China’s Clean Energy Challenge

A U.S. Response to China’s Global Energy Interconnection Initiative

China’s Global Energy Interconnection (GEI) initiative is an ambitious vision for transforming the global energy system. It envisions rewiring the world’s transmission networks into a global network of smart grids connected by long-distance transmission backbones. This global grid would allow states to tap clean energy bases in remote parts of the world: solar in deserts, for instance, or hydropower in isolated mountain gorges. GEI backers see such a network as a powerful tool for meeting rising electricity demand worldwide while also drastically reducing reliance upon fossil fuels.

GEI allows China to weave together a pitch for climate leadership with traditional priorities around industrial upgrading. China’s utilities are world leaders in the development, manufacture, and deployment of ultra-high-voltage (UHV) transmission lines, a technology designed to carry electricity over distances up to several thousand kilometers. All but a handful of the world’s 20-odd UHV lines in full commercial operation were built by Chinese-owned utilities. They are also major investors and contractors in the global transmission sector, with an estimated $102 billion in investments across 83 projects from 2013 through February 2018. Expanding UHV transmission’s role in world markets will mean a bevy of new business opportunities for Chinese players in the transmission-sector abroad—and a chance to secure long-term leadership in the still-maturing UHV market.

GEI deserves attention from U.S. policymakers as an extension of the Belt and Road Initiative (BRI), and as a project with strong high-level support in China. GEI’s industrial policy leanings certainly make it a tempting target for U.S. opposition amidst souring bilateral relations. But as China makes a play for green leadership in global energy governance, the U.S. needs to present a positive agenda of its own for the clean-energy transition. Such an agenda would be worth advancing in any circumstances, but two planks are particularly important in the context of GEI. First, policymakers have set up the forthcoming U.S. Development Finance Corporation (USDFC) to strengthen U.S. competitiveness against Chinese development lending; in the energy sector, this institution should stress initiatives that leverage American strengths in quality infrastructure and institutional design and support high renewable-energy penetration. Second, the U.S. should look to use the USDFC and other diplomatic channels to help Global South states develop sustainable alternatives to Chinese-backed megaprojects.

Thinking Practically about GEI

A judicious response to GEI must begin with a realistic appraisal of its potential. For one, the grid interconnection goals it sets forward are far too ambitious to be realized in full. GEI imagines a global grid network in 2070 compromised of 18 synchronized regional grids, with interlocking transmission backbones that stretch across continents—Canada to South America, Japan to Europe, the Baltics to South Africa. But cross-border power trading in most parts of the world is restricted to low-volume exchanges negotiated bilaterally between neighbors. Electricity’s political salience makes it a commodity that many states are reluctant to entrust to their neighbors. Trade measures also require durable backing from national utilities and civil society affected by the transmission and generation projects built to support these exchanges.

These realities mean that GEI’s vision is best understood as an image-building exercise to support China’s pitch for global climate leadership while strengthening China’s transmission sector and aiding its outbound expansion. Like many other BRI projects, GEI’s image-building work has benefited from its strong relationship with the UN. The partnership began with a 2016 MoU between the UN Economic and Social Commission for Asia and the Pacific (UNESCAP) and the Global Energy Interconnection Cooperation and Development Organization (GEIDCO), the latter of which was set up to promote GEI by the Chinese state-owned utility, State Grid Corporation of China (SGCC). GEIDCO has since co-sponsored several UN-hosted symposia on grid interconnection, including a 2017 event whose opening remarks came from Secretary-General Antonio Guterres himself. The organization even held its own events at COP24 through an official partnership with the conference’s organizers, the UN’s climate change secretariat.

China pursues its industrial policy aims through GEI in two ways. One is implicit in its climate-leadership work; strengthening China’s leadership role in the clean-energy transition offers clear benefits to its companies and their overseas activities. These benefits extend across the many areas in which GEIDCO is active, from electric vehicle penetration and smart-grid upgrading to advanced technologies research and national energy strategy design. GEI also serves Chinese industrial policy through the specific technologies it promotes. Of particular note here for U.S. policymakers is GEI’s affinity for UHV transmission. No other country has China’s expertise in constructing and operating these lines. That expertise will only deepen with government plans announced in November to expand the number of lines in China by almost a third; this decision affirmed China’s commitment to UHV in light of the initial challenges the sector faced after a wave of expansion in 2014–15. (I myself, observing these challenges, was too pessimistic on UHV’s domestic prospects.) The politics of interconnection, as noted above, make a global UHV grid improbable, and certainly on the 50-year timeline that GEI proposes. But 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 Turkey.

An Opportunity for the U.S.

