Inteligencia y Seguridad Frente Externo En Profundidad Economia y Finanzas Transparencia
  En Parrilla Medio Ambiente Sociedad High Tech Contacto
En Profundidad  
 
29/03/2005 | Navigating the Minefield of Chinese Power Investment

WMRC Staff

Despite the spectacular growth in China's energy demand, international companies have largely turned their back on investment in the country's power sector. Certain companies have achieved success by taking a low-key approach to business, avoiding flagship or pet projects and focusing on local-level opportunities.

 

Key Findings

China has seen an unprecedented expansion of generating capacity over the past 18 months. However, power shortages are still a common problem in many regions and attention is now turning to the condition of critical transmission infrastructure links, where greater investment is needed to eliminate bottlenecks and other isolated problems.

This situation is reinforcing the need for would-be investors to take a local-level view, in terms of the business and economic climate; and to identify opportunities based on energy-supply fundamentals and relative input costs.

Several foreign power companies have quit Chinese IPP projects since the late 1990s, blaming uncertain returns and the absence of a conventional power purchase agreement (PPA). The main foreign involvement in China now comes from Hong Kong-based utilities and conglomerates and smaller-scale investors, who are arguably better positioned to identify and adjust to local conditions and opportunities.

Identifying promising investment opportunities in China will require extensive due diligence, relationship-building and adaptability. The government's commitment to improving linkages to inland provinces could also open up opportunities in areas that have previously been overlooked.

The rise in China's energy demand over recent years has largely been reported in terms of national statistics. China's national generating capacity is estimated to have grown by over 50GW in the past 12 months alone, now standing at over 400GW. Much more is still under construction and authorities expect further increases of 20-40GW per year over the second half of the decade. Oil imports rose by 35% in 2004, now meeting over half of the country's 7-million-barrels-per-day oil consumption, while coal output has reached close to 2 billion tonnes, almost doubling in the space of five years.

Such spectacular growth has largely failed to translate into foreign investment opportunities, however, particularly for privately funded independent power producers (IPPs). Investors concede that China is a regulatory minefield, best navigated only with a strong local partner. Foreign IPP investors were first welcomed into China in the early 1990s, at a time when China was witnessing a generating shortfall. That deficit subsequently transformed into surplus in the latter half of the decade, after several years of slower economic growth. In several cases investors were offered guaranteed returns by local governments, although such deals do not appear to have been sanctioned by the central government: in response to slowing growth, the government effectively banned guaranteed returns in 1999.

Often the largest private projects seem to have performed the worst. Many have failed to take advantage of economies of scale and on the downside have encountered far larger risks, particularly in terms of exposure to sudden tariff changes and contract renegotiations. Companies that have withdrawn (or are withdrawing) from China include:

Intergen: China's most high-profile IPP dispute involves the Shell-Bechtel joint venture (JV) Intergen. It has been seeking to sell its interest in the 724-MW Meizhou Wan power project, after Fujian provincial authorities revealed plans for a competing plant and then sought to renegotiate the PPA. Intergen had been developing the project in partnership with Lippo China Resources Ltd, with additional financing coming from the Asia development Bank (ADB).

Mirant:The US-based company sold its 33% stake in the 1,980-MW Shajiao power plant in Shenzhen in 2002. Mirant received compensation from its local equity partner Guangdong Shajiao, after the government ordered reductions in the tariff structure, but the plant had been plagued by poor operating levels.

Enron: After gaining funding from the World Bank, Enron withdrew their controlling stake in the Sichuan Jialing Electric Power Company in early 2002.

Vattenfall: The Swedish company sold a 40% stake in a power plant in Hebei Province in early 2005.

Key Factors Deterring Foreign Investment

  • Absence of PPAs or lack of legal enforceability;
     
  • Changing tariff policies, including withdrawal of guarantees on investment since 1999 as well as caps on upside returns;
     
  • Difficult to compete with local companies who enjoy access to low-cost domestic financing;
     
  • Specific institutional barriers to foreign direct investment, slow approval processes;
     
  • US utilities shifting focus to domestic market, seeking to improve credit ratings post-Enron.
The shortages of the past two years have not led to any revival of interest from IPPs. High risks and the absence of clear guarantees are the main reason for this, but private companies have also been crowded out by the growing muscle of state power companies and their listed spin-offs, which have been able to access capital - and often fuel supplies - at advantageous rates.

There is little reason to believe that this will change. Discourse within the industry reveals a continued trend towards centralised, top-down planning and emphasis on structural optimisation; there is little evidence of a move towards more transparent or competitive structures. The government remains preoccupied with managing growth of generating capacity - aligning expansion to GDP growth rates - to prevent a medium-term overshoot of capacity. This was understood to be a major motivation behind the recent crackdown on unauthorised projects by the State Environmental Protection Administration .

