On the global stage, we are seeing a swift shift in geopolitical strategy away from free market trading toward protectionist policies and “friend-shoring” as a direct response to last year’s European energy crisis. Years of a free market approach to energy trading had left Russia with enormous influence over European energy markets. In 2021, countries in the European Union sourced 45% of their total gas imports – about 155 billion cubic meters (bcm) – from Russia alone. Then, Russia illegally invaded Ukraine and all hell broke loose.
After the invasion in February of last year, a political scuffle turned into an all-out energy war between Brussels and the Kremlin, causing a crisis in European energy markets that reverberated around the world. Europe condemned Russia’s actions with a mix of actual and threatened economic sanctions; Russia responded by cutting off gas supplies overnight to flex its leverage over European markets; and thus, the relative danger and vulnerability of relying on one (particularly volatile) source for a significant portion of the bloc’s energy mix was thrown into stark relief. Related: Chances Of World Reaching Net-Zero By 2050 Unlikely: Exxon
As a result, leaders in the West have swiftly changed their trade strategy. United States Treasury Secretary Janet Yellen has openly called for a shift of strategy away from free market trading to the concept of “friend-shoring”, in which countries shift supply chains to “trusted countries” with similar values and political allegiances – that is to say, away from Russia and China. The European Commission’s Strategic Foresight Report 2022, too, has called for a similar reconfiguration of trade networks. “Staking out spheres of influence and assessing the reliability and trustworthiness of suppliers and countries is the order of the day,” read a recent analysis from Stiftung Wissenschaft und Politik, the German Institute of International and Security Affairs.
In addition to trying to break economic ties with Russia as the war in Ukraine drags on, increasing attention is being called to the global dependence on China for clean energy supply chains, and to strategies to break that dependence and decrease supply chain vulnerability before history repeats itself. According to the International Energy Agency’s Energy Technology Perspectives 2023 report, “China is the leading global supplier of clean energy technologies today and a net exporter for many of them. China holds at least 60% of the world’s manufacturing capacity for most mass-manufactured technologies (e.g. solar PV, wind systems and batteries), and 40% of electrolyser manufacturing.”
Experts have argued that after years of neglecting the domestic clean energy industry, the United States will have to make an assertive and accelerated effort to build up domestic production and manufacturing capacity to have any chance of competing with China on the global market. According to a recent study from Cornell University, it would also be essential for meeting national decarbonization targets (and therefore global targets, as the United States is the second largest greenhouse gas emitter after China). The study found that nationalizing United States solar energy supply chains would greatly reduce their carbon footprint and energy use.
Just this month, in an attempt to shift the balance of clean energy power away from China, the United States treasury department released new guidance limiting clean energy tax credits to U.S.-based solar developers that produce their photovoltaic cells domestically. However, clean energy experts have warned that this approach will backfire spectacularly, as the United States has negligible extant solar panel production capacity. Instead of breaking the United States’ dependence on Chinese solar panel imports, the requirement would simply prevent virtually all existing U.S. developers from accessing the credit.
“Directly and indirectly, the US will rely on supply from China,” Pol Lezcano, a senior associate at BloombergNEF, was recently quoted by the Financial Times. “This guidance may encourage more cell manufacturing to take place in the US, but most of the cells used in US solar projects will continue to come from . . . factories in south-east Asia, most of them owned by Chinese companies.”
While this specific policy approach may be misguided, the intent behind it is spot-on, and many experts argue that it actually does not go far enough. Solar cells are only one small part of a very long supply chain that will have to be reconfigured from top to bottom in order to diversify clean energy markets. Primary materials will also become increasingly important in clean energy markets and geopolitics in general as demand for finite rare earth materials skyrockets. Currently, China has a chokehold on these supplies as well, but the U.S is scrambling to build up its own lithium operations and to forge new trade agreements in South America – though this will present its own challenges.
In short, increasing clean energy production in the West without also increasing cash flow to China will be very, very difficult to pull off. Piecemeal policy measures such as the one introduced by the Treasury last week are doomed to fail without system-level coordination. In fact, as solar panel manufacturers are currently finding out, inadequate measures designed to support local supply chains can – and will – make matters even worse.
By Haley Zaremba for Oilprice.com
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