As the global race for renewable energy accelerates, the billions of dollars of subsidies that the US, Europe and China dole out to vie for market dominance are likely to have implications for investors.
This year, the EU adopted the Net-Zero Industry Act, which aims to make investing in solar, wind and other clean technologies more appealing. The legislation eases bureaucracy, accelerates project approvals, and targets reaching 50mn tonnes of carbon dioxide storage capacity in Europe by 2030.
Investors will have seen that these subsidies have begun to prompt companies to take action. For example, ArcelorMittal, the world’s second-largest steelmaker, has started testing a carbon capture project in Ghent, Belgium, according in a Morgan Stanley report in June. This facility will test the feasibility of a full-scale carbon capture at the site as the Act comes into effect, Morgan Stanley said.
Asset manager Invesco said the legislation is “expected to be a game-changer for EU companies transitioning to net zero emissions”, in its own report in August. The law will accelerate demand for European-based manufacturers, such as solar cell makers. “The €375bn in grants, tax credits, direct investments and loans from the NZIA will help to spur additional capital and operating expenditures,” the report concluded.
The EU’s action highlights how the bloc is eager to match renewable energy subsidies adopted by the US and China in recent years. The Biden administration’s 2022 Inflation Reduction Act angered many European officials, who worried the $369bn package would lure cleantech businesses and investments away from their region.
It even prompted the EU to accuse Washington of breaching World Trade Organization rules. The head of carmaker Stellantis and other European executives called for Brussels to consider reciprocal measures, or change its rules to respond to the IRA.
The EU should “take action to rebalance the playing field . . . [and] improve our state aid frameworks”, European Commission president Ursula von der Leyen said shortly after the US adopted the IRA. The EU’s net zero law was quickly proposed in 2023 to counter the American legislation. “There is a risk that the IRA could lead to unfair competition,” von der Leyen warned.
Brussels’ net zero law aims to have EU manufacturers meeting 90 per cent of the bloc’s domestic demand for electric vehicle batteries by 2030. In addition to responding to the US, the law is an attempt by Brussels to prevent a flood of Chinese EVs in the EU market, says Marco Siddi, a senior researcher at the Finnish Institute of International Affairs.
China’s rapid development of electric vehicles, which the government subsidised heavily, has shocked competitors around the world. For example, EV maker Nio received government subsidies as well as grants to build and operate charging stations. Then, in 2020, Nio received a nearly $1bn bailout from state-backed investors. Chinese electric battery makers have been offered subsidies that could account for more than 50 per cent of the cost of the product.
In October, China’s biggest electric vehicle maker BYD posted higher quarterly revenues than US rival Tesla for the first time, highlighting how competitive the Asian powerhouse has become.
“In Europe, it is pretty clear that it is not just about subsidies but it is also about industry protection now,” Siddi says.
China’s top-down central planning for green subsidies cannot easily be replicated by Europe, with its 27 member states. Similarly, the US, which is also nervous about Chinese subsidies, has a complex federal-and-state regulatory apparatus. However, it also enjoys a booming stock market and venture investment ecosystem that can grow cleantech businesses.
Compared with the IRA, Europe’s subsidies efforts are “a bit more convoluted”, Siddi says. “It is not easy to understand how the industry actually gets the support.”
Europe’s challenges are about to get tougher as Donald Trump returns to the White House in January. On one hand, the president-elect might roll back some of the 2022 clean energy subsidies. But a full repeal of the IRA is unlikely. In August, 18 Republican members of Congress wrote to Republican House Speaker Mike Johnson, urging him to preserve the law’s tax credits and warning that a full repeal would be “a worst-case scenario”. The IRA was heavily skewed to fund projects in Republican states.
Additionally, surging electricity consumption in the US is likely to drive demand for all energy sources. Adoption of artificial intelligence and moving manufacturing back into the US are leading to a historic rise in power demand, supporting the case for renewable energy.
But the real problem for Europeans is US tariffs. The incoming Trump administration and its tariffs proposals make it hard for businesses to plan now, says Janka Oertel, director of the Asia programme and a senior policy fellow at the European Council on Foreign Relations.
Amid the political uncertainty, “you will have a lot of wait-and-see” — and that is slowing down investment, business expansion, and ultimately decarbonisation, Oertel observes.
“It is a stalemate,” she says. “It makes the competitiveness of European companies lower and it slows down decarbonisation.”
She adds: “So you have the worst of all worlds if you wait, but everyone is afraid to make the wrong move.”
One of the subsidies most at risk when Trump takes office is that for wind power. Trump’s election victory immediately hurt shares of European wind companies. The president-elect vowed on the campaign trail to end the offshore wind industry on “day one”. Shares of Danish wind manufacturer Vestas, whose biggest market is the US, are now trading at a five-year low.
“The sector I am most concerned about and where I am most interested in how things pan out is wind,” Oertel says. “If Chinese producers are able to take advantage of the slumping European wind manufacturers and are able to actually deliver turbines, then it will be very, very hard for the Europeans to maintain an industrial base in the wind energy space,” she adds.
For Europe, “that means full energy dependence in the renewable space on China”, she says. “That is game over, checkmate.”
Source: Economy - ft.com
