Corporate Debt Review

A Chinese-Saudi Renewable Gambit?

About-Face

With China is considered a main beneficiary after the Trump Administration pulled the U.S. out of the Paris Climate Accord. Last week, however, I was advised of a possible Saudi connection in what is shaking out.

But before we get there, let me set the backdrop.

After the U.S. decision, the Paris initiative includes all but three countries. Even North Korea signed on, and of the other two countries that opposed it, one (Nicaragua) refused to join because its government thought the accord did not go far enough.

That leaves Washington in the august company of only Syria in rejecting the agreement and the climate change argument that goes along with it. For its part, international sanctions made it difficult for Damascus to send an official delegation, while the civil war at home prompted the Assad regime to reject any limitations on Syrian energy use.

The net impact from the departure on the American domestic market remains unknown. The debate over whether the climate accord would actually cost any jobs remains ongoing. But for what it’s worth, the trajectory has actually been in the other direction.

Renewables are Generating More Jobs than Traditional Energy

Recently released Energy Information Administration (EIA) estimates for 2016 show 373,807 jobs nationwide in solar, 101,738 in wind power, 130,677 in bioenergy, 65,554 in hydroelectric, and 5,768 in geothermal. Renewables now exceed the total employed in both the oil industry (515,518) and the coal extraction/power generation sector (160,119).

By expanding the broader economic impact, the rising ascendency of clean energy is even more paramount. The EIA reported 3,384,834 Americans were directly employed by the clean energy industry (which includes the energy efficiency, smart grid, and energy storage industries; electric power generation from renewables; renewable fuels production; and the electric, hybrid, and hydrogen-based vehicle industries).

Meanwhile, the International Renewable Energy Agency (IRENA) estimated there were 8,079,000 direct and indirect jobs in renewable energy worldwide, with China, Brazil, the United States, and India among the leaders.

By comparison, the EIA estimates that 2,989,844 Americans were directly employed by the fossil fuel industry (which includes fuels and electric power generation from coal, natural gas, and petroleum; and the manufacturing of gasoline and diesel-powered vehicles and their component parts).

And then there are the prospects of continued capital investment in renewables and clean energy applications. It is here that some pundits have suggested the effect of the Washington decision would have its greatest weight.

Clean Energy Investment Continues, With or Without D.C.

But apparently not – at least to date.

The departure of government subsidies in some states, the continuation in others (California, in particular), and the commitment by state and city officials throughout the country to continue the Paris standards, have combined to provide an interesting picture.

Solar and wind now have achieved grid parity with both coal and natural gas in many regions of the country. That means the move in their direction is continuing as levels of efficiency begin to kick in. But the real story may be elsewhere.

When clean energy initiatives encompass moves to increase efficiency in energy usage – smart grids, building construction, insulation, and the like – U.S. investment is actually increasing to include new real estate investment trust (REIT) and limited partnership clones.

The issue may instead be funding the next generation of renewable breakthroughs. Most of the American-based investment is focused on current status projects. The intensive capital infusions necessary for genuine next level innovations are more problematic.

This is where the real result from the U.S. departure from the Paris Accord may well be experienced.

China is Taking the Technological Lead

Here, China has become the main focal point for developments in the Accords and has taken over the leading worldwide role in renewable technology.

In solar, Beijing already has the leading position in the next wave of technology, while Chinese research has unveiled what may be the next stage of wind turbines.

Yet these are coming at a price.

China has amassed an impressive array of research facilities fueled by significant government commitments of funds and manpower. Solar applications are already providing entire areas with just about 100% of their power requirements; the country leads the world in solar panel production and installation.

But this change in emphasis has been taxing the national infrastructure. This is a grid that remains dependent upon coal for electricity generation.  Despite the advances in alternative energy sources, China still needs to put a new medium-sized coal-fueled power plant on line every week to keep up with demand.

Each of the new advances hailed in solar or wind comes with an additional cost. This is not an integrated system. These are largely stand-alone embellishments, there to prove the concept without providing any genuine expansion of scope.

For that, China must rely on what is still a highly undercapitalized domestic investment base. Unlike the U.S. or Western Europe, Chinese R&D (or the perhaps the more accurate European term “RTD” – standing for “research and technical development”) remains heavily dependent upon direct or indirect government finance.

This is very inefficient, distorts and imbalances the central budget, while obliging greater expenditures from “off the book” accounts. That combined with heavy additional government subsidies and export support makes for a very expensive proposition.

Despite the rise of some equity-based funding, the lack of any real private investment sector prevents the knock-on effect in applied market areas and the decisively important dilution of risk.

After all, there have been few technological advances that have been able to transform economies until they have been broadly applied. That requires an integrated network of technology and finance, further requiring the private capital motives animating entrepreneurship.

No amount of central finance and planning can replace the private profit motive.

That’s where the Saudis may be entering the equation.

The Saudi Vision of Win-Win Renewables Investment

In the ramp up to the IPO of Saudi Aramco, the Saudi National oil company, some interesting sidebars are emerging. This may be a float of “only” 5% in the oil giant, but it will still result in the largest sovereign investment fund ever created.

I have previously discussed how the proceeds will be utilized. Saudi Crown Prince (and heir apparent) Mohammad bin Salman, via his “Vision 2030,” intends to diversify the Saudi economy and move it from unitary dependence on crude oil export revenues.

Some of this will take place internally. But the bulk of the diversification will take place outside the country. For the first time in history, a national economic diversification will largely transpire through the acquisition of non-oil assets in other countries.

It is the national revenue flow that will be diversified. For this Prince Mohammad will utilize the Saudi Council for Economic and Development Affairs, which he just happens to chair. The Council, in turn, will establish the Public Investment Fund (PIF). And PIF just happens to be the entity receiving the windfall from the Aramco IPO.

Here is where it gets interesting. I was given notice during my last series of meetings in the Persian Gulf that the PIF intends to invest in next generation energy technologies, especially in solar (where the Saudis have already made a sizable domestic investment).

In advance of the move on renewable RTD, the Saudis have begun using existing sovereign wealth funds to accumulate positions in publicly traded Chinese solar and wind power companies. Additionally, Riyadh has approved joint initiatives between Saudi and Chinese research centers.

As the Saudi investment largess moves into the global marketplace, Chinese renewable leadership may have the near-term finance it requires. The Saudis intend on profiting from the advances, but – at least for the time being – the actual technology centers will remain in China.

Seems a win-win scenario for what still can be a risky energy gambit, one made more likely by a hasty decision from Washington.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.