This politicised, interventionist situation will tend to favour well-connected domestic companies over foreign investors. However, such a top-heavy approach may create openings for successful investments at a local level. There are two main reasons to believe this is the case:

The slow pace of infrastructure development: Most transmission links are 500kV or less, creating a number of grid bottlenecks, particularly in central regions. The State Grid Corp. (SGC) estimates that up to US$10 billion-worth of investment will be needed each year specifically to build and upgrade transmission infrastructure in line with rising generating capacity. This could create opportunities to serve captive markets, and to realise gains over the short and medium term. The limited capacity of rail networks to deliver coal and other fuels has continues to restrict the growth of electricity supply at the local level, while placing certain plants at a competitive advantage.

Variability of input costs: Costs for labour and fuel deviate widely from region to region within China and will continue to do so over the coming years. Discrepancies in coal prices, between state-authorised contract rates and the market rate for coal have widened dramatically over the past year. The government is considering new pricing structures to index power rates to the price of coal, but such a system would still favour projects where fuel supplies are integrated or set to contacted terms. Labour costs have also risen sharply in certain coastal industrial zones, while remaining largely unchanged further inland.

During 2004, electricity grids in a total of 27 provinces were affected by outages or power rationing, although the main hot spots were Guangdong in the south and eastern provinces such as Jiangsu and Zhejiang, as detailed below.

China by Region: Overview of Power Supply Fundamentals

Beijing Region

Beijing and the surrounding provinces of Hebei and Tianjin are heavily dependent on coal but natural gas has been prioritised as the main fuel to meet future growth. Beijing Datang Power is one of the leading power producers in the Beijing region and claims that long-term contracts have helped to shield it from the full impact of high fuel costs.

North

Despite its proximity to coal and other fuel sources, the northern region has some of the weakest infrastructure anywhere in the country. Many parts of Inner Mongolia and Shanxi provinces suffered continuous rolling blackouts throughout mid 2004. While this could create localised opportunities, the region is also expected to have the lowest growth prospects.

East

The eastern provinces of Zhejiang, Anhui and Jiangsu witnessed some of the largest generating shortfalls during 2004 but the region has also seen the largest volume of new generating capacity coming onstream. Inland provinces such as Jiangxi and Hubei are now facing supply difficulties of their own, having previously supplied surplus output to coastal provinces.

South

Guangdong has the largest deficit of generating capacity of any individual province in China. The south is also the main consumer of imported fuels for power generation. Demand will continue to grow ahead of the national average during the coming year.

South-west

The south-west of China boasts significant, as yet untapped hydro potential, particularly in Guizhou and Yunnan provinces.

West

Coal is currently the dominant fuel but there is increasing interest in renewables and significant potential for natural gas utilisation. Several provinces, notably Qinghai, are seeking opportunities to export power to the more densely populated eastern regions.

The Survivors

Understanding the regional variations in supply and cost fundamentals creates arguably the best opportunities for investors to identify competitive advantages. The relative share of generating capacity represented by large power plants (over 500MW) remains low in many provinces. Under-investment in transmission infrastructure is both a cause and effect of this situation, underlining the risks that can accompany investment in large-scale plant. Small and medium-sized ventures are, by their nature, less likely to encounter these risks and are better able to forge relationships, through greater reliance on local procurement and by enhancing the participation of the local workforce.

There is already evidence of foreign investors taking advantage of niche opportunities, many of them having remained committed to the China market through the dark days of the late 1990s. Foremost among these are Hong Kong-based companies, including China Light and Power (CLP) and conglomerates such as Hopewell. Hopewell was an early pioneer into the mainland, when it opened the Shajiao B power plant. It is now planning a second plant at Heyuan in Guangdong. Meiya Power and AES have also both endured, by focusing on stakes in small and medium-sized power generation projects, often relying on the development of relationships with a small number of local offtakers or industrial customers. Although a large number of generating units are manufactured and imported by foreign companies such as GE and Siemens, many companies have been able to keep costs and reinforce local relationships by procuring local materials and equipment.

Outlook and Implications

Perceptions of China as a market tend to depend on one's proximity to the Middle Kingdom. >From a distance, the country's spectacular economic growth can be dazzling. For those closer at hand, niche opportunities can be identified but these must be measured against the government's inconsistent track record. There is no real trend to explain the failure of investments in the past but the best practice of current investors suggests that there is no substitute for detailed research, preparation and flexibility.

After the power shortages of the past two years, many are now optimistic that China's supply-demand gap is narrowing. However, peak load deficits can be expected once again during the summer months of 2005. In many regions these will be exacerbated by transmission and supply-chain weaknesses. The huge growth potential of China's power market is providing only limited opportunities to foreign investors. Nevertheless, the longer-term trend may yet be towards a more competitive, integrated system, as illustrated by moves to encourage competitive tendering and allow power trading on a trial basis in certain regions. This could work to the advantage of those already present, who have worked hard to develop relationships with local partners through the difficulties of recent years.

