China offers deep energy subsidies to boost domestic AI chip industry

China is offering cheap energy to support its domestic artificial intelligence chips, increasing subsidies that cut energy bills by half for some of the country’s largest AI data centers to bolster its native chip industry and compete with the US.

According to sources familiar with the matter cited by the Financial Times (FT), local governments have increased incentives to help Chinese tech giants such as ByteDance, Alibaba, and Tencent, which faced higher electricity costs after Beijing prohibited the purchase of Nvidia’s AI chips.

Officials added that the new subsidies followed complaints from several tech groups about the rising cost of using domestic semiconductors from companies like Huawei and Cambricon.

Most of these semiconductors are not as energy-efficient as Nvidia’s. Local governments in data center-heavy provinces like Gansu, Guizhou, and Inner Mongolia have responded to this complaint by offering subsidies that reduce the electricity bills of large data centers by up to 50%.

However, data centers using chips from foreign suppliers like Nvidia cannot benefit from these subsidies.

This move is another sign of China encouraging its tech companies to break their dependence on Nvidia and strengthen the country’s own semiconductor industry, enabling it to compete with the US in the AI race.

According to experts, the electricity required to produce the same number of tokens (a unit of computing power) from the current generation of Chinese chips is about 30% to 50% more than from Nvidia’s H20.

China’s leading chip manufacturer, Huawei, has tried to overcome the weak single-chip computing performance of its flagship Ascend 910C chip by combining them into larger clusters, but this has also increased operating electricity costs.

Tech companies typically rent computing power from third-party data center operators, but they still need to build a significant amount of their own infrastructure to meet the growing demand from AI-focused businesses.

Despite the higher energy costs associated with using domestic chips, China’s more centralized grid provides cheaper and greener electricity compared to the US, and no shortages are expected in the near future.

China’s energy-rich remote provinces, such as Gansu, Guizhou, and Inner Mongolia, have become hubs for data center clusters. To attract the largest projects, these local governments are already competing to offer various energy subsidies and cash incentives.

A person knowledgeable on the matter said that some of these incentives are sufficient to cover about a year’s operating costs for a data center.

The unit cost of industrial electricity in these provinces is about 30% cheaper than in the more developed coastal regions of eastern China. With the new subsidies, this cost will fall to approximately 0.4 yuan, or 5.6 cents, per kWh.

This figure is comparable to the average industrial electricity cost in the US, which was about 9.1 cents per kWh, according to data published in August by the US Energy Information Administration.

While electricity prices vary significantly across different states in the US due to fragmented grid networks, American tech groups like Meta and xAI are also building their own generators near data center clusters to reduce energy costs.