By Rishikesh Ram Bhandary
The Egyptian government, host of the 2022 United Nations Climate Change Conference (COP27), has dubbed this meeting the “implementation COP.”
For many developing countries, international finance is a key enabler that allows them to translate their climate pledges into real implementation on the ground. In the UN climate process, the climate finance conversation has mostly revolved around the commitment by developed countries to mobilize $100 billion in climate finance by 2020. However, this commitment has not yet been met and with no significant new pledges on the horizon, the logjam persists.
Over the last decade, Chinese policy banks have increased their investments in renewable energy. For example, at the time of its launch, the Quaid-e-Azam solar park, financed through the Belt and Road Initiative (BRI), was the largest solar park in the world at 1,000 megawatts. When China’s leader Xi Jinping announced his government’s intention to limit public finance towards coal in overseas investments in 2021, he also made a pledge to significantly scale up financing for renewables.
But what does scaling up finance for renewables require? In a new assessment published in the journal of Energy Research & Social Science, we examined the factors driving Chinese overseas financing for renewables in the nine countries receiving the greatest volume of renewable energy financing from Chinese policy banks – Argentina, Bulgaria, Chile, Ecuador, Ethiopia, Kenya, Lesotho, Pakistan and Romania. We found that host country policies decisively steer Chinese policy bank finance towards renewable energy and in particular, host country incentives for renewables, a lack of a competitive regulatory environment and strong host country energy grids are crucial determinants of Chinese finance for renewable energy.
- First, we found that Chinese finance responded well to host country incentives geared towards renewables. For example, Bulgaria and Romania offered green certificates and feed in tariffs, but once these incentives were removed, renewable energy developers no longer displayed much interest. More generally, predictable and transparent policies are helpful in steering Chinese finance for renewables.
- Second, the bulk of Chinese investments in renewables flowed to countries without competitive regulatory environments. Often these investments were part of broader bilateral deals with China. However, many host countries are changing their regulatory regimes and switching to competitive processes to open the power generation playing field to a wide range of actors. Chinese power developers and policy banks will have to adjust to this changing regulatory environment.
- Third, many projects ran into delays and overruns because the wider energy infrastructure was either not yet in place or needed improvements. Many countries need to expand their grids and improve quality so that it can handle variable renewable energy sources like wind and solar. Investments in these areas through the BRI will be necessary if host countries energy mixes are to fundamentally change.
Additionally, we found that a shift from focusing purely on renewable energy generation to integrating renewables with broader industrial development strategies is underway. For example, the second phase of the China-Pakistan Economic Corridor includes an emphasis on industrial parks to help Pakistan increase its manufacturing capabilities. Such a move to greater value addition from renewable energy will increase the value proposition of the low carbon transition.
When China’s climate envoy Xie Zhenhua was asked at the COP if China would pay into a possible loss and damage facility, he said that while China supports the agenda, it will not pay into a fund directly and would instead help countries through South-South cooperation. But with climate impacts only intensifying in the years to come, there will be greater calls from host countries for the BRI to not just climate proof infrastructure, but also to actively support climate resilience across its member states.
Rishikesh Ram Bhandary is the Assistant Director of the Global Economic Governance Initiative at the Boston University Global Development Policy Center. Follow him on Twitter: @RishiRBhandary.