IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v15y2023i3p1784-d1038820.html
   My bibliography  Save this article

Effect of Chinese Currency Appreciation on Investments in Renewable Energy Projects in Countries along the Belt and Road

Author

Listed:
  • Huazhang Wang

    (College of Electrical Engineering, Southwest Minzu University, Chengdu 610041, China)

  • Daji Ergu

    (College of Electronic & Information Engineering, Southwest Minzu University, Chengdu 610041, China)

  • Wenjiao Zai

    (College of Engineering, SiChuan Normal University, Chengdu 610101, China)

Abstract

Foreign investment in renewable energy generation projects is a critical part of the Belt and Road Initiative. Under the background of the market economy, the electric energy will participate in power market competition among the countries along the line, and the sales revenue will be settled in the local currency. The exchange rate of the countries along the Belt and Road fluctuates frequently and widely, thereby posing significant risks to the investment income of the projects. To address this problem, this paper proposes the concept of Ek as the effective exchange rate expressed by the on-grid price, investment cost per kilowatt electricity generation equipment, and annual operating cost rate of unit power generation capacity. Moreover, this paper presents a model of power generation cost, income, and earning expressed by the real exchange rate. The flexibility formula of the fluctuation of power generation cost, income, profit, and internal rate of return relative(IRR) to Ek is derived, and the effect of exchange rate level and fluctuation on projects is analyzed. With the wind power projects invested by China in Pakistan taken as an example, the trend during the entire life cycle is calculated. The changes in net profit rate, IRR, and levelized cost of energy (LCOE) are calculated under Chinese currency appreciation of 10%, 20%, and 35% and 5% and 10% reduction of investment cost per unit. As the Chinese currency appreciates and the project IRR declines significantly, LCOE decreases slightly, but this decrease is not sufficient to compensate for the losses caused by the decline in IRR. The following effective measures are proposed to deal with the exchange rate fluctuation of foreign renewable energy generation projects: building energy Internet, reducing project cost, and using Chinese currency as the settlement currency. In this paper, a solution is provided for investments in renewable energy projects in regions where exchange rates fluctuate greatly.

Suggested Citation

  • Huazhang Wang & Daji Ergu & Wenjiao Zai, 2023. "Effect of Chinese Currency Appreciation on Investments in Renewable Energy Projects in Countries along the Belt and Road," Sustainability, MDPI, vol. 15(3), pages 1-23, January.
  • Handle: RePEc:gam:jsusta:v:15:y:2023:i:3:p:1784-:d:1038820
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/15/3/1784/pdf
    Download Restriction: no

