable energy, help drive innovation up, push the relative cost of manufacturing down, and complete the cycle by encouraging private investment.

2. Capacity Comes First – Friedman and others may be right that China is doing an exceptional job putting forth a very green face to the world — and, indeed, they are delivering. As Bradsher reports, “China intends for wind, solar and biomass energy to represent 8 percent of its electricity generation capacity by 2020….[t]hat compares with less than 4 percent now in China and the United States.” Bradsher continues, noting correctly, “China’s biggest advantage may be its domestic demand for electricity, rising 15 percent a year.”

In other words, while U.S. lawmakers – and even those in the green movement – continue to jostle over where money should be directed (subsidies for green power purchase, green tech research and development, energy efficiency) and debate whether we can stem the anticipated tide of growth in demand for environmental benefit, the Chinese have one directive: more capacity, now! And, a lot of it, from anywhere. They are not shy (nor ambivalent) about capacity growth. After all, it means economic growth.

In fact, in spite of the green push that Friedman heralds, Bradsher does note that most of the capacity growth to meet increasing demand will come from coal.

In the context of green tech competitiveness, the United States cannot be comforted by one of Bradsher’s final numbers on Chinese capacity: “To meet demand in the coming decade…China will need to add nearly nine times as much electricity generation capacity as the United States will.”

With so fevered a push for capacity growth, the Chinese government will take it any way they can get it, and if it means creating a new global industry, all the better. Remember, investor certainty is much less an issue in the Chinese context already, where the government makes the rules and the investments. U.S. companies have no certain market for their products – be it energy equipment or green power – and have no incentive to “bet the house” on E.T.

3. Starting from Scratch Has its Advantages – The most remarkable part of the climate bill fight in the United States in 2009 was watching how battle lines were drawn over how proposed changes would impact vested interests and sunk costs. But, notwithstanding these political and business concerns are the technological and logistical questions that surround proposed expansion of the green grid. For example, there is already a transmission glut in the US, and building new high-voltage lines has proven to be challenging. But, any new large-scale renewable collection points would have to be integrated with the existing grid, and it is unclear – with opposition to the erection of turbines themselves still a hurdle – that building out an extensive new transmission work would be politically feasible.

Vested interests also have self-interest at stake. Indeed, U.S. utilities have a fiduciary duty to shareholders under American law, and current proposals do not accommodate those concerns to allow for buy-in.

Bradsher at least touches on this problem, noting that “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.”

This is the element of the equation that Friedman has consistently ignored in calling for the “space race” in green energy. Without immense accommodation being made to utilities and other interests who will have to decommission and divest themselves of existing equipment and infrastructure, Friedman’s challenge is a pipe dream. Electricity is still a regulated business, and it is possible to conceive of ways to change the regulatory climate so that utilities, their customers and their shareholders could absorb and recover the costs of a transition like this. But, it will be a political bloodbath.

The Chinese can take the required steps unilaterally. As Friedman notes in his Sunday column, China operates in a “Confucian-Communist-Capitalist‘ hybrid under the umbrella of a one-party state, with a lot of government guidance, strictly controlled capital markets and an authoritarian decision-making process that is capable of making tough choices and long-term investments, without having to heed daily public polls.” Political problems, solved.

But, that notwithsanding, building out a renewable network from scratch – right alongside capacity growth – is a lot easier than trying to replace a dynamic existing system that is historically balkanized by state commissions, franchise territories and regional transmission organizations, while balancng the competing interests of reliability, capacity, efficiency and affordability.

Beat China? Or, First Among Equals – In his State of the Union address, President Obama exchanged some of his global credibility for an unexpected refrain of American exceptionalism. Specifically, in the energy context, he noted that China, Germany and India are “making serious investments in clean energy because they want those jobs…I do not accept second place for the United States of America. ”

What the president did not acknowledge is that – perhaps for the first time since World War II – the United States is engaged (however passively) in a contest where its social, economic and political infrastructure puts the country at a distinct disadvantage.

It’s easy to chalk up the Chinese advantages to the obvious. Friedman is right, they are making a proactive “E.T.” policy push; and, yes, low-cost Chinese labor makes it nearly impossible for U.S.-made photovoltaic panels and turbine blades to compete on the open global market (hence the beginnings of tariff discussions and rules preventing federal spending on imported equipment).

But, favorable political and economic conditions are critical to the success of those initiatives. The United States cannot become an authoritarian, communist regime. Labor costs will not come into parity with China anytime in any living person’s lifetime.

Without significant re-regulation of our electricity markets, there is no formula for gaining ground anytime soon. We can dabble around the edges – and, yes, $11 billion in stimulus is just dabbling in this context – but, China’s E.T. edge only figures to expand in the near-term.

When we find a way to give utilities skin in the efficiency and green game, we will have taken a large first step toward leveling the playing field. Until then, as long as the entities that everyone in the country buys their power from are not incentivized to really get on board, we cannot expect the United States to bring E.T. home. And, going up against green energy’s Goliath, we need all the help we can get.

photos: Pacific Northwest National Laboratory, Slimmer Jimmer

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7 Comments

  1. Pingback: The Jolly Green (Energy) Giant? | Xenia Institute

  2. Outstanding analysis, Joe.

    Here is an observation with conjecture: over the long-term, democracies tend to monumentally outperform others – even Confucian-Communist-capitalists – because the Bill of Rights, etc. encourages innovation, upward mobility, and correcting mistakes before they mushroom exponentially. The environmental ethic appears to be further along, per capita, in American than in China.

    Therefore, if American can improve its deficit/regulatory/ incentive atmosphere for green investment, I think we will catch up and then some.

  3. Jim — Thanks for reading and for the ‘atta boy.

    I don’t think we disagree, because I am not sure how it will play out, but I am not sure the US does have an IP advantage.

    Clearly, a lack of Western-style property protections has been crippling in places like Russia where innovation and investment have been stifled by routinely confiscatory government practices. It has been equally crippling for the gas/oil sector (where Russia should be much more of a player) because – of course – someone has to own the fields and extract the resources.

    Not so in renewables. First, the fuels are in the public domain. Second, I’m not sure we are talking about an innovation race. Solar PV and wind are relatively mature technologies, and if you are looking to rapidly expand capacity, those are the go-to’s.

    The Chinese government’s proprietary approach may benefit a quick burst of capacity. Yes, there may be some innovation in wafer technology, etc., but those are unlikely to be the kind of innovations that are proprietary. In fact, tweaking and retrofitting are among the things that Chinese companies do really well.

    If the government can co-opt technology and build out capacity on a grand scale while US solar and wind developers fight all of the licensing, permitting and other battles that are inherent in building out any new capacity — on top of the r&d timelines and investment fights (over vc and Washington money) — the Chinese could yet benefit.

    Like I said though, I am amenable to your point of view. The really fun thing about all of this is going to be watching it all play out! Thanks again!

  4. Jonah Goldberg, in NRO, takes Friedman to task on some of the same concerns about the columnists assertions on “green” China: NRO

  5. Pingback: Collide-a-scape » Blog Archive » Collide-a-scape >> China’s Energy Security

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