New Energy: Security Issues Amid Green Transition and Energy Crisis

Abstract

Background: Amid the trend of deglobalization, the global energy industry should ensure the security of energy supply while enhancing efficiency. The world is shifting to new energy from fossil fuels. Unlike fossil fuels, of which supplies are limited, new energy comes from inexhaustible resources and depends upon the manufacturing of equipment. As a result, the global energy industry is shifting its focus to optimizing energy equipment manufacturing from simple resource consumption. Against such a background, new energy equipment manufacturing plays a more crucial role in energy security issues.

Security risks facing China’s new energy industry chain: We think the vertical risks in China’s new energy industry chain are generally manageable as the industry chain is comprehensive, with a high degree of vertical integration. Some raw and auxiliary material segments may be subject to constraints from overseas countries in terms of resources, technologies, and patents. For these segments, we expect related companies to reduce risks by upgrading technologies or developing alternative materials. Compared with vertical risks, we think that horizontal risks need more attention.

In 2021, China exported 55% and 20% of its photovoltaic (PV) and lithium-ion battery (LiB) products to overseas markets. However, with the trend of deglobalization, some countries have repeatedly imposed tariffs on China's new energy products to raise China’s trading costs, and have increased subsidies to local new energy industries after assessing the vertical risks their own industry chains might face. This may convert the supply–demand mismatch in China’s new energy industry chain into horizontal risks.

Solutions to mitigate the risks: Mature capacity is moving to regions with lower production and trading costs driven by market competition. We expect Chinese companies to move their mature capacity to Southeast Asia and maintain the competitive advantages of their mature capacity in the global new energy industry chain. In addition, we suggest that domestic companies maintain their leading positions and strengthen the competitive advantages of their advanced new energy technologies via incremental and radical innovations. In our opinion, the development and success of China’s new energy industry chain might be attributed to related companies’ cost and technological advantages amid policy tailwinds and economies of scale. Therefore, tapping domestic demand, breaking through the bottlenecks that restrict the growth of domestic demand, and enhancing China's position as the world’s largest new energy market are crucial to the new energy industry chain.

We expect the government to launch policies to optimize the trading and business environment required for the transfer of mature production capacity and to increase funds for skilled personnel required for the upgrading of advanced technologies in China. We also recommend policy support for the development of power infrastructure facilities and power consumption facilities as the development of the infrastructure could boost end-market demand. In addition, the government could also step up efforts to mitigate vertical and horizontal risks facing China’s new energy industry chain.

Authors of this chapter: ZENG Tao, MIAO Yufei, LIU Shuo, MA Yan, WANG Yingdong, QU Haoyuan, JI Feng, BAI Lu, JIANG Peng, ZHU Zun, DU Yizhen, SHI Yuqi, XU Han. Translator: WANG Xuefeng. Editors: Kenneth HO, Jonathan Barlow, QU Haoyuan, LIU Xinran.

13.1 The Overall Context and Security Issues Facing China’s New Energy Industry Chain

13.1.1 Security Issues Amid Green Transition and Energy Crisis

Energy security is closely related to social progress and economic development. The Russia-Ukraine conflict that began in 2022 reveals the European energy industry’s overreliance on a single energy supplier and related security problems. In the EU, natural gas accounts for 20% of primary energy consumption (Eurostat data). However, 40% of the natural gas consumed by Europe was imported from Russia in 2021 (Eurostat data). Due to the Russia-Ukraine conflict, the monthly average Dutch TTF natural gas price over January–September 2022 increased by 136%, resulting in energy and electricity cost spikes in Europe. Over January–September 2022, wholesale electricity prices in European countries increased by 36–85%, while residential electricity rates increased by 32%. The energy crisis has significantly impacted Europe’s economy and livelihoods, and has also sounded the alarm bell over energy security for countries around the world. At present, governments of many countries are calling for energy independence.

