At a time when the U.S. is propping up its coal industry, China is expanding its support for clean energy. After years of targeted policy and investment, it has emerged as a global leader in the clean energy industry. Chinese firms continue to expand their share of the global market and have gained the technical expertise to build and manage nearly every portion of clean energy production and transmission. The Cipher Brief’s Will Edwards spoke to Tim Buckley, the Director of Energy Finance Studies for Australasia at the Institute for Energy Economics and Financial Analysis (IEEFA) to learn more about how China has expanded worldwide, how government policy shaped its industry-leading role, and the importance of clean energy for China’s security and stability.
The Cipher Brief: With the U.S. and China as examples, how significant is the role of government in fostering investment and development of clean energy?
Tim Buckley: I think the government role is critical to fostering the development of new industry, particularly one that is very capital-intensive, has very long-dated investments, and has a public good role as well. You’re providing the electricity grid to the whole of society. Having the right policy framework for the establishment of industry gets the industry’s confidence to take the long-term investments – infrastructure investments, manufacturing technology investments – and this enables the development and growth of that industry. And so, we need policy clarity and a good policy framework overall, but we also need certainty and stability of that framework.
TCB: And would you say that China gets good marks for providing long-term stability for their own policy framework?
TB: Yes I would. I’m certainly no advocate for forms of government contrary to ours, but the beauty of the Chinese government system is they have a long-term policy framework, and their entire footing is predicated around their five-year plans and the policy direction that is implicit in that. When the Premier of China gave his opening address of the People’s National Congress two months ago, he said, we commit to the people of China to a return to blue skies. I’m paraphrasing him, but he’s saying we commit to resolving, permanently, the massive pollution problems that have been absolutely hammering the Chinese people and society for the last five years.
With that overarching framework, you don’t know exactly the incremental policy and regulations that are coming up, but you have a very clear direction from the government that they are going to continue to tighten the policy framework on particulates, air pollution, water pollution, coal ash disposal, and all the externalities of particularly coal-fired power generation. Industry can invest with a high degree of confidence knowing that the government has a long-term policy framework that’s clear to everyone and is reviewed every five years. That gives you the long-term policy clarity that corporates can invest in.
TCB: Turning to the U.S., the Trump Administration has taken a very different tack on clean energy and looking at the status of the clean energy industry in the United States. How do you see this affecting its growth prospects?
TB: Certainly materially different. Diametrically opposed. The U.S. now has a government who is saying, not withstanding all of the merits of and inevitability of the transition to a low-carbon future, we’re going to do everything we can to prop up dying industries of the past, we’re going to remove all the regulations to the extent we possibly can that effectively internalize some of the costs of, for example, coal mining. The new Administration claims it’s for the benefit of coal miners. The trend has been for the American coal industry to downsize every year. A decade ago they employed 500-600,000 people now they’re well below 100,000. That’s never coming back. Mine automation is an inevitability, so what you will see is increased production and prolonged life for coal-fired power plants that will use more coal, give longer life to the existing assets, and the owners will be able to milk those assets for gross cash flow for another couple years, thanks to the redirection of American policy.
America’s regulatory framework is going to try and reverse the tide of what to me is an inevitable technology-driven transformation; it might have a short-term stalling effect of that transformation in the American economy, but I think it won’t change the outcome, it will just transfer the benefits away from American industry towards China, and also India, as those two countries continue to accelerate their transformation of their economies.
TCB: Increasingly, we’ve heard China referred to as a leader in the clean energy industry. Is that in terms of manufacturing ability, installed capacity, overseas investment, something else, or all of the above? What aspects make them a global leader in this industry?
TB: It’s all of the above, and it’s become increasingly evident that this is not only a long-term policy, but also the corporates are going to very aggressively pursue this strategy. The International Energy Agency has estimated that China will represent a third of all wind, solar, and hydroelectricity installs globally in the five years to 2021.
If you look at hydro for example, China has been building 40 percent of the world’s hydro capacity for the last decade. If you look at who is building most of the hydro capacity around the world, you’ll find there are two major Chinese hydro companies. They operate six or eight subsidiaries to give the appearance of competition, but the reality is 60 to 70 percent of all hydro is being built by Chinese engineers using Chinese turbines, technology, capital, and manpower.
I think China by stealth and by strategy gained global technology leadership: they have built or bought the best technology in the world, they also have the capital funding availability, and the policy clarity to drive that technology leadership. It’s about investment, jobs, and exports. It’s about global industry dominance for industries of the future. When you look at the Chinese government, almost every external decision they make is about going global, the One Belt One Road policy is about going global. You have a very clear long-term policy framework, and state-owned enterprises are rapidly implementing that policy, and they’re doing it both through acquisitions and greenfield investment.
