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US climate investment plan to challenge China's dominance in clean energy

Highlights

IRA likely to exacerbate trade frictions and intensify competition

No formal policy response from Beijing but industry wary of impact

Climate change fight shifts from collaboration to intense competition

  • Author
  • Eric Yep    Ivy Yin
  • Editor
  • Surbhi Prasad
  • Commodity
  • Agriculture Electric Power Energy Transition Metals

The Biden administration's ambitious plan to make the US a clean energy superpower is a direct challenge to China's dominance of global clean energy supply chains and is likely to exacerbate trade frictions and intensify competition in what is now viewed as a clean energy arms race.

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Washington's Inflation Reduction Act or IRA is expected to attract billions in investment across existing and future technologies in sectors such as wind and solar power generation, battery storage, electric vehicles, green hydrogen, and carbon capture.

It has already put allies like the European Union and Australia on the backfoot, but its biggest impact will be on China, which has made clean energy the cornerstone of its economic transformation plan.

For instance, China had around 70% of global market share for solar PV modules and wind turbines in 2022, according to the National Energy Administration, and more than 70% of lithium refining capacity and 50% of nickel refining capacity, S&P Global Commodity Insights data showed. It also dominates manufacturing for other clean energy products like EVs, fuel cell stacks and electrolyzers.

Banks like Credit Suisse have called the IRA a tipping point in climate action and said that "the IRA marked the most ambitious legislative action the US has ever taken on climate, which we believe will have a profound effect across industries for the next decade and beyond."

The IRA effectively pits China's low labor costs and economies of scale against America's free market economy and financial strength. Major carmakers have already announced plans to build new electric vehicle manufacturing bases in the US, many of which would otherwise have sprouted up in China.

The IRA also comes at a time when China needs overseas markets to offload the excess production capacity it has been building up, even as the West is attempting to decouple its reliance on China.

The siphon effect

Unlike Europe, which launched its "the Green Deal Industrial Plan for the Net-Zero Age" in February, Beijing has not announced any formal policy response to the IRA, and it remains unclear what its strategy will be, although experts have pointed to policies like the greening of the Belt and Road and stimulating domestic demand.

The industry has already voiced concerns and started taking countermeasures.

Earlier this month, the China Photovoltaic Industry Association (CPIA) warned local solar PV manufacturers about potential market share loss and stiff price competition at a forum. Wang Bohua, CPIA's Honorary Chairman, pointed that the IRA aims to transfer the global supply chain to the US and help boost local manufacturing.

"The IRA is going to have a 'siphon effect' that attracts all things associated with the green transition, raw materials, capitals, technologies, manufacturing capacities and of course employment. It seems that Chinese stakeholders are noticing the IRA, while a bit slower than the EU," Bixuan Wu, a lawyer specializing in international trade at law firm Hiways, said.

Some of the unanswered questions are -- how will Chinese companies respond and is the IRA big enough to dislodge them?

Wu said it is certain that Chinese solar or EV battery makers with significant US sales do not want to be left out and would even consider setting up factories in north America.

"However, given the geopolitical status quo, Chinese companies might inherently face more uncertainty than a company from a country like South Korea or Israel," he said. He cited Ford's recent collaboration with China's battery giant Contemporary Amperex Technology Co. Ltd. to build a battery factory in Michigan and China's top solar PV module manufacturer JA Solar's investment in a factory in Arizona.

"IRA's most evident impact on China is on its EV industry. Before IRA, EVs exported to the US were eligible for tax credits, but this has now become very difficult. From 2024-2025, batteries and critical minerals from China will face a significant challenge in entering the US EV market," Kevin Mo, Principal at Chinese policy think tank the Innovative Green Development Program (IGDP), said.

He said China's EV companies could establish manufacturing bases in North America but whether this strategy will work remains uncertain, as the finer details of IRA are still pending.

"Solar and wind products are also likely to be exposed to significant shocks," Mo said, adding that in the long term, the IRA will significantly impact sectors like hydrogen and energy storage.

Tougher competition

Credit Suisse said the IRA magnifies America's strategic advantages such as natural resources, infrastructure, geologic storage, technical expertise, and technology talent. This also means that sectors where China holds a strategic advantage will be tougher to crack, such as batteries.

"Multiple measures [under IRA] across the battery supply chain will provide a strong incentive to expand cell manufacturing facilities in the US, but uncertainties remain regarding whether this is significant enough to draw the wider supply chain away from China," S&P Global Commodity Insights said in a report.

Chinese firms, which have benefited from government's largesse and first-mover advantages, will have to switch to operating and surviving in a highly competitive environment, bringing them out of complacency. Experts said this will be like separating the wheat from the chaff.

Low-price competition is quenching thirst with poison, Wang Xin, Deputy Director of China's Trade Remedy and Investigation Bureau, said in a recent industry forum. "Winning the market ultimately depends on technological innovation that enhances the overall competitiveness of the industry," he added.

Beijing had recognized the need for firms to be competitive without government support in the long run, with programs such as "Made in China 2025" over 8 years ago. Earlier in February, it made another call for companies to boost the quality of their products.

IGDP's Mo said IRA benefits from being a decade-long commitment and policy certainty that enables long-term development plans, which can be good reference for China. But the IRA also reaffirms the American view that clean energy and decarbonization technologies are closely related to national security.

"Such a mindset is expected to make the climate issue more complicated in international society," Mo said, noting that climate change mitigation is no longer limited to collaboration, and China, US, and EU, as three climate leaders, will engage in intensifying competition.