Amid the green transition trend, new energy is replacing traditional energy as a means to safeguard energy security. Many countries have stepped up efforts towards green transformation since 2020, expecting to drive their economic recovery. Europe, China, Japan, and South Korea have announced their goals to achieve carbon neutrality. We expect growth in LiB and PV demand to continue to accelerate in the next decade. The International Energy Agency (IEA) and China Photovoltaic Industry Association (CPIA) estimate that global LiB and PV demand will grow at CAGRs of 26.0% and 14.9% over 2021–2025 (Fig. 13.1). Against the backdrop of global green transition, we expect solar power, wind power, LiB, etc. to replace traditional energy in fields of electricity and transportation. The shift to new energy as the main sources of energy also reflects the current crucial role of new energy in energy security issues.

Fig. 13.1

Source IEA, CPIA, CICC Research

LiB and PV demand forecasts.

Traditional energy is limited and exhaustible. A country’s supply of fossil fuels is limited by its resource reserves, ore grades, as well as difficulty of extraction. Fossil fuel resources cannot move to other places once they are formed. In contrast, new energy sources such as solar, wind, and LiB are inexhaustible. The supply of new energy is determined by costs of factors of production, economies of scale, expertise and technology accumulation, and supporting facilities, and equipment manufacturing capacity can be transferred. In our opinion, new energy provides countries around the world with more “equal” opportunities to address energy security and energy independence.

Globalization enables China to trade its high-quality and low-cost new energy products with overseas countries with few constraints, and to establish a leading position in the global new energy supply system. However, there is a trend towards deglobalization at present, and the impact of the Russia-Ukraine conflict on Europe’s energy system has aroused concerns among other countries about their reliance on external new energy supply (including new energy imported from China). Therefore, the security of China’s new energy industry chain has become a hot topic.

13.1.2 Vertical Risks Controllable, Deglobalization Exacerbates Horizontal Risks

In 2021, the annual output value of China’s PV, LiB, and wind power manufacturing segments approached Rmb750bn, Rmb600bn, and Rmb200bn,¹ with the proportion of exports at around 55%, 20%, and 5% based on our estimation. From the perspective of output value and export dependence, PV and LiB are the two segments in the industry chain most likely to be affected by security issues in the new energy manufacturing industry. Our analysis below focuses on the two segments.

The “three-step” development strategy has facilitated the rapid development of China’s new energy industry chain in the past 15 years (Fig. 13.2). First step: During the 11th Five-Year Plan (FYP) period (2006–2010), global production capacity of some energy-consumable manufacturing segments (e.g., anode material graphitization for LiBs) and processing segments (e.g., PV cell modules) was relocated to China given its labor advantages and relatively low electricity costs.

Fig. 13.2

Note (1) The proportion of China’s LiB in the global production in 2010 and before is calculated based on the number of batteries released by Wind, and the proportion after 2010 is calculated based on data from China Lithium Battery Industry Development Index (Suining Index) White Paper; (2) The dotted line represents China’s market share of supply and the solid line represents China’s share of demand; (3) Exposure to supply–demand mismatch =China’s share of supply—China’s share of demand. Source Wind, BNEF, CPCA, CAAM, NEA, China Lithium Battery Industry Development Index (Suining Index) White Paper, GGII, MIIT, CICC Research

Localization rate in China’s new energy industry chain continued to increase in the past 15 years amid policy tailwinds.

Second step: During the 12th FYP period (2011–2015), China took the lead in reducing the “green premium,” which is the additional cost of using new energy over traditional energy, by providing consumption subsidies. The end market for new energy in China expanded rapidly, creating economies of scale in the manufacturing industry. China also accelerated the speed of cost reduction in the industry chain by encouraging “learning by doing”, and enhanced its cost advantages in production.

Third step: During the 13th FYP period (2016–2020), the YoY decline in government subsidies catalyzed companies’ technological upgrades and cost reduction. In addition, the government set higher goals to encourage companies to improve technologies. As a result, the industry chain entered a high-quality development stage, and the growth momentum of China's LiB and PV segments shifted from production capacity to a focus on R&D.

The “learning by doing” in the new energy manufacturing industry chain and large electricity and transportation markets maximize the effect of the scale-expansion-centered industrial policies and help China create cost and technological advantages. The new energy industry is a typical learning-by-doing industry, which needs substantial demand to support companies’ R&D successes and failures. China has large electricity and transportation markets, and has boosted PV and LiB demand by providing consumption subsidies, further expanding the room for new energy companies’ trial and error.

