China’s Vision for a Global Grid

In fall 2015, Chinese president Xi Jinping debuted at the UN a grand scheme called Global Energy Interconnection (GEI) to transform the world’s power grids. GEI imagines taking our existing grids—fragmented today along national lines—and knitting them together over the next five decades into a global network. This integrated system would serve as the backbone of a transition from fossil fuels to a new energy system based around three pillars: clean energy, smart grids, and a new technology for long-distance power lines known as ultra-high-voltage (UHV) transmission.

Three years later, GEI is an important part of Chinese outbound energy policy—indeed, “a personal priority of Xi Jinping,” according to an anonymous senior power official quoted in the Financial Times in June 2018. The organization set up to promote the program—the Global Energy Interconnection Cooperation and Development Organization (GEIDCO)—has partnered with the UN alongside a host of companies and regional organizations and launched early-stage discussions around cross-border power lines in Northeast Asia.

China presents GEI as a mutually beneficial project for global sustainable development. But how should we really understand this initiative? Answering this requires examining both the needs of cross-border electricity trade today and the interests driving China’s interconnection policies. These diverge in important ways. International power trade is in its infancy in most of the world; GEI’s ambition for the coming decades far outstrips what can be achieved. Realistically, interconnection progress at present demands a politically-focused agenda that pairs domestic power-sector transformation with multilateral cooperation. GEI’s contributions to this agenda are hindered by two factors. First, GEI has tied itself closely to UHV megaprojects that do little for interconnection while intensifying concerns from the US and other countries about the scheme’s industrial policy aims. Second, China itself has sent mixed signals about its interest in deepening multilateral power-trade cooperation with its neighbors.

Interconnection’s Challenges

China is in many ways a natural spearhead for a global push on interconnection. Its leading utility, the State Grid Corporation of China (SGCC), is the world’s second-largest company behind Walmart. (SGCC is also the lead sponsor of GEIDCO, whose chairman is former SGCC CEO Liu Zhenya.) Chinese companies are major contractors in the global transmission-sector market, and Chinese utilities have acquired large minority stakes in utilities in South America, southern Europe, and Asia since the mid-2000s.

But for all China’s resources for pushing GEI, the world’s track record on interconnection is poor. Over the past several decades, regional organizations and development banks have struggled to mobilize support for a host of regional power–trade initiatives throughout the developed and developing world. Outside of a handful of regions—southern Africa, Central America, and (in particular) Europe—international electricity trade is characterized by low volumes of trade, limited cross-border infrastructure, and weak institutional integration.

The obstacles here are in some ways economic and technical: harmonizing regulatory standards, designing effective exchanges, and making cross-border projects bankable. But they are also highly political. Institutionalizing a friendly environment for trade requires states to build durable support for integration across many diverse stakeholders: competing state bureaucracies, utilities, generation companies, local communities affected by power plant or transmission line siting. At the geopolitical level, officials also must consider trade a boon to grid strength and efficiency, rather than a backdoor threat to national sovereignty. A World Bank-sponsored report on power sector integration summed up this reality in 2010: “if there is one overriding requirement for regional integration to be successful, it is that countries need to have the political will to cooperate with their neighbors.”

GEIDCO and SGCC can advance grid integration where it can help countries build this political will: rallying states around integration, guiding institution-building initiatives in cross-border trade, and marshaling Chinese and international capital towards socially responsible investments in interconnection. China is already well underway with some of this work, building coalitions around GEI among regional organizations, UN bodies, and even private-sector actors. But the strength of these coalitions will be limited by two elements of China’s approach to interconnection: its industrial policy priorities and its stance on electricity trade with its own neighbors.

GEI as Industrial Policy

GEI fits nicely into China’s industrial policy for the energy sector: expanding the global footprint of companies like SGCC and establishing them as technology leaders in their respective spheres. Two elements of this push are particularly relevant here. One is a wave of outbound investment by Chinese utilities: $102 billion across 83 projects from 2013 to February 2018, per figures from the D.C.-based RWR Advisory Group. GEI is a useful political adjunct to these purchases, positioning China as a multilateralist leader for the global renewables transition. Of course, GEI’s sponsorship by SGCC means that political suspicions over Chinese utilities’ expansionism extend to GEI as well. Yet SGCC’s technical expertise and (especially) its access to cheap capital can help strengthen other countries’ grid systems and make them better prepared to take on cross-border trade. The world needs transmission investments. Taking Chinese financing can bring real risks, but there is no wave of capital coming from the West and its allies.

