China’s investment in renewable energy in the Indo-Pacific presents risks and opportunities

Next week’s G20 meeting, hosted by Indonesia, will feature discussions on climate change and the need to accelerate global energy transition from fossil fuels to renewable energies. Jakarta should also officially announce that he joins the Partnership for a just energy transitiona multi-billion dollar G7 initiative led by the US, France, Germany, UK and EU designed to help emerging economies accelerate their transition to renewable energy.

The expansion of the partnership to Indonesia (which South Africa joined last year) reflects the G7’s concern that the The objectives of the Paris climate agreement will not be achieved without significant financing and other support for the energy transition of emerging markets. But it also reflects the group’s attempt to counter China’s growing importance in renewable energy investment, particularly in Asia.

China is the largest funder of renewable energy projects in the Indo-Pacific. More than half of its energy investments abroad under the Belt and Road Initiative, worth 20 billion US dollars in 2020, fall under the renewable energy sector. This significant funding is essential to support the energy transition of the territories. But the G7 leaders also expressed concerns that Beijing will leverage this funding to political influence and strategic advantagein particular by creating financial and technological dependence on China.

These concerns are exacerbated by China’s dominance of renewable energy products and control of supply chains for rare earth minerals and the processing capacity to produce them. The International Energy Agency estimates, for example, that China’s global share in all key stages of solar panel manufacturing, which currently exceeds 80%, will increase to over 95% in the coming years.

The country too product about 85% of the world’s rare earth oxides and about 90% of the rare earth metals, alloys and permanent magnets. And China has demonstrated a willingness to use its control of the supply chain in pursuit of its broader geopolitical interests, including in 2010 in retaliation for a maritime dispute with Japan, it restricted exports of rare earth minerals to that country.

China’s leverage is particularly pronounced in the Mekong Region. Myanmar, Laos, Cambodia and Vietnam depend on hydroelectricity generated along the Mekong River system for more than 50% of their electricity production, and China is their main source financing of hydroelectric dams. More importantly, however, China’s upstream dams increasingly allow it to control the flow of water to its downstream neighbors, where 60 million people depend on the Mekong for their livelihood.

China has promised to use dams to ensure a more even distribution of water during the dry and wet seasons. But recent analysis suggests that on at least one occasion during the extreme drought affecting the region in 2019, it did not. At least one specialist in the region viewed China’s control of Mekong water during the drought as an act of political manipulation.

But it’s important to keep in mind that China’s energy investments are driven by multiple overlapping goals, including gaining economic advantage, ensuring energy security, building geopolitical influence and leverage. and reduce climate risks. All of these goals are on display in the Mekong, including the key role hydropower plays in China’s plan to become carbon neutral by mid-century. Chinese objectives are also changing. As Huong Le Thu observed of Beijing’s investments in the Mekong, “energy security has become almost secondary as dams gain geopolitical importance on top of economic importance”.

Chinese funding for renewable energy projects in the Indo-Pacific has increased significantly, but the investments may not bring the broader political benefits one might expect. Despite recent major investments in Indonesia, for example, a 2021 survey found that 60% of Indonesians agreed that “Indonesia should join other countries in limiting China’s influence,” an increase of 10 percentage points since 2011. A recent study investigation Southeast Asian elites found China to be the region’s most suspicious power. Similarly, opinion polls in other Asian sub-regions that have received significant Chinese investment, such as Central Asianoted a steady decline in positive public sentiment toward China.

China’s multidimensional engagement in the region’s renewable energy systems has important implications. A clearly positive implication is that Chinese national and regional investments in renewable energy are a fundamentally important contribution to efforts to prevent dangerous climate change. Indeed, it will be impossible to achieve the goals of the Paris Agreement without China’s funding, support and commitment.

Both Covid-19 crisis and the Russian invasion of Ukraine have clearly demonstrated the importance of securing critical supply chains. In this regard, China’s dominance in the renewable energy market is a major risk. And this risk can increase; for example, recent reports suggests that China sees the disruption of gas supplies from Russia to Europe as a major opportunity for Chinese wind and solar energy companies to expand their European markets and presence.

Supply chain risk has at least two dimensions. The first is the opportunity it offers China to leverage its control over resources and technology to wrest geopolitical concessions from competitors or adversaries, as it attempted to do with Japan in 2010. second is the exposure and vulnerability of China’s national renewable energy infrastructure. to disasters that are quickly intensification due to climate change, which is a risk that China itself should seek to reduce. As the International Energy Agency observed:

Today, the Chinese province of Xinjiang accounts for 40% of the world’s polysilicon manufacture. In addition, one in seven people [solar] Panels produced worldwide are manufactured by a single factory. This level of concentration in any global supply chain would represent considerable vulnerability; solar photovoltaic is no exception.

Clearly, it must be a priority for Australia and like-minded countries to diversify the renewable energy supply chain as quickly as possible. China plays a central role in the transition from fossil fuels to renewable energies, including in the Indo-Pacific. Australia and its allies must find ways to engage with China to accelerate the transition to reduce the increasing risk of catastrophic climate change. Identifying opportunities to do so at a time when China is increasingly challenging the geostrategic order, and without undermining other important interests, is an urgent, daunting and fundamentally important task. As the Brookings Institution observed recently concerning the United States and China:

The relationship remains too consequential for people in both countries and the rest of the world to be guided by a fatalistic acceptance of growing enmity. And while competition lies at the heart of the relationship, it is a mistake to view the relationship only through the prism of rivalry. This limits the tools Washington has to develop a more enduring and productive relationship that serves America’s interests.