In early August, China’s National Development and Reform Commission (NDRC) announced the implementation of a national feed-in tariff for solar power, roughly equivalent to 15–18 cents per kilowatt hour (kWh). China hopes these guaranteed subsidies will double its current solar photovoltaic (PV) capacity by the end of 2011. Such a goal might seem wildly ambitious, if not for China’s recent emergence as the world leader in wind energy deployment—94 percent of the country’s 42 gigawatts (GW) of wind capacity was constructed in the past three years. Already the world’s leader in PV manufacturing, China’s solar feed-in tariff will aim to greatly expand the country’s renewable portfolio with solar panels produced domestically. This could have major implications for the world solar market as well as for the future trajectory of PV technology.
Feed-in tariffs (FITs) have a history of jumpstarting large-scale deployment of renewable energy, most notably in the German wind power sector. At the most basic level, FITs guarantee renewable generators access to the electricity grid at a fixed rate per kWh for a fixed number of years. Unlike the production tax credits or renewable portfolio standards (RPS) most common in the United States, FITs largely eliminate price uncertainty. For electric utilities and project developers, this means a simpler break-even calculation. Going forward, Chinese solar investors will be able to predict annual return on investment without worrying about potential energy supply shocks, changes in consumer demand, or policy instability. The latter can serve as a powerful deterrent to renewables investment, as with the U.S. federal production tax credit that has required congressional renewal every two years. Such policy uncertainty has led to biennial dips in U.S. wind investment, a pattern that FITs are designed to avoid.
FIT policies are typically tailored to individual technologies, with higher rates required to incentivize relatively less developed, high-cost technologies. Hence, it makes sense to frame China’s solar FITs not as energy or climate policy, but rather as technology policy. From this perspective, the NDRC is essentially stimulating a PV boom in the hopes of achieving technological improvements and future cost reductions. Increased demand for PVs should drive increases in R&D spending among China’s solar industry. Cost reduction also comes via “learning-by-doing,” by which the technology naturally becomes less costly as more PV panels are manufactured and installed. The U.S. Energy Information Administration estimates a learning rate of 15 percent for solar PV—meaning that by doubling its capacity, China should expect the cost of PV-generated electricity to fall by 15 percent.
Of course, it doesn’t hurt that China is home to four of the world’s top five PV manufacturers. Any expansion of solar generating capacity will also funnel state support to domestic manufacturing firms. Moreover, if these firms concentrate the aforementioned learning benefits to reduce costs, China could develop a powerful advantage in undercutting foreign competitors. (Relatively cheap labor already provides much of this advantage.) As with China’s cornering the market for rare earth metals, a massive surge in Chinese solar manufacturing would spark global fears of export quotas and anticompetitive behavior. U.S. policymakers will be far less enthusiastic about solar power if domestic PV producers cannot stay afloat. However, if China can somehow move PV technology close to cost-parity with wind, biomass, and other renewable sources, the benefits will be hard to ignore.
