For years, China’s booming economy was a horse every government wanted to hitch its wagon to. Today, relations have soured between China and many Western countries, with potentially serious implications for clean-energy supply chains, investment and even existing infrastructure.

The U.K. is a case in point. In June 2014, then-Prime Minister David Cameron signed a £14 billion ($18.5 billion) trade deal with China that included a £400 million solar investment with ZN Shine. Britain's solar market was booming thanks to the Renewables Obligation scheme; Huawei was cleaning up in the local PV inverter market.

In October 2015, Cameron and China’s President Xi Jinping signed another deal for China General Nuclear Power Group (CGN) to take a one-third stake in the new Hinkley Point C nuclear power plant. That deal may have marked the zenith for U.K.-China relations.

Times have changed dramatically. ZN Shine ceased operating in Europe in 2015 after running afoul of EU trade rules. Huawei’s telecommunications infrastructure is being removed from the U.K.’s budding 5G mobile network. Hinkley Point C could be the first and last U.K. nuclear plant built with Chinese investment as lawmakers question the security implications.

A number of factors are contributing to the deterioration of relations, from ongoing trade wars, to Hong Kong's new National Security Law and alleged withholding of information in the early days of COVID-19, to pressure over the treatment of the Uighurs in Xinjiang Province. The U.K. is far from alone in having shifted its perspective on China from economic competitor to strategic or systemic rival.

“The narrative had been ‘China will join the international system, then it will liberalize and it will be fine,’” said Hugo Brennan, principal Asia analyst at Verisk Maplecroft. “I think a lot of Western leaders have lost the appetite for that narrative, and now there's been a hardening of stances.”

The relationship between China and the West has moved far beyond "It’s complicated." And all of this is now spilling into the power sector.

Implications across the power sector

One risk to consider is the potential for China to limit access to key building blocks of the energy transition. Beijing's 'Made in China 2025' strategy focuses on 10 key sectors the country wants to dominate in five years’ time, including areas such as power equipment, renewable energy and electric vehicles.

But would Chinese officials really instruct a sector to limit their sales into key markets like the U.S. and Europe?

“In short, yes,” said Brennan, citing the threat to restrict rare earth mineral exports to the U.S. as an example. “China has a great deal of power over both the state and private sector and definitely puts pressure on actors — including Chinese companies — to align with their global policy positions."

One result of the simmering tension with China is an increased focus on building local supply chains for "energy-transition-relevant technology,” said Brennan.

That trend is evident in electric vehicles as well as solar energy. Europe is in the early stage of what it hopes will be a solar manufacturing renaissance, and there is growing pressure for additional support from national and regional governments to enable a competitive and innovative new phase of PV manufacturing to be established.

“In Europe, we are completely dependent on China [for solar modules],” says Stefan Reber, managing director and CTO of German solar materials firm NexWafe. “If they decide for political reasons that they won't deliver solar to Europe anymore, what do we do then?” 

NexWafe is one of many emerging solar manufacturers across the value chain that would benefit were the EU to mitigate for that dependence and build up some home-grown capacity.

The localization trend may be further driven by the West's growing willingness to target specific Chinese companies. For example, having opened the door to Huawei infrastructure being used to build the U.K.'s 5G mobile phone network, the U.K. government made a U-turn this year. All Huawei equipment is now to be retroactively stripped out from the U.K. network by 2027.

Across the Atlantic, Huawei has pulled its solar business out of the U.S. entirely after a group of senators proposed banning Huawei inverters from the market. Huawei insists its equipment poses no threat.

Will countries turn away Chinese investment?

Another area of risk for the energy transition is cross-border investment. 

The EU has tightened its investment screening rules to give member states greater scope to block foreign direct investment and merger and acquisition activity if they are uncomfortable with it on security grounds. Foreign direct investment from China into Europe fell by 50 percent in 2018 compared to the 2016 peak.

The issue is already rearing its head in individual deals and companies. China Three Gorges’ (CTG) bid to buy Portuguese utility EDP — one of the world's largest renewables developers — was ultimately thwarted by the company's shareholders. But U.S. opposition to CTG controlling EDP’s assets in the American market — including gigawatts' worth of wind farms — was seen as a secondary obstacle.

There are other examples where governments have moved proactively to stop investments from China, particularly around grids. The Australian government blocked the sale of a majority stake in AusGrid in 2016. In 2018, Germany's state development bank, KfW, bought a 20 percent stake in network firm 50Hertz just as China's State Grid Corporation was on the brink of purchasing the very same shares. Chinese firms continue to own stakes in parts of the U.K. and Italian gas grids. 

Back in the U.K., concern around Chinese investment in new nuclear power plants is also rising.

China General Nuclear and EDF are the main backers of the Hinkley Point C, a 3.2-gigawatt facility already under construction. A slate of additional new nuclear projects are waiting on the sidelines, with investment and financing the major stalling factor. Two separate U.K. nuclear projects, led by Toshiba and Hitachi, respectively, already fizzled due to financing concerns, and the loss of additional Chinese investment would be substantial.

After the Huawei 5G U-turn, it was reported that China threatened to pull the plug on its backing for new nuclear power in the U.K.

Influential lawmakers in the U.K. are calling for additional safeguards in the event of further Chinese investment, with the CGN/EDF Bradwell B project in their sights. Member of Parliament Bernard Jenkin, writing for the site Conservative Home, said: "The Chinese government has demonstrated an established pattern of [intellectual property] theft, nuclear espionage, political interference with private enterprise and cyber attacks on Western interests.”

Nuclear power is a cornerstone of the U.K.’s net-zero plans: The government’s independent climate advisory group, the Committee on Climate Change, is projecting another 15 gigawatts of build-out (PDF). But the means of paying for it is only getting hazier. The government is looking at the potential of a levy on consumer bills; one nuclear think tank suggests it could be easier for the government to assume all the construction risk and auction the operational plant once it's ready.

Looming as another source of friction, the EU has made a future carbon border adjustment tax for imports from non-EU companies a major policy in its economic recovery plans. This would impose a carbon tax, for example on Indian steel, to prevent EU emissions from being outsourced to overseas suppliers.

“It is a protectionist policy dressed up in green credentials,” said Brennan. “China has been very clear, as has the Trump administration, that any move by the EU to impose their carbon border adjustments will not go down well."

"We expect tit-for-tat measures if the EU goes down that route," he said.