The October launch of the USDFC gives the U.S. an upgraded set of tools to handle GEI and the global expansion of China’s energy sector that GEI supports. Of course, it cannot entirely close the competitiveness gap between U.S. and Chinese energy project developers in the Global South. China’s transmission developers build projects fast and bring technical expertise and access to cheap capital. The U.S. has no comparable global transmission developers to SGCC, the world’s second-largest company by revenue after Walmart. On the generation side, China is the world’s leading coal and hydro financier, but its experiences with solar and wind––as a manufacturer for global markets and a project developer at home––also give it enviable resources for outbound expansion in the coming decade. In generation and transmission, Chinese companies also enjoy a freer hand in paying off commissioning bureaucrats than their American counterparts.

But the U.S. also has advantages as an energy lender that can serve as a foundation for USDFC activity. Discussions about “quality infrastructure”––inspired by Japan’s lending model––have received well-deserved attention in the establishment of the USDFC. Criticisms of Chinese standards in infrastructure can sometimes exaggerate the gap between China and other major global developers. But high-profile mistakes and public relations naïvetè have left Chinese infrastructure developers with a notoriety that is difficult to shake. The U.S. cannot compete with China on funding volume. But as the USDFC expands the U.S.’s development aid footprint, it needs to protect its reputation for jobs well done.

The USDFC also allows the U.S. to link its financial portfolio with technical assistance in ways that were not available to the Overseas Private Investment Corporation, the organization responsible for the bulk of U.S. outbound development lending beforehand. This change allows the USDFC to leverage American (or third-country) expertise in electricity market design and institutional innovation more effectively as part of its package of offerings. This sort of assistance can be useful for Global South looking to take advantages of the major drops in renewables prices that have made low-carbon energy affordable for emerging economies. States cannot exploit those opportunities without regulatory adaptations: designing markets or other structures that can handle intermittency in renewables, for instance, or opening their grids to behind-the-meter generation. Many U.S. states have several decades of experience with the issues of regulatory reform and market design at the heart of this transition; China, on the other hand, only just launched its first steps to set up electricity markets in 2015. The U.S. has experience coordinating technical assistance and large-scale financial support through programs like the interagency Power Africa initiative, launched in 2013; housing these activities in a single body will smooth their integration.

In other respects, too, Power Africa offers invaluable lessons for USDFC’s energy-sector lending on a host of issues: mobilizing private finance, building a diverse project pipeline, coordinating generation and transmission investments. These lessons should form the basis for extensions of the Power Africa model to other parts of the world under USDFC leadership; one good start would be souped-up version of USAID’s Clean Power Asia initiative, with a financing component to complement its technical assistance work. In targeting these loans, the U.S. should look out in particular for states seeking a counterweight to Chinese influence in their own development process. OPIC’s recent success backing an American refinery project bid in Uganda against Chinese competition shows the potential of this approach.

Pushing high renewable-energy penetration in these initiatives is essential. As the climate crisis intensifies, the current administration is blowing U.S. political capital on a rearguard action for the fossil-fuel industry––and to China’s benefit. OPIC’s portfolio continues to tilt strongly towards renewables, and the institution retains greenhouse gas emissions caps on investments that were launched in the late 2000s. But it has engaged in at least one set of discussions on a coal project in Kosovo under the Trump administration, while the U.S. Trade and Development Authority has supported private-sector “clean coal” projects in emerging markets.

These are steps backward. A strong and well-publicized focus on renewables in the USDFC’s early days can help win back some of the U.S.’s standing on climate issues, especially while China’s policy banks remain focused on coal and hydropower investments. Some states’ appetites for renewables will no doubt tend conservative. Yet the USDFC is inheriting an agency with an excellent track record in executing renewables projects; it should make full use of this strength. This would be true even without GEI; the green-leadership pitch accompanying GEI makes this shift all the more important.

Responding to Megaprojects

The Made in China 2025 strategy to turn China into a high-tech superpower has attracted intense suspicion in the U.S. amidst deteriorating bilateral relations. U.S. policymakers have targeted China’s high-tech transition as part of the trade war, pressuring Beijing to unwind the network of subsidies, competition restrictions, and technology acquisition strategies with which it seeks to incubate leading companies in this sphere. But if China has made gestures to mollify the U.S., American demands still far exceed what Beijing is likely to accept. U.S. allies’ mixed reactions to the campaign against Huawei also underscore how China’s strongest technological giants are already well-established in many high-tech markets around the world.