Looking at 2017–2022, we note rapid growth in domestic demand and frequent rollout of core technologies, including nickel-rich and ternary battery technologies, cell-to-pack (CTP)/4680 (46 mm in diameter and 80 mm tall) battery technologies, ultra-thin copper foil & composite copper foil technologies, and lithium manganese iron phosphate technologies in the LiB segment. In the PV segment, the frequent rollout of core technologies – including Czochralski method, diamond wire cutting technology, and passivated emitter rear cell (PERC) technology – and the growth of domestic demand were concentrated in 2015–2018.

China’s new energy manufacturing industry chain has a high degree of vertical integration. Therefore, except for a few segments, the overall industry chain may face limited vertical import dependence risk. Segments that may still face vertical risks include: (1) Lithium carbonate metal for LiBs and quartz grains for PV quartz crucibles. China relies on imports due to the uneven geographical distribution of related raw materials. (2) Ultra-fine and high-purity materials such as high-purity carbon black conductive agents, mesh cloths (PV battery consumable), and silver powder (OV battery auxiliary material). Chinese companies face high technological barriers in these segments. (3) Lithium iron phosphate (LFP) batteries and monocrystalline solar batteries. In these segments, overseas companies have registered patents for the underlying structure of batteries.

The new energy manufacturing industry chain in China is stepping up efforts to achieve import substitution in components segments. Related companies are developing alternative products or upgrading technology roadmaps. For example, domestic companies are developing carbon nanotubes to reduce reliance on imported carbon black conductive agents and are developing sodium-ion batteries to cope with the shortage of lithium carbonate. As for patent-related problems, we believe that the constraints will ease as product structure upgrades and patents expire.

Although we think that the vertical risks facing China’s new energy industry chain are manageable, the green transition and the rise of deglobalization are exacerbating horizontal risks. China’s new energy industry chain has been exposed to supply-demand mismatch risks. For the LiB segment, the exposure has been standing at around 20% since 2014. For the PV segment, the exposure remains above 30%. (Fig. 13.3, Fig. 13.4).

Fig. 13.3

Note (1) The localization rate in segments marked with red stars is low, and these segments are still facing some vertical risks; (2) The percentage of upstream resources in the figure reflects countries’ global share by resource reserves in 2021. The percentage of the rest of upstream resources and midstream resources are countries’ global share by national production capacity in 2021. The number in the white box is the ratio between current segment’s value and the overall ternary battery pack’s value, and the number in the gray box is the GM of this segment in 2021 (we only calculate data of ternary batteries in the battery manufacturing segment). Downstream demand forecast is based on the installed battery capacity data (unit: GWh) predicted by IEA according to different countries’ policies for alternative-fuel vehicles. Source America's Strategy to Secure the Supply Chain for a Robust Clean Energy Transition by U.S. DOE, 100-Day Reviews under Executive Order 14,017 of the US, USGS, EVTank, IEA, CICC Research

Qualitative and quantitative analysis on the LiB industry chain.

Fig. 13.4

Note The localization rate in segments marked with red five-pointed stars is low, and these segments are still facing some vertical risks. Source CPIA, BNEF, Solarzoom, CICC Research

Qualitative and quantitative analysis on the PV industry chain.

The growth of LiB and PV demand will likely accelerate amid the global green transition. This may create growth opportunities for the new energy industry, but will also inevitably increase the industry chain’s exposure to horizontal risks. Supply-demand mismatch is a persistent problem challenging China’s new energy industry chain. In the past, globalization enabled China to export its LiB and PV products at relatively low trading costs; therefore, horizontal risks did not materialize.

However, given the trend of deglobalization, overseas countries have reexamined their dependence on China’s new energy industry chain and have started to take various measures to improve their local capacity and reduce dependence on Chinese imports. They continue to increase subsidies for local new energy industry chains and impose tariffs on new energy products imported from China to push up China’s trading costs. In addition, they call for raw material traceability and tracking of a carbon footprint, and require downstream supporting facilities, which will likely increase China’s implicit trading costs. We review some policy changes in major countries below.

