Special Report - Opportunity and Risk in China - Making life comfortable at home

Closing the gap between demand for wind power equipment and its supply has this year been a main focus of China's wind power policy, along with reducing the need to import technology and lowering the cost to its industry of any imports still required. At the same time it has taken steps to encourage domestic production of machines with capacity ratings of 2.5 MW or more.

The attention to policy detail comes after the government got its key implementation rules for the 2006 renewable energy law into place towards the end of last year and has worked through five rounds of concession agreements for the development of large, state-sponsored projects, a process which since 2003 has resulted in it awarding 3.3 GW of contracts across 15 projects.

Mainly to lower manufacturing costs for domestic companies, the government announced in April that sales and import duties on some components and raw materials are to be refunded to Chinese wind turbine manufacturers, backdated to January 1. Some of the money saved should be used for further research and development (R&D), says the government. To further reduce competition from foreigners, the government abolished its tax exemption for imports of complete turbines smaller than 2.5 MW.

More recently it unveiled plans to subsidise research and development (R&D) of Chinese wind equipment. Companies are being offered CNY 600/kW ($88/kW) for the first 50, 1.5 MW or larger machines produced specifically for R&D purposes. Machines must have been operating for 240 hours. The subsidy is applicable only to wholly or majority owned domestic companies that primarily buy components from suppliers that are also wholly or majority Chinese owned. The purchaser is to receive half the subsidy, with the rest proportionally awarded to the Chinese component suppliers. The subsidy, or "reward system," as the government calls it, is intended to further support weak links of the supply chain.

According to one-time investment bank Lehman Brothers, the measures are long overdue. In a report issued in August, shortages of bearings, gearboxes, towers, and electrical control systems, compounded by the increasing price of raw materials, "are really defining China as we go into 2009," at least in terms of the wind power market. "Without addressing them, a move up the value added curve is unsustainable." More government subsidies for local firms, the report said, will "enable Chinese companies to obtain their own intellectual property and become less dependent on foreign suppliers." The government's recent actions indicate its agreement, but the results will take time to filter through. Component shortages in China are forecast to continue to 2011.

Lehman Brothers' encouragement of protective practices by China will not have endeared it to wind power companies from outside the country who already feel the playing field is tipped against them. The bank's report, "China's Great Transition: Taming Inflation, Cleaning up the Environment; Building Infrastructure," was released before its collapse, a victim of the crisis in financial markets globally.

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