On September 21, 2021, Chinese President Xi Jinping told the United Nations General Assembly via video link that China would increase its support for green and low-carbon energy in developing countries, and do not build new coal-fired power projects overseas.
The move reflects a broader decline in coal among traditional and emerging aid donors. Two of Asia’s top exporters of coal-fired power projects, Korea and Japan, made similar statements in June 2021. The month after Xi’s announcement, OECD members said they would no longer offer export credit support for coal-fired power plants unless emission reduction plans are in place.
China has been a major builder of coal-fired power plants around the world, often providing both financing and technology. His decision has and will have a profound effect, both domestically and in broadening low-carbon development and energy transition pathways for developing countries.
Political announcements and signals
Since the announcement, Chinese government agencies, financial institutions and power plant builders have worked at the political, financial and project levels to increase support for renewable energy projects in its overseas energy investments.
At the political level, in March this year, the National Development and Reform Commission and three other government bodies issued a joint document on promoting green development in the Belt and Road countries. He called for “a complete halt to new overseas coal-fired power plant projects and cautious progress on those already under construction”, as well as green and low-carbon development of coal-fired power plant projects. abroad that have already been built, which in practice means modernization. factories to improve efficiency and reduce pollution. These were the first concrete instructions from the Chinese administration on how to handle projects at different stages of implementation since the initial announcement.
Between September 2021 and April 2022, 15 overseas coal-fired power plant projects that were in the pre-financial close and pre-construction stage were abandoned or canceled. These are projects that have yet received Chinese financial support or EPC (engineering, procurement and construction) support.
question marks Still hovering are projects whose financial closure has already taken place but whose construction has not yet begun, and “captive” power plants built specifically to supply industrial zones. In these cases, compensation for breach of contract could be due if a Chinese party withdraws unilaterally, making cancellation more complicated.
On January 6, 2022, the Ministry of Ecology and Environment (MEE) and the Ministry of Commerce published guidelines on environmental protection in overseas investment. These focus on environmental risk management throughout the lifetime of projects in Belt and Road countries, and encourage companies to apply standards set by international organizations and multilateral bodies, or Chinese standards when they are more stringent.
The rapid pace of political announcements shows that there is unanimity within the government on the decarbonization of Chinese projects abroad. While producing high-level policies and specific guides for project-level operations in the country, China has also been active diplomatically, working with developing countries to create platforms and mechanisms for green and low carbon international cooperation. In November 2021, the Forum on China-Africa Cooperation published a joint statement on the fight against climate change. The following month, a China-ASEAN forum on high-quality development of the Belt and Road was held. In May 2022, a joint statement was issued at a high-level meeting on climate change of BRICS countries (Brazil, Russia, India, China and South Africa).
In October 2021, MEE and domestic and foreign partners founded the Belt and Road Initiative (BRI) International Coalition for Green Development, with 10 research topics identified. Important outputs include a green development guideline for the BRI, which has created a system for classifying and selecting projects according to their potential impacts on the environment. The second phase of the development of this guideline includes a handbook for companies and financial institutions, and an ecological development guide for the construction of highways and railways. These promote the green management of Belt and Road projects by helping stakeholders identify, assess, manage and improve the environmental impacts of BRI projects; and providing processes and tools for project management and self-assessment.
The Exim Bank of China, the China Development Bank (CDB) and the China Export and Credit Insurance Corporation (Sinosure) are the main public financial institutions financing overseas projects and, as such, reacted quickly to the change in government policy. . Exim Bank successfully issued 3 billion yuan ($425 million) in green bonds for clean energy investments, which will finance the construction and operation of renewable energy projects such as hydroelectricity and wind energy. The CBD has signed memorandums of understanding on climate finance with the Green Climate Fund and the United Nations Development Programme. Sinosure, meanwhile, has accelerated its approval processes for renewable energy projects and set up a team to analyze risk control and insurance models for renewable energy projects in developing countries. Establishing a green export credit system for clean energy is now on the agenda of these “political financial institutions” – public financial institutions responsible for implementing policy.
Meanwhile, in commercial banking, the Bank of China and the Postal Savings Bank of China said they would not finance new overseas coal mining or coal power projects. The Industrial and Commercial Bank of China said it would “produce a roadmap and timetable for a phased withdrawal of coal financing.”
Reform investment and financing models
Our research at the Green BRI Center of the International Institute of Green Finance, Beijing, found that central government-owned power plant construction companies have already pulled out of projects for which binding commitments have not yet been made. effect and are actively considering how to develop their renewable energy portfolio. The proportion of fossil fuel projects in China’s Belt and Road energy sector projects began to decline in 2016 and bottomed out in 2020, when 58% of investment went to renewables (hydropower, solar , wind, and bioenergy), the first time that renewables overtook fossil fuels. And apart from the 15 coal-fired power projects built or financed by China that have been canceled Between September 2021 and April 2022, the country made no overseas coal power investment in 2021 or the first half of 2022.
When it comes to renewable energy projects, hydropower accounted for the bulk of China’s investment in the Belt and Road in 2021-2022, with 56% of renewable energy’s share, followed by solar and then wind power. To promote global energy transitions and low-carbon development, China should build on this foundation and expand cooperation with developing countries on renewable energy capacity building and grid construction, and thus gradually increase the proportion of renewable energy projects in its overall investment.
China has a complete industrial chain of renewable energy, with strong R&D, manufacturing, installation, operation and maintenance capabilities. It should use this leadership in the renewable energy sector by providing technical support and capacity building to developing countries, as well as promoting the sharing of information on green development and the use of green technologies in these countries. .
China’s low-carbon approach to overseas energy investment requires its financial institutions to be flexible, open and innovative, leaving behind peerless, closed and rigid investment models. Specifically, they can no longer rely on EPC+F (engineering, procurement and construction plus financing) contracts underwritten by sovereign guarantees of the host country. These were for many years the dominant model for large coal-fired and hydropower projects. In the renewable energy sector, on the other hand, independent power producers and more flexible project financing are the norm. Chinese financial institutions should work with third parties, strengthen cooperation with international development donors and commercial financial institutions to level their learning curve for overseas renewable energy financing. Cooperation with third parties allows: financial power to be combined with experience in project management; exploration of hybrid financing, non-recourse loans and structured financing; improvement of the environmental and social management of the project throughout its life; and more private capital. This will help realize the full potential of renewable energy in developing countries.
China should coordinate its overseas renewable energy investments, including: major renewable energy generation facilities and associated grid and other infrastructure; knowledge transfer and capacity building through South-South cooperation mechanisms; distributed projects; and other types of development assistance. China’s investments in renewable energy should cover both “software” (knowledge transfer) and “hardware” (equipment and infrastructure), large and small projects, equity investments and development contracts. construction, as well as the combination of export credits and development aid. Only this will really help developing countries achieve the necessary transitions in the electricity sector.