EU oversight of foreign investment in energy projects lacking
by Joe Mitton, 18 April, 2019
At the 21st EU-China Summit on 9 April, both sides hailed a new era in the trade relationship. Increasingly confident of its domestic technological capabilities, China will soon no longer oblige foreign companies active in China to share their tech know-how. And a new Foreign Investment Law in China allows for greater inward investment to the country, but maintains restrictions and scrutiny mechanisms on 48 sectors of key strategic interest (the “negative list”), including the energy sector. In the EU, there is no such coordinated approach to inward investments in energy. Scrutiny of foreign investments in energy is left to the discretion of Member States and is often not done at all. According to Joe Mitton, recent events laid that fracture in EU policy bare.
The ‘Belt and Road’ reaches Italy
Europe’s energy sector is increasingly integrated, as the European Commission Vice-President for Energy Union, Maroš Šefčovič, made clear in his State of the Energy Union speech last week. Yet oversight of foreign investments in the sector is patchy. In the age of populist governments, it may fall to the EU to scrutinise large foreign investments in European energy. Italy joining China’s ‘Belt and Road Initiative’ last month – the first G7 country to do so – drew criticism from leaders such as France’s President Macron. The Sino-Italian deal includes commitments on natural gas, and it has brought the question of Chinese intentions in this sector to the fore.
The great majority of Chinese foreign direct investment (FDI) in the sector benefits Europe and is commercially-driven. The European energy sector needs investment, particularly in the south and the east. In public debate, concerns about Chinese investments are sometimes driven by a generalised fear about the intentions of the greatest rising power, rather than by specific issues. (This article examines Chinese FDI in the sector, but the benefits and risks raised here could also apply to investments from other governments).
Nevertheless, given the scale of the FDI from the People’s Republic of China (PRC), coupled with the high degree of government participation in investment decisions, mean that more a uniform approach to scrutiny would be prudent. At present, the EU Foreign Investment Screening Framework (presented only in late 2018) encourages cooperation and information-sharing between Member States and the Commission, and allows the Commission to issue opinions on specific FDI projects. But it is explicit that “Member States keep the last word whether a specific operation should be allowed or not in their territory”. It also notes that 14 Member States – half of the Union – have no mechanism for reviewing FDI on national security grounds, and it does not oblige states to adopt such mechanisms.
State funds bring state priorities
The scale of PRC investment in the EU warrants more scrutiny than that. In all sectors, Chinese FDI in the EU totals about €20 billion annually. Over a five-year period, the largest share – 28 percent – of Chinese FDI in Europe went to the energy sector. Between 60 and 70 percent of investment comes from the PRC’s sovereign wealth funds and state-owned enterprises, and even the remaining investment from the private sector may come with government strings attached. The Chinese government often attaches conditions on companies wishing to transfer capital abroad, and the extent of state involvement in private sector investments is not always clear.
These investments are diverse, and cover fossil fuel energy, renewables, electricity grids and nuclear power (such as the the state-run China Nuclear Power Group investing in the UK’s Hinkley Point development). The geographic spread of the investments is also diverse. The large energy markets in France and Germany attract much Chinese capital, but increasingly so do the smaller markets in southern Europe. In some cases, China has been able to take advantage of privatisation sales following the last recession, such as when China’s State Grid bought a quarter share of Greece’s electricity grid following privatisation under the international bailout plan.
Tech transfer can be a two-way street
Part of the motivation for these investments appears to be technology transfer. A recent academic study found that ‘technology integration’ was a motivation in Chinese acquisitions in wind and solar companies, particularly in Germany. The PRC government’s “Made in China 2025” initiative is explicit about the aim of acquiring technology from overseas. Of course this is a strategy pursued by many countries, but the level of Chinese investment in Europe’s energy sector may give it unprecedented access to new technologies. Some relatively small investments can give access to leading technologies, for example a PRC state-owned firm’s stake in Solibro, the German company with the world’s most efficient thin-film solar cell technology. In other cases, the investments are large and give access to major firms. In 2011 a Chinese sovereign wealth fund bought 30 percent of the exploration arm of French giant Engie (formerly GDF Suez), allowing it to nominate 2 of the 7 international Board members. This allows the PRC not only to shape the company’s direction, but also to know about commercially sensitive information and R&D initiatives not in the public domain.
Technology transfer need not be negative, if it is done with respect for existing intellectual property law. Europe can gain new ideas from Chinese participation in our energy market. Preparing the world for cleaner, more renewable energy requires some coordination and sharing of technology. And as a recent report commissioned for the International Renewable Energy Agency points out, China is emerging as a major source of new renewable energy technologies in its own right. “No country has put itself in a better position to become the world’s renewable energy superpower than China”, said the report. China is the world’s largest producer, exporter and installer of solar panels, wind turbines, batteries and electric vehicles. It also has the most renewable energy patents – 150,000 as of 2016, 29 percent of the global total, much higher than the US.
Welcome investment, but scrutinise properly
The approach of EU Member States to investigating investment deals has been inconsistent and without a coordinated strategy. When Italy joined the Belt and Road Initiative, the decision seems to have been rushed through, and led by political considerations. There was disagreement within Italy’s ruling coalition, with the Five Star Movement in favour of the deal, and the League more sceptical of it. Deputy Prime Minister Salvini made his concerns publicly known. The Commission also had concerns about a Member State joining an initiative that is as much about Chinese foreign policy as it is about commerce.
The EU’s energy sector ownership is highly internationalised, and much Chinese investment is not cause for alarm in itself. But the EU and its members collectively need to decide how much foreign ownership of its energy sector is desirable, and what kinds of ownerships would constitute a genuine strategic or security risk. With scrutiny and decision-making on FDI so inconsistent between Member States, there is a role for the EU to play in ensuring consistency and transparency. Matters of energy security and safeguarding leading technologies affect the whole of Europe, so it is right for the Commission to take an active role in reviewing investments, particularly by state-owned bodies. A first step would be to build on and strengthen the EU’s Screening Framework over the course of the next European parliament.