UHV, in contrast, is an industrial policy project that does little to meet the needs of interconnection. The global UHV market is young, and manufacturers from China, Europe, and elsewhere have been jockeying in recent years to establish global technical standards that suit their own products. China has a clear advantage in this battle: all but a handful of the world’s 20-odd UHV lines in full commercial operation were built by Chinese-owned utilities. By promoting UHV, then, GEI contributes to China’s broader push to command leading positions in global high-tech industries.

But at present, cross-border UHV has very few realistic applications. These projects cost hundreds of millions of dollars and only suit the exchange of enormous electricity volumes over very long distances, well beyond the volumes that most regions are trading. They also raise sensitive grid security questions for states, as taking so much power from a single line magnifies the damage caused by a line malfunction. States can minimize these risks in multi-state UHV import arrangements that avoid inducing disproportionate dependency on a given line for any one grid. The world’s experience with the form of UHV best-suited for these arrangements—multi-terminal direct-current UHV—is quite limited: China only just began construction on its first such project domestically this year. More importantly, most regional interconnection schemes worldwide have yet to construct even basic trilateral trading arrangements; they need major institutional deepening before they can take on UHV-sized projects.

Yet China does not need a widespread diffusion of UHV for GEI to fulfill its industrial policy aims. The initiative’s publicity—combined with a project or two in more developed power trading regions in Europe or Africa—can build enthusiasm for Chinese UHV in more friendly markets: large countries with high power demand, like Brazil or Argentina. Meanwhile, UHV can generate buzz around Chinese utilities in ways that have positive knock-on effects for their many non-UHV activities, both interconnection-related and otherwise. If technological gains and institutional advances improve the environment for UHV in the coming decades, China could be well positioned to take advantage.

Nonetheless, GEI’s close ties to UHV make it a natural target for the US and other countries leery of Chinese industrial policy in multilateralist garb. Opposition on this front will complicate Chinese efforts to expand GEI’s support base, particularly through multilateral forums like the UN. In this sense, centering UHV within GEI is a high-risk, high-reward strategy for SGCC and its transmission sector partners. And it is a high-risk, low-reward strategy for other Chinese energy sector players with an interest in expanded global power trade: renewable developers, for instance, who can find greater opportunities in larger trading areas that integrate intermittent power resources more smoothly.

China and Asian Interconnection

The second tension in China’s interconnection push lies in its own participation in power-trade institutions. Cross-border trade at scale requires multilateral institutions to coordinate regional planning and oversee exchange. But the longest-running interconnection scheme involving China—the Asian Development Bank’s Greater Mekong Subregion (GMS) power-trade initiative—is currently deadlocked over who should host the scheme’s permanent secretariat. The countries pledged in a 2012 memorandum of understanding (MoU) to establish this institution but remain at odds over competing bids from China and Thailand, nominally because of differences on bid evaluation criteria. The political backdrop is obvious, with hosting rights an implicit potential channel for influence and information-gathering. (Notably, Europe and southern Africa have both placed their power-trade secretariats outside of regional hegemons, in Belgium—alongside other EU organs—and Zimbabwe.) ADB documents suggest that China has shown little flexibility on this dispute; notably, in summer 2015, it blocked a push for rebidding supported by the five other GMS states. An ADB official suggested this summer that a resolution may not come until after 2022.

China’s hardline stance in the GMS bears watching for Northeast Asia, where integration discussions opened up with a 2016 MoU on an “Asian Super Grid” (ASG) involving utilities from China, Russia, and South Korea, along with the Japanese conglomerate Softbank. The leaders of these countries (and Mongolia) have all voiced support for the ASG, and the UN has partnered with GEIDCO and other interconnection promoters in these countries to sponsor events on regional power trade. The utilities have started exploring cross-border lines, as did GMS leaders twenty years ago, but deepened interconnection will require multilateral institutions beyond utility-level MoUs. Progressing to this stage will present China and its neighbors with the same political challenges of institution-building that bedevil the GMS today.

Interconnection Beyond GEI

What do these tensions mean for how the world should receive GEI? Interconnection, done right, is a worthy project. It can deepen regional cooperation while reducing both emissions and costs for member states. Moreover, as intermittent generation sources like wind and solar expand their footprint, transmission operators can strengthen grid stability by using interconnection to access more diverse power sources for covering shortfalls in supply.

The world requires an interconnection agenda that focuses on multilateral institution-building and frames power trade as a tool for states to shore up their grid systems in the renewables age. GEI can offer much for this agenda, building support for interconnection and promoting important elements of the global energy transition like smart grids and clean energy. But its contributions are limited by the complications of GEI’s industrial policy bent and by China’s own mixed signals on power trade with its neighbors. Energy policymakers must find ways to leverage GEI’s strengths without identifying interconnection with GEI so closely that the controversies around GEI become controversies around interconnection itself.

Edmund Downie was a Fulbright Scholar at Yunnan University in southwest China from 2017–2018.