US: In recent years, the US has continued to place tariffs on LiB and PV products from the Chinese mainland. In addition to planned punitive tariffs on overseas production capacity of Chinese companies, the US government has restricted the origin of raw materials of imported products. In addition, the Biden government signed the Inflation Reduction Act of 2022, proposing to provide a high proportion of cash subsidies (in the first five years) or tax preferential subsidies for local manufactured LiB and PV products. We estimate that the subsidies can cover 30–50% of the end-market cost of PV and 50–70% of the end-market cost of LiBs, and this will significantly reduce the cost of local new energy manufacturers’ production capacity.

EU: In September 2022, the EU issued a draft plan proposing to review the origin of raw materials of imported products according to which it would increase the difficulty of exporting new energy products from China after 24 months, and called for building local LiB and PV manufacturing capacity. It also made its intention of building a “carbon border” clear, forcing Chinese companies to completely transform the production, supply, and marketing systems to meet the EU’s requirements.

Select emerging markets: India tends to exclude Chinese PV module products from the Indian market by raising basic import tariffs and issuing a “white list” of model and module suppliers. Indonesia has abundant nickel resources, and it will likely impose tariffs on nickel product exports to increase costs of direct exports, expecting to support the development of its local industry chains.

13.2 Mitigating Horizontal Risks by Moving Mature Production Capacity to Overseas Markets and Developing Advanced Technologies

We suggest that chinese companies move mature production capacity to overseas markets and develop advanced technologies in China given the current risks facing China’s new energy industry chain.

13.2.1 Mature Capacity: Relocating Production to Southeast Asia, Europe, and the US Driven by Rising Trading Costs

According to the product life cycle theory, a product often undergoes the stages of innovation, growth, maturity, and decline during its lifetime. Industrial transfer often occurs at the maturity stage (Fig. 13.5). From 2000 to 2010, consumer batteries from Japanese and South Korean companies and polycrystalline PV modules manufactured in Europe or the US, which had been developed and iterated for several years, gradually began to mature and have laid a foundation for technological development. Therefore, LiB and PV capacity moved to China as China had lower production and trading costs on the back of its advantages in labor, electricity, land, and equipment.

Fig. 13.5

Source Salvatore (1995),Footnote

Salvatore, Dominick. International Economics. Printice-Hall Inc., 1995.

CICC Research

Product life cycle.

According to our calculation, the LiB manufacturing cost (excluding raw material costs) in China was only around 25–55% of that in Europe, the US, Japan, and South Korea, and the PV module manufacturing cost (excluding raw material costs) in China was only around 42–80% of that in Europe, the US, and India. Due to the relatively low manufacturing costs and the low trading costs amid globalization, LiB and PV capacity transferred to China in 5–10 years, and the industry chains of related upstream materials and auxiliary materials also moved to China after 2015.

At present, liquid LiBs and mono PERC PV modules have entered the maturity stage in China, and the trend of deglobalization is pushing up trading costs of Chinese products. Against this backdrop, new energy product manufacturers in China have chosen to move the industry chain to regions outside China. We share our projections below for Chinese companies that adopt the transfer model for mature capacity (Fig. 13.6).

Fig. 13.6

Source Congress.gov, USITC, European Commission, CICC Research

Estimated transfer model of LiB and PV industry chains.

Based on current US tariff and subsidy policies, we calculate that from 2023, the theoretical cost of Chinese LiB and PV products exported to the US will be more than 100% higher than the theoretical cost of local LiB and PV product manufacturers in the US. Given the US Congressional Budget Office’s forecast of total subsidies for the local manufacturing industry under the US Inflation Reduction Act of 2022, we calculate that the total amount of its budget targeting PV subsidies corresponds to about 20% of the next 10 years of local demand in the US, or 50% of the expected demand in 2025. Its budget targeting LiB subsidies may cover less than 10% of the next 10 years of local demand in the US. However, we believe that more than 10% of the new energy industry chain will be moved to the US. This means that there will be more production capacity competing for US government subsidies. The long-term direction of relevant policies is not clear at present. If the lucrative subsidies continue, we believe that the US could successfully increase its proportion of local capacity in LiB supply.

