China is the clear world leader when it comes to technology, production and installation in relation to zero emissions sectors of the future, such as renewable energy and EVs, says Tim Buckley.
China’s commitment to become carbon neutral in 2060 will see the country expand its firmed renewable energy generation drastically in the coming years.
This commitment, combined with the Chinese government’s desire to keep the domestic economy ticking over in the current challenging environment, will likely see infrastructure spending pulled forward, paving the way for large investments.
“China will deliver on its commitment of peak emissions before 2030 and will be net zero by 2060. But the science dictates that Europe, China and many other countries must pull forward their targets by 10 years. Everything will be accelerated,” Tim Buckley, Director of Climate Energy Finance, Australasia, says during an [i3] Insurance Luncheon in Sydney earlier this month.
This year, Chinese investments in sustainable projects could reach 16 per cent of total infrastructure investment.
“Applying the average construction cost of solar and wind power during 2016 to 2020, total investment in renewables through 2025 could range from 2.2 trillion to 5.2 trillion renminbi,” ANZ said.
Buckley says the very nature of renewable energy generation means much of the capital investment needs to take place upfront and much of it will take place in emerging markets.
When you build a wind farm, you get the capital cost upfront and then you get 25 years of free energy. You can pay the interest, but there is no fuel bill. So there's a massive pull forward of the spending.
“When you build a wind farm, you get the capital cost upfront and then you get 25 years of free energy. You can pay the interest, but there is no fuel bill,” he says.
“So there’s a massive pull forward of the spending. Now, that might sound obvious, but then think about the implications of it when combined with the investment needed in places like India and the whole emerging markets, where they are going to see energy demand double in the next 20 years.
“Then on top of that, if you have to pull forward your CAPEX plan for 25 years, then I think the IEA (International Energy Agency) is quite right in talking about how global investment in energy markets is probably going to be US$4-5 trillion a year.
“Multiply that by 28 years and you’re talking over US$100 trillion. Now, that’s investment; it’s not a cost.”
Already a number of large infrastructure funds have raised tens of billions of dollars to tap into this opportunity, with the likes of KKR, Brookfield and EQT all raising capital in recent months.
“This is going to be a huge financing opportunity and the financial markets are absolutely key. You’ve got to have the right policy framework to actually unlock the capital,” Buckley says.
Solar in China
China is already investing heavily in solar energy generation. Bloomberg data reveals that in the first half of this year, China has already invested 170 per cent more than it spent on solar last year.
“They’re already 40 per cent of the world’s solar industry and BNEF reports growth of 173 per cent year-on-year in 1H CY2022,” Buckley says.
“Wind was up 107 per cent year-on-year, so China is not stuffing around. We are stuffing around. We are denying the implications of climate science as a country, but the reality is China is moving at a million miles an hour.”
Emissions trading schemes (ETS) will be an important part of facilitating investment in the energy transition and while Europe has had one for some time, China has now joined the party.
“The reality is we all know the best way to actually solve the problem is to price the externality and then let the markets deal with it,” Buckley says.
“Europe, after a decade or two of stuffing around, has actually got their ETS working effectively and they’ve got a clear high price on carbon of Euro80-90/t. It is accepted and the industry is responding to it.
What you might not be fully aware of is that China's ETS was launched a year ago in July 2021. Covering just the power sector, it is three times bigger than Europe's entire ETS and China is about to expand it into heavy industry as well
“But what you might not be fully aware of is that China’s ETS was launched a year ago in July 2021. Covering just the power sector, it is three times bigger than Europe’s entire ETS and China is about to expand it into heavy industry as well.”
China is also far ahead in the take-up of electric vehicles (EV). This year, the uptake of EVs in the country was up 90 per cent compared to last year. And this shift is taking place as overall auto sales in China are actually declining (-12 per cent year-on-year).
“It’s pretty obvious the pending death of the internal combustion engine. We probably won’t be able to buy a new mass-market internal combustion engine car in 10 to 20 years’ time,” Buckley says.
He points to the announcement by BYD, one of the largest EV manufacturers in the world, that it closed its internal combustion engine manufacturing facility in April.
“They didn’t announce they were going to do it in six years’ time. No, they closed it several months ago. They’ve given up on the internal combustion engine entirely and BYD reported EV sales in the first seven months of the year up 290 percent,” he says.
Mining and Australia’s Role
China is not only at the forefront of renewable energy investments, it also dominates the processing of critical minerals needed for the energy transition.
Australia, with all its riches in minerals and commodities, is well placed to benefit from the energy transition.
But Buckley argues Australia needs to start refining the raw materials rather than simply digging them out of the ground for export.
I’m actually really bullish about the opportunities for Australia. Australia will be a renewable energy superpower, but we also will be a future-facing, mining value-add superpower
“I’m actually really bullish about the opportunities for Australia. Australia will be a renewable energy superpower, but we also will be a future-facing, mining value-add superpower,” he says.
“For example, Australia produces 46 per cent of the world’s lithium. We always hear about the lithium shortage and we always hear about how lithium [demand] is going to double and double again.
“What COVID and Ukraine have done is highlight that Australia actually also gives supply-chain security to America, Europe, Japan and India. These countries don’t want to be reliant on China.
“Australia is in the box seat to be a massive beneficiary from the energy transition. But we should be refining our resources before we export them, leveraging our global competitive advantage in large-scale renewable energy.
“We already have some of the lowest renewable energy costs in the world. We have the ability to scale that a thousandfold because we’ve got the best wind and solar in the world. We have a massive energy competitive advantage.”
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.