Let a hundred megawatts bloom
The UK-China energy relationship continues to grow, boosted by George Osborne's China visit
(Image via Channel 4 News)
What does a restless and ambitious Chancellor do during the traditional parliamentary recess for party conference season? The answer of course is to head for the land of milk and honey, a place which can help power Britain’s economic revival and chart a new course for the country’s long-term development. I know what you’re thinking and no, George Osborne isn’t in Germany,the US or that new ‘paradise’ which is the SNP’s Scotland. He is of course in China.
Osborne’s five-day trip marks another upswing in the UK-China relationship, following a cooling of relations in the wake of the Dalai Lama’s meeting with the Prime Minister in 2012. Since then Cameron and Osborne have both been to China, and the Chancellor’s current trip comes just before President Xi Jinping’s first official visit to the UK. This week Osborne has reinforced the UK government’s strategy of building relations between the two countries on commercial ties above all else, a strategy which Osborne clearly believes will be a key building block in a renewed UK economy.
The Chancellor has identified a number of strategic areas in which Britain can create a vibrant commercial partnership with China, including offshore RMB trading (the UK is now the leading RMB trading centre outside Asia), exports to China (Osborne aims for the country to become the UK's second biggest export market within 10 years) and energy.
In the energy space we wrote recently about the energy revolution China is undergoing (click here to read). The current Conservative government, and the previous Conservative-Liberal Democrat coalition, has been steadily positioning the UK as a partner in that endeavor. In addition, it has announced a series of policies aimed at encouraging Chinese investment in the UK’s energy sector.
This week we have seen a raft of announcements aimed at further strengthening bilateral cooperation in the sector. Most notably, early this week in Beijing, Osborne announced an initial £2bn government guarantee for the Hinkley Point nuclear power station, which is set to attract substantial Chinese investment. Critics have suggested that the announcement doesn’t materially change prospects of the troubled power station ever getting built. However Osborne’s announcement is significant as, if construction of the plant does come to fruition, it will in Osborne’s words “open the door to unprecedented co-operation” between both countries on nuclear plants.
Indeed, speaking in Beijing at the same time UK Energy Secretary Amber Rudd said she hoped China would develop more nuclear plants in the UK, starting with the construction of a nuclear reactor at Bradwell power station in Essex. While the prospects of Chinese investment and management of a sector as politically sensitive as nuclear has left many in Britain nervous, Rudd suggested that successful Chinese operations would be the best antidote to any lack of trust. That a communique from Osborne’s meeting with Chinese Vice Premier Ma Kai talks of assisting Chinese investors understand the UK’s regulatory, legal and electricity market issues, suggests there is still a long way to go before more concrete plans can be announced.
Offshore wind is also an area of collaboration between the two countries. During Osborne’s visit both sides committed themselves to a Chinese Industry Advisory Group on offshore wind, which will work with its UK equivalent. The Chinese are committed to rapid deployment of offshore wind in China and the group will explore how to do so cost-effectively. In the UK, the government is seeking Chinese investment in the offshore sector.
Sustainable urbanisation is an important part of China’s energy revolution, given impetus by increasing public anger in China over terrible urban pollution. In his meeting with Ma Kai, Osborne committed the UK to strengthening bilateral R&D efforts in this area. Interestingly, Osborne leveraged China’s interest in city clusters, which Chinese officials see as one solution to the issue of unfettered urbanisation, to his Northern Powerhouse policy. Whether China is best placed to provide counsel on urbanisation projects, given the current state of many Chinese cities, is debatable however.
The two countries also announced that they would continue to work together on power and gas market reforms, a key pillar of China’s energy revolution. China is attempting to address pricing imbalances which have distorted the sector and contradict its pledge that it would allow the market to set prices. As with the other policy announcements the UK government’s goal here is to identify commercial opportunities and attract Chinese investment to the UK. One wonders whether the UK’s retail power market, itself the subject of an ongoing reform process, will one day see the involvement of Chinese firms.
As the UK-China relationship, unencumbered for now by human rights issues, continues to bloom, the energy sector will remain, in the words of the communique released this week, a ‘key pillar of the bilateral relationship’. In nuclear, offshore wind, tidal power, and power markets, collaboration and investment is growing rapidly. Whether this proves to be the win-win both parties suggest it will remains to be seen.