The European market has not been affected by large amounts of subsidies or import tariffs. However, downstream of the LiBs in Europe has higher requirements for coordination along the industry chain and local supporting facilities. In addition, EU regulations on batteries and waste batteries and its deal on carbon border tariffs may increase implicit trading costs, driving the LiB industry chain to shift to Europe to support local demand. We estimate that the LiB self-sufficiency ratio in Europe will exceed 50% in 2025. As cost is at the core of the PV industry, Chinese companies at present do not plan to move their PV capacity directly to Europe. In the long term, such a move may depend on whether Europe will implement its raw material traceability proposal and the actual effect of this regulation.

Production costs of PV cells and modules in Southeast Asian countries are only about 5% higher than those in China, and there are currently no Sect. 301 tariffs or anti-dumping and anti-subsidy duties on PV products exported to the US from Southeast Asia (PV modules that are vertically integrated in Southeast Asia and contain zero or few raw and auxiliary materials from China may be exempt from the potential anti-circumvention investigation). Countries with rich nickel resources, such as Indonesia, will likely impose tariffs on the exports of nickel products in the future. We expect Chinese companies to build precursor or cathode manufacturing factories in Indonesia. In our opinion, the scale of the new energy industry chain in Southeast Asia will likely expand further to meet the needs of Europe and the US.

13.2.2 Advanced Production Capacity: Upgrading Technologies to Build Advantages Over Mature Capacity Overseas

China’s advantages in labor costs and electricity prices may weaken as the country heads for new stage of development. Labor: Due to the aging population and the improved educational level of the population, the cheap labor once readily available for China’s manufacturing industry is shrinking. The average salary of workers in China’s manufacturing industry increased by 18% in 2019–2021.³ By comparison, the average salary of workers in the manufacturing industry of Vietnam, Myanmar, and the Philippines only increased by 8%, 5%, and 3%, while that in Malaysia remained the same and Thailand fell 17% in the same period.⁴

Electricity rates: The regulations on prices of energy for industrial and commercial users in China have been loosening since 2021. As a result, ordinary electricity prices for industrial and commercial users in key provinces in China have increased by 10–20%.⁵ In our opinion, Chinese companies must step up their technological innovation to maintain their leading positions in the global new energy industry chain and build stronger competitive advantages over mature capacity overseas. We think there are two key strategies through which China’s LiB and PV industries can develop advanced technologies.

First, incremental innovation. According to the theory of Induced Technical Change (ITC), innovation in the energy industry is to a degree induced by changes in relative prices of production factors. As relative prices of production factors change, the energy industry will shift to cheaper materials. Therefore, we believe that current new energy-based manufacturing processes with lower energy consumption and higher levels of automation will likely attract more attention and gain larger investment (e.g., box furnaces for LiB anode material graphitization and fluidized bed reactor technology for the PV silicon material segment). Second, radical innovation. Next-generation technologies, including solid state LiB technology and perovskite solar cell technology, are less compatible with the mature liquid LiB and crystalline silicon PV cell industry chains and have a disruptive impact on the existing industry chains. At present, China outperforms its overseas rivals in next-generation technologies.

13.3 Solutions to Horizontal Risks: Breaking Constraints, Tapping Domestic Demand

In addition to moving mature capacity outside China and developing advanced technologies, tapping domestic end-market demand for new energy in China is also an important way to reduce horizontal risks facing the manufacturing industry chain. As a result, the energy industry needs to watch out for constraints that potentially limit the growth of domestic new energy demand.

13.3.1 Infrastructure is the Most Critical Factor Deciding the Upper Limit of Mid-To-Long-Term Demand Growth

LiB: The increase in the penetration rate and ownership of passenger alternative-fuel vehicles (AFVs) in China has led to demand for public charging stations. The expansion of public charging infrastructure is crucial to removing consumers’ range anxiety and encouraging purchases of AFVs. At present, the insufficient power grid hosting capacity and peak shaving capacity are two major constraints on the infrastructure side, impeding large-scale access to charging facilities and affecting charging convenience and efficiency. (Fig. 13.7).

