Boosting India-Australia clean energy collaboration through pooling public finance

Australia’s recently announced "Future Made in Australia Act" is the latest effort in a steadily increasing list of countries committing public finance to build domestic clean energy supply chains. It mirrors efforts in the US, Europe and India, and plans to offer subsidies and incentives to enhance domestic manufacturing and support critical industries like green metals, green hydrogen and value-added critical minerals.

Economies across the world are aggressively making plans to decarbonise their economies, with some of the most aggressive targets seen in the power sector. Between 2021 and 2030, planned global electricity generation from committed solar and on- and offshore wind projects (excluding China) will more than triple from 125 gigawatts (GW) to 459GW.

Such ambitious decarbonisation targets require stable markets and resilient supply chains. Today’s clean energy supply chains face several security concerns – notably the high dependence on imports from individual countries like China in key stages of clean energy supply chains.

China’s Domination on Global Clean Energy Supply Chains

China is the leading global supplier of clean energy technologies today and a net exporter of many of them. China holds at least 60% of the world’s manufacturing capacity for most mass-manufactured technologies (e.g. solar photovoltaic (PV), wind systems and batteries). For instance, in the case of polysilicon, 79% of global capacity is located in China and half of that is in the province of Xinjiang, making wind and solar players across the globe especially vulnerable to disruptions in this area.

China’s dominance is built on some key factors including high domestic demand, affordable energy and labour costs historically, less stringent environmental controls (which seem to be changing now) and supportive public policies. 

Building Resilience in Renewable Energy Supply Chain

Clean energy technologies, like solar PV and batteries, depend on various raw materials and minerals like aluminium, glass, copper, silicon, lithium, cobalt and nickel. Some of these minerals can take up to a decade to extract and process. Therefore, countries relying heavily on imports, notably from China, must strategically plan their investments in the supply chain.

However, the existing market conditions pose challenges for new manufacturers of modules, cells, wafers and battery components. Securing financing, accessing international markets and expanding operations is challenging in the current environment, where the dominance of a few countries and players has created significant market entry barriers.

Public Support for Scaling Up Domestic Supply Chains Imperative

Increased public funding is vital to de-risk innovations and investments in the clean energy supply chain and attract private capital. Many governments are actively creating policies and incentives to promote domestic clean-energy manufacturing. For instance, the US’ Inflation Reduction Act earmarks nearly US$30 billion in production tax credits for the renewable energy supply chain, with similar initiatives in the European Union, Japan and Korea. In India, the Production Linked Incentive (PLI) scheme for module manufacturing has an outlay of US$2.4 billion and aims to reduce imports and create domestic green jobs.

Issues With Achieving Aggressive Supply Chain Targets

However, governments pursuing the building of supply chain resilience through public finances face some key challenges. Firstly, while they incentivise domestic content sourcing to build domestic capacities, countries also aim for competitive neutrality for global players. Additionally, domestic content sourcing often relies on imports from countries against whom resilience is being pursued. For instance, in India's PLI scheme, there was minimal interest in the vertical integration from polysilicon to module manufacturing despite offering significant incentives.

Secondly, for developing countries such as India, incentives under schemes like PLI cannot rival those of developed economies like the IRA. Therefore, the emphasis must be on offering appropriate types and levels of incentives in specific sections of the supply chain to attract significant private capital flows. This approach is more effective than pursuing overly ambitious goals that may not yield the desired outcomes.

Cross Border Collaboration is Key

In Australia, where 27% of economic output depends on international trade, Prime Minister Anthony Albanese announced the Future Made in Australia Act, emphasising cooperation to achieve clean energy goals and capitalise on comparative advantages. Coordinating efforts can mitigate supply chain risks and maintain competitive neutrality.

In this context, the Australia-India Economic Cooperation and Trade Agreement (ECTA) is a significant development that aims to help Indian corporates make strategic investments in Australian critical mineral mines such as lithium and cobalt, which are essential for battery manufacturing. The ECTA also envisages technical collaboration among Indian and Australian firms on mining technology.

Pooling Public Finances to Make Strategic Investments

Besides resource use and technical collaboration, creating a shared pool of public finance can ensure adequate capital is available to finance such an arrangement. This capital can be reoriented from existing outlays, such as the PLI for battery manufacturing in India and the one envisaged under the new Future Made in Australia Act. This bi-sovereign pool of capital can also solicit contributions from multilateral development banks (MDBs).

This collective capital pool can offer catalytic support through grants for capacity building, project preparation and research and development in refining technology and low-carbon mining in India and Australia. Australian corporations can strategically invest in India utilising these incentives, and vice versa. Furthermore, long-term concessional debt from MDBs can be utilised to expand operations. Properly managed, these capital interventions can attract substantial private investment and facilitate strategic cross-border investments by private entities in both nations.

India’s National Investment and Infrastructure Fund (NIIF), a quasi-sovereign fund, has recently established a US$600 million bilateral India-Japan fund in partnership with Japan Bank of International Cooperation (JBIC) to finance low-carbon technologies in India and foster collaboration between Indian and Japanese companies. NIIF can set up a similar fund in collaboration with its Australian counterparts.

(This article was first published on pv-magazine.com.)