Something similar happened in commercial law. A growing set of mandates and incentives, introduced with the commendable intent of building clean, homegrown energy, adds to the supply chain needed to build an energy system for the 21st century.
So-called Local Content Requirements, or LCRs, are found on everything from Indonesian solar farms to US wind farms and electric cars. It seems to be thriving. According to Megan Hogan, an analyst at the Peterson Institute for International Economics, the number of countries they are in will double to 24 by 2021.
Clearly, such rules run counter to trade law, but with a growing focus on energy as a matter of national security and the weakening of the World Trade Organization after the Trump administration dissolved its supreme body in 2019, there is little sign of recovery. Otherwise, it's a concern. Like British planning laws, the LCR may seem simple and even harmless. In fact, it can be just as effective as a legal ban.
Take South Africa, for example. The country's power grid has been collapsing more than a decade ago after billions of dollars were wasted and siphoned off state-owned generators by Eskom Holdings SOC Ltd. Solar panels seem to be a good solution to this problem, allowing homes and businesses to generate their own electricity when the power grid goes out, as backup diesel generators do in less affluent parts of Africa.
However, they are extremely rare. According to BloombergNEF, only 1.04 GW of commercial and residential panels were installed nationwide in 2021, compared to 17 GW in Australia, a country also blessed with abundant solar power. In the decade to 2021, solar and wind power have fallen from 3.5% to 20% of Australia's electricity supply. In South Africa, it rose from zero to 6.4 percent.
In part, that's because Australia has few restrictions on the production of renewable energy equipment, while South Africa waited until January this year to relax rules that require 100% of solar panel components to be produced locally. (Fossil fuels are treated more leniently, requiring only 60% of the local content for the large and incomplete Medupi and Kusil coal-fired power plants.)
Countries that do not have a renewable energy equipment industry can assume that LCR can provide a good start to life. Basically, they are a chicken and egg problem. Manufacturers won't invest if they don't think there will be a market for their products, but developers won't sign contracts to sell electricity or order panels and turbines unless they're sure the plants can deliver on time and on budget. This is a difficult problem in countries like South Africa, where the entire manufacturing sector is suffering, especially due to grid instability, which could justify more investment in energy.
Such regulations are perhaps obscene at best in countries such as Ghana, Morocco, Saudi Arabia and South Africa, which do not have a well-developed manufacturing sector that can supply the required equipment. However, they may cause the most damage in the larger countries where supply chains will be built, but at higher costs and on a smaller scale than a move away from fossil fuels.
A growing body of research has shown that renewable LCRs are effective at increasing the cost-effectiveness of carbon-neutral technologies, but they fall short when it comes to increasing industrial efficiency. A 2020 study found that the law raised the price of Indian solar power by about 6%, but failed to prevent domestic production from losing market share to cheaper imports.
Ironically, it highlights energetic changes that allow LCR development. The government doesn't really care whether disposable cups or plastic shoelaces are made in China, but power plants are more strategic and therefore worth protecting. This puts another inch on the scale to offset the major economic benefits of carbon-neutral energy. In many countries, producers of fossil fuels do not have to pay a single penny for the health and climate damage caused by their pollution. At the same time, renewable energy competitors usually have to bear the costs of grid stability, and often pay for coal contracts signed many years ago in accepted or paid coal contracts. Increasingly, they have to support the sub-economy of the domestic production sector as well.
For generations after World War II, Latin American countries pursued import substitution industrialization policies, raising high tariff barriers to create domestic manufacturers. They have a sclerotic, indebted factory sector that is far below the economies of the Asian tigers that have opened up to trade. The world has only about 30 years to change its energy system to a more sustainable one. We cannot waste decades on a new wave of protectionism.
More from Bloomberg Opinion.
• The fight for climate change is turning into a geopolitical game. Liam Denning
• New European carbon tariffs will not help the climate. Mihir Sharma
• The United States can create and combat climate change. Elaine R. father.
This column does not necessarily reflect the opinions of the editors or Bloomberg LP and its owners.
David Pickling is a Bloomberg columnist covering energy and commodities. He previously worked at Bloomberg News, The Wall Street Journal, and the Financial Times.
Other similar stories are available at bloomberg.com/opinion.
