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Anders Hove is a Senior Research Fellow at the Oxford Institute for Energy Studies China Energy Research Programme. Previously a non-resident fellow at the Columbia University Center on Global Energy Policy, he worked in Beijing for 12 years, most recently as Project Director for the Sino-German Energy Transition project at GIZ, a German federal enterprise providing services in international development cooperation. In this lightly edited Q&A, we discussed whether the war in Ukraine has affected China’s energy security, coal’s changing role in China’s energy mix, and how China became a leader in renewable energy.

Q: Since Russia’s invasion of Ukraine, China has increased imports of Russian gas and oil. How has that impacted its energy security?

A: It’s important to understand that oil and gas are a very small share of Chinese energy consumption. In China, oil is not primarily used for transport; it goes mostly to industry. That affects the degree to which oil prices or geopolitical events impact on the daily life of individuals in China. 

Gas is meanwhile an incredibly small part of the energy picture. Compared to oil, which is still essential to the Chinese economy, only certain provinces and certain industries use gas. Only 3 percent of the country’s electric power comes from gas: You could eliminate it completely and replace it with existing coal-fired assets. It is also not cheap. One expert has described gas as a “luxury perfume”.

Additionally, China is a regional market. That is surprising to many people because, in the last 20 years, the liquefied natural gas market has become a global market. But when LNG gets to China, the national pipeline infrastructure can’t send it on easily, so it stays in the province where it arrives. The same goes for pipeline gas: if it arrives in Dongbei or Inner Mongolia or Xinjiang, there are pipelines that can carry it across the country. But in practice, it makes more sense to use it where it enters China: in certain industries, to some extent in LNG trucks, and for heating.

Yet despite all this, any changes to the composition of China’s energy imports have a big impact on specific industries. The gas industry worldwide is affected [if] China increases its dependence on gas from Russia, and that hurts global LNG markets; or vice versa. 

It is always a paradox: China’s demand for something can be growing strongly enough to represent the biggest source of demand growth worldwide for that thing; and yet it remains a small share of the domestic Chinese market itself. That’s the situation for gas. 

Did Russia’s invasion of Ukraine lead to a greater focus on energy security in China? 

Energy security really became a top priority for the central government in 2019. That is not only way before the war in Ukraine, but also prior to President Xi Jinping’s announcement in 2020 of China’s dual carbon goals of peak CO2 emissions by 2030 and carbon neutrality by 2060. The focus on energy security has been rising steadily since 2019, especially after the power outages in 2021 that had nothing to do with any international geopolitical situation. They were purely domestic issues. 

When we talk about energy security, in China it means something quite different: the focus is often on the reliability of the power sector. That emphasis on energy security has been one of the factors contributing towards a large amount of additional coal-fired power capacity being set up, because provinces want to try to avoid any kind of power unreliability issue. A lot of times issues that have occurred have been more related to pricing, or the design of China’s power market and long term contracts, not due to any physical shortage of oil and gas, and nothing to do with geopolitics.

What is the role of coal in China’s energy mix, and how is that changing? 

Coal has been called the “ballast stone” of the Chinese economy and energy system: it enables the ship to stabilize itself. In other words, it is not necessarily baseload power that has to stay on all the time, but its role should shift to become more of a support and backup for renewable energy. 

It is still a major element of China’s energy security, especially at the provincial level, because of the lack of a national spot market [for buying and selling electricity which is delivered immediately]. There is now an interprovincial spot market and many provinces have pilot spot markets internally, but these markets are low-volume, so their impact is minimal. For this reason, the provinces tend not to want to trade power between each other. They would prefer to make use of their underutilized in-province assets and even construct new coal plants so that they do not need to import power, even if they could do so more cheaply. Most provinces therefore have a dramatic overcapacity of coal power. 

[Note: According to Global Energy Monitor, China began construction of 70 gigawatts of new coal-fired power stations in 2023, almost four times more than in 2019. The rest of the world combined began construction of 4 gigawatts.]

Renewables should, even just at their current rate of growth, meet all of China’s electric power demand growth in the future. The worry about the new coal plants provinces are building, and the consequent overcapacity, is that they will make the energy transition in China more expensive. 

It also could mean that in the future, China will return to the situation of 2016 and before, when the power companies had some incentive to curtail renewable energy output so that they could earn more money from their coal plants. The new capacity payment [to coal plants], which the government decided on last year, is designed to reduce the incentive the companies have to in effect curtail renewables in favor of coal plants so they can make money to pay back their loans. But it doesn’t completely eliminate that incentive.

