Solar plan in China's Inner Mongolia highlights pitfalls for U.S. firms

By Keith B. Richburg
Washington Post Staff Writer
Friday, August 13, 2010; A06

With great fanfare, an Arizona-based energy company signed a preliminary agreement with China last fall to build the world's largest solar-power plant in the Mongolian desert.

The deal was hailed as the first major example of the United States and China cooperating on a big-ticket energy project, and the largest foray by a U.S. company into Asia's fast-growing alternative- energy market. The agreement became a centerpiece achievement of President Obama's visit to China last November.

Nearly a year later, the deal has not been completed and there is growing skepticism as to whether it will happen.

Chinese competitors in the solar business have complained openly about the U.S. company, First Solar, getting such a lucrative contract. A planned June 1 date to break ground has been missed. Government officials from the Chinese region of Inner Mongolia, where the plant would be built, say they plan to open the project to competitive bidding.

Many solar-industry insiders now say the deal, outlined in a "memorandum of understanding," was mainly a showpiece for Chinese officials to demonstrate support for one of Obama's signature initiatives, strategic energy cooperation.

What happened to the Mongolian solar farm project reads like a cautionary tale on the pitfalls facing U.S. firms trying to enter the Chinese market, particularly in a sector such as alternative energy, which has many indigenous competitors.

It also underscores what U.S. business executives here say is a lack of reciprocity in access to China's markets. About the same time First Solar was signing its preliminary agreement for the Mongolian project, China was making an aggressive push into the U.S. alternative-energy market. A Chinese consortium invested $1.5 billion in a 36,000-acre wind farm in West Texas, with all the wind turbines to be made in China.

Murray King, managing director for Greater China at APCO Worldwide, a business advisory firm, said it is not unusual for Chinese leaders to race through with signing ceremonies for major business deals around the time of high-level foreign visits -- and to have many of the deals never go through.

A memorandum of understanding in China "is a first date," King said. "And not all first dates lead to marriage."

In the case of First Solar, it signed a "partnership agreement" with the city of Ordos on Sept. 8, 2009, to build a huge 2,000-megawatt solar farm in phases over several years. The plant, when complete, would provide power for as many as 3 million households.

On Nov. 18, First Solar's president, Bruce Sohn, and the mayor of Ordos, Yun Guangzhong, signed a separate framework agreement, in the presence of top Chinese leaders and U.S. Energy Secretary Steven Chu. The 11-year-old company is the world's largest maker of thin-film photovoltaic modules and has been expanding into constructing solar farms. The signing was part of the summit between Obama and Chinese President Hu Jintao.

"First Solar's inability to move forward with this [agreement] doesn't make China look too good, especially as they claim to 'open market access' to Western companies," said Andy Klump, managing director of Clean Energy Associates, a solar advisory firm. "Typically, there's always a big bang and a lot of press when these agreements are signed, but they often don't come to fruition."

Steve Ye, the chief financial officer for competitor Solar Enertech in Shanghai, said: "I don't think the memorandum means anything. My guess is it was for show."

Ye said the Inner Mongolian local officials "have been talking with lots of companies. I happen to be involved in some of the discussions."

From the time the agreement was announced, Chinese solar companies began complaining loudly. China has thousands of companies manufacturing solar panels. Many of them are small start-ups; others export to the largest international markets, in places such as Germany and the United States.

Han Xiaoping of, an energy information Web site, said: "Of course, Chinese enterprises are not satisfied: How can an American company win such a big project . . . without even competing with Chinese enterprises?"

The Ordos project was supposed to operate under an arrangement in which the government's National Energy Administration would guarantee the company a price for the energy produced at the Mongolian desert farm. The price guarantee is essential to give clarity to the company's investors. (Although no cost figure has been announced, industry analysts say a similar project in the United States would cost at least $5 billion.)

But the price subsidy generated controversy among Chinese solar producers. They said that if the government set the price too high, there would be enough money only for a few solar companies out of the thousands here. Others raised nationalistic concerns, questioning why the government should subsidize a U.S. firm.

An official in Ordos confirmed that the process to build the plant is now wide-open. Gao Gengui, energy section chief for the Ordos government's development commission, said the government is treating First Solar the same as competing Chinese solar companies, and he said First Solar should "go through the bidding process."

First Solar said in an e-mailed statement that "we are still negotiating the economic framework conditions for the project with our local partners. We are also currently experiencing very strong demand for our modules in other markets.

"In light of these factors, we likely won't start construction of the Ordos project until 2011," the statement said.

Researcher Liu Liu in Beijing contributed to this report.

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