China has firmly established itself as the world’s dominant manufacturer of clean energy technologies, having been the largest producer of solar photovoltaic cells and modules for at least a decade (Energy Policy, February 2011). The country now accounts for half of all solar manufacturing (International Energy Agency, October 4, 2017) globally and leads wind turbine (Renewable Energy Policy Network for the 21st Century, 2018) and lithium-ion battery production as well (Bloomberg, June 28, 2017).
As a result, Beijing is well-poised to benefit economically and strategically from the global shift toward clean energy technologies as countries—particularly those in the developing world—seek to decarbonize their economies and reduce pollution without sacrificing growth. Beijing is seeking to capitalize on this positioning by investing in and acquiring foreign power companies overseas, including a recent, high-profile attempt by a large Chinese power generation company to purchase outright Energias de Portugal, Portugal’s largest utility company. At a time when protectionism is on the rise globally, these overseas acquisitions may provide Beijing a global foothold in the growing offshore wind market, as well as backdoor cyber-access to foreign grids, and—most importantly—the ability to influence other countries’ power generation decisions in ways that benefit China’s own firms and national clean energy strategy.
Sun Belts and Roads
China’s quest for clean energy domination has been enshrined in national strategy—in 2006, the Chinese government released the Medium- to Long-Term Plan for the Development of Science and Technology, identifying energy as priority for technological development, as well as economical, efficient, and clean energy as a frontier technology that the country should focus on (State Council, February 9, 2006). The government continued its support for energy technology in the Twelfth Five-Year Plan, covering the years 2011-2015, then put its interest in green energy front and center starting in 2015 with Made in China 2025 (State Council, May 19, 2015). Beijing has promised so much support to clean energy companies that, by 2020, the government will owe companies $30.2 billion (Reuters, October 8, 2017) in unpaid subsidies—for comparison, the PRC government paid out $25.4 billion in renewables subsidies in 2017 (World Economic Forum, May 22). Government support for Chinese clean energy technology paid off—China became the world’s largest exporter of environmental goods and services in 2012 (Bloomberg, December 5, 2017).
The ramping up of Made in China 2025 will coincide with the continued rollout of the Belt and Road Initiative (BRI), China’s amorphous foreign policy plan to connect continents through development and infrastructure projects. BRI has also served a vehicle for China to increase its exports in the advanced clean energy sector. According to the Ministry of Industry and Information Technology’s green industry development plan, China should “grasp the opportunity of BRI to comprehensively promote industrial green development,” and actively participate in the investment, construction, and operation of new energy projects, including wind, solar, and nuclear energy, and power grids (Ministry of Industry and Information Technology, July 18, 2016).
Despite a broader slowdown (Radio Free Asia, April 23) in outward foreign direct investment (FDI), Chinese investment in BRI countries has been growing—the value of acquisitions in those countries surpassed 2016 levels by August 2017 (Reuters, August 15, 2017). Clean energy has been a particular bright spot. By one estimate, China’s large international clean energy projects and takeovers totaled more than $44 billion in 2017, compared to $32 billion in 2016 (Carbon Brief, January 9).
Investments abroad could allow China to export its domestic overcapacity in clean energy industries to other countries, where it can win market share while walking back expensive domestic policy support for clean energy. In many cases it is a question of survival for the companies involved; they have to secure new projects abroad to stay afloat as China’s National Energy Administration has announced plans to cut expensive subsidies for solar energy (Green Tech Media, June 6). As part of this push, Chinese companies, both private and state-owned, are buying larger stakes in power companies that put generation assets onto national grids such as Energias de Portugal.
Three Gorges in Portugal
The latest step in China’s overseas clean energy plans has been the attempt by Three Gorges Corporation (CTG), a state-owned enterprise and one of the world’s largest energy companies, to take over Energias de Portugal (EDP), Portugal’s largest utility, as part of its Belt and Road corporate strategy (China Three Gorges, July 29, 2017). This would allow CTG to access new technologies and hard-to-reach markets—EDP serves almost 10 million clients across North America, Europe, and South America, and runs more than 205,000 miles of transmission lines globally (South China Morning Post, May 12).
CTG bought its first stake in EDP in 2011 amid the eurozone sovereign debt crisis, paying $2.5 billion for 21.4 percent of the company (Publico, December 22, 2011). Now, seven years later, CTG is looking to take over the entire company, whose portfolio includes wind, hydro, and solar power projects in twelve countries in Europe and the Americas (Energias de Portugal). At the end of 2017, EDP had businesses in forty countries, with a total contract value of $15 billion (Bloomberg, May 12). Through this possible acquisition, China would be able to gain on-the-ground experience and technical skills, as well as increased access to power markets in Europe and the Americas.
Although EDP rejected CTG’s initial offer of $3.83 per share, along with a $8.48 per share offer for the purchase of EDP’s renewable subsidiary alone, the company has indicated that it is still open to acquisition by CTG for a higher price (South China Morning Post, May 12, 2018). In the meantime, Portuguese Prime Minister Antonio Costa has indicated that he will not interfere with the deal (South China Morning Post, May 12, 2018).