On the topic of renewables, how much energy security can intermittent sources like wind and solar provide?

That is a huge question; I would not claim to have the final answer. In the late 1990s, people would tell me that power systems really couldn’t accept any more than maybe 1-3 percent of wind and solar combined, because they are intermittent. But the UK now is at 45 percent reliance on just wind; Germany is even higher than that for wind plus solar. Of course, these are smaller geographical areas than the whole of China, and they are connected to some extent. 

Germany is a good analogy for China because they have coal, not gas power. They just made their coal power more flexible and introduced spot power markets so that there’s an incentive for companies to turn off their coal power plants when the power price is low [because there is ample renewable energy] and to turn them on when the price is high. 

A lot of people have a mistaken stereotype that cheap energy and low labor prices are major factors in China’s success in renewables… It is really a combination of the country’s central policy focus and strong domestic demand creating internal competition among Chinese players that really helps keep them at the technology frontier.

Right now, China is not so willing to allow fluctuations in power prices of this nature, and remains focused more on long-term power contracts — which tend to resemble, unfortunately, the old type of coal-based power system, as opposed to the new type of power system where renewables are central. 

But as to the future, in general, proponents of renewable energy do not envision a power sector which relies 100 percent on renewables. The assumption is the power sector will not be just wind, solar, plus storage; the models do have a role for other flexible power sources, as well as for things like nuclear power to play a big role in China’s future.

Is there resistance to adopting clean energy in China? 

There are aspects of the system which prevent creative destruction in a low-carbon direction. Most companies are highly incentivized to invest their profits back into their existing business, as opposed to investing in new businesses that might reduce the existing business’ profits. An example is an incumbent automaker being reluctant to invest in or design attractive electric vehicles that could reduce the profits or sales of its incumbent technology. 

But it also applies with large energy companies being reluctant to invest in solar energy because of low profit margins, whereas their primary investment areas of oil and gas have the potential for large profits. Even if the solar business is economically efficient and attractive, large players may prefer not to put their capital into those fields. In China, even though there aren’t shareholders pressing companies to stay in their area of core competence, energy companies may be staffed by people who prefer to continue working in their own area of competence rather than invest in new areas. 

So wind and solar have had to overcome what’s called the “liability of newness” in order for both the private sector, and the big five electric power companies that ultimately are building and own the country’s wind and solar power plants, to invest in them. Still today, the coal companies do constitute a lobby and a political and economic force in China that works against the integration of clean energy. 

Interestingly, in the EV space, this hasn’t happened. In Europe and the United States, there has been a push back against EV adoption from incumbent automobile manufacturers. That does not seem to be the case in China. There’s been a conversion to the new technology that has greatly exceeded government targets. I can’t fully explain why the incumbent car companies haven’t pushed back more against this, other than the fact that they received the signal from the beginning from Xi Jinping that China should become a strong car making country, and that EVs offered the industry the potential to leapfrog its external competition. It also seems obvious that, with batteries being so manufacturing-intensive, Chinese companies thought: “This is our forte. We should be able to do this better than anybody. If we don’t, other companies are going to eat our lunch.”

China is something of a superpower when it comes to green tech. Is that lead unassailable? 

Yes and no. Interestingly, in the field of batteries and electric vehicles, if you look at patents not just by analyzing the number a country produces but also by analyzing how often they’re cited in academic literature, China is not leading on battery technology right now. Now, I predict that it will eventually lead, because it is likely to follow the same path as it did in solar manufacturing. The most important part of scaling up and reducing costs is having such high domestic demand that it forces you to compete on price. You then end up learning things about how to design the right tools that could ultimately be patented, and lead you to have real intellectual property. 

A lot of people have a mistaken stereotype that cheap energy and low labor prices are major factors in China’s success in renewables. They’re not really. It is really a combination of the country’s central policy focus and strong domestic demand creating internal competition among Chinese players that really helps keep them at the technology frontier.

But the lead is not totally unassailable because manufacturing-intensive technologies in clean energy have fairly low barriers to entry: they rely more on knowhow than patented intellectual property. Clean energy technologies are relatively small and modular, leading to economies of scale, which itself is a barrier to entry, but in other respects the lower barriers to entry and relative speed of setting up production would seem to imply other regions could pursue some of the same catch-up policies that China did a decade or more ago. But it will need a large and growing domestic market, and partnership with leading Chinese players to plant the seeds and enable the learning-by-doing essential for manufacturing-intensive technologies.

