Economic cooperation between Australia and India may open doors for investment in clean energy technology. The Institute for Energy Economics and Financial Analysis (IEEFA) discusses how public funding and resource pooling could support manufacturing ambitions.
Australia's New Supply Chain Act
The Future Made in Australia Act has recently been introduced joining similar initiatives from the US, Europe and India that invest public funds into domestic clean energy supply chains. This industrial package offers subsidies and incentives to boost local manufacturing, focusing on decarbonizing economies with ambitious targets particularly in the power sector.
Challenges and Realities in Clean Energy Supply Chains
China is the primary provider of clean energy technology controlling at least 60% of global manufacturing capacity for solar panels, wind systems and batteries. It holds about 79% of the world's polysilicon capacity with half located in Xinjiang making wind and solar companies there vulnerable to disruption. China's dominance is supported by robust domestic demand, affordable labor costs, lenient environmental regulations and favorable government policies.
Current challenges for clean energy supply chains include reliance on imports from a limited number of countries. Planned electricity generation from solar and wind projects outside of China is projected to increase significantly between 2021 and 2030 requiring stable markets and robust supply chains to achieve these targets.
Building Resilient Clean Energy Supply Chains
Clean energy technology relies on raw materials and minerals such as aluminium, glass, copper, silicon, lithium, cobalt and nickel. Given the lengthy process of extracting and processing some materials, nations relying on imports particularly from China must strategically invest in their supply chains.
The concentration of clean energy manufacturing among a few nations and corporations poses challenges for emerging producers in obtaining funding, entering global markets and scaling up. Boosting public funding is crucial to mitigate risks in innovation and investment attracting capital into clean energy supply chains. Governments are formulating policies and incentives to encourage domestic manufacturing.
The US Inflation Reduction Act (IRA) allocates nearly $30 billion in production tax credits for the renewable energy supply chain, mirroring similar initiatives in the European Union, Japan and South Korea. In India, the production-linked incentive (PLI) scheme for module manufacturing is budgeted at $2.4 billion to reduce imports and foster domestic clean energy employment opportunities.
Governments face challenges in using public funds to boost supply chain resilience, aiming to promote local production without imposing trade barriers. However, sourcing domestic content often involves imports from countries targeted by resilience measures. For instance, India's PLI program struggled to attract interest in vertical integration despite offering incentives due to continued reliance on Chinese raw materials.
Developing nations like India should focus on offering tailored incentives in various supply chain segments to attract private investment rather than aiming for overly ambitious goals that might not deliver the desired outcomes.
Energy Goals through Collaboration
Australian Prime Minister Anthony Albanese unveiled the Future Made in Australia Act highlighting collaboration to reach clean energy objectives and leverage comparative strengths. Aligning endeavors can reduce supply chain vulnerabilities and uphold competitive fairness.
The Australia-India Economic Cooperation and Trade Agreement (ECTA) is designed to facilitate strategic investments by Indian companies in mining critical minerals in Australia including lithium and cobalt crucial for battery production. The ECTA also envisions technical cooperation between Indian and Australian enterprises in mining technology.
Establishing a mutual pool of public funds can guarantee sufficient capital for financing such agreements. This funding could be redirected from current expenditures such as India's PLI for battery manufacturing and the Future Made in Australia Act. The shared capital pool between the two nations could seek contributions from multilateral development banks (MDBs). This shared capital pool can act as a catalyst for clean energy by providing funding for capacity building, project preparation and R&D in technology refinement and low-carbon mining in both India and Australia. Australian companies can strategically invest in India using these incentives and vice versa.
Additionally, long-term concessional debt from MDBs can support the expansion of operations. When managed effectively, these capital injections can draw significant private investment and promote strategic cross-border investments by private entities in both countries.
India's quasi-sovereign National Investment and Infrastructure Fund (NIIF) recently launched a $600 million bilateral India-Japan fund with the Japan Bank of International Cooperation to finance low-carbon technology in India and encourage collaboration between Indian and Japanese firms. The NIIF could establish a comparable fund in partnership with its Australian counterparts.