Géopolitique, Réseau, Énergie, Environnement, Nature
China’s at the Gate of the European Power Grid
Number #1
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Number #1

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Clémence Pèlegrin , Hugo Marciot

21x29,7cm - 153 pages Issue #1, September 2021

China’s Ecological Power: Analysis, Critiques, and Perspectives

China’s conquest of the European power sector

Energy has a very high capital intensity at all stages of its value chain. But most of all it contributes to socio-economic development and has numerous geopolitical and environmental impacts. Today, although energy consumption in Europe is stable or even declining, electricity is a major and growing part of this market. On the one hand, new uses, mainly arising from digitalization, are increasing the demand for electricity; on the other hand, energy transition policies aim to electrify overall energy consumption so as to reduce greenhouse gas emissions downstream while decarbonizing production upstream, particularly through renewable energies. For these reasons, investments in the power sector and its infrastructure are growing significantly, mainly in Europe but also in other economically powerful countries.

The energy sector is indeed an integrated part of the new Chinese Belt and Road Initiative (BRI). Moreover, according to recent research, energy represents two-thirds of China’s spending on the BRI, the remainder going to the transportation and telecommunications sectors 1 . In Europe, the surge in Chinese investments across all sectors is due to a combination of the debt crisis, beginning in 2008, and the perceived mutual economic opportunity for European and Chinese institutions to deepen their relationship, notably through the purchase of euro bonds (a common debt instrument for eurozone countries) and investments in strategic infrastructure. For example, between 2010 and the end of 2012, the volume of Chinese investments in the European Union quadrupled, from 6 to 27 billion euros 2 . This was due to the decrease in asset values and to a revised Chinese policy for overseas mergers and acquisitions. Underlying this, the long-standing trend of deindustrialization in the West, as well as China’s ambition to pursue an active investment policy in Europe, further contributed to the equation. Between 2015 and 2016 alone, Chinese investment in the EU grew by 77%; among the most concerned sectors were telecommunications, real estate and automotive. In 2019, the transport, energy, utilities and infrastructure sector was the fourth largest sector of Chinese foreign direct investment (FDI) in the EU, with 800 million euros 3 .

The Global Interconnection Initiative: The view of Climate Leadership through Electricity Infrastructure

Within the energy sector, electricity is an interesting component of the BRI in Europe for China, as it is a strategic sector for the Union. More specifically, as it is part of a complex value chain where competition, security and innovation issues intersect, electricity transmission is one of the pillars of China’s New Silk Roads. This is evidenced by the mega-project to intercontinentally link the Chinese and European power grids and, in the longer term, the global linking of electricity networks on all continents. Presented in 2015 by President Xi Jinping at the United Nations Sustainable Development Summit, this project, known as the Global Interconnection Initiative, is led by the Global Energy Interconnection Development and Cooperation Organization (GEIDCO), an international nongovernmental organization. The project aims primarily at developing electricity infrastructure on both sides of the Eurasian continent. According to GEIDCO, the Global Energy Interconnection project intends to establish “a modern, clean and electricity-centric energy system that is globally interconnected, jointly built, and mutually beneficial to all” 4 . This international infrastructure responds to three well-identified challenges in the energy transition. It will interconnect national and regional energy systems in order to (1) facilitate and improve the integration of renewable energies, (2) increase the flexibility of networks in the face of rising alternatives and intermittent energies, and (3) ensure greater security of electricity supply, in a context of strong electrification of the energy mix. The organization’s ultimate objective is to achieve low-carbon and sustainable development 5 .

This project is of unprecedented scope and will be deployed in successive stages through 2070. The first stage, estimated to start in 2035, plans to connect the Chinese to European domestic networks; the second stage, in 2050, aims at developing the African and American networks; finally, the third stage will focus on connecting the Arctic, linking the five continents through these energy arteries 6 . In addition to its futuristic dimensions, this project is built on Ultra High Voltage (‘UHV’) network technology for the transmission of very high-speed, alternating or direct electrical current. China has been developing this technology since the end of the 2000s as a necessary supplement to the deployment of telecommunications technologies such as 5G. Thanks to substantial government and local funding and the large-scale installation of these networks (in 2020, China is expected to spend more than $20 billion on the deployment of UHV projects) 7 , China has already managed to significantly reduce the costs, although several difficulties remain. One is technical and lies in the fact that, despite fewer electricity losses by the Joule effect, the transmission distances of the GEI project will necessarily imply significant losses in the transmission of electricity, which will further reduce profitability. The other difficulty is economic: UHV cablings are very expensive, especially on a continental and global scale, even though economies of scale theoretically seem considerable. While the post-coronavirus context could slow down the deployment of this project abroad, it could be an opportunity for China to activate economic stimulus plans through public investment and major industrial programs 8 . The Chinese Communist Party has already taken that step with the announcement of new infrastructure projects in March 2020 9 .