…China’s leaders have seen that green industrial policy pays economic rewards. Realistically, leaders in the West may see Trump’s victory as a sign that green industrial policy does not pay political dividends… If green industrial policy is not seen as politically beneficial, that could also hinder the transition in a major way.

As a final point, if you look at whether other countries can catch up, a lot of countries, when they answer, they think: “I have this famous company in my country, I wonder if it could catch up?” But in China, a lot of the innovative companies begin as startups. In the United States and Europe, other than Tesla, it is all relying on some incumbent company.

Given the importance of coal in China’s energy mix, are the EVs, batteries etc., that it produces net beneficial in terms of fighting climate change?

I did a study with Tsinghua University on the life cycle carbon emissions for electric vehicles in China. Each part of China has a different amount of coal in its electric power mix. I wanted to ask the question: if we look at each region, and then we also consider where in China batteries are manufactured, what is the improvement in emissions due to EV adoption? Even with the present power mix in China, it is just overwhelming how much more efficient EVs are, even if you charge them “from coal”. The power sector gets cleaner over time, so if you look over the lifetime of that vehicle, it is even more beneficial. People are not necessarily aware: only about two-thirds of emissions from gasoline cars comes out of the exhaust. The rest is upstream emissions in extraction, refining and transportation.

For batteries, you have to consider the emissions from making them which are also significant. But if you look at some of the more authoritative research on this topic, wind and solar have extremely positive energy returns, meaning they go on to generate far more energy than you put in. So it does not have to be manufactured with 100 percent renewable energy to have a positive overall effect.

President Donald Trump has imposed an extra 10 percent tariff on all Chinese imports. What are the implications for China’s renewable energy manufacturers?

The U.S. accounts for only 7 percent of the global solar market, and it already has some tariffs on solar, EVs, and other clean energy imports from China. Basically, the U.S. market is a footnote for Chinese players. 

Tariffs are not the only policy that Trump has said that he would like to change regarding clean energy. The new administration is working on, for example, eliminating the subsidy for EVs, reducing IRA subsidies for new technologies, and reducing spending on innovation research and development in these fields. If all these things went away, it would certainly reduce U.S. innovation as a whole. If the domestic market for these technologies goes down dramatically, that would also impact on the sort of innovation that would enable the U.S. renewable sector to become more economic in the future. It would also inhibit startups, innovators and their investors from considering this as an attractive area. Renewable industries being so uncertain is a confidence killer.

Just as an aside here: I think that China’s leaders have seen that green industrial policy pays economic rewards. Realistically, leaders in the West may see Trump’s victory as a sign that green industrial policy does not pay political dividends, because the benefits take so long, or because of the culture war, for whatever reason. If green industrial policy is not seen as politically beneficial, that could also hinder the transition in a major way.

Some Chinese analysts talk about Trump’s reelection as an opportunity for China to extend its lead in green technologies. What could that look like?

It looks like more of what we’re already seeing. China is dominating these fields, not just from the perspective of manufacturing, but also leading technologically to the extent that if any other company wants to get into these fields now, they would probably have to license a Chinese technology, or get a significant part of their upstream supply of parts, tools, and equipment from China. A new manufacturing line for making batteries would have to get a significant part of that from China, and they might even need to get Chinese companies to set up production near their own location of production. 

For example, CATL [a Chinese battery maker] is starting factories in Europe and the United States. That’s not just to get the technology, but also to make things more efficient, [to avoid them being] put on a ship and sent around the world. It will be efficient for solar, wind, batteries, EVs, to be made in many parts of the world. 

A big part of the efficiency of innovation in China is driven by this “learning by doing” that takes place in a local area. We’re seeing a little bit of that in Europe, with some of it being led by Chinese companies: CATL announced this summer they were going to invest in the suppliers of battery parts in Europe. They are trying to develop a battery part cluster in Europe, because it is not efficient to import all these parts from China. It is not just tariff evasion; other companies, like solar companies, see a cost-benefit from shoring production outside of China. 

The EU recently announced that they might require recipients of certain types of subsidies and benefits to show that they either licensed the technology, or transferred a technology from China, if they’re to receive the benefits. Those are policies that really directly use the Chinese playbook. The Chinese government never relied on tariffs as its primary development strategy. Domestic content requirements, requirements for technology transfer for the auto industry, joint venture requirements, those types of things were protective industrial policies that China used, and continues to use now, to not just obtain access to technology, but to drive innovation and to essentially capture a leadership position. The tariffs alone are unlikely to help, and China’s leadership position in these fields is likely to continue.

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