Thu, May 30, 2019

Energy governance and China’s bid for global grid integration

EnergySource by Phillip Cornell

China Energy Markets & Governance Geopolitics & Energy Security

Power lines in Beijing, China (photo by keso s/Flickr).

Energy projects have always been a major part of China’s Belt and Road Initiative (BRI) infrastructure mega-plan for Eurasia. The enormity of that plan was on display at the BRI Forum last month, where an official report was released estimating that energy investments in BRI countries would add up to $27 trillion by 2050, with $7 trillion alone going to power grid construction, and over 200 million new jobs created in the process.

That report was published by the Global Energy Interconnection Development and Cooperation Organization, or GEIDCO, a young “international organization” set up by the State Grid Corporation of China (SGCC, or “State Grid”) in 2016, under the leadership of its former chief executive, to advance “Global Energy Interconnection” or GEI.

That strategic plan, to build out and then connect the power grids of Eurasia and beyond, is key to BRI’s energy component and “a personal project of Xi Jinping.” Its potential to grant China leverage over such a large economic swath highlights the role of interconnected infrastructures to distribute political power in the modern global economy. China’s advancement of GEI through established international regimes like the United Nations Framework Convention on Climate Change (UNFCCC), the UN 2030 Agenda for Sustainable Development, the Clean Energy Ministerial, the African Union, and the Gulf Cooperation Council (GCC) is a stark example of how the US retreat from the international order is surrendering American power and influence in the 21st century.

What is GEI?

GEI emerged as an international initiative in September 2015 at the UN Sustainable Development Summit, when President Xi proposed to establish “a global energy network” to meet global power demand “with clean and green sources.” Within a few months, SGCC Chairman and former President Liu Zhenya was promoting the idea of GEI at major international meetings. In February 2016 at CERAWeek in Houston, Liu emphasized the green motivations behind GEI and described it as “a roadmap for combating climate change.”

From the start, GEI was enormous in scale and made up of three components. First, an intercontinental backbone network of transmission and distribution grids; second, large energy bases in polar regions, at the equator, and on each continent to integrate distributed generation and renewable power sources; and third, a smart “comprehensive platform” that enables resource allocation and market trade.

SGCC’s plan envisioned three phases in GEI transition. In the first phase up to 2020, SGCC would promote the interconnection of national grids in various countries, including technical research, building smart grids, and accelerating the deployment of renewables. Between 2020 and 2030, countries within a continent would connect their grids and develop “clean energy bases.” In the third phase from 2030 to 2050, transcontinental grids would be linked via ultra-high voltage (UHV) “Afro-Eurasia Backbone Grids” comprised of sixty-seven key projects along 126,000 kilometers with a transmission capacity of 410 gigawatts (GW).

UHV circuits (of 800 kilovolts (kV) or more) had been developed previously in Europe, but China’s dramatic expansion of UHV since 2009 has made SGCC the technological leader in the field—largely thanks to strategic state funding under the last three five-year plans (2006-2020).

From the start, central control of such a comprehensively integrated network was an issue. Liu told Power magazine in 2016 that “the global IT network is fully interconnected, but no one controls others. Everyone just follows international rules and operation code.” GEI would thus be like the internet, “global but not controlled by a single country,” and grid operations would be guided simply by “technical standards, operation standards, and operation codes.” All that begs the question of how standards and international rules are set, as well as China’s role in international energy governance.

In March 2016, at a dedicated conference in Beijing, the GEIDCO organization was established in the presence of its new chairman, Liu Zhenya, and the UN undersecretary general for economic affairs.

The Various Rationales for Continental Interconnection

Long-distance high-voltage (LDHV) power lines are genuine enablers for the expansion of renewable energy, by linking regions of high renewable resource (like windy plains or sunny deserts) with distant demand centers, and by better balancing demand and supply between grids and regions. In that sense, continent-level grid integration, high-voltage interconnectors, and markets to facilitate power transactions are useful for achieving global climate goals and decarbonizing the energy sector. In the United States, there is major potential for high-voltage grid interconnection and upgrades to foster large-scale renewable energy build-out.

Long-distance interconnections can also facilitate efficiencies by linking big markets with different peak demand times (e.g., across time zones), or with big energy price disparities.

In poor rural environments, the expansion of power grids is also important for addressing energy access, with its multiplier effects on development and the provision of information and communications technology (ICT) services for economic connectivity. 

In China’s case, there is an economic argument rooted in its domestic development. With heavily concentrated demand along the populated coasts and traditional coal resources in more barren inland regions, long-distance energy transport has always been a source of insecurity. Bad winters that paralyzed the rail network could cause power shortages in distant cities. In the past twenty-five years, massive hydro-electric projects, imported gas, rural renewable energy farms, and efforts to urbanize the west mean that the national energy system has become increasingly interconnected with high-capacity, long-distance supply links, especially for power. SGCC itself is the second largest Fortune 500 company after Walmart, and it has taken the global lead on developing and building ultrahigh-voltage (UHV) transmission technology, recently completing a 1.1 million-volt, 3,300-kilometer line from Xinjiang. Domestic Chinese development is already on a continental scale.

