What was the impact of the State on the renewable energy sector in Brazil and China?

Responsible researcher: Viviane Pires Ribeiro

Paper Title: Wind and solar power in Brazil and China: interests, state–business relations, and policy outcomes

Authors: Kathryn Hochstetler and Genia Kostka

Location of Intervention: Brazil and China

Sample Size: 2 Renewable energy sources

Big theme: Environment, Energy & Climate Change

Variable of Main Interest: Solar and wind energy

Type of Intervention: Analysis of developments in the renewable energy sector in Brazil and China

Methodology: Field Research

Hochstetler and Kostka (2015) examine developments in the renewable energy sector in Brazil and China. The results show that the two countries share many interests regarding solar and wind energy, but institutional differences in relations between state and companies led to different results. In China, in a context of state-business corporate relations, state interventions have been more comprehensive, with the state coordinating with state-owned banks, offering large financial and investment incentives to state-owned or state-linked companies. In contrast, in Brazil's public-private partnerships, state support for promoting renewable energy has been shaped by a stronger preference for competitive auctions and stricter financing rules.

Assessment Context

International climate negotiations have failed, in part because of conflicting expectations about the role that major emerging powers like China and Brazil should play in reducing their greenhouse gas emissions. Its economic growth rates recorded after the year 2000 were accompanied by an equally rapid increase in emissions. The energy investments that these countries are making to support their economic growth seek to lock in emissions levels in the coming decades. Even as they grow rapidly, emerging powers continue to have millions of low-income citizens and make it clear that any climate mitigation action must meet national development needs.

The hybrid wind-solar energy sector in Brazil establishes an energy political economy that alternates between national public planning, procurement and financing agencies, as well as an increasingly private generation sector. This public-private partnership approach began to include state support for the renewable energy sector after 2002, but since 2009 it has also imposed a competitive auction system. The independent regulator holds regular auctions of licenses to supply energy to the national grid, with the participation of public and private generation companies. Those who commit to supplying energy at lower prices win the auction. Likewise, the National Bank for Economic and Social Development (BNDES) provides credit for many projects at subsidized rates.

In China, state-business relations can best be described as state-corporate. The continued centrality of the state and state-owned or state-supported enterprises in the political economy and its decentralized authoritarian governance structure localizes the calculus of interests, particularly in the complex relationships between central and local governments. The state works with state-owned companies and mixed ownership companies to develop a globally competitive renewable energy sector. The state retains overall control of the market, decides the rules and exercises control over market entry. A unique feature of the Chinese case is the relatively large discretion granted to local governments in guiding economic development, giving Chinese state corporatism a decidedly local character.

Intervention Details

Hochstetler and Kostka (2015) assume that development is a priority as a starting point for their study, in which the authors examine developments in the renewable energy sector in Brazil and China since the year 2000. Renewable energy were almost non-existent in both countries in the 1990s, but during the 2000s, China expanded its wind and solar power generation while gaining global leadership in both sectors. Brazil generates substantial wind power and has a thriving wind industry, although expansion of solar power generation is slow. Both countries coupled their renewable energy purchases with policies to develop related industrial capacity, but they did so in different ways and with different results.

In this sense, Hochstetler and Kostka (2015) raise the following question: what explains the differences in the policies initiated and in the results of development and climate emissions? To answer this question, the authors use explanatory variables from classical theories of comparative politics, examining the roles of institutions in determining policies and outcomes.

Methodology Details

The analysis is based on field research carried out in Brazil and China between 2010 and 2014. In Brazil, Hochstetler and Kostka interviewed employees from energy planning agencies and the National Bank for Economic and Social Development, as well as representatives from industry and the community. In China, the authors carried out field research in Beijing, Hunan, Jiangsu and Shandong provinces. The analysis also draws on government policy documents, media reports, and available secondary sources.

