How Innovative Financing Mechanisms Can Green the Belt and Road Initiative

By Niccolò Manych and Ishana Ratan

The year 2023 marks the tenth anniversary of China’s Belt and Road Initiative (BRI). Over the last decade, the BRI has evolved into the world’s largest international investment program. In 2022, the annual financial volume reached $67.8 billion, with a significant portion directed towards the power sector. Notably, investments in coal were curbed following Chinese leader Xi Jinping’s 2021 announcement that China would not build new coal-fired power plants overseas and instead would seek to ramp up investments in renewable energy in developing countries. The question at hand is how China can accelerate these investments in renewable energy.

As policymakers reflect on the first ten years of the BRI and conceive plans for the next decade, they should endeavor to position the BRI as a driver of green development abroad.

To support this undertaking, we along with Boston University Global Development Policy Center (GDP Center) researchers Tsitsi Musasike, Cecilia Springer and Kevin P. Gallagher, under the coordination of Lin Zhu, contributed to a new special policy study (SPS) published by the China Council on International Cooperation on Environment and Development (CCICED). The SPS is the fourth report with input from the GDP Center; previous reports focused on policies, practices and pathways to achieve a green BRI.

The SPS is the result of global cooperation between various agencies. For the 2023 report, the GDP Center collaborated with experts of the National Development and Reform Commission (NDRC), the BRI International Green Development Coalition (BRIGC), the BRI Green Development Institute (BRIGDI) and the National Center for Climate Change Strategy and International Cooperation (NCSC) and other institutions.

The study proposes relevant policy recommendations for the innovation mechanism of a green BRI. The innovation mechanism involves using new tools, such as project preparation facilities and pre-feasibility studies to provide technical assistance and build capacity for renewable energy project implementation in BRI participant countries. To do so, the report reviews and summarizes China’s renewable energy development experience in terms of policies and practices, lays out the basis and inspiration for renewable energy cooperation in key BRI participating regions, proposes the best practices and cooperation demands for the sustainable financing of green and low-carbon BRI development and maps out the overall cooperation mechanisms for a green BRI.

The report consists of three parts. Part 1 presents an overall picture of the BRI’s green and low-carbon development, which includes the mechanism, progress and demands of international cooperation, and analyzes the green financing challenges for BRI renewable energy projects. Part 2 looks at renewable energy policies in China and BRI key regions, and strategies for energy cooperation. It identifies the policy objectives, practical basis, barriers and needs for renewable energy development in Southeast Asia, Central Asia, Africa and Latin America. It continues by outlining China’s main renewable energy development policy instruments, such as innovative and integrated photovoltaics application scenarios. Part 3 provides a condensed overview of the policy recommendations to promote the process of sustainable development through the BRI using innovative financing mechanisms.

Main findings and policy recommendations

The report finds that with financial support from China and other entities, the cumulative capacity of solar and wind energy in Asia-Pacific and Europe has grown steadily since 2010, though there is still a large financing gap. The gap can partly be explained by issues that BRI renewable energy cooperation projects tend to face, such as insufficient upfront technical capacity and information reserves. In addition, the report identifies a lack of pre-feasibility funding for early development of transmission infrastructure, such as power grids and an efficient profit model.

Regarding renewable energy development policies, the report showcases the important role of development finance in expanding the production and installation of renewable energy in China. In a similar fashion, Chinese development finance is found to be essential for renewable power infrastructure projects in the four key regions considered in the report – Southeast Asia, Central Asia, Africa and Latin America. Based on the Chinese experience and the analysis of key areas’ policies and investment needs, the report proposes several steps to steer development finance into BRI sustainable development projects. These proposals include intensifying target guidance, optimizing subsidy policies, simplifying entry procedures, improving the investment environment, enhancing multi-channel consumption and strengthening international cooperation. In addition, Chinese institutions could develop targeted cooperation proposals for Central Asia, Africa and Latin America.

To conclude, the SPS outlines three major policy recommendations on the innovation mechanism of the BRI to promote sustainable development. First, strengthen the innovative financing mechanisms and establish a support system for renewable energy projects. Required steps include establishing a pre-feasibility research and development fund and a database of pre-feasibility financing options accessible to renewable energy project developers. Second, strengthen the synergy among the BRI’s green development cooperation mechanisms in various fields and promote the establishment of a policy environment conducive for BRI green development cooperation. Options include strengthening vertical and horizontal coordination and improving the policy environment for the development of overseas cooperative green BRI projects. Third, implement innovative BRI demonstration projects and support the development of customized sustainable development solutions for BRI participating countries. As part of this recommendation, the existing cooperation platforms can be utilized to coordinate resources from various parties. Other options include exploring the cooperative demonstration of “PV+” and other innovative application scenarios, as well as profit models of such projects that align with the characteristics of developing countries.

