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

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.