The urgent need to combat global climate change is set to ensure that the search for renewable energy will play a much greater role in the global energy supply in the UK. Research so far has been encouraging, but expansion worldwide (or limitation, depending on which side of the fence you’re on) has been driven by government policies to encourage renewable energy.

Domestic content requirements imposed in China in 2006 boosted its renewable energy sector considerably, resulting in increased foreign investment as well as the setting up of local renewable energy equipment facilities. Despite abolishing almost 70% of local requirements in 2009, China overtook the US to lead investments in the global clean energy sector, with an investment of approximately $34.6bn.

Both Ontario (Canada) and India soon followed this growth market strategy with the introduction of a ‘domestic content requirement’ in its wind and solar power sectors. The US also implemented the Buy American Act for government procurement of products for public projects in varied sectors, including renewable energy.

The US, European Union (EU) and Brazil also encouraged their domestic biofuels market by imposing trade restrictions on imports in the form of, for example, import tariffs and advalorem taxes.

Using detailed information from GlobalData’s ‘Renewable Energy Trade Imbalance – Will WTO Scanner Revive the Situation?’, this feature seeks to shed light WTO allegations against China’s imbalanced renewable energy trade.

China’s local content requirement issue

“In 2009, China overtook the US to lead investments in the global clean energy sector.”

Local content requirement has been in place in the Chinese power industry for many years.

Wind farm projects approved by the country’s National Development and Reform Commission (NDRC) during the Ninth Five-Year Plan (1996-2000) required that wind turbine equipment should contain at least 40% local components.

In 2003, China implemented local content of 50% for the development of its domestic wind power market.

In 2004, under the wind concession programme, this requirement increased to 70% for large-scale wind projects. Later in 2005, the 70% mandate extended to all types of wind farms.

The main aim of local content policy was to develop China’s technology and encourage local manufacturers to favour domestic production of wind power equipments. Local content policies have decreased the huge dependence on imported wind turbines, developed the technical expertise of local players and increased the domestic production capacities of wind power equipment.

The main factors limiting the development of domestic wind power in China in the early 2000s were the high dependence on imported wind turbines and technical design capabilities which hampered the development of domestic wind turbine equipment.

During the Ninth Five Year Plan, the NDRC approved a minimum of 40% local content policy for wind turbine equipment in China. In addition, certain measures were issued to develop new renewable energy and increase the local production of new energy equipments. Subsidies are provided by the Ministry of Science and Technology for the research and development of new technologies and a prototype machine was approved by the government and installed at wind farms.

“In 2003, China implemented local content of 50% for the development of its domestic wind power market.”

In September 2004, the Chinese Government decided to employ 70% local content for wind power technology. This requirement increased from 50% in 2003 in order to promote the country’s local wind equipment manufacturing market. It was observed that with local content policies and support of strong incentives, the development of wind industry in China has been tremendously enhanced.

The 70% local content requirement programme focused on the development of wind concession farms and later in 2005 was extended to ordinary wind farm projects. This local content requirement of 70% was a key factor in evaluating the feasibility of the wind power project.

In 2008, China announced a $586bn economic stimulus package, which is extended to the renewable energy market. Wind power received major allocations such as concessions to major wind farms and wind turbine manufacturers. Major concessions were given to domestic products by the NDRC and eight government ministries and commissions.

Abolition of China’s Local Content Requirements

In 2009, China eliminated the 70% local content requirement in its wind farms, although it still considers the rate of domestic content as one of the important factors in the bidding selection process for awarding concessions to wind farms.

China’s government has provided a 5% preference to domestic firms during the bidding process for wind concessions and has imposed technical and other procedural conditions on the foreign firms in order to compete for the wind concession. Due to the above conditions, foreign firms in China face difficulties in receiving wind farm concessions, despite their high competitive bids.

There is, however, an agreement between the Chinese government the US company First Solar to build a solar power plant, which includes the setting up of a domestic supply chain for the facility in China. Furthermore, the country is conditioning the approval of power plants and prioritising grid access to the power plants using domestic equipment.

