BRICS+ paves way for China's clean energy push

When BRICS announced an expansion early in 2024 to include the UAE, Iran, Egypt, Ethiopia and potentially Saudi Arabia, stakeholders in the oil market took notice of the fact that its members now control 42% of global oil production and 35% of global oil consumption.

But what must also not be overlooked is that the expanded group gives China access to markets -- particularly the UAE and Saudi Arabia -- that are ripe to import its clean energy ecosystem. This is of particular significance to China as it struggles with excess capacity in its clean energy industry, which is at the center of trade barriers and supply chain diversification efforts.

China has been an economic partner to the UAE and Saudi Arabia for several years -- they supply over 20% of China's crude oil imports and have been recipients of billions of dollars worth of Chinese infrastructure and other investments. Their geopolitical relationship also witnessed a massive leap in 2023 when China launched joint defense exercises with both and pulled off a détente between arch rivals Saudi Arabia and Iran. But in an era of rising multipolarity, non-alignment and hedging-based foreign policy, groupings like BRICS+ provide the glue that can keep economic relationships tight.

There is no denying that BRICS+ is a motley group with varying motives, political systems, economies and geopolitical clout, but the organization provides its members with a common discussion platform and access to markets and technologies. Beijing would appreciate this more now than ever as volatility in the Middle East seems to be re-establishing the United States' presence in the region.

China is in the vanguard of investment and production of clean energy technology, and despite geopolitical headwinds, the country is determined to strengthen its position in this sector as President Xi Jinping pursues his focus on "new productive forces" to boost the economy.

At a meeting with the Politburo of the Chinese Communist Party in early March, Xi said that China's clean energy industries have become the pillar for growth amid broader economic concerns, signaling continued investment in these sectors.

However, a critical challenge that China faces is oversupply, particularly in its solar photovoltaic and electrolyzer industries, and this is where its interests are closely aligned with the UAE and Saudi Arabia -- both of which are looking to diversify their economies by expanding solar power generation and green fuels (hydrogen, ammonia and methanol) capacity.

By the end of 2023, China's solar module production capacity was at about 861 GW. In comparison, based on the most optimistic forecast by the China Photovoltaic Industry Association, the global annual solar capacity addition will only be 587 GW in 2030.

Over January to December 2023, China's solar module prices fell by 43% from 23 cents/watt to 13 cents/watt. China's solar manufacturers have been forced to suspend production, cut jobs and delay investment plans.

The UAE and Saudi Arabia have committed to net-zero targets by 2050 and 2060, respectively.

As the host country of the UN Climate Change Conference, or COP28, in December 2023, the UAE joined a pledge to triple renewable generation capacity by 2030. But despite its ambitious targets, the country's installed solar PV capacity was merely 7 GW as of 2023, falling behind many countries.

Saudi Arabia, meanwhile, is trailing even further behind on its renewables target of installing 40 GW of solar PV modules by 2030. Despite its large land space and strong sunlight that can support renewable development, the country's total installed solar PV generation capacity stood at only 4GW as of 2023.

"The Middle East countries are key partners to China under the Belt and Road Initiative, and can now cooperate and leverage each other to develop renewable energy projects through China's integrated renewable products supply chain," said Holly Hu, principal analyst, clean energy technology, at S&P Global Commodity Insights. "Green hydrogen is another hot area of cooperation between the two. Several Chinese solar manufacturers, who have diversified into electrolyzer manufacturing, have moved to the Middle East."

In 2022, the value of China's solar PV modules exported to the UAE was $915 million, up nearly five-fold from $187 million in 2021, according to data from the China Chamber of Commerce for Import and Export of Machinery and Electronic Products, or CCCME. This fell to $395 million in 2023 owing to excessive imports in the previous year.

China's export value to Saudi Arabia for solar PV modules was only $17 million in 2021, but increased to $311 million in 2022 and $1.33 billion in 2023, CCCME's data showed.

Besides exporting solar PV products, China's state-backed construction companies have also offered integrated engineering, procurement and construction contracts to Saudi Arabia and the UAE as a way for China to leverage these emerging markets to digest its excessive supply of conventional commodities, like aluminum, iron and steel.

In April 2023, Energy China, a state-owned construction giant, announced that its EPC project in Saudi Arabia's Rabigh solar park -- a 300-MW solar PV power plant -- had successfully connected to the grid and started operation. In December 2023, on the sideline of COP28, PowerChina, another state owned construction company, announced a new EPC agreement to support Saudi Arabia in building a 1.1-GW solar PV power plant.

Saudi Arabia and the UAE also have big plans to scale up their production of green fuels, such as green hydrogen, ammonia and methanol, alongside renewables, and China's electrolyzers can be lapped up here.

By the end of 2024, China's hydrogen electrolyzer manufacturing capacity is expected to reach 40 GW, which significantly exceeds global demand of around 10 GW in 2025, according to a report by China's Hydrogen Energy Industry Promotion Association. By 2025, China's excess capacity for electrolyzer manufacturing may exceed 60 GW, the industry association warned. China regards the Middle East as a promising market for green fuel development, according to a survey by the China Hydrogen Alliance.

Saudi Arabia has announced a target to have 4 million mt/year of hydrogen production capacity by 2030, while the UAE aims to have a 25% share in the global hydrogen market by 2030. Both have assets in their well-established oil and gas industry that can be retrofitted to produce green fuels. China's state owned companies, including Sinopec, PetroChina and CNOOC, have deep relationships with these countries for developing conventional oil and gas projects, which can be leveraged in green fuel projects. It was a group of Chinese companies, including Sinopec and Longi Green Energy Technology, the world's largest solar PV manufacturer, that launched Dubai's first hydrogen refueling station during COP28.

However, that China's foray into the Middle East clean energy business is not without challenges. Companies and investors told S&P Global that they are facing a double whammy of significant technical difficulties and low prices.

"Building and maintaining a solar PV plant in the desert is never an easy thing," a solar PV project engineer said. "The equipment needs to resist strong winds and sandstorms."

If the station is to be built in a coastal area, there are problems related to high humidity and salinity, the project engineer added.

There are also polarized views about energy transition across the Middle East, given that fossil fuel industries are the pillars of their economic growth, a Chinese fund manager specializing in clean energy investments told S&P Global. Hu said that while the region is emerging as a market for China's clean energy technology, policy uncertainty, counter-party risk to project developments and high cost of capital are key challenges

This article was first published in the May 2024 issue of Commodity Insights Magazine