IEEFA did a report at the start of this year looking at outbound mergers and acquisitions of Chinese companies in the electricity market globally, and we estimate that Chinese outbound investment grew by 60 percent year-over-year last year alone. There were 11 multibillion-dollar investment decisions made by Chinese corporates globally in the low-emissions sector. Their acquisition framework is spread across the globe. It’s not entirely tied to the One Belt One Road strategy. They’re also making acquisitions in Europe, America and Canada. That buys the critical mass, technology, management expertise, and the learning-by-doing, but then what’s behind that is a massive amount of capital that can then be deployed by those Chinese companies.
And the low-emissions investment has recently been accelerated with India’s new plans to build out 275 gigawatts of renewables by 2027, a fivefold capacity expansion in just one decade. Don’t underestimate India in this equation.
TCB: Again comparing China and the United States, as far as having a very strong clean energy or renewable energy sector, what are the implications for either country’s national security or stability?
TB: Energy security is one of the single most important policy drivers for almost every country globally, and not just currently, but through modern history. When you look at what has underpinned Germany’s energy transformation program, a multidecade, multi-hundred-billion-dollar investment in renewable energy, it was not from an altruistic government looking to support the development of a new industry or to reduce climate change, it was very much predicated on trying to reduce Germany’s dependence on Russian gas. Energy security is critical to government policy frameworks.
So economics, energy security, political security all go hand in hand.
America has had a policy framework predicated on trying to build energy independence and energy security for probably the entire period post-World War II, and it is only very recently that America has reached or is close to being net energy neutral in terms of its net energy imports. The gas fracking transformation of your country has dramatically changed the energy import balance of the country and built your capacity in terms of oil production, and you’re now looking like you’re going to be one of the major exporters of gas globally within five to 10 years. Energy security has been a clear government policy for the last eight presidents.
China is assuming a more global leadership profile as we speak via external investment. India is probably five or 10 years behind China in that context, but you already see a lot of the policy framework in India starting to address the need for outbound investment to avoid being hemmed in by China. When China goes in and invests in Pakistan, it’s no coincidence that not only does Pakistan have port access that China is very interested in, but it is adjacent to India. And then it’s no surprise that you see China announce a $600 million investment in Bangladesh solar in March 2017. Now, who’s India’s neighbor to the East? Bangladesh. You have a situation where China is using the One Belt One Road policy to cement its regional leadership through investment. We know the global shift of economic power is towards Asia, and China is looking to cement its leadership in its neighboring countries.
It’s worth bearing in mind why I really belabor these points. The research that IEEFA does highlights the point that it really only matters what three countries do: America, China, and India. Now historically Germany has been an absolute world leader in driving the energy market transformation, absolutely no doubt, a clear global leader. But you only have to look at their employment profile in the renewable energy sector. It’s been decimated in the last five years. They were the world leader, but they’ve passed that baton on to the Chinese, and now they’re passing it on to the Indians. You’ve got a policy in India called “Make in India” that to Prime Minister Narendra Modi is so much about driving economic growth. India is saying, well, let’s be the new manufacturing power of the world. Let’s take on that manufacturing leadership from China, the reason being India has something like a million new workers coming into its workforce every month for the next 20 years.
China is pursuing a policy that effectively reduces the strategic impediment of a flat employment group by moving up the value-added chain rapidly. The one-child policy has meant their population and workforce has already peaked. As China moves away from the low value-added manufacturing base that they’ve built up for the last 20 years, they’re moving into higher-value things like renewable energy, energy efficiency, grid development, etc. And effectively that’s passing the lower value manufacturing mantle to India and places like Bangladesh, Pakistan, and Vietnam. It provides an interesting balance to that equation when you say that India and China are not necessarily moving into a policy conflict area. It could actually be relatively compatible, within reason.
There are some very, very significant geopolitical economic implications to all of this, but I actually see it as a relatively safer world where you have a sharing of global leadership between America and Asia, and that hopefully will come through the drive and focus of these countries on energy security and also the opportunities for foreign investment that entails. I’m hoping that if China takes a pragmatic long-term view, they’re going to realize the One Belt One Road policy may preclude them exerting excessive military power, or using their military might the way Western countries have done for the last hundred years. I’m not trying to be idealistic here, and we’ve seen the consequence failures of using military might, so why wouldn’t China continue to use its economic might and its growing technology leadership instead?