Because of EDP’s operations of wind farms in the United States, CTG’s takeover would typically require review by the Committee on Foreign Investment in the United States (CFIUS), which may be strengthened to more closely scrutinize Chinese investment in critical infrastructures and technologies. However, CTG may convince other European utilities to buy EDP’s US renewables portfolio, avoiding CFIUS while still expanding its business in other fast growing renewables markets (Reuters, June 26). It has since been revealed that the State Administration of Foreign Exchange, an arm of the People’s Bank of China, owns 5 percent of EDP, giving Beijing even more leverage in negotiations (Financial Times, June 19).
CTG’s bid to take over EDP, a company that generates, supplies, and distributes electricity globally, is not an isolated case. Rather, multiple Chinese SOEs have developed a habit of buying stakes in power companies, especially those in debt-laden countries. Amid Brazil’s economic downturn in 2017, China’s State Grid, the largest utility in the world, bought a controlling stake in CPFL Energia, Brazil’s third largest utility (China Daily, September 1, 2017). It has employed the same tactic in Europe’s more financially-vulnerable countries including Greece, Italy, and Portugal, acquiring ownership stakes in power grid companies (Xinhua, June 21, 2017).
Buying In to Offshore Wind
The EDP acquisition reflects a larger pattern of purchases by Chinese SOEs, not only in foreign power grids, but in foreign companies with large offshore wind portfolios and technical know-how. Although China leads in nearly all other clean energy technologies, it lags in offshore wind development.
Beijing has ambitious plans to increase its offshore wind capacity, but has so far lacked the technical capacity to achieve them (Reuters, June 24, 2016). CTG is still developing its first offshore wind farm, even as dramatic drops in the levelized cost of offshore wind energy have made the technology accessible elsewhere (China Three Gorges, December 30, 2017).
In this respect, EDP would be a valuable acquisition—its renewables arm installed the fourth-most wind capacity globally in 2017, and has offshore wind projects under development in the United Kingdom and France (Energias de Portugal, June 2018). In the long term, the company aims to become a leading offshore wind company globally and is developing innovative new technologies like floating wind farms. If the acquisition were to go through, EDP itself has flagged the Chinese domestic offshore wind market, where CTG plans to play an active role, as a potential area for growth (China Daily, February 9).
Other Chinese state-owned companies have been buying into companies driving offshore wind development forward—in December 2017, China Resources, a state-owned Chinese company, bought a 30 percent stake in the Dudgeon offshore wind farm in England from Statkraft, a Norwegian company, in an explicit bid to improve Chinese knowledge and experience with the technology (South China Morning Post, December 19, 2017).
Concerns: Innovation, Cybersecurity, and Control
The fact that China is strengthening its knowledge of offshore wind technology is not a problem in and of itself. China’s ability to produce cheap solar panels helped fuel solar’s explosive growth globally. However, its domination of the solar industry has also resulted in incremental improvements that have stifled demand for and the ability to invest in more disruptive technologies in the energy sector (Vox, April 18, 2016).
PRC companies acquiring positions in foreign power grids also brings cybersecurity risks associated with grid infrastructure, especially as that infrastructure becomes more advanced.
Power grids are becoming increasingly intelligent and networked, potentially allowing those with access to not only disrupt electricity supply, but to also conduct espionage through detailed monitoring of power use. Advanced behind-the-meter technologies can track information as granular as opening a refrigerator or turning on a shower, allowing anyone with access to monitor private activities (Council on Foreign Relations, June 2018). Countries will likely have a difficult time maintaining secrecy in critical infrastructure like military installations if Chinese companies control the power systems that supply them.
China’s focus on acquiring electric companies overseas will also make it easier to shape the global clean energy market to its liking. An outsized role in a country’s power sector will give China the ability to influence decisions regarding that country’s future generation mix in a way that could benefits PRC state-directed firms.
For example, State Grid’s large investments in Brazil have allowed it to showcase high-voltage transmission lines, which allows electricity to travel over longer distances with lower losses to resistance (Global Energy Interconnection Development and Cooperation Organization, October 13, 2017). Beijing aims to popularize and export this technology globally, creating large regional country-spanning power grids (South China Morning Post, January 21, 2016). Through their foreign power-sector acquisitions, Chinese companies are directing procurement toward specific clean technology products that Beijing aims to deploy, maintaining and eventually strengthening China’s broad state-directed influence in the market. If CTG’s acquisition of EDP goes through, Portugal may find itself acquiescing to the needs of Chinese state-owned enterprises before those of its own national energy strategy.
Ashley Feng is a research associate at the Council on Foreign Relations, focusing on Chinese foreign policy. She can be found on Twitter @afeng79. Sagatom Saha is an independent energy policy analyst based in Washington, D.C. His writing has appeared in Foreign Affairs, Defense One, Fortune, Scientific American and other publications.