China's Clean-Energy Monopoly Outshines OPEC Cartel

As the world increasingly turns to renewable energy sources, the potential for disruptions in the global supply chain is growing. Countries that rely on imported oil and gas are particularly vulnerable to the whims of producing nations, as the recent conflict in Ukraine has shown. But with the rise of renewable energy, even countries with their own domestic energy sources are at risk of being left behind if they don't keep up with the latest technology.

The International Energy Agency's publication of global supply numbers last week highlights the concentration of necessary renewable energy transition supply chains in China. China refines 95% of the world's cobalt supply, a metal used in lithium-ion batteries. It manufactures over 70% of sicilia-based solar photovoltaic modules and is home to three-quarters of global electric-vehicle battery production capacity.

The oil market looks fragmented by comparison to the green-energy technology market. The 13 countries of the Organization of the Petroleum Exporting Countries have cornered around 40% of the world’s oil supply since the early 1990s, according to Goldman Sachs. Add the additional producers of the larger OPEC+ group, such as Russia, and this jumps to 60%. For now, the oil cartel has much greater power over the global economy than green-energy technology suppliers, but this could change as the world’s energy mix shifts.

China has long been a leader in renewable-energy technology manufacturing, due to years of generous subsidies, access to cheap power, labor and land. The Chinese government first identified clean energy as strategically important more than a decade ago, and since then Beijing's share of global investment in new factories for clean-energy products has remained steady at 80%.

The world has benefited from China's low-cost manufacturing and highly integrated supply chains, which have dramatically improved the economics of renewable energy. From 2010 through 2021, the cost of electricity generated by large solar photovoltaic facilities fell by up to 90%, depending on the country of installation. This has made renewable energy more affordable and accessible to people around the world.

As geopolitical tensions have increased, Western governments have been working to diversify their supply chains in industries that are sensitive to these tensions. For example, the United States' Inflation Reduction Act offers subsidies to encourage domestic manufacturing of electric vehicles, solar and wind-energy components. These tax credits are tied to local production requirements, meaning that, for example, EVs need to be assembled in North America to qualify for subsidies. The European Union is considering easing its state aid rules so that it can launch a green industrial policy that is competitive with the United States' policy.

Developing local manufacturing for clean energy technology is not cheap. Factory building costs alone can be up to six times higher in the U.S. and EU than in China, according to BloombergNEF. Higher labor and energy bills mean they will also be more expensive to run, pushing up component prices. A Western-made electrolyzer is five times as expensive as one made in China, for example.

The cost of decarbonizing the global economy is likely to increase. However, the benefits of spreading supply chains more widely, such as greater energy security and new jobs in local manufacturing, outweigh the costs. Additionally, renewable energy will eventually drive down energy bills, making the switch to renewables a wise investment in the long run.