Allegations under the WTO

“The WTO has identified prohibited subsidy programmes implemented by China.”

Under the WTO SCM Agreement, Article 3, WTO members cannot grant subsidies that affect their export performance or encourage domestic products over imported goods. When joining the WTO, China agreed to remove all prohibited subsidies, but the US identifies the benefit provided to the producers and exporters by China in the form of subsidies.

The United Steelworkers Union (USW) filed a Section 301 petition with the Obama Administration requesting an investigation of current subsidies and other restrictions imposed by the Chinese Government to support its domestic renewable market.

The Administration has to further decide to initiate the investigation on the issues raised in the petition, which would result in filing the case with the WTO.

To date, the WTO has identified several such prohibited subsidy programmes implemented by China to benefit its clean technology producers and exporters, some of which are illustrated below.

  • Government preferences to domestic companies and local equipment:. Under article III 4 of the GATT 1994, WTO members are required to consider imported and domestic goods equally in terms of laws and regulations affecting their internal sales and marketing activities. In paragraph 3(a) of China’s Protocol of Accession to the WTO, the country agreed to treat foreign firms and domestic firms equally in terms of the procurement of input materials, as well as conditions affecting the production, marketing and sales of their respective products; however, China violated its commitments by applying local content requirements to discriminate against imported goods and foreign firms in the clean energy sector.
  • Local content requirements in wind and solar sectors. Even though in 2009 China eliminated the mandate of 70% local content requirement in the country’s wind farms, it still considers the rate of domestic content as one of the factors in the bidding selection process for awarding concessions to wind farms. In 2009, the country approved the construction of its first solar power plant with a condition to procure 80% of the solar equipments locally. Furthermore, another agreement to build a solar power plant involves First Solar setting up a domestic supply chain for the facility in China. Such domestic requirements are against the stated rules of the GPA in the WTO. Although China is not a member of the GPA group, it has recently reapplied to join this group. The country’s government is not directly buying equipment for wind and solar plants; rather it is conditioning the approval of these power plants, as well as giving priority grid access to the power plants using domestic equipment. Against this backdrop, the local content conditions violate Article III: 4 of the GATT.
  • Prohibition of foreign firms from accessing carbon credits. Under the CDM, emission-reduction project owners in developing countries are allowed to increase the financial viability of their project by raising funds through the sale of carbon credits to developed countries. In China, the government prohibits access to such credits by foreign project owners. This practice violates paragraph 3(a) of China’s Protocol of Accession to the WTO.
  • Foreign investment agreements requiring transfer of advanced technology. The Chinese Government considers transfer of advanced technology as a condition for approving foreign joint venture agreements. Some of the green technology firms, such as GE and Siemens AG, have complained about China’s technology transfer strategy; for example, in 2009 Evergreen Solar entered a joint venture with the provincial government of China in order to raise funds to open its plant in the country. The agreement required Evergreen to license solar wafer technology to the new venture. Thus, the firm is now shifting its solar panel production unit from Massachusetts, US, to China. Against this backdrop, China’s technology transfer condition for investment approvals of foreign firms violates paragraph 7.3 of China’s Protocol of Accession to the WTO.
  • High domestic subsidies affecting trade in other countries. China’s high renewable energy subsidies are leading to a trade imbalance and are affecting green technology producers in other countries. China provides green technology subsidies twice as high as the stimulus provided by the US and almost half of the total green energy stimulus spent globally, accounting for nearly $216bn in green technology. China’s green energy producers are promptly scaling up their production, increasing their market share, lowering green equipment prices and as a result giving themselves a competitive edge over other green technology firms globally. As a result, green energy firms in other countries, especially the US, have suffered a decline in their export businesses, job losses, decreases in domestic market share and a fall in market-driven prices, thereby largely affecting their profit margins. As a result, such lenient green energy subsidies in China are considered prohibited under Article 5 and Article 6 of the SCM Agreement.

More details on the full GlobalData report.

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