Going green and clean overseas

GDP Center researchers contributed three key elements to the report. First, the status-quo of BRI green energy investment and future investment needs. Second, innovative financing mechanisms that promote green BRI, and third, the evolution of China’s renewable energy development policy.

Status-quo of BRI Green Energy Investment

From 2000-2021, China provided development finance for overseas energy projects at the level of $235 billion, which is more than all multilateral development banks (MDBs) combined provided during that same time period. While the accumulated financial volumes of fossil fuel projects still surpass that of renewable energy projects, the latter has seen a steep increase in recent years and has enabled 25.3 GW of solar and wind capacity. Figure 1 demonstrates how significant regional differences between Chinese finance for fossil fuels and renewable energies prevail, as well as differences in comparison to financial support provided by MDBs. Based on past Chinese financial commitments for solar and wind per region and countries’ green investment needs, the report highlights the importance for China to increase engagement in African countries and Southeast Asia, while sustaining high levels of  investment in Latin America.

Figure 1: Financial Commitments for Solar and Wind Capacity by Region in GW and as the Share of the Total Power Capacity in the Respective Region Financed by China or MDBs

Innovative Financing Mechanisms to Promote Green and Low-carbon Development of BRI Energy Projects

The success of China’s efforts in greening the BRI not only depend on the amount of investment, but also on the effectiveness and longevity of each individual project. The previous Green BRI SPS emphasized the need for a “whole lifecycle” approach to renewable energy project development. This year’s report develops this idea further and proposes innovative financing mechanisms to support renewable energy projects along their whole lifecycle, in particular the project preparation phase, which is identified as a current key barrier in renewable energy project development. Hurdles at this stage include an insufficient enabling environment, low technical capacity in the host country and a lack of pre-feasibility funding for early-stage project development. Only a handful of pre-feasibility funds and project preparation facilities for renewable energy projects exist. Thus, special funds for BRI’s green development projects will need to be set up, providing financial support for the cost of the pre-feasibility study and project preparation stage, to leverage the project development process.

Evolution of China’s Renewable Energy Development Policy

China’s global leadership in renewable energy stems from a robust domestic renewables industry. Its domestic industry scaled up due to natural resource abundance, competitive renewable energy component manufacturing, and high levels of domestic demand. Throughout the 2000s, China used industrial policies and its comparative advantages to both build a thriving renewable energy manufacturing sector and install large quantities of wind and solar in its domestic grid. After establishing their competitiveness domestically, leaders like JinkoSolar, Trina Solar and Goldwind now supply panels and are considering constructing manufacturing facilities in green BRI host countries.

China’s success in domestic renewable energy development yields useful lessons for its investment under the green BRI, both in manufacturing and deployment. There are five key channels through which Chinese investment finance can support green BRI countries. The first three involve knowledge-sharing of best practices at the regulatory level; China can provide quantitative guidance, assistance in optimizing subsidy policies based on the levelized cost of electricity and knowledge about energy information management systems, which are essential for governments to track subsidy recipients and their progress in project completion. China can also advise in strengthening the broader investment environment, and long-term power grid planning and management. In these ways, China is well positioned to assist emerging economies in developing a renewable energy industry.

Conclusion

The green BRI innovative financing mechanism can help BRI participating countries sustain both economic growth and green industry development by leveraging China’s expertise in the clean energy transition. The report recommends that the Chinese government and BRI countries focus on cooperation on customized green technology projects, which will help BRI participants develop their own green policies and green technology industries. China can provide BRI countries with assistance throughout the renewable energy investment process, from project preparation and pre-feasibility studies to long-term infrastructure planning. At the international level, China can leverage international cooperation platforms to support regional planning for energy transition, to create norms and standards for investment and support cooperation between industry and governments. Additionally, Chinese finance can support the development of innovative solutions like “PV +” based on the success of BRI projects in aquaculture, agriculture and industrial parks.

Overall, Chinese expertise can help BRI countries gain the skills and capital necessary to implement a green energy transition, from the details of project planning to macro-level regional coordination.

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