Interactions between renewable energy policy and renewable energy industrial policy: A critical analysis of China's policy approach to renewable energies Sufang Zhanga※c, Philip Andrews-Speedb, Xiaoli Zhaoa c, Yongxiu Hea a School of Economics and Management, North China Electric Power University, #2 Beinong Road, Changping District, Beijing ,China 102206 b Energy Studies Institute, National University of Singapore, 29 Heng Mui Keng Terrace, Block A #10-01, Singapore 119620 c Institute for Low Carbon Economy and Trade, North China Electric Power University, Beijing, China Abstract This paper analyzes China's policy approach to renewable energies and assesses how effectively China has met the ideal of appropriate interactions between renewable energy policy and renewable energy industrial policy. First we briefly discuss the interactions between these two policies. Then we outline China's key renewable energy and renewable industrial policies and find that China’s government has well recognized the need for this policy interaction. After that, we study the achievements and problems in China's wind and solar PV sector during 2005-2012 and argue that China's policy approach to renewable energies has placed priority first on developing a renewable energy manufacturing industry and only second on renewable energy itself, and it has not effectively met the ideal of appropriate interactions between renewable energy policy and renewable energy industrial policy. Lastly, we make an in-depth analysis of the three ideas underlying this policy approach, that is, the green development idea, the low-carbon leadership idea and indigenous innovation idea. We conclude that Chinas policy approach to renewable energies needs to enhance the interactions between renewable energy policy and renewable energy industrial policy. The paper contributes to a deeper understanding of China's policy strategy towards renewable energies. Keywords Renewable energy China Policy interaction ※ Corresponding author: Tel.: +86 10 13552847009 E-mail address: [email protected] 1 1. Introduction Along with its rapid economic growth in the past three decades, China has successively become the largest carbon emitter in the world since 2007 and the largest energy consumer since 2009 (Chen, 2013). On the other hand, as a developing country, China has a long way to go in its industrialization, urbanization and modernization. To advance further toward these development objectives, China has been striving for rational growth of energy demand through closures of outdated production facilities and the use of energy efficient equipment and clean energy, among others. However, since China's energy mix is dominated by coal which accounted for 66.2% of its primary energy consumption in 2012 (NREC, 2013) and cannot be substantially changed in the near future, the control of carbon emissions will be rather difficult. As such, how to achieve a trade-off between short term economic growth and long term sustainable development becomes a great challenge to the country. Since the beginning of this century, China has looked to address the challenge by making greater efforts to develop renewable energies, particularly wind and solar PV energy, and remarkable achievements have been made in these two sectors. To date, China has emerged as the largest wind power market in the world, both in terms of manufacturing and installed capacity. At the end of 2012, the cumulative installed capacity of wind power in the country reached 75,324 MW, representing 26.7% of the world total. At the end of 2011, China hosted four of the global top ten wind turbine manufacturers (GWEC, 2013). Yet China's rapid growth of wind power industry has run far ahead of the power grid development scheme and the mechanism reform suitable for renewable energy deployment, which results in industrial overcapacity, immense grid connection problems and ever-growing amounts of curtailed wind generation in recent years. 2 Compared to its wind power market, China's domestic solar PV market has been rather small. However, its solar PV manufacturing industry has grown dramatically since 2004, currently taking the first position in the world in terms of production scale, which is due to incentivizing industrial policies provided by the Chinese government as well as to overseas market demand simulated by governments like Germany and other European countries. Yet, in recent years the industry has been facing challenges such as industrial overcapacity and financial losses resulting from shrinking overseas markets. These lines of evidence show that there are two distinctive development features in China's wind and solar PV power sectors: on the one hand China has emerged as a manufacturing leader in the world in these two sectors, on the other hand industrial overcapacity and under-deployment of wind and solar power have occurred. Our premise is that this stems partially from China's policy approach to renewable energies, which has not led to appropriate interactions between China's renewable energy policy and renewable energy industrial policy. The aim of the paper is to analyze China's policy approach to renewable energies and assess how China's renewable energy policy and renewable energy industrial policy have interacted. To this end, the rest of the paper proceeds as follows: we first discuss the analytical approach and theoretical groundings upon which the interactions between renewable energy policy and renewable energy industrial policy are built in Section 2; Section 3 outlines the key renewable energy and renewable industrial policies in China; Section 4 examines the major achievements and problems in China's wind and solar PV sector over the period of 2005-2012, to illustrate China's policy approach to renewable energies. In Section 5, we make an in-depth analysis of the ideas underlying China's policy approach to renewable energies. Section 6 provides 3 concluding remarks. This paper contributes to a deeper understanding of China's strategy towards renewable energies. 2. Interactions between renewable energy policy and renewable energy industrial policy To date, there is no uniform definition of either renewable energy policy or industrial policy for renewable energy in the world. Indeed, these two policies have been more often used interchangeably. In this paper, we define renewable energy policy as policy aimed at promoting the development and deployment of renewable energy, which provides a sustainable and stable domestic renewable energy market, while renewable energy industrial policy is defined as policy aimed at enhancing the competitiveness and capability of renewable manufacturing industry. Self-evidently there is a natural affinity between these two policies. As depicted in Fig.1, the improved competitiveness and capabilities of the manufacturers of renewable equipment, components and parts result in price reduction for wind turbines that leads in turn to lower costs for the installation and generation of wind power. At the same time, the development, generation and consumption of wind power are conducive to enhancing the manufacturing competitiveness and capability of wind turbines by providing a sustainable and stable domestic renewable energy market. This provides signals to both local manufacturers and to foreign firms that they have the long-term planning horizon necessary to allow them to reasonably invest in the market and may be a pre-requisite to attracting leading foreign manufacturers to establish local manufacturing facilities or to develop local joint venture partnerships (Lewis and Wiser, 2007). Companies facing unstable or small renewable energy markets, on the other hand, will be less willing to spend money on 4 R&D, product development, and local manufacturing facilities. It is apparent that appropriate interactions between renewable energy and industrial policy for renewable energy enhance both renewable energy manufacturing industry and renewable energy development and deployment. RE policy Industrial policy for RE RE development & Affect RE development and deployment RE manufacturing deployment Equipment RE development Component RE generation Part RE consumption Affect RE manufacturing ........... Fig. 1 Diagram of interactions between renewable energy policy and renewable energy industrial policy Note: RE is the abbreviation of renewable energy. Source: Authors’ own illustration. The nature and progress of national strategies to promote renewable energy deployment depend, among other factors, on the motivations of key actors and on the national innovation systems. Four categories of national motivations for the development of renewable energy can be identified (Sims Gallagher, 2013): the economic drive to develop industrial capacity in the development and manufacturing of renewable energy technology; the wish to exploit a generous (per capita) endowment of renewable energy to meet national energy needs; political motivations of different types which support the development and implementation of policies to encourage the deployment of renewable energy; embedded social values and ideas which support renewable energy strategies. Although the relative importance of these motivations varies between different 5 countries, economic policy, in other words industrial policy, ranks highly in many cases (Sims Gallagher, 2013). As a consequence, renewable energy policy and renewable energy industrial policy have a general tendency to be intimately linked, at least in those countries