Solar Snafu

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The Washington Post has a piece on troubles dogging U.S. First Solar's planned mega project in Inner Mongolia, China:

The deal was hailed as the first major example of the United States and China cooperating on a big-ticket energy project, and the largest foray by a U.S. company into Asia's fast-growing alternative- energy market. The agreement became a centerpiece achievement of President Obama's visit to China last November.

Nearly a year later, the deal has not been completed and there is growing skepticism as to whether it will happen.

Really? The First Solar deal was "a centerpiece achievement" of Obama's China visit last year? That seems an overstatement, or we need to collectively lower expectations of what a "centerpiece achievement" constitutes. The project moved from the initial "memorandum of understanding" stage to the "cooperation framework agreement" around the time of Obama's visit. And neither an MOU or a CFA mean much of anything in the Chinese context. It's a quick handshake and photo-op, and the local Chinese authorities will tout the "deal" with great fanfare. So to say the deal is floundering when no such deal has been truly sealed seems misleading.

First Solar was probably never going to pour massive investment into this enormous 2GW project without assurances of the right supportive policies. This is not just a First Solar problem; it's one that also affects China's domestic solar industry. The government so far has been unwilling to subsidize the industry via what's called a "feed-in-tariff" (the price at which solar-generated electricity will be purchased). It's a tricky balance. If you set the tariff too high, no one will buy solar because coal is just so much cheaper (and as I've noted before, more taxes on coal could change the dynamics). If you set it too low, then solar companies aren't going to want to invest because they can't recover costs. Last year, China floated a $0.16/kwh tariff for solar, but everyone thought it was too low.

Chinese solar companies are facing a host of other problems as well, too numerous to go into at length now. Suffice it to say that First Solar and other foreign solar companies are operating in an environment in which the Chinese government still hasn't quite figured out what to do with its own industry. So issues facing First Solar shouldn't come as a surprise, and it's probably premature to conclude that the stalling of this project represents a concerted effort by the government to help its own companies. Whether that changes remains to be seen, but Beijing's hesitation in subsidizing the solar industry so far suggests that industry lobbying has had mixed success at best.

And let's just keep in mind that the road between a project announcement in China to its realization is usually long and somewhat torturous.

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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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