China's power industry A few cautionary tales for foreign companies
By James Kynge
Published: April 30 2003 5:00 | Last Updated: April 30 2003 5:00
China's power industry is experiencing a bonanza. But glaringly absent from the fun are foreign generating companies. Demand for electricity has shot up in the last few months, with shortages starting to appear in some provinces that have suffered from oversupply for years.
The low cost of domestic capital, coupled with the rapid ascent up the technology ladder of local equipment companies, have combined to create the conditions for a large expansion in capacity. But the worry, in the short to medium term, is that the speed of capacity installation cannot keep pace with demand in some areas.
Foreign power generators, however, are not in great demand. The requirement that foreign generators have to finance at least part of their costs in foreign currencies and with foreign equipment has meant that many of their plants are too expensive to compete.
Cautionary tales from those that came unstuck in the late 1990s and early 2000s are legion. One of the longest running disputes, that between the Fujian provincial government and Fujian Pacific Electric (FPE), consortium that includes Royal Dutch Shell, Bechtel, El Paso Electric, Indonesia's Lippo Group and the Asian Development Bank is seen as a test case for the future participation of foreign companies in China's power sector.
FPE wants to secure refinancing for the $655m 724MW facility but disagreements over tariff rates with Fujian provincial authorities have threatened the plant's viability. The amount of debt that requires refinancing is $511m from 18 high profile international lenders. The basic dispute is this; an oversupply of power in Fujian has helped drive down the unit cost in electricity, meaning that authorities are loath to honour previous agreements on tariff rates made with FPE.
FPE would be prepared to take a lower tariff than that agreed, but Fujian authorities are dragging out the negotiations because they have limited use for the power generated.
"We believe the project was a model investment. If we are unable to conclude some type of equitable arrangement in the near term, that will be a bad signal for China and for foreign investment in the energy sector," says Mark Takahashi, China managing director for InterGen, a partnership between Royal Dutch Shell and Bechtel which has a 45 per cent stake in FPE.
"China's demand for power is so large that ultimately they will need foreign investment. The way to attract foreign investment is to make a very transparent legal and industry framework and to honour contracts that are in place," says Mr Takahashi.
There is, however, a question as to whether it is China that needs foreign power generators or foreign power generators need China. Certainly, the demand for new capacity has become red hot in some provinces where shortages have emerged, particularly Guangdong, Zhejiang, Shanghai, Jiangsu, Shandong, Henan, Hebei, Sichuan and Shanxi.
China generated 264.3bn kWh of electricity during the first two months of this year, an increase of 16.8 per cent over the same period in 2002, as industrial and commercial demand rocketed. Overall, the State Eelectricity Regulatory Commission (SERC), the new industry watchdog, expects demand to increase by 9 per cent during 2003, reaching 1,8000bn kWh by the end of the year.
Shi Yubo, vice-chairman of the SERC, has admitted in local media that certain areas of China will experience worsening electricity supply conditions during 2003.
Although several capacity additions are planned, most are not coming on stream until next year or later. Huaneng Group, a large domestic power company, plans to double capacity over a five to 10 year time frame and has received bank credit lines to enable it to achieve this plan.
Shenhua group, a state-owned coal and power company, has placed orders for 5,400MW of new generating capacity, to be installed in Guangdong, Zhejiang and Hebei provinces by 2005.
The Southern Grid Corp has launched a 17-year market development plan to upgrade transmission links between Guangdong and neighbouring southern provinces.
China's generating capacity currently stands at about 315,000MW but analysts predict that this may increase to more than 500,000MW by 2010 if more widespread shortage problems are to be avoided. This type of increase presupposes an annual capacity addition of 25m KW, but this year only about 15m KW is slated to come on stream. That means that shortages may persist for some time, driving up the price of electricity and earning bumper profits for generators but crimping the ability of industry to expand.
Aside from the problem of insufficient capacity, are three other infrastructure bottleknecks. One is that the water levels in the Yangtze and Yellow rivers is dwindling, a factor that threatens the hydropower dams along those rivers.
There are also shortages of coal after the government closed down many marginal or dangerous mines.
The third infrastructure frailty is the lack of transmission capacity in some areas - a subject that is of interest to foreign equipment suppliers such as ABB, the Swiss-Swedish company. But for power generators, foreign companies appear likely to be restricted to areas such as gas thermal plants where Chinese counterparts lack the necessary technology and expