How mainland China dominates in production of clean energy equipment

Government intervention in economic activity via industrial policy is again gaining a lot of traction in the Western world. In a bid to strengthen their supply chains and improve energy security, advanced economies are increasing efforts to expand clean energy technology manufacturing.

In August 2022, the US signed into law what will probably transpire to be the most important piece of climate legislation in the country’s history. Indeed, according to the International Energy Agency (IEA) the Inflation Reduction Act (IRA) is the most significant climate action yet to have followed from the Paris Agreement of 2015.

Other countries, however, will not sit idly by and watch the US boost its industrial competitiveness. The IRA represents a key risk to the European Union’s (EU) green technology industry in particular. It has the potential to divert clean energy capital away from Europe, a region where green subsidies are lower and energy bills are relatively higher compared to the US.

So far, the EU has been leading on climate action and regulation. The EU needs to respond to protect its leadership in clean energy, addressing the potential loss of competitiveness to the US and the risk of energy-intensive industries relocating. Industrial policy is now making a comeback in Europe too, and will be an important tool to continue promoting European renewable energy.

While the EU and the US have only recently started looking at forms of state intervention to support clean energy manufacturing, China already dominates the scene.

According to research by the Center for Strategic and International Studies (CSIS), mainland China has spent a large amount of resources to boost its domestic industry. It is estimated industrial policy spending amounted to more than US$240 billion in 2019. This was three times that of the US and nine times more than that of Japan.

The CSIS research also shows that, relative to other economies, mainland China spent more on direct subsidies than any other country, while also providing significant support through credit to its state-owned Enterprises.

The strong efforts of the central Chinese government have helped the country become the world’s leader in the clean energy sector, with dramatic implications for global value chains (GVCs).

Data from the IEA highlights that mainland China dominates the processing of many minerals that are critical for green technology manufacturing. It has around a 70% share of global processing for cobalt and 60% for lithium and nickel.

Mainland Chinese companies started to invest in mineral-rich countries like the Democratic Republic of Congo as early as 2006. Sustained policy support has also helped China take control of the world’s production of mass-manufactured technologies.

The Asian economy accounts for more than 70% of global manufacturing capacity of solar panels and batteries. It is also the largest producer of wind capacity and heat pumps respectively commanding 58% and 38% of these markets.

In its latest Energy Technology Perspectives 2023 report, the IEA shows that “mainland China alone would be able to supply the entire global market for solar PV modules in 2030, one-third of the global market for electrolysers, and 90% of the world’s EV batteries”.

As the energy transition gathers pace, mainland China’s role in GVCs for the production of equipment used to generate clean, renewable energy is set to expand over the next decade.