Fig. 13.7

Source CICC Research

Weak charging infrastructure leads to range anxiety.

PV: By 2021, the proportion of new energy in total power generation was 11.7% in China, vs. more than 20% in Europe.⁶ However, in 2020–2021, the proportion increased at a growth rate of 2.2ppt per year. Generally speaking, as the proportion reaches 20–25% or higher, the power system’s stability, flexibility, and reliability should be upgraded and improved to safely provide more links to new energy generation resources. Therefore, the pressure from the infrastructure side on the growth of domestic ground-mounted power stations’ PV demand has been substantial. The growth of distributed PV installations is limited by transformer capacity and distribution network carrying capacity. Therefore, capacity expansion for transformers and distribution network transformation in areas with rich wind and solar power is required. (Fig. 13.8, Fig. 13.9).

Fig. 13.8

Source ZHUO Zhenyu, et al., Challenges on Key Technologies and Development of Power Systems with A High Proportion of Renewable Energy (2021), CICC Research

High proportion of new energy in power generation poses challenges to power system operations.

Fig. 13.9

Source Technical rule for distributed resources connected to power grid (Q/GDW 1480–2015, released in 2016), Technical guideline for evaluating power grid hosting capacity of distributed resources connected to network (DL/T 2041–2019, released in 2019), CAO Wei, et al., Foreign experience and practical insights on high penetration of distributed PV integration (2022), CICC Research

Infrastructure constraints for distributed PV development in China.

13.3.2 Constraints on Product Quality and Return on Investment Need to Be Resolved Through Joint Efforts of Companies and the Market

The safety of LiBs directly affects end-market consumption of AFVs. In the AFV market, vehicle safety is closely related to the safety of LiBs as quality problems or the occurrence of fires or explosions due to external factors such as collisions, charging, high temperature, etc. may lead to LiB-related safety issues. In addition, AFV manufacturers prefer LiBs with high energy density and large-power fast charging functions. This further increases risks of thermal runaways and safety risks.

In the energy storage market, fire accidents related to LiB energy storage stations not only significantly impact consumer safety but also harm the profitability of end-market applications, which in turn affects sales of energy storage batteries to power stations. We expect the government to implement higher safety standards for LiBs and guide companies to address the safety performance of LiBs.

In addition, the relatively high prices of LiBs affect the end-market application economy. In the AFV market, AFVs have green premiums over gasoline-fueled vehicles due to high LiB costs, and the AFV industry’s growth still relies on government subsidies. The maintenance costs of LiBs are also high. Integrated die casting technology and intelligent functions both increase maintenance costs when the vehicle is damaged. In the energy storage market, LiBs are also less competitive than traditional pumped storage and thermal power peak shaving methods. Therefore, we suggest that the industry continue to reduce costs of LiBs via technological upgrades and creation of economies of scale. We also expect government departments to improve the economy of end-market applications and boost end-market demand by providing subsidies and optimizing the profit models of related companies.

13.3.3 Mitigating Land Pressure via Specialized Plans and Key Projects

LiB: The scarcity of high-quality land resources and parking spaces in residential areas affects the construction of charging facilities and indirectly weighs on end-market demand. Public charging facilities: The utilization rate of public charging facilities significantly impacts the return on investment. However, tier-1 cities lack high-quality land resources and face high rents, which may impact return on investment. In addition, public charging facilities are usually built on leased land; therefore, negotiation and cooperation between the local governments and the land use right owners are required.

Private charging facilities: Parking spaces are scarce in some residential areas, with some spaces unsuitable as they lack power sources. In our opinion, the relevant government departments could implement policies to designate more high-quality land resources for the construction of public and private charging facilities. They can also support pilot projects, including adding charging facilities at gas stations, to expand the charging facility network and boost end-market demand for AFVs.