GEI’s industrial policy serves a wide range of priority technologies included in Made in China 2025’s agenda for the electrical equipment sector. UHV transmission is one of the most high-profile beneficiaries. But this technology need not force the U.S. into the sort of confrontation with China that Huawei has, because its prospects in the grid of the future are highly uncertain. UHV transmission, as I described in a prior post on this blog, is enormously expensive and requires the exchange of electricity on scales well beyond what most regions are trading today. The multi-state UHV connections that would best suit trade at this scale––projects that snake across three or more states––demand formidable levels of interstate coordination in what is a very politically sensitive sector. China’s experiences with UHV so far give little indication about whether these projects are as cost-effective as promised, particularly given low utilization rates that have dogged some lines in their early stages. Regions of the world with existing power-trade institutions and strong relationships with Chinese utilities––sub-Saharan Africa, for instance, or southern Europe––may provide a market for a few cross-border UHV projects; China’s signals on UHV thus far suggest it will do its utmost to create these opportunities. But even amidst rising energy demand in developing economies, the conditions for these projects will remain unfriendly in most of the world.

Against this backdrop, the U.S. needs to separate the broader aim of interconnection from the specific vision that China presents for it. Advancing the former does not mean signing up in toto for the latter. In the UN, and in other multilateral fora, the U.S. should uphold interconnection as one of many useful tools for states pursuing their own clean-energy transitions. It should look for opportunities through USDFC and USAID to support cross-border power trade, building on work that USAID does already in South Asia. And it should work through these vehicles and through diplomatic channels in Europe and the Indo-Pacific to push modes of interconnection that avoid transmission megaprojects.

The U.S. should push a similarly skeptical message on generation megaprojects––particularly in coal and hydropower. Made in China 2025 makes clear China’s interest in large-scale hydropower and thermal generation technology. It sets a specific goal of “reaching international standards” in “large-scale thermal, hydro, and nuclear” generation by 2025, and various “priority technologies” in this sphere include 700MW–1GW hydropower generation units and large-capacity thermal generation unit control systems. In the context of GEI, hydropower is particularly worth noting for two reasons. First, most of the UHV lines that have consistently enjoyed high utilization rates in China draw upon hydropower. Second, GEI (and China more broadly) treats hydropower as a clean-energy resource alongside wind and solar, and GEIDCO is co-hosting UNESCO’s 2019 International Water Conference this coming May.

The case for large-scale dams has always been overstated: cost overruns, environmental footprints, and consistent records of underperformance are an unappealing cocktail. But solar and wind projects now offer an economic competitor with a comparable (if not better) carbon footprint and minimal disruptions to river ecosystems and communities. The long-mooted Grand Inga Dam in the Democratic Republic of Congo illustrates this shift. GEIDCO CEO Liu Zhenya has promoted a UHV link from there to Europe––a project of spectacular political complexity that would likely cause serious damage to local ecosystems and communities. But recent research from Berkeley professors also calls into question the economic logic of Inga; it shows that South Africa, who has pledged to buy half of its output, would likely save money by expanding domestic renewables and gas capacity instead.

As the U.S. commits itself to a lending agenda based on quality infrastructure, it needs to highlight how the changing economics of the energy sector are undercutting the price advantages that massive hydro dams have claimed to enjoy. The USDFC should look to develop lower-risk energy investment “packages” for states considering these sorts of megaprojects, drawing in particular on tools like loan guarantees for mobilizing private-sector investment. In the Indo-Pacific, it should seek to enlist its Japanese and Australian counterparts to pool resources towards such packages.

China’s transmission-sector expansion also presents the U.S. with difficult questions about Chinese smart-grid technology. Smart-grid upgrades are key to GEI and much more important for the grid of the future than generation or transmission megaprojects. Incorporating cybersecurity into the U.S.’s global agenda for the transmission sector is beyond the scope of this article, but, at a minimum, U.S. aid programs in this sector should liaise closely with Department of Energy cybersecurity specialists to set stringent standards for U.S.-backed infrastructure that can win host-country confidence.

A Positive Agenda

Since China announced the Belt and Road in 2013, the U.S. has shown a tendency to respond to its projects by scolding countries who draw on them rather than providing its own alternatives. Global Energy Interconnection––a pitch for climate leadership combined with an industrial-policy play––presents the U.S. with the temptation to draw from the same playbook. It should resist this. GEI has plenty of good priorities beyond its headline UHV promotion: strengthening the renewables sector, deepening cross-border power trade, and expanding smart-grid deployment. More importantly, the U.S. simply does not have a global transmission-sector investment footprint comparable to China’s over the past decade.

Instead, the U.S. should use its new development agency to expand the U.S.’s activities as a clean-energy development lender. China’s skillset works very well for building projects, but less well for ensuring that countries can use those projects effectively. The U.S. should stake its image on doing both, even if it cannot lend in the volumes that China does. Meanwhile, it should uphold the value of interconnection while stressing alternatives to GEI’s megaproject-friendly vision. These steps will help the U.S. reclaim its role as a global clean-energy leader for the coming decade.

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