When Premier Wen Jiabao called for the development of 'environmentally friendly technologies' and 'clean production' in his work report last week, he might have been talking about Dongshan Island. Perched on the southern coast of Fujian , overlooking the Taiwan Strait, Dongshan is the mainland's favourite spot for staging mock invasions across the water. But the island is also the perfect place for harnessing one of the country's greatest and most underused natural resources: wind. At the end of a rutted dirt track surrounded by rows of green crops hand-tended by farmers in conical hats, 15 sleek white towers are planted firmly in the sand above the beach. The rhythmic swoosh from the turbine blades, now powering the light bulbs and televisions in local farmers' homes, is barely audible above the waves crashing on the shore below. Dongshan wind farm is the coal-free cutting edge of China's power industry. The country may no longer be the sick man of Asia but it's the filthiest: it burns more coal than any other nation, and relies on the fuel for about 70 per cent of its energy needs. In 2005, China burned more than 1.2 billion tonnes of coal and emitted more carbon dioxide than the whole of Europe. As the mainland's cheapest and most secure energy resource, coal will remain the nation's primary electricity-generating source for the foreseeable future. China's leadership knows, however, that its present energy model is unsustainable and - despite the struggle to enforce environmental policies and energy efficiency targets at the local level - the central government is doing more than many other countries to promote green energy sources. The Renewable Energy Law, for example, was one of the most comprehensive pieces of renewable energy legislation to be passed anywhere in the world, said Jan Hamrin, executive director of the Centre for Resource Solutions in Washington, DC. The law, which came into effect on January 1 last year, sets out a legally binding development plan for promoting green energy and encourages the construction of renewable power facilities across the country. It mandates power grid operators to purchase all electricity generated from renewable sources, with the extra cost to be spread evenly among consumers. Beijing's target is that 16 per cent of primary energy should come from renewable sources by 2020, up from 6 per cent today, with spending on alternative energy set to top 1.5 trillion yuan. Most of the electricity produced by renewable sources will come from hydro, biomass and wind - but the fastest- growing is wind power. China's wind energy potential is huge. The China Academy of Meteorological Sciences estimates the country possesses a total of 235 gigawatts of practical onshore wind power potential. Offshore potential - much more expensive to harness - is estimated at 750 gigawatts. In theory, China could meet its entire projected electricity demand for 2020 from wind. Wind resources are concentrated along the east coast - from Liaoning in the north to Guangdong in the south - and across the northern grasslands and Gobi desert, from Inner Mongolia to Xinjiang . At the end of last year China had 1.6 gigawatts of installed capacity - twice 2005's figure - ranking fifth globally. By 2020, China plans to increase capacity to 30 gigawatts, which may place it first in the world. 'The government's target might even be exceeded,' said Lars Andersen, managing director of Vestas China, the local subsidiary of Danish wind equipment-maker Vestas Wind System, which supplies the turbines on Dongshan Island. 'The political will means it is very likely to happen.' But wind power has one major problem: the exorbitant cost of power generation. At 0.5-0.6 yuan per kilowatt hour, real costs are roughly twice those of electricity produced in a conventional coal-fired power plant. Moreover, wind farms are not as reliable as traditional power plants. Vestas' turbines need a wind speed of 4 metres per second to produce power, and 15 metres per second to reach maximum output of two megawatts. The Dongshan turbines are active for roughly 35 per cent of the year, which is considered good for an onshore site. In an effort to make wind power economically competitive with conventional sources, the government launched a project in 2004 to encourage developers to build large-capacity wind farms that achieve economies of scale. The 'wind concession' system, planners hope, will make wind power a commercially viable technology. Under the concession system, all projects with a capacity of 100 megawatts undergo a competitive tendering process in which potential developers bid to sell electricity from the project at the lowest price. The winner signs a fixed, long-term power purchase agreement (PPA) with the local power grid. The advantages of the concession system for the developers are that they know precisely what price they will get for their electricity, thus minimising risk in recovering investment costs. The rub of the system, however, is that competitive bidding forces developers to price electricity unrealistically low, sometimes barely above the cost of production. Since competitive bidding was introduced, the average tariff has nearly halved. Average internal rates of return on wind power projects are between 6 per cent and 9 per cent, well below the 12 per cent profit generally required by foreign investors. The upshot is that experienced foreign developers do not bother to submit bids. In the past few years, competition in the sector has pushed wind electricity tariffs down to barely viable levels - though the cost of buying the electricity still remains high compared to energy generated by burning coal. There is evidence that developers are bidding aggressively for projects with a view to selling carbon credits under the UN's Clean Development Mechanism. JP Morgan analysts Edmond Lee and Boris Kan say that some wind developers are betting on carbon trading to make the industry more profitable in the long term. Depending on the price of carbon, they say, selling carbon credits may more than double current rates of return. 'It's a new industry and many power operators are happy to pay a high price for an entry ticket, even if that behaviour may look irrational,' said Mr Lee. 'Carbon credits are one of the reasons why operators are willing to go in at such low tariff levels. Without carbon credits there are a number of wind projects that would be even less profitable than they are today.' At present 20 Chinese wind farms have been approved by the UN's Clean Development Mechanism executive board to sell carbon credits on the international market, which is based in London. Most wind power developers, however, are subsidiaries of large state-owned utilities that can afford to lose money if it means gaining access to the wind market. Vestas' partner at Dongshan, for example, is Longyuan Power, a subsidiary of state power giant China Guodian. Wang Wanxing, programme officer for electric utilities and renewable energy at the Energy Foundation, a US non-government organisation, said market access was a key consideration for the big utilities, which will be required to buy 5 per cent of their total output from renewable energy sources by 2010, rising to 10 per cent by 2020. From the government's short-term perspective, the concession system is a success because wind energy is growing both quickly and cheaply. But some industry experts argue that competitive bidding is not conducive to the healthy development of wind power in the longer term. 'It would be helpful for the wind industry to have a defined and rational wind tariff structure that would reward technology developers and investors alike,' said Alan Sides, Asia manager for GE Energy. In theory, large concession projects requiring many big turbines should be a boon for foreign makers. In 2005, 90 per cent of China's large-capacity wind turbine generators had to be imported. Yet meagre profits mean that few wind farm developers want to pay for expensive foreign technology. Vestas supplies turbines to just one concession project: 'We felt we couldn't be competitive in the bidding for concession projects,' said Mr Andersen. Domestic manufacturers, moreover, are beginning to catch up. Although the top Chinese wind turbine maker, Goldwind Technology, only manufactures 600 and 750 kilowatt turbines - much smaller than Vestas' two-megawatt turbines on Dongshan Island - it has plans to introduce a new generation of much larger turbines. The government's requirement that 70 per cent of wind power equipment must be manufactured domestically has also boosted the fortunes of domestic turbine makers. Goldwind's market share shot up from 20 per cent in 2005 to 33 per cent last year, according to the Global Wind Energy Council. 'Local manufacturers are much cheaper than we are, and some do a good job, but we are not competing on price only. Fortunately, the market is so big that there is room for both local and international players,' said Vestas' Mr Andersen. But other market watchers are less optimistic about the outlook for foreign turbine manufacturers. 'There's going to be a race to the bottom,' said Stephen Terry of Azure International, a Beijing-based investment firm that specialises in renewable technologies. 'A lot of people will lose money making turbines in China, just as they did in the auto industry and every other industry in China.'