PV: The land utilization rate in the PV segment is low. The land area needed for power generation by solar farms is approximately 15sqm/MWh, larger than that required by nuclear power plants, coal-fired power stations, gas-fired power stations, wind farms, and hydropower plants (0.1, 0.6, 1, 1.3, and 16.9 sqm/MWh). In recent years, the government has tightened land use policies and has strengthened project review and verification procedures. For example, it clearly stipulates that PV projects shall not occupy forest land, farmland, rivers, lakes, and reservoirs.

In addition, land rents in central and eastern China have been rising. In 2021, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) jointly approved a plan to deploy and accelerate the construction of large-scale wind power photovoltaic bases in deserts and the Gobi Desert and the Announcement of the List of Pilots for the Development of Roof Distributed Photovoltaics in the Whole Counties (Cities, Districts), stipulating land and rooftop PV resources that can support the development of PV projects. With these stipulations, the PV industry can basically meet the wind power PV installation targets set in China’s Action Plan for Carbon Dioxide Peaking Before 2030.

13.3.4 Increasing Funds via Effective Financing Methods Such as Infrastructure REITs

Charging station and solar farm development and construction are asset-heavy; therefore, the effectiveness of investors’ and constructors’ financing is crucial. Market funds such as venture capital (VC) and private equity (PE) are active in supporting LiB and PV manufacturers’ technological upgrades and product innovation. In the field of asset-heavy new energy infrastructure operations, we expect infrastructure real estate investment trusts (REITs) to help ease capital pressure on the industry. We believe that infrastructure REITs are more suitable for the new energy industry given their risk appetites and yield expectations.

On January 30, 2022, Opinions on Improving the System, Mechanism, and Policy Measures for the Green and Low-Carbon Transformation of Energy, published by the NDRC, proposes including clean and low-carbon energy projects in infrastructure REITs. On June 1, 2022, in the 14th Five Year Plan for the development of renewable energy sources, the government proposed conducting pilot infrastructure REITs projects for the construction of hydropower plants, wind farms, solar farms, and pumped storage power stations. In 2022, there were about 20 power infrastructure REITs funds to be issued. We expect infrastructure REITs to be a refinancing channel for central and state-owned enterprises in China's electricity sector and help address financial constraints.

13.4 Thoughts and Implications

The efforts of a well-functioning government and an efficient market in China have helped the new energy industry improve industry chain integration and reduce vertical risks. We expect these to further support the relocation of mature capacity, upgrades of advanced technologies, and domestic demand expansion.

Mature capacity transfer: We suggest that companies strengthen cooperation in regional trades and improve the efficiency of their resource utilization in different regions.

Upgrades of advanced capacity in China: We suggest that government departments launch favorable policies to support the industrialization of new technologies. (1) Funds: The government could encourage major market entities to increase investment in new technology by issuing certificates for high-tech companies and launching national research projects. Policy-based financial instruments for new technology developers in the areas of plant construction, equipment purchase, R&D investment, and tax payment are also needed. (2) Employees: The government could provide certain subsidies for skilled technical personnel and inter-disciplinary talent. (3) Patent protection: We suggest that the government improve the intellectual property protection system, shorten the patent review cycle, and reduce the difficulty and cost of protecting rights. The government could also encourage companies to apply for global patents based on their research.

New energy infrastructure: We suggest that the government strengthen the construction and transformation of the power distribution network and optimize the early warning and identification mechanism for grid connection.

Power consumption of ground-mounted PV power stations: We suggest improving power sources, grids, load, and storage, as well as power consumption capacity of centralized PV power stations. We have four suggestions for improving the power consumption capacity of centralized PV power stations. (1) Power source: Companies should step up efforts in R&D, promotion, and application of new energy grid connection technologies; (2) power grid: The construction of electricity transmission channels and the digital transformation of the power grid should be accelerated; (3) load: We propose developing demand response mechanisms on the load side; and (4) energy storage: We expect to see the development of energy storage technologies suitable for multiple application scenarios such as ultra-short-term frequency regulation, short-term peak shaving, and long-term energy storage. We also expect the government to optimize the power market system to increase the return on investment of energy storage projects.

Risks related to system instability caused by the grid connection of new energy: In our opinion, the government could encourage the coordinated development of new energy and energy storage, as well as orderly charging of AFVs.