DON'T FORGET: WEST'S ENERGY TRANSITION HINGES ON CHINA

Sarah Miller, New York - Mar 15, 2022

What if the EU and US suddenly lost access to virtually all new solar photovoltaic (PV) generating equipment and a big chunk of the batteries they need for electric vehicles (EVs) and electricity storage? This is not an idle question. US National Security Adviser Jake Sullivan hinted strongly before meeting Mar. 14 with senior Chinese diplomat Yang Jiechi that Beijing could face secondary sanctions by the US if it gives Russia military or other “large-scale” help in evading Western sanctions. He didn't mention the fact that China supplies roughly two-thirds of all PV equipment sold globally — including in Europe and the US — and a single Chinese company, CATL, makes one-third of the world’s EV batteries. The EU and US are depending on that solar gear and batteries for relief from the crisis caused by plunging Russian oil and gas sales. Beijing could derail the West’s energy transition by simply using that renewable equipment at home. Getting the transition back on track in the West could take years.

China is the source for 60%-75% of all solar-generating equipment sold in the world today. Estimates vary on the level of reliance as broadly defined, but when it comes to some key components needed in all solar modules, China’s dominance is clearly overwhelming. Take silicon wafers, a necessary element in all panels: 92% or more of these wafers are made in China.

It isn’t as if China’s ambitions — and notable successes — in solar or other new energy fields were kept secret by Beijing, or accepted without comment or complaint in Europe and the US. “Low-emissions power-generation equipment” figured prominently on the list of industrial sectors pinpointed by Beijing for special support in the Made in China 2025 10-year plan it issued in 2015. EVs and batteries were also on the list.

As far back as 2013, Chinese government support had already spurred such rapid growth in solar manufacturing, and brought prices down so rapidly, that the EU slapped near-65% tariffs on Chinese-made solar panels, two years before the Made in China report was issued. In 2018, the EU effectively surrendered on the manufacturing front, dropping the tariffs in the interest of rapid expansion of its solar-generating capacity and in recognition of the fact that even those steep tariffs hadn’t made its domestic industry competitive.

The same year the EU gave up, the Trump administration decided to launch the US on the path the EU was abandoning, slapping 30% tariffs on all solar panels imported into the US. The tariff rate was programmed to fall gradually to 15% by this year.

The Biden administration recently extended those tariffs of just under 15% for another four years, although no appreciable build-out in domestic solar manufacturing resulted any more than it had in Europe. Even those factories in other Southeast Asian countries such as Vietnam, Malaysia and Thailand where solar modules are completed and assembled, to avoid the Made in China label, are mostly owned by Chinese firms. Again like Europe, emphasis in the US is more on rapid decarbonization by getting more solar capacity installed than it is on making solar panels domestically.

China has developed such a high level of expertise, efficient supply chains and economies of scale that it is basically impossible for Western firms to compete, even when they have substantial tariff protection.

Batteries More Balanced

China is also the largest supplier of batteries for EVs and utility-scale electricity storage, but its dominance is less than with solar components, and there’s more movement to expand domestic battery manufacturing in both the US and EU. EV-maker CATL, which manufactures over 30% of the world’s EV batteries and has plans to triple capacity yet again by 2025, is just one of six Chinese companies that figure in the world’s Top 10 battery makers.

Several automakers and battery providers are building or plan to build multiple battery factories in the US, and the government is working to alleviate problems in component supply chains. Similarly, the EU has a plan to boost domestic battery production, and VW alone plans to build six “gigafactories” for this purpose by 2030. The first isn’t due to be up and running until 2025, however.

What Happens Right Now?

So what happens right now if sanctions enforcement against Russia leads to a major trade disruption with China that extends to solar-generating equipment and/or batteries?

South Korea and Japan might be willing and able to make up some of the loss in battery availability — although many of their companies’ biggest battery factories are located in China, casting some uncertainty over how well that would work. When it comes to solar gear, there’s very little the West could do in the near term to compensate for reduced or eliminated access — less even than it can do to make up for lower Russian oil and gas sales.

If Western governments want the energy transition to continue, much less accelerate — both as an alternative to Russian fossil fuels and to mitigate climate change — they must avoid such a standoff with China.

Given a few years and a lot more political will power than either has exhibited so far, the EU and US could build their own factories and theoretically get out from under their solar dependence on China, thereby eliminating this exposure to transition disruption. But it wouldn’t be easy. Tariffs at levels that allow trade to continue won’t spur the needed private investment. Western companies have demonstrated that. They simply won’t build big solar equipment factories as long as the output of those plants would have to compete in their home markets with Chinese-made equipment. The Chinese equipment is simply too cheap and too good.

The implication is that governments might have to build the solar factories themselves, or at least provide purchase guarantees that would erase the risk posed to private investors by actual or potential Chinese competition. They would have to engage in the same long-term, sectorwide planning and follow-through that Beijing used to get China’s solar industry to its current virtually unassailable position. In the current atmosphere of global upheaval, that isn’t as impossible to imagine as it would have been a few months ago, but it still seems a very long shot.

The better hope, perhaps, is that calmer heads prevail in both Washington and Beijing than have been evident in recent days, and escalating-sanctions between the West and China can be avoided — that the world goes toward the multipolar image China has long espoused, rather than a bipolar economic configuration with China and Russia on one side; the US, Europe and their close Asian allies on the other; and the rest of the world adrift in between. Or even in that nightmarish scenario, perhaps Beijing would continue trade in renewables and batteries for fear of the climate catastrophe that disruption of the energy transition could bring.

The one certainty is that these are issues that deserve urgent attention from all sides. Maybe it’s even worth contemplating whether there’s something oil and gas companies could do to help out. Just a thought.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

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