China’s $6.4trn energy transition commitment

With a net-zero target for 2060 and as one of the world’s worst polluters, China will have to facilitate significant investment in its infrastructure. We investigate whether this is a theme international investors can buy into.

Although it may be one of the world’s largest economies, China has a reputation for being one of the worst polluters. However, President Xi Jinping stunned the international community in late 2020 by announcing a sea change in the country’s energy policy. Speaking to the UN, he revealed China would be targeting a peak in its carbon emissions before 2030 before achieving net-zero status by 2060.

The scale of this task is immense and energy research consultancy Wood Mackenzie estimates it will require $6.4 trillion of investment to bring about. Prakash Sharma, the firm’s Asia-Pacific head of markets and transitions, says: “It is definitely a colossal task for a country using 90 percent hydrocarbons in its energy mix and annually producing more than 10 billion tonnes of CO2 [equivalent] and, in addition, accounting for 28 percent of global total emissions.”

The opportunities for infrastructure investment are clear. Yet questions will linger as China’s energy transition theme may not be one to which all infrastructure investors will be willing to commit. For a long time, many Western investors have treated Chinese investments with scepticism due to concerns over lack of transparency and the unavoidable influence of the ruling Communist Party.

Gaining trust

Flora Wang, director of sustainable investing at Fidelity International, has analysed China’s plans from a policy perspective. Although the country faces significant challenges, she expects it to follow through on its clean energy commitments simply because it has to.

“From an energy security perspective, China needs a lot more renewable energy because it is heavily reliant on oil and gas imports,” says Wang. “As the world’s factory for the past 30 years, China has also been the biggest exporter of carbon. Much of the carbon generated in China is embedded in the products that are exported and consumed elsewhere. As markets like the EU start to consider the introduction of a carbon border tax, it is important for China to cut its carbon emissions to remain trade-competitive.”

The case for President Xi staying true to his word is clear, and the benefits for China stretch beyond simply fighting climate change. As a superpower that wants to strengthen its international position, embracing the next generation of energy production makes sense and many commentators acknowledge China has the economic heft to push through such a large-scale change.

“As markets like the EU start to consider the introduction of a carbon border tax, it is important for China to cut its carbon emissions to remain trade competitive”

Flora Wang
Fidelity International

Zula Luvsandorj, a project finance advisor to the UK Cabinet Office, says investors should view the heavy involvement by the state as evidence that China is sincere about achieving its energy transition goals.

“Larger corporations, including state-owned enterprises, are well matured internationally and transparent enough with international investors, especially listed larger private infrastructure companies,” she says. “There have been strong success stories of EU and developed-market larger players going into business in China, such as EDF’s collaboration with Chinese investors on offshore wind investments.

“Personally, it is a pleasant journey to deal with larger SOEs and they are trustworthy as business partners.”

China’s SOEs have already played a pivotal role in the country’s urbanisation drive and are partly why the country’s development has become synonymous with ‘ghost cities’ – vast urban landscapes created in anticipation of growing populations. This is the result of a campaign by China’s Ministry of Housing and Urban-Rural Development to fully integrate 70 percent of its population – around 900 million people – into city living by 2025. As of last year, China had reached 60 percent of this target, helped in part by significant state-led investment in urban living spaces.

“China is very good at the construction of larger and innovative technology projects nowadays and they are seeking the right collaboration with EU counterparties,” says Luvsandorj. “There is great potential in the offshore wind area, where EU investors can collaborate on a win-win basis, filling the gaps in each other’s skills.”

Clearing the smog

For China to achieve its net-zero ambitions, it will require a vastly different energy infrastructure set-up. Consultancy Intralink has calculated that, based on renewable energy accounting for 9.5 percent of China’s electricity, this could require $1 trillion of investment in new energy infrastructure alone.

Solar power has been identified by many commentators as a natural route forward for China’s energy infrastructure transition. This is partly because, despite the country’s infamous citywide smog clouds, China actually produces more solar power than any other nation. According to the International Renewable Energy Agency, China is the top ranked country for energy produced by solar power and in 2020 produced 254,000MW of electricity this way. The second-highest ranked country was the US, which produced only 75,000MW.