    File URL: https://www.mdpi.com/2071-1050/15/3/1784/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Daniel Velásquez-Gaviria & Andrés Mora-Valencia & Javier Perote, 2020. "A Comparison of the Risk Quantification in Traditional and Renewable Energy Markets," Energies, MDPI, vol. 13(11), pages 1-42, June.
    2. Deseatnicov, Ivan & Akiba, Hiroya, 2016. "Exchange rate, political environment and FDI decision," International Economics, Elsevier, vol. 148(C), pages 16-30.
    3. Sadorsky, Perry, 2012. "Modeling renewable energy company risk," Energy Policy, Elsevier, vol. 40(C), pages 39-48.
    4. Tan, Yan & Uprasen, Utai, 2022. "The effect of foreign direct investment on renewable energy consumption subject to the moderating effect of environmental regulation: Evidence from the BRICS countries," Renewable Energy, Elsevier, vol. 201(P2), pages 135-149.
    5. Takagi, Shinji & Shi, Zongying, 2011. "Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008," Japan and the World Economy, Elsevier, vol. 23(4), pages 265-272.
    6. Magali Dauvin, 2014. "Energy prices and the real exchange rate of commodity-exporting countries," International Economics, CEPII research center, issue 137, pages 52-72.
    7. Almona Tani & Piergiuseppe Morone, 2020. "Policy Implications for the Clean Energy Transition: The Case of the Boston Area," Energies, MDPI, vol. 13(10), pages 1-15, May.
    8. Li, Yanhong & Kou, Gang & Li, Guangxu & Peng, Yi, 2022. "Consensus reaching process in large-scale group decision making based on bounded confidence and social network," European Journal of Operational Research, Elsevier, vol. 303(2), pages 790-802.
    9. John Martin & Doug Ramsey, 2009. "The Economics of Wind Energy," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(2), pages 100-109, March.
    10. Hernández-Moro, J. & Martínez-Duart, J.M., 2013. "Analytical model for solar PV and CSP electricity costs: Present LCOE values and their future evolution," Renewable and Sustainable Energy Reviews, Elsevier, vol. 20(C), pages 119-132.
    11. Magali Dauvin, 2014. "Energy prices and the real exchange rate of commodity-exporting countries," Post-Print hal-03399446, HAL.
    12. Ekholm, Karolina & Moxnes, Andreas & Ulltveit-Moe, Karen Helene, 2012. "Manufacturing restructuring and the role of real exchange rate shocks," Journal of International Economics, Elsevier, vol. 86(1), pages 101-117.
    13. Thomas Klitgaard, 1999. "Exchange rates and profit margins: the case of Japanese exporters," Economic Policy Review, Federal Reserve Bank of New York, vol. 5(Apr), pages 41-54.
    14. Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
    15. Hugo Morais & Tiago Pinto & Zita Vale, 2020. "Adjacent Markets Influence Over Electricity Trading—Iberian Benchmark Study," Energies, MDPI, vol. 13(11), pages 1-22, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Salisu, Afees A. & Adekunle, Wasiu & Alimi, Wasiu A. & Emmanuel, Zachariah, 2019. "Predicting exchange rate with commodity prices: New evidence from Westerlund and Narayan (2015) estimator with structural breaks and asymmetries," Resources Policy, Elsevier, vol. 62(C), pages 33-56.
    2. Chandrarin, Grahita & Sohag, Kazi & Cahyaningsih, Diyah Sukanti & Yuniawan, Dani & Herdhayinta, Heyvon, 2022. "The response of exchange rate to coal price, palm oil price, and inflation in Indonesia: Tail dependence analysis," Resources Policy, Elsevier, vol. 77(C).
    3. Go, You-How & Lau, Wee-Yeap, 2021. "Extreme risk spillovers between crude palm oil prices and exchange rates," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    4. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
    5. Sakli Hniya & Ahlem Boubker & Fatma Mrad & Sawssen Nafti, 2021. "The Impact of Real Exchange Rate Volatility on Foreign Direct Investment Inflows in Tunisia," International Journal of Economics and Financial Issues, Econjournals, vol. 11(5), pages 52-67.
    6. Ntokozo Patrick Nzimande & Marcel Kohler, 2016. "On the Validity of Purchasing Power Parity: Evidence from Energy Exporting Sub-Saharan Africa Countries," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 66(3), pages 71-82, July-Sept.
    7. Niftiyev, Ibrahim, 2020. "Determinants of the Agricultural Exports in Azerbaijan," EconStor Preprints 226347, ZBW - Leibniz Information Centre for Economics.
    8. Yıldırım, Durmuş Çağrı & Erdoğan, Fatma & Tarı, Elif Nur, 2022. "Time-varying volatility spillovers between real exchange rate and real commodity prices for emerging market economies," Resources Policy, Elsevier, vol. 76(C).
    9. Aye Aye Khin & Wong Hong Chau & Ung Leng Yean & Ooi Chee Keong & Raymond Ling Leh Bin, 2017. "Examining between Exchange Rate Volatility and Natural Rubber Prices: Engle-Granger Causality Test," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 33-40.
    10. Anna A. Gainetdinova, 2023. "Asymmetric Impact of Geopolitical Risk and Economic Policy Uncertainty on Russian Ruble Exchange Rate," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 22(2), pages 270-293.
    11. Abubakar Lawan Ngoma & Normaz Wana Ismail & Zulkornain Yusop, 2016. "An Analysis of Real Oil Prices and Real Exchange Rates in Five African Countries," Foreign Trade Review, , vol. 51(2), pages 162-179, May.
    12. Allegret, Jean-Pierre & Mignon, Valérie & Sallenave, Audrey, 2015. "Oil price shocks and global imbalances: Lessons from a model with trade and financial interdependencies," Economic Modelling, Elsevier, vol. 49(C), pages 232-247.
    13. Gabriel Gomes, 2016. "On the impact of dollar movements on oil currencies," EconomiX Working Papers 2016-1, University of Paris Nanterre, EconomiX.
    14. Jean-François Carpantier, 2021. "Commodity Prices in Empirical Research," Dynamic Modeling and Econometrics in Economics and Finance, in: Gilles Dufrénot & Takashi Matsuki (ed.), Recent Econometric Techniques for Macroeconomic and Financial Data, pages 199-227, Springer.
    15. Gurbanov, Sarvar & Nugent, Jeffrey B. & Mikayilov, Jeyhun, 2017. "Management of Oil Revenues: Has That of Azerbaijan Been Prudent?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 5(2), pages 1-20.
    16. Boubakri, Salem & Guillaumin, Cyriac & Silanine, Alexandre, 2019. "Non-linear relationship between real commodity price volatility and real effective exchange rate: The case of commodity-exporting countries," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 212-228.
    17. Zhang, Teng & Ouyang, Puman, 2018. "Is RMB appreciation a nightmare for the Chinese firms? An analysis on firm profitability and exchange rate," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 27-43.
    18. Pazouki, Azadeh & Zhu, Xiaoxian, 2022. "The dynamic impact among oil dependence volatility, the quality of political institutions, and government spending," Energy Economics, Elsevier, vol. 115(C).
    19. Ma, Xiuying & Yang, Zhihua & Xu, Xiangyun & Wang, Chengqi, 2018. "The impact of Chinese financial markets on commodity currency exchange rates," Global Finance Journal, Elsevier, vol. 37(C), pages 186-198.
    20. Rodrigo da Silva Souza & Leonardo Bornacki Mattos, 2022. "Oil price shocks and global liquidity: macroeconomic effects on the Brazilian real," International Economics and Economic Policy, Springer, vol. 19(4), pages 761-781, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:15:y:2023:i:3:p:1784-:d:1038820. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.