Since its creation, GEIDCO has engaged in international partnerships and the fight against climate change within climate negotiations and initiatives. The organization has published multiple Action Plans, including the 2017 Action Plan to promote the United Nations 2030 Agenda for Sustainable development, the Action Plan to promote the Paris Agreement during the COP 24, and the Action Plan for the Promotion of Global Environmental Protection 10 . In an effort to enhance the legitimacy of the project, partnerships with more than 70 countries and organizations such as UNFCCC or the G20 Global Infrastructure Connectivity Alliance have been concluded. In this regard, it is particularly interesting to observe how the rhetoric promoting this project, which is also an integral part of the Belt and Road Initiative, is meant to coincide with global policies to fight climate change. China has indeed installed more renewable energy facilities than any other country in the world and has increased both political and industrial initiatives to assert its leadership in this area. China’s foreign investments in fossil fuels contradict this image of an ambitious environmental player both at home and in international negotiations 11 .

The debt crisis in Europe and the Trojan horse of Chinese strategic investments in electricity transmission

The history of Chinese investments in strategic infrastructure stem from the economic and financial crisis of 2008-2012. In the years immediately following the financial crisis, Southern Europe was the main recipient of these transactions. Italy accounted for nearly the annual total in 2014 and in 2019 became the first European country to officially join the BRI by signing a memorandum of intent and more than 2.5 billion euros in contracts. A number of symbolic announcements marked the 2010s, such as the acquisition of a 51% stake in the Greek port of Piraeus in 2016, the launch of the 16+1 Format in 2012 12 , and the increased cooperation between the Italian shipbuilder Fincantieri and the Chinese State Shipbuilding Company.

An analysis of Chinese investments in European energy infrastructure reveals recurring methods and objectives. First, Chinese companies usually acquire majority stakes through initial minority investment. In addition, these heavy investments focus on specific segments of the energy value chain, aiming for both influence and, most of all, profitability. In this regard, power networks are ideal investments as they are regulated, natural monopoly assets in national territories 13 . Whether in electricity transmission or distribution networks, the 2010s recorded substantial investments, first in Southern European countries, which were undergoing massive privatizations, and later in Northern Europe.

In 2011, the Portuguese government sold its shares in the national transmission system operator (TSO), Energias de Portugal (EDP), as part of the rescue and privatization program set up by the European Commission and the IMF. The state-owned company China Three Gorges (CTG) then bought them for 2.7 billion euros. Six years later, as the main shareholder with 23.27% of capital, CTG filed a takeover bid to buy out all EDP’s remaining capital for 9 billion euros. The initiative was prevented by EDP’s statutes, which prohibit any shareholder from holding more than 25% of capital. The takeover bid, launched in May 2018, was dropped almost a year later as shareholders refused to change said statutes. However, this is not the only remarkable investment in the Portuguese power system: in 2012, CTG also acquired 49% of EDP Renewables — EDP’s renewable energy subsidiary — and the state-owned investment company CNIC Corporation Limited in turn acquired 5% of EDP’s capital in 2015. State Grid Corporation of China (SGCC) also purchased 25% of the grid operator Redes Energticas Nacionais (REN) for €387 million in early 2012, becoming the largest shareholder. It was then in a position to appoint the chairman and three members of the board of directors 14 .

Portugal is the best illustration of this Chinese strategy of investing in several links of a strategic and traditionally monopolistic value chain which has been favoured by European austerity 15 . Other Southern European countries such as Italy or Greece have experienced the same investment moves. In 2014, SGCC bought 35% of the Italian public holding CDP Reti for 2.4 billion euros, the largest investment SGCC has ever made abroad, but also the largest contract ever signed by China in Italy 16 . CDP Reti is also a 30% shareholder in the TSO Terna and the gas operator Snam. Through this acquisition, SGCC therefore took a blocking minority and a voting right in the board of directors of these two companies. Although it is not a TSO, the equipment manufacturer Shanghai Electric Power entered into a strategic partnership with the Maltese TSO Enemalta in December 2014 by acquiring a 33% stake. In Greece, SGCC had already acquired a minority stake (24%) in the Independent power transmission operator (ADMIE) for 320 million euros in 2014, the Italian TSO Terna entering ADMIE’s capital at the same time. Once again, the Greek government sold its shares as part of the Greek rescue plan and to comply with requirements imposed by the IMF in exchange for funding.

Northern Europe has not been spared from this trend, although it is significantly different. In the United Kingdom, the economic context surrounding these decisions is dominated by Brexit and has more to do with reorienting investment in the British economy outside the Union. In 2017, Theresa May’s government nevertheless approved the sale of 61% of the TSO National Grid gas division to an international consortium including the China Investment Corporation (10.5%) and investors such as Macquarie (14.5%) 17 . Moreover, SGCC acquired 24.92% of the holding company Encevo, which in turn owns the Luxembourg TSO Creos. Yet, in other instances, government interventions effectively blocked some takeover attempts, thereby preserving European shares in some TSOs. For example, the Spanish government did not respond to SGCC’s interest in purchasing its share of the TSO Red Eelctrica de Espana (REE). In Germany, where power transmission relies on four different TSOs, the 50Hertz TSO has on two occasions seen 20% of its capital put up for sale by their respective shareholders. SGCC twice attempted to acquire them in order to give its equipment subsidiary a significant advantage in future calls for bids related to the extension of the German network 18 . And German institutions twice opposed these acquisitions by involving the public bank Kreditanstalt für Wiederaufbau (KfW). In Belgium, the electricity distributor Eandis was also targeted by Chinese investors, but the city of Antwerp barred an attempt to buy 14% of the shares 19 . To date, there have been successful acquisitions in European TSOs by Chinese investors in seven European Union member states.

A recent and heterogeneous awareness in Europe

In specific terms, these acquisitions have two direct implications for the European electricity sector. On one hand, they often grant voting rights to Chinese state-owned or parapublic companies on boards of directors of grid operators, which are directly involved in the energy security of member states. On the other hand, they reinforce a deeper financial dynamic which has already affected other components of the electricity value chain, such as power generation. But these acquisitions make perfect sense inlight of the aforementioned GEI project: Italy and Greece, both in terms of ports and energy, are ideal entry points for the transcontinental grid. Some analysts even fear that a sufficiently important Chinese influence on the European electricity infrastructure will eventually allow China to sell electricity produced within its territory to EU member states at a cheaper price than the domestic market as a result of the abundant, and even surplus, electricity production from the world’s first renewable power plants. At first glance, such a transcontinental network may seem advantageous in every way. It would grant access to cheap renewable electricity, making it beneficial for both the environment and the European consumer. But these advantages hide less explicit economic and geopolitical effects. The effect of economic dumping and technological vulnerability, as already observed in other sectors, would be particularly strong in the case of a transcontinental network. China would indeed continue to supply European countries with renewable means of production (solar panels, wind turbines, power electronics, etc.), while providing them with renewable electricity at a lower price than Member States could sell theirs; a phenomenon which would arise from the combination of the scale effect of its plants and the internalization of production costs. Furthermore, an abundance of Chinese renewable power and its low price could make European countries highly energy-reliant on a foreign power, thereby replicating the dependence on Russian gas. Finally, the potential complementarity of production patterns (Chinese renewable production reaching high levels when European renewable production is low, for example at night, due to time differences) could, in the most extreme scenarios, lead to significant marginalization of conventional European (i.e. thermal) production, which will likely be less needed.

Chinese investments in European electricity infrastructure peaked between 2012 and 2016, at the height of Member States’ economic vulnerability, primarily in Southern Europe. It is interesting to note that this trend was nevertheless preceded by a decade of close cooperation between the EU and China on energy and economic matters. This is evidenced in particular by the launch of the EU-China Comprehensive Strategic Partnership in 2003 and the EU-China 2020 Strategic Agenda for Cooperation.

The tone of strategic cooperation between China and the EU has substantially changed compared to the early 2000s, resulting in member states positioning themselves around two political stances with increasing assertiveness. On the one hand, public opinion and politicians viewing these investments as an economic and industrial opportunity; Italy’s official membership in the BRI and the conclusion of a Memorandum of Understanding in March 2019 (two years after the signing of a first Action Plan for the Strengthening of Economic, Commercial and Cultural-scientific Cooperation between Italy and China 2017-2020) is a good example. By formalizing a privileged relationship that satisfies both Italian export opportunities to China and the Chinese investment strategy in Europe, both parties seek to link Europe and China through Italy’s “traditional role as terminal of the maritime silk routes” 20 . The Under Secretary of State at the Ministry of Economic Development, Michele Geraci, even called on the European Commission to take greater account of Member States commercial interests in the construction of its trade policy with China 21 . This intervention is a sign of the political and commercial freedom that is being demanded at a time of disagreement between Member States on this issue. Portugal also concluded a memorandum of understanding with Beijing in December 2018 deepening economic cooperation within the BRI, mainly regarding infrastructure. Portuguese officials have nevertheless denied claims of a privileged relationship — or even dependence —with China 22 . But the Minister of Foreign Relations Augusto Santos SilBut the Minister of Foreign Relations, Augusto Santos Silva, told the Financial Times that he hoped for “credible” offers from European and American investors in future calls for bids, lamenting that in the case of energy companies that were deregulated beginning in 2011, only Chinese investors were convincing 23 .

On the other hand, other countries have recently toughened their approach to Beijing, among them Germany, as previously mentioned, and France. Since 2017, the two countries have jointly called for new regulations regarding foreign investment (see below). Following the cooperation and the development of mutual economic opportunities that prevailed from the early 2000s to the mid-2010s, more and more voices in Europe are speaking out against a purely “competitive” approach to network infrastructures that pays little heed to their geostrategic importance. This view occupied a central place in the 2017 European debate around the questions of China’s market economy status and the European institutions’ response to the risks of dumping, a debate in which the European Parliament was given a central role 24 . However, the increased visibility of the Global Energy Interconnection in international organizations, and its promotion by China, both in terms of development and energy transition, points to a discrepancy in European vigilance.

Still, electricity transmission infrastructure — owned by either their operators or by their government — are by their very nature essential to a country’s economic and social activities. They are also hubs of technological innovation, and the interconnection of European networks makes the operation of each national grid particularly crucial for the supply of neighboring States. The continuous cross-border flow of electricity creates an energy solidarity that strengthens European cooperation and integration. These networks are a major strategic infrastructure for the European Union, as they facilitate the internal electricity market.

The crucial importance of these networks for the European power system — and, by extension, for the European economy as a whole — calls for special protection against foreign takeovers. Given that foreign interests do not necessarily align with thte interests of EU Member States, any foreign acquisition would likely pose risks for the European electricity supply and its economies. Because these buyouts are massive and originate only from China, they are a major continental issue, especially as European electricity markets and systems are increasingly interconnected and weakened as a result. The presence of a third country in the capital of several major TSOs reveals the economic fragility of the EU electricity sector, which allows a third country to influence European energy security 25 .

Notes

  1. T. S. Eder, J. Mardell, “Powering the Belt and Road”, Mercator Institute for China Studies, June 2019.
  2. J. Anderlini, “Chinese investors surged into EU at height of debt crisis”, Financial Times, October 2014.
  3. A. Kratz, M. Huotari, T. Hanemann, R. Arcesati, “Chinese FDI in Europe: 2019 update”, Mercator Institute for China Studies et Rhodium Group, April 2020.
  4. Global Energy Interconnection, Development concept, see: en.geidco.org.cn/aboutgei/.
  5. Global Energy Interconnection, Global consensus.
  6. Global Energy Interconnection, Development strategy.
  7. Bloomberg News, “A 1,000-Mile Long Clean Energy Artery Is Completed in China”, June 2020.
  8. 8.7 priority areas in the field of infrastructure have been identified by the PCC for post-Covid economic recovery: the 5G network, industrial IoT, data centers, UHV transport networks, IRVE and high-speed lines between the country’s major cities.
  9. “China Develops $26bn Ultra High Voltage Electrical Grids to Stimulate Economic Recovery”, Power-Technology.com , May 2020.
  10. Global Energy Interconnection, Global consensus.
  11. C. Lizé and C. Pèlegrin, “Climat : où va la Chine ?”, Le Grand Continent, April 2020.
  12. The 16+1 format is a multilateral economic partnership signed by China and 16 central and eastern European countries (Albania, Bulgaria, Bosnia and Herzegovina, Croatia, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, the Czech Republic, Romania, Serbia, Slovakia, Slovenia).
  13. N. Wakim, “Comment la Chine achète l’Europe de l’énergie”, Le Monde, Augu 2018.
  14. A. Khalip, “Factbox: Chinese investments in Portugal”, Reuters, May 2018.
  15. X. Yi-chong, Sinews of Power. Politics of the State Grid Corporation of China, Oxford University Press, 2019.
  16. “Le chinois SGCC finalise l’acquisition de 35 % des actions de l’italien CDP Reti”, French.china.org.cn, December 2014.
  17. C. Peterson, “CIC buys 10.5% of National Grid’s gas division”, China Daily, December 2016.
  18. DW, “China’s SGCC to buy stake in German grid operator 50Hertz”, February 2018.
  19. A. Hope, “Antwerp puts end to potential Chinese energy deal”, Flanders Today, October 2016.
  20. Memorandum of understanding between the government of the Italian Republic and the government of the People’s Republic of China on cooperation within the framework of the Silk road economic belt and the 21st century maritime silk road initiative, March 2019.
  21. S. Zheng, “ Italian government’s China expert urges EU to make it easier for member states to deal with China ”, South China Morning Post, May 2019.
  22. “Lisbon rebuffs claims Portugal is China’s ‘special friend’ in EU”, Financial Times, January 2020.
  23. Ibid.
  24. G. Grésillon, “L’Europe trouve enfin la parade face au ‘Made in China’ ”, Les Échos, october 2017.
  25. CREDITS: GREEN is publishing C. Pèlegrin, H. Marciot, “La Chine aux portes du réseau électrique européen”, Groupe d’études géopolitiques, Note pour l’action, January 2021.
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Clémence Pèlegrin, Hugo Marciot, China’s at the Gate of the European Power Grid, Sep 2021.

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