Results

The outcomes of renewable energy development policies differ markedly in Brazil and China. In Brazil, advances in renewable energy are more modest, including some successes in the manufacture of wind turbines, with the increase in the number of component manufacturers and accelerated growth in wind energy generation. However, few deployment activities for solar energy have been identified, despite the country's abundant solar resources. In contrast, over the same period, China gained global leadership in the manufacturing and deployment of wind and solar energy.

Thus, the authors argue that the difference observed in the results of renewable energy is partially explained by the variation in relations between the state and companies in Brazil and China. Brazil's public-private partnership model and China's state-owned corporate model are different approaches to aligning interests between the state and market participants.

In Brazil, the public-private partnership approach has encouraged a more coordinated and deliberate start to renewable energy generation, working better for wind power. The Alternative Electricity Sources Incentive Program (Proinfa) used “generous” tariffs to attract private players into wind production and offered market protection to encourage local production of wind turbines and components. BNDES auctions and subsidized financing managed to attract companies into both generation and industrial production, but they also disciplined the industry by subjecting it to fierce price competition at auctions and strict supervision of BNDES loans. Over time, this has allowed Brazil to develop a fairly lean, if not entirely globally competitive and innovative, wind industry that helps meet national demand.

For solar energy, the requirement that prices, generation and production of parts meet public and private objectives has, to date, failed. Many policy tools cannot be considered, either because private actors cannot be forced to participate or because public actors have been forced to make short-term calculations based on market-based fundamentals. Strong environmental interests in solar production and good material bases for such an industry came up against limits imposed by contradictions between price and domestic production objectives.

In China, the state-owned corporate model gives central and local governments a greater number and variety of leverage to promote solar and wind energy. Managers in state-owned companies are part of the same annual staff evaluation system as civil servants, making it easier for such governments to guide business behavior. Furthermore, the banking system is dominated by large state-owned banks, which finance state-owned or state-linked companies in renewable energy. In China's decentralized authoritarian political structure, local governments actively support the expansion of the wind and solar industries.

However, China's corporate-state approach also presents serious challenges to renewable energy development. Excessive interventions by local governments and local branches of state banks sometimes distorted central government plans and policies. The easy provision of bank loans at the local level has resulted in huge amounts of short-term debt, much of which appears destined to become bad loans. Easy access to finance, combined with the lack of strong budget constraints, has resulted in large-scale industrial overcapacity and subsequently deteriorating corporate finances.

Public Policy Lessons

Hochstetler and Kostka (2015) argue that Brazil and China share many interests regarding renewable energy, but institutional differences in relations between the state and companies have led to different results. In Brazil, a public-private partnership approach has played a key role in promoting wind generation and a new wind industry, but has left the solar sector largely uninvested. In China, a state-corporate approach meant that the political agendas of national and local governments, as well as the investment interests of powerful state-owned enterprises and state-supported enterprises, shaped policy outcomes.

Policymakers in both countries have many of the same interests in developing solar and wind energy. Such energies improve local air pollution and help national leaders meet international climate change commitments. Renewable energy also helps solve home energy security issues. The installation and operation of wind and solar energy farms bring potential economic benefits, although the benefits are greater if local industries are established to produce components of these industries.

In short, although China's state-dominated model provides the institutional foundations of remarkable success in renewable energy development, the approach comes at a significant cost. In particular, the prioritization of renewable energy manufacturing over domestic demand for that energy itself has created several undesirable outcomes, as renewable energy deployment was initially sacrificed in the effort to build a strong solar and energy production sector. wind.

 For other developing countries, the experiences of Brazil and China illustrate the many tradeoffs and dilemmas that grid-based renewable energy generates. The construction of wind and solar generation plants continues to be higher costs than fossil fuel plants for most countries, although the last decade of developments in Brazil and especially China have changed these calculations notably. For countries wishing to balance higher generation costs with the economic gains from adding a dynamic new component production industry, the experiences of these two giants suggest that they will face a delicate balancing act between these two objectives.

References

Hochstetler, K., & Kostka, G. (2015). Wind and solar power in Brazil and China: interests, state–business relations, and political outcomes. Global Environmental Politics , 15 (3), 74-94.