04.10.23 Review

From Gas to Electricity: The new energy sector may be no less vulnerable to geopolitical risks

The accelerated transition to renewable energy is becoming a major concern in Europe. While reducing dependence on Russian fossil fuel supplies, the European Union finds itself increasingly reliant on China, the global leader in the production of solar panels, lithium-ion batteries, and other new energy equipment. The energy transition was supposed to address Europe's vulnerability to autocratic regimes in fossil fuel supply chains, but it appears that the new energy sector is susceptible to similar risks. Instead of one autocracy, Europe is now partnering with another, and this one happens to be the most powerful in the world. Given the heightened geopolitical tensions, the prospect of imposing restrictions on Chinese imports seems almost inevitable, and discussions on this topic are already underway. The side effect of such measures would likely be a slowdown, if not a stall, in the planned energy transition.

In its latest forecast, the International Energy Agency (IEA) predicts that global demand for oil, gas, and coal will peak by 2030, even without the introduction of additional measures to restrict their use. Earlier this year, the agency had stated that only oil demand would plateau by the end of the decade. While the IEA experts have called this forecast 'promising,' they caution that the goal of limiting global warming to 1.5°C by 2030, as outlined in the Paris Agreement, remains elusive. The adoption of renewable energy sources and the proliferation of electric vehicles must accelerate. Fatih Birol, the Executive Director of the IEA, anticipates that energy policy changes may speed up this winter, which will serve as ‘a test for solidarity among European countries’. In Europe, the rapid transition to renewable energy sources is a growing cause for concern, as reducing dependence on Russia for fossil fuels has led to a heightened dependence on another, more powerful autocracy.

The IEA predicts that solar panels will play a key role in the energy transition. Europe produces them in limited quantities and relies heavily on imports, with 90% of these imports coming from China, according to the consulting firm Rystad Energy. In the first eight months of 2023, solar panel shipments from China to the EU totaled $16 billion, compared to $7.2 billion during the same period last year, according to data from the Chinese customs agency cited by Quartz. To some extent, this growth can be attributed to the rising cost of polysilicon, a key material in solar panel production. However, when measured in gigawatts of imports, the growth is still impressive. According to data cited by Quartz from Infolink, a Taiwanese consulting firm, in the first half of the year, China supplied Europe with a total capacity of 42.4 gigawatts, up 137% from last year. By comparison, the European Association SolarPower Europe estimates that hundreds of European manufacturers combined can only produce panels with a total capacity of less than 1.5 gigawatts in a year.

Europe is also dependent on China for the supply of equipment used to store energy generated by alternative methods. While the EU has a strong position in the production of electrolysis devices (accounting for around 50% of the global market), fuel cells and lithium-ion batteries, primarily used in electric vehicles, need to be imported. Moreover, demand for these components is expected to increase by 10-30 times in the coming years. This is, according to Reuters, the assessment of a document prepared for the meeting of EU leaders on October 5th in Granada. The document explicitly states, 'If no action is taken, by 2030, Europe's energy ecosystem will be as dependent on China as it was on Russia before the start of the war in Ukraine.'

The threat that concerns the EU’s leaders does not appear to be at all far-fetched. In late 2021, China began to block shipments from Lithuania and other EU countries if they contained products associated with Lithuania. This was triggered by Lithuania's decision to open a trade office in Taiwan. This represents a new reality in global politics. The increasing geopolitical tensions and the willingness of all parties to prioritise political interests over economic ones, as Re: Russia has already written, is contributing to the fragmentation of global trade.

The transition to a new energy paradigm should, among other things, free the West from the dominance of hydrocarbon producers, many of which are autocracies. However, there is a possibility that resource constraints, monopolies, and bottlenecks that create the risk of shortages will make the new energy sector equally vulnerable to political pressure. In September, the European Parliament voted in favour of a resolution aiming to ensure that, by 2030, dependency on any individual country for critical resources does not exceed 65%. However, given China's technological leadership in the field of renewable energy, these and other restrictive measures that the EU may want to implement are likely to slow down the energy transition or leave it on paper.