INSIGHT by Ziyi Ma and Yu Ma, the World Resources Institute
China is one of the world’s major sources of infrastructure finance in developing countries. The Belt and Road Initiative (BRI), the country’s massive scheme for financing infrastructure, is active in well over 100 countries. China has emerged as one of the most significant financiers of, and investors in, global power infrastructure, with $52 billion invested in coal power generation in the past two decades in BRI countries.
On September 21st, 2021, in a major departure from its practice of backing significant coal investments overseas, China pledged it would stop building new coal power plants and support low-carbon and clean energy. A year later, evidence shows that China has indeed followed through and ceased grid-connected coal-fired power project finance. Now China has the opportunity to marshal its substantial resources and capabilities to accelerate decarbonization.
However, China’s pivot from coal didn’t decisively end overseas finance for fossil fuels. Experts worry about an unsustainable increase in China’s overseas gas investment as discussions to convert several invested coal pipeline projects to gas emerge, which would lock in risky gas supplies and polluting infrastructure for decades.
The world can ill afford more fossil fuel investment, and the fact is, economics suggest that renewables would be a better investment for China. With countries eager for sustainable investment facing a global energy crisis, China is well positioned to promote green power sources on a large scale.
| China has limited opportunities in natural gas
Limiting global temperature rise to 1.5 degrees C (2.7 degrees F) — the limit scientists say is necessary for averting dangerous climate impacts — requires that global gas production, along with coal and oil, must decline significantly each year until 2050. In the past, China has not been a major player in the gas market, and it is unlikely to be one in the future. Compared to OECD countries like Japan and the United States, and major multilateral development banks (MDBs), China does not have a comparative advantage in overseas gas power generation investments.
As the chart below shows, from 2001 to 2022, Japan, the United States and France accounted for almost 60% of international gas power generation investments from top 10 countries, with Japan dominating the market. China ranks just 13th, with just $6.8 billion in investment — less than one-tenth Japan’s amount.
A Boston University briefing finds that MDBs also have invested heavily in gas power plants (eight banks contributed $17 billion from 2008-2021), with the European Investment Bank leading the pack (though it has pledged to avoid future investments in fossil fuels). In comparison, China’s much smaller-scale gas investment overseas is focused on gas chemicals activities rather than power generation (only $3 billion).
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The top investor countries share some common attributes that China lacks. They cultivate and retain their comparative advantages thanks to mature gas markets at home, where experience in extraction, equipment manufacturing and engineering can be developed and then exported or used for a technical, knowledge-based edge in investing. In Japan, for instance, gas financing provides a means to support its already-substantial equipment and service exports, with significant backing from its development finance institutions (DFIs). In fact, 39% of Japan’s DFI investments were deployed in gas power between 2000 and 2018.
By contrast, China has neither a mature domestic gas market nor a strong industry that aims to export technical services. Gas accounted for only 3.3% of power generated in China in 2020, compared to 38% in both Japan and the U.S.
| China’s renewable energy advantage
When it comes to renewables, the picture is a mirror image. China is in a good position to build on its strong domestic market and its existing comparative advantage in renewable energy finance.
China’s comparative advantage starts with its extensive experience in renewable supply chains. China dominates the global markets for renewable manufacturing, accounting for 72% of global solar manufacturing and 50% of global wind turbines. That scale translates into lower prices; China boasts cheaper-than-world-average wind and solar equipment, as well as an efficient and low-cost equipment supply chain. China has also established its competitiveness in the international market as an Engineering, Procurement, and Construction (EPC) contractor and equipment supplier in renewables.
Demand conditions are favorable, too. Countries China already works with through the BRI are increasingly interested in renewable energy, and many have their own ambitious net-zero emissions goals. Rising clean energy investment needs from emerging economies eager to decarbonize their grids will continue to be an important pull factor. The International Energy Agency (IEA) has estimated that achieving net-zero emissions by 2050 will require $573 billion in renewable energy investments in emerging markets from 2026 to 2030 (about 86% of total investments), with fossil fuel investment needs at only $25 billion.
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Data from WRI’s China Overseas Finance Inventory 2.0 also shows encouraging signs of wind and solar investment growth compared to gas investment over the past decade. And while current investments in wind and solar are relatively small compared to hydropower, they have much stronger potential for growth compared to hydropower, which increasingly draws social and environmental concerns.
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| Significant challenges remain for increasing China’s investments in renewables
Still some challenges remain. Overall, the market for overseas solar and wind energy finance is tough for global investors to navigate. From country to country, there is significant unevenness in regulatory frameworks and policy conditions. The global economic downturn may play a role, too, as increasing shipping costs, soaring commodity prices and declining electricity demand change the investment calculus.
For Chinese state-owned enterprises in particular, some countries may be off-limits for regulatory or national security reasons concerning foreign investment. And increasing geopolitical tensions also play a role in some regions. Moreover, China’s dual circulation policy, created in 2020, also pulls the financial focus to its domestic market.
Like other international investors, Chinese ones also face financing risks in renewable projects. To mitigate the risks, financial institutions often ask investors or host country governments to provide guarantees. However, there is lack of sovereign guarantees provided for renewable projects, and Chinese corporates are unable to take on further liabilities by using their assets as collateral.
Sinosure, primary source of export guarantees from China, also has limited capacity on taking up more insurance for renewable projects, as it has used much of its quota for mid- and long- term insurance. All these factors make renewable projects less bankable.
| How China can deliver as a solar and wind champion
The conditions are favorable for China to prefer renewables over fossils in its next generation of foreign investment. However, decisive steps remain to be taken. To build on its comparative advantage in renewables, China should work with BRI countries to better understand and encourage renewable energy demand. It can also encourage innovation — not just in renewable technologies, but in financial tools that make renewables more widely bankable.
Indeed, investors should be able to find synergy in combining new financial products with local and international collaboration. The result will be an accelerated rollout of renewables in emerging markets with surging energy demands — a global win-win.
This piece was originally published by the World Resources Institute.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