“The share of solar energy in China’s power generation mix increased by 16.6 percent in 2020 compared to previous years and the 14th five-year plan envisages that this should continue to increase,” says Ying Fu, an energy and infrastructure lawyer at Linklaters. “However, in parallel, the Chinese government is also looking to phase out subsidies for solar and further encourage competitive bidding as the cost of solar power generation continues to fall.

“That said, while official reports emphasise the general phasing-out of national-level government subsidies in the coming few years, there will remain an expectation for local governments to continue to support projects in their locality on a case-by-case basis. Investors will need to take these regulatory developments into account when looking at investments into solar in China.”

“Electric vehicles and other new energy vehicles are the future of mobility in China and will require massive investment in charging infrastructure, hydrogen generation and distribution”

Micah Hostetter
Intralink

China dominates the solar world and, despite the notion of government subsidies being pulled back, these projects could still benefit from state support via the involvement of SOEs. As a result, Luvsandorj is optimistic about this trend.

“Larger Chinese corporations, especially SOEs, have been frontrunners in solar technologies and now almost 80 percent of solar technologies worldwide are manufactured in China,” she says. “There are large projects in China, which Chinese SOEs are hugely benefiting from due to their status and the incentivised nature of these schemes.”

Driving change

The infrastructure investment opportunities aligned with China’s energy transition go beyond new power plants and cleaner energy sources. China has already been identified as the biggest electric vehicle market in the world and, as a country with roughly 372 million fossil-fuel-powered vehicles – the highest number in the world – this will require an overhaul of infrastructure.

This has already begun. Intralink energy specialist Micah Hostetter points out that 800,000 charging outlets have been built in China over the past year, and highlights the potential for new energy sources, such as hydrogen, to be increasingly adopted in this market.

“Electric vehicles and other new energy vehicles are the future of mobility in China and will require massive investment in charging infrastructure, hydrogen generation and distribution,” he says. “[One of hydrogen’s] most important uses is arguably not in the passenger vehicle space – in which it faces stiff competition from batteries – but in public transport, trucking and other heavy-duty applications.”

Logistical challenges remain in terms of transporting and distributing hydrogen gas, but this has not stopped China proceeding with heavy investment in hydrogen-friendly infrastructure. “As of 2020, the country only had about 50 refueling stations nationwide,” says Hostetter. “That said, tens of billions of dollars are being ploughed into the industry and I’m optimistic China will be one of the first countries in the world to successfully build a hydrogen economy.”

Investment in new infrastructure for China’s electric vehicle market is already gathering momentum with some of the country’s largest utility companies confirming plans to invest in this. China Southern Power Grid has already committed to investing
$3.6 billion in new charging infrastructure over the next four years. Such efforts are projected to make China the second-largest market for charging infrastructure, next to the combined European market.

China’s energy transition may have been announced with the rhetoric of saving the environment, but the ensuing infrastructure investment opportunity is not limited to renewables. The country is also pivoting heavily towards nuclear energy.

“Both nuclear and renewables have made tremendous strides in the past decade in China,” says Hostetter. “Nuclear capacity has increased from 12GW in 2011 to 51GW in 2020 and currently accounts for 5 percent of China’s electricity generation, producing 366TWh last year.”

Fission expedition

Undoubtedly cleaner than fossil fuels, nuclear energy still attracts critics due to the waste it creates and the safety concerns following the disasters in Fukushima and Chernobyl. What cannot be denied, however, is the infrastructure investment that long-lasting nuclear power sites require.

“China is one of the few major economies pouring money into nuclear deployment and next-generation reactor technology,” adds Hostetter. “I’ve seen some estimates predicting that nuclear will supply 20 percent of China’s electricity by 2050 with deployed capacity of 340GW – an almost sevenfold increase from today.”

It is clear that China has set itself targets that would be ambitious for any country, let alone one with an existing energy infrastructure set-up so dependent on fossil fuels. It remains to be seen how China will manage to meet its own targets, and many Western investors will still be wary about engaging with the country’s energy transition story.

However, as Wang points out, China has met renewable targets before and this could give an idea of how the country will embrace its infrastructure obligations: “China had a 2020 target of cutting carbon intensity by 45 percent from the 2005 level, which it actually achieved two years ago.

“Another 2020 target was to hike its non-fossil fuel share of the primary energy mix to over 15 percent, and that was achieved last year. I think the good track record gives us some level of assurance that China can achieve its 2060 pledge.”