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How bad relations with China could spoil the energy transition

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For years, China’s booming economy has been a horse all governments have wanted to harness. Today, relations have deteriorated between China and many Western countries, with potentially serious implications for clean energy supply chains, investments and even existing infrastructure.

The UK is a good example. In June 2014, Prime Minister David Cameron signed a £ 14 billion ($ 18.5 billion) with China, which included a £ 400 million solar investment with ZN Shine. The UK solar market was booming thanks to the revolving bond program; Huawei was cleaning up the local photovoltaic inverter market.

In October 2015, Cameron and Chinese President Xi Jinping signed another agreement for China General Nuclear Power Group (CGN) to take a third-party stake in the new Hinkley Point C nuclear power plant. This agreement may have marked the zenith of relations between the United Kingdom and China.

Times have changed dramatically. ZN Shine ceased operations in Europe in 2015 after breaking EU trade rules. Huawei’s telecommunications infrastructure is being pulled from the UK’s nascent 5G mobile network. Hinkley Point C could be Britain’s first and last nuclear power plant built with Chinese investment as lawmakers question the security implications.

A number of factors are contributing to the deterioration of relations, ongoing trade wars, Hong Kong’s new national security law and the alleged withholding of information in the early days of COVID-19, pressure on the treatment of Uyghurs in Xinjiang province. The UK is far from alone in shifting its perspective on China from economic competitor to strategic or systemic rival.

“The story was, ‘China will join the international system, then liberalize and everything will be fine,’ said Hugo Brennan, senior analyst for Asia at Verisk Maplecroft. “I think a lot of Western leaders have lost their appetite for this narrative and now there has been a hardening of positions.”

The relationship between China and the West has gone far beyond “it’s complicated”. And all of this is now spreading in the electricity sector.

Implications in the electricity sector

One of the risks to be taken into account is the possibility for China to limit access to key elements of the energy transition. Beijing’s “ Made in China 2025 ” strategy focuses on 10 key sectors the country wants to dominate in five years, including areas such as electrical equipment, renewables and electric vehicles.

But would Chinese officials really instruct an industry to limit its sales in key markets like the United States and Europe?

“In short, yes,” Brennan said, citing the threat to restrict rare earth mineral exports to the United States as an example. “China has a lot of power over both the state and the private sector and definitely puts pressure on actors – including Chinese companies – to align with their global political positions.”

One of the results of the simmering tension with China is an increased focus on building local supply chains for “technology relevant to the energy transition,” Brennan said.

This trend is evident in electric vehicles as well as in solar power. Europe is at the start of what it hopes will be a renaissance in solar manufacturing, and there is growing pressure for additional support from national and regional governments to allow a new phase to be established. competitive and innovative PV manufacturing.

“In Europe, we are totally dependent on China [for solar modules]Says Stefan Reber, Managing Director and Technical Director of German solar materials company NexWafe. “If they decide for political reasons to no longer deliver solar to Europe, what do we do then?”

NexWafe, based in Germany, is one of many emerging solar power manufacturers along the value chain that would benefit if the EU alleviated this dependence and built local capacity.

The localization trend may be further driven by the West’s growing desire to target specific Chinese companies. For example, after opening the door to the Huawei infrastructure used to build the UK’s 5G mobile phone network, the UK government has done a U-turn this year. All Huawei equipment must now be retroactively removed from the UK network by 2027.

Across the Atlantic, Huawei withdrew its solar business entirely from the United States, after a group of senators proposed to ban Huawei inverters from the market. Huawei insists its equipment poses no threat.

Will countries refuse Chinese investments?

Cross-border investments are another area of ​​risk for the energy transition.

The EU has tightened its investment screening rules to give member states more leeway to block foreign direct investment and M&A activity if they are uncomfortable for security reasons . Foreign direct investment from China to Europe fell by 50 percent in 2018 compared to the peak of 2016.

The question is already emerging in individual and corporate transactions. The offer by China Three Gorges (CTG) to buy the Portuguese utility EDP – one of the largest renewable energy developers in the world – was finally sabotaged by the shareholders of the company. But US opposition to CTG’s control of EDP’s assets in the US market – including gigawatts of wind farms – was seen as a secondary hurdle.

There are other examples where governments have acted proactively to stop investment from China, especially around networks. The Australian government blocked the sale of a controlling stake in AusGrid in 2016. In 2018, the German state-owned development bank, KfW, bought a 20% stake in grid company 50Hertz while the State Grid Corporation of China was about to buy the same shares. . Chinese companies continue to hold stakes in parts of the British and Italian gas networks.

Back in the UK, concern about Chinese investment in new nuclear power is also growing.

China General Nuclear and EDF are the main backers of Hinkley Point C, a 3.2 gigawatt facility already under construction. A slew of additional new nuclear projects lie on the sidelines, with investment and funding the main blocking factor. Two separate UK nuclear projects, led by Toshiba and Hitachi respectively, have already blocked funding as the major concern, and the loss of additional Chinese investment would be substantial.

After the Huawei 5G turned around, it was reported that China has threatened to withdraw support for the UK’s new nuclear power

Influential British MPs are calling for additional guarantees in the event of new Chinese investments, with the CGN / EDF Bradwell B project in sight. Bernard Jenkin MP, writes for the site Conservative house, said, “The Chinese government has demonstrated an established pattern of intellectual property theft (intellectual property), nuclear espionage, political interference with private companies, and cyber attacks against Western interests.”

Nuclear power is a cornerstone of the UK’s net zero reduction plans: Independent government climate advisers, the Climate Change Committee, project an additional 15 gigawatts of construction (PDF). But the means to pay for it are only becoming more murky. Government examines potential for levy on consumer bills, while nuclear think tank suggests it may be easier for government to shoulder all construction risks and auction the operational plant once it’s ready.

Shaping itself as another source of friction, the EU has made a future carbon border adjustment tax for imports from non-European companies a major policy in its economic recovery plans. This would impose a tax on carbon, for example on Indian steel, to prevent EU emissions from being outsourced to foreign suppliers.

“It’s a protectionist policy dressed in green letters,” Brennan said. “China has been very clear, as has the Trump administration, that any decision by the EU to impose its carbon border adjustments will not go well.

“We expect tit-for-tat measures if the EU goes down this road,” he said.

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