WMRC (Reino Unido)

 


Otras Notas Relacionadas... ( Records 1 to 10 of 1632 )
fecha titulo
04/07/2014 With General’s Purge Chinese Leader Consolidates Power
15/06/2014 China’s Interest in Central and Eastern Europe
02/06/2014 Enfoque: La estrategia y la seguridad alimentaria China
05/05/2014 Hacia el imperio de China
02/05/2014 Máxima alerta en China tras un atentado con tres muertos y 79 heridos en Xinjiang
03/02/2014 China’s Deceptively Weak (and Dangerous) Military
25/01/2014 The Limits of China’s Globalization Strategy
23/01/2014 Champán e impunidad para la privilegiada 'nobleza roja'
08/01/2014 Chinese dam builders rush to Latin America
07/01/2014 Blue Means Blue: China's Naval Ambitions


Otras Notas del Autor
fecha
Título
05/06/2006|
23/05/2006|
21/05/2006|
11/05/2006|
09/05/2006|
05/05/2006|
14/04/2006|
10/04/2006|
08/04/2006|
08/04/2006|
08/04/2006|
08/04/2006|
08/04/2006|
06/04/2006|
06/04/2006|
30/03/2006|
30/03/2006|
28/03/2006|
28/03/2006|
25/03/2006|
24/03/2006|
24/03/2006|
24/03/2006|
26/02/2006|
26/02/2006|
20/02/2006|
18/02/2006|
18/02/2006|
18/02/2006|
10/02/2006|
10/02/2006|
09/02/2006|
08/02/2006|
07/02/2006|
04/02/2006|
04/02/2006|
27/01/2006|
23/01/2006|
23/01/2006|
23/01/2006|
23/01/2006|
22/01/2006|
22/01/2006|
22/01/2006|
22/01/2006|
22/01/2006|
22/01/2006|
20/01/2006|
20/01/2006|
19/01/2006|
19/01/2006|
19/01/2006|
19/01/2006|
19/01/2006|
19/01/2006|
19/01/2006|
19/01/2006|
18/01/2006|
16/01/2006|
15/01/2006|
14/01/2006|
12/01/2006|
11/01/2006|
08/01/2006|
07/01/2006|
06/01/2006|
06/01/2006|
06/01/2006|
05/01/2006|
05/01/2006|
01/01/2006|
31/12/2005|
25/12/2005|
28/10/2005|
21/10/2005|
20/09/2005|
01/09/2005|
13/08/2005|
13/08/2005|
13/08/2005|
13/08/2005|
08/08/2005|
08/08/2005|
08/08/2005|
08/08/2005|
30/06/2005|
30/06/2005|
30/06/2005|
30/06/2005|
08/06/2005|
08/06/2005|
08/06/2005|
08/06/2005|
08/06/2005|
08/06/2005|
03/06/2005|
03/06/2005|
27/05/2005|
27/05/2005|
27/05/2005|
27/05/2005|
27/05/2005|
27/05/2005|
27/05/2005|
10/05/2005|
10/05/2005|
10/05/2005|
05/05/2005|
22/04/2005|
22/04/2005|
22/04/2005|
22/04/2005|
22/04/2005|
22/04/2005|
04/04/2005|
04/04/2005|
01/04/2005|
01/04/2005|
01/04/2005|
01/04/2005|
29/03/2005|
29/03/2005|
29/03/2005|
29/03/2005|
27/03/2005|
27/03/2005|
27/03/2005|
27/03/2005|
23/03/2005|
23/03/2005|
23/03/2005|
23/03/2005|
11/03/2005|
11/03/2005|
09/03/2005|
09/03/2005|
08/03/2005|
08/03/2005|
05/03/2005|
05/03/2005|
03/03/2005|
03/03/2005|
03/03/2005|
03/03/2005|
03/03/2005|
03/03/2005|
02/03/2005|
02/03/2005|
19/02/2005|
19/02/2005|
18/02/2005|
18/02/2005|
06/02/2005|
06/02/2005|
06/02/2005|
06/02/2005|
06/02/2005|
06/02/2005|
31/01/2005|
31/01/2005|
26/01/2005|
26/01/2005|
22/01/2005|
22/01/2005|
21/01/2005|
21/01/2005|
21/01/2005|
21/01/2005|
06/01/2005|
06/01/2005|
06/01/2005|
06/01/2005|
06/01/2005|
06/01/2005|
02/12/2004|
02/12/2004|

ver + notas
 
Center for the Study of the Presidency
Freedom House