By Iain Mills, on 31 May 2012,

BEIJING — While China’s much-hyped clean energy drive has become bogged down in problems of impracticality and policy incoherence, the U.S. has quietly effected a genuine energy revolution that creates huge cost advantages for America’s manufacturing base going forward. With major structural shifts already underway, changing international energy market dynamics present Washington with an opportunity to fundamentally reorient its foreign policy approach, toward China and a broader range of actors, in the decades to come.

In 2011, China overtook the U.S. in terms of renewable energy investment and under current plans will surpass the European Union in 2014. Beijing plans to invest $470 billion in renewables during the 12th Five-Year Plan (FYP), more than double the $211 billion allocated in the 11th FYP. China aims for 11.4 percent of total energy to come from renewables by 2015, up from 7.5 percent in 2007. But for a variety of reasons, China’s renewable energy drive has failed to deliver the desired results.

The most glaring problem is China’s addiction to coal, which continues unabated, with the country having installed nearly five times as much coal-fired power-generation capacity as renewable over the past decade. Moreover, the contribution of renewables actually contracted from 8.6 percent in 2010 to 8.3 percent in 2011, partly on weak hydroelectric generation due to drought, but also due to chronic inefficiencies and imbalances in both the solar and wind industries. To further complicate matters, China’s domestic oil and gas supply is lagging demand by some distance, causing dependence on imports for both fuels to increase sharply.

Nor do any of these issues look like they will be resolved in the near future. Coal power-generation capacity growth will continue to outpace other sources for at least a decade. Summer droughts are becoming more severe, and hydroelectric capacity growth rates look to have peaked. Sentiment is bleak in both the wind and solar sectors, where, in addition to inherent disadvantages of high cost-per-unit of output and inability to guarantee base load, political support seems to be fading after the failure of previous policies. Moreover, under any scenario, dependence on oil and gas imports will continue to increase, rendering China increasingly exposed to supply-chain vulnerabilities, while any move toward nuclear is complicated by public concerns in the wake of Japan’s Fukushima disaster.

Overall, China’s energy markets are facing profound environmental and economic challenges that could materially restrict national development going forward. Policy remains fragmented and uncertain, with many core aspects of the 12th FYP still unclear 18 months after its launch. Reliance on foreign fuel imports will continue to increase rapidly, while the end-user cost of domestic energy can only increase from current heavily subsidized levels, compounding inflationary pressures.

Nor does China have the domestic technological capabilities to extract most of its domestic alternative energy resources, such as tight gas. Punitive requirements on foreign energy-exploration companies — foreign partners shoulder all exploration risks while committing to full disclosure of any intellectual property employed to the government — mean that, despite policy signals of a larger role for private investment, this deficiency will persist for at least the next five years.

This contrasts sharply with the energy revolution currently under way in the U.S. Despite China’s high-profile, heavy-spending drive toward renewables, the U.S. has achieved better results in terms of renewable contribution to the total energy matrix with less spending over the past five years.

The U.S. has also developed significant advantages in terms of oil and gas supply, particularly alternative gas-extraction technologies. Since 2006, U.S. gas output has risen 30 percent while oil has risen 22 percent. Oil imports, which account for 50-60 percent of the total U.S. trade deficit, have fallen 11 percent in volume terms since 2006. On current predictions, the country is on course to be nearly energy self-sufficient by 2025, yielding huge cost advantages for U.S. users.

To give an indication of the scale of this advantage, natural gas is currently under $3 per million Btu in the U.S. against an Asian spot price of $14 per million Btu. Include the fact that net labor costs in China are rising at 15-20 percent annually, and the takeaway is that by 2020 it will likely be cheaper to run a factory in the U.S. than in China.

Given the United States’ comparative advantages in other areas, such as rule of law and business culture, changing energy market dynamics have the potential to reverse nearly 40 years of capital and manufacturing migration to Asia, and in particular to China. In addition, due to the close relationship between trade balances and hydrocarbon trade, Asian foreign exchange accumulation will slow over time due to rising fuel imports, while the U.S. trade deficit will be drawn down as the country imports less, improving the balance of the global economy.

More broadly, with a reduced interest in global energy markets, Washington will be freed of several of its most resource-intensive foreign policy burdens, enabling the U.S. to fundamentally reorient its foreign policy and respond with greater flexibility to geopolitical shocks, especially in the Middle East.

China bet heavily on a green energy revolution to overcome its structural deficit in conventional energy sources, but so far that bet has yielded only marginal returns. The ongoing slowdown in the Chinese economy will reduce energy consumption growth, but coal’s cost advantages mean it remains by far the country’s largest source of power, while alternative and renewable sources look unlikely to yield material benefits before the middle of the 2016-2020 FYP.

The U.S., meanwhile, has gotten more for its money on renewables, while the rapid growth of domestic natural gas supply offers a ready-to-use, relatively clean energy source that is already having a transformative effect on its domestic economy and global energy markets.

So while China’s superior spending on new energy sources has often been cited as an example of comparative U.S. decline, when measured in terms of outcomes, the respective policies in fact affirm broader U.S. advantages in efficiency of investment and policy implementation. And both will continue to yield considerable cost advantages going forward.

Iain Mills is a Beijing-based freelance writer.

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