Meanwhile, decades of economic growth facilitated by cheap lending through state-owned banks and enterprises led to massive industrial capacity overhangs, including in the energy sector. Beijing’s Keynesian approach to the 2009 global slowdown also meant lots of infrastructure build in the subsequent decade. As China now re-orients its economy toward consumer-led growth, it needs to develop its near-foreign markets to off-take surplus supply. Developing international grids creates demand for solar panels and digitalized distribution technologies where China excels, but also for all the consumer products and services that rely on cheap and reliable power supply—particularly in conjunction with new Chinese ICT infrastructure.

(Sometimes the sequencing is reversed. Where China flogged big hydroelectric dams in Southeast Asia, over-capacity meant that those countries needed infrastructure and facilities to sell excess power abroad—mostly to China.)

The efficiencies gained by trading power among distant markets with price disparities are real, and the “free trade” argument for GEI is certainly one employed by its proponents. However, it suffers from the same critique as other unqualified free-trade ideologies by ignoring disparities among local policies and values, whether about government subsidies, labor rights, or environmental standards. It favors state-subsidized equipment and generation, and rewards cost efficiencies from unregulated or corrupt spaces. By trading the end-product directly, “free” power trade also masks the myriad state interventions or poor conditions along the value chain. All of this favors the Chinese model, with capacity over-hangs and state-coddled energy companies looking to offload onto the world market.

But when it comes to global energy trade policy, the arguments are never purely economic. Chinese authorities recognize the potential for continental grid integration to foster regional economic and political influence. During the financing and construction phase, China reaps the leverage of other big BRI projects—dictating guarantees, lending conditions, and debt repayment while setting technical standards. Where SGCC (or smaller players like Three Gorges) acts as owner or operator, there are also possibilities for intelligence gathering or access denial. And as national and regional grids become interconnected, supranational market governance is necessary to facilitate trading, load balancing, and wider network operations. Even if local grids are independently operated, deep interconnection means that supply and demand will increasingly be matched across the super-grid, making them more interdependent. It may be managed by “international rules and operation code” as Liu insists, but those will be defined by a regional authority where China is bound to have major influence.

Technological dependence, cybersecurity, and the susceptibility of networks to backdoor access are also serious issues. The role of equipment provider Huawei in developing global 5G networks is a well-known security concern for the United States, who has pressured allies to resist. But modern power grid interconnections rely on complex supervisory control and data acquisition (SCADA) systems, which are particularly critical given the increasing emphasis on integration, use of new communication and network technologies, and access to information by more users. As entire power grids are sewn up with unified network technology from a few Chinese suppliers who answer to Beijing, the state gains power to interfere abroad. Liu has referred to GEI as “the ICBM of the power industry.”

The complexities of actually realizing GEI make its timetable overly ambitious, suggesting that it is mostly a marketing tool for selling Made in China 2025 technologies, rather than a Trojan horse. The plan has been described as “an image-building exercise to support China’s pitch for global climate leadership while strengthening China’s transmission sector and aiding its outbound expansion.”

And yet China’s accumulation of soft power through infrastructure build, trade facilitation, and influence over international regimes are linked. Like the United States in the post-war period, China understands that molding multilateral initiatives is an effective way to advance narrowly national interests without engendering resistance to outright domination. Luckily for them, the United States under Trump has been ceding the institutional field. That allows Beijing to quietly redefine international energy governance. Rather than set-up competing regimes, China has worked within existing frameworks while fostering its own institutions like the Asian Infrastructure Investment Bank (AIIB)—and more recently, GEIDCO.

Uniting on Climate Change, with Chinese Characteristics

In March 2019, GEIDCO Deputy Director Zhang Yibin boasted that since its founding three years prior, the organization had gathered 602 members from eighty-five countries and regions; signed thirty-one agreements with national governments and international organizations; and launched cooperation programs on idea dissemination, research, and resource sharing. It also set up seven regional offices and thirty-six joint offices around the world.

Its role is to market the GEI scheme in terms that are attractive to developing countries but also familiar to the West—free trade, environmental sustainability, and energy access. In its Action Plan and presentations to international fora, GEIDCO stresses that GEI is about ensuring worldwide access to electricity by 2050 and halving CO2 emissions from 1990 levels.

The UNFCCC describes GEIDCO as a non-governmental organization partner, and GEI as an implementation of the UN Sustainable Energy for All (SE4All) initiative. At last year’s COP24 in Poland, the UN said GEI was “crucial” for the realization of the Paris goals, the GEIDCO Action Plan was billed as a pathway to achieve them, and the organization put on events with names like “Energy Interconnection: Advancing Energy Transition for Sustainable Development.”

That path toward sustainable development, as outlined by GEI enthusiasts, tends to emphasize massive networks under centralized controlled management. Georg Kell, the founding director of the UN Global Compact, calls GEI “a building block towards planetary stewardship.” However, when it comes to other models of transition to low-carbon power systems, like the increasing prevalence of distributed generation and local micro-grids, GEIDCO seems less enthusiastic. At Columbia University, Mr. Liu insisted that we need “centralized large-scale clean energy” and that even localized, distributed generation should be attached to a mega-grid to aggregate surpluses for international sale and balancing.

The line is thin between GEIDCO’s mission to “serve the sustainable development of humanity” and its role in laying the groundwork for huge SGCC contracts and Chinese-led infrastructure build. For the moment, the organization is focusing on expanding research and information internationally to promote various green technologies that can justify (and prosper by) the UHV technologies that its corporate backers are selling—and so with elements of an industry shill “think tank.” But Liu also chairs the China Electricity Council (an official group reporting to China’s State Council), so GEIDCO also reflects official strategy, especially in light of President Xi’s personal interest. As the “first international organization in energy initiated by China,” GEIDCO is billed as a “driving force for the transition of global energy governance.” It may be that international energy governance is evolving to facilitate a few dominant strategic players in more efficient but centrally managed mega-networks—in which case the allocation of power within that governance structure becomes all the more crucial.

None of this means that GEIDCO is unpopular. As with other elements of the BRI, countries eager for Chinese projects have been enthusiastic about GEI. In September 2018, GEIDCO and the Guinean government initiated the establishment of the African Energy Interconnection Sustainable Development Alliance. African nations have responded positively, with over ten countries promising to join the federation. GEIDCO has “actively worked on grid interconnections of China-ROK-Japan, China-Myanmar-Bangladesh and the Gulf Region with East Africa and South Asia, as well as projects such as hydropower development and transmission in the lower reaches of the Congo River.”

As with other large infrastructure lend-and-build proposals, customers will have to weigh the short-term benefits of faster and cheaper development with the long-term costs of foreign obligations, technology dependence, and influence. The same is true when it comes to selling off control of existing assets.

Connecting Global Chinese Assets: Transmission Equity Strategy

Proponents of GEI stress that “China’s push for interconnectivity does not have to mean that Chinese companies own or operate the grid.” That may be true, but Chinese companies are in fact aggressively seeking stakes in various foreign grids, while also pushing to link them up. Since 2010, SGCC has embarked on a major program to gain equity in grid operators around the world, particularly in Europe and Africa.

These large Chinese companies, of course, enjoy access to a great deal of state support, and the financing to win bids for power assets overseas is underwritten by the China Development Bank and the Export-Import Bank of China.

In Europe, progressive privatization and market liberalization since the 1990s means that smaller, private players are susceptible to foreign acquisition. While Chinese bids were fended off in the larger countries amidst security and competition concerns, China already has a significant presence in southern Europe. In 2012, SGCC became the biggest shareholder in the Portuguese national grid, while Three Gorges is seeking to increase its stake in EDP, Portugal’s largest company with generation and distribution assets at home and in Spain and Brazil. Chinese state companies also own significant grid assets in Italy and Greece.

This raises the question of whether ENTSO-E, the European institution which brings together national transmission operators, should be elevated from a forum to a real European regulator (akin to the American Federal Energy Regulatory Commission) with the authority to control foreign acquisition of power assets. Here is an example where international market liberalization absent sufficient supra-national governance structures can expose the vulnerabilities of existing multilateral trade regimes—and serve as a guide for properly institutionalizing future market integration.

Conclusion

From a technical perspective, continental grid and market integration can have enormous positive impacts on cost efficiencies, greater renewable generation, energy access, and trade.

At the same time, energy is closely linked with sovereignty and security for a reason. Particularly as the global economy becomes more electrified and networked, electricity transmission and distribution networks “are key elements of a state’s security and defense. They constitute a vital infrastructure for the economy well as for the communications of a country.” Power grids are common targets for cyberattack because they underpin modern states and societies.

Where those markets are integrated, for example on a regional basis, countries are hesitant to surrender sovereignty unless they are convinced that multilateral governing institutions are strong, equitable, and representative. The EU has been the most successful after decades of trust-building, but even so it is unclear that common institutions can provide the protection against foreign or “market” control that national institutions once did. Within the Association of Southeast Asian Nations (ASEAN), another group with similar interests and a strong institutional track-record, concerns about sovereign control over the power grid continue to hinder integration.

If China wants to facilitate massive continental and even global power grid integration, it is right to focus on common governance. But it will either have to convince participants that governance is not just window dressing for Chinese dominance, or it will have to downplay the fact until infrastructure on the ground and piecemeal equity stakes deliver de-facto integration first.

Phillip Cornell is a senior fellow with the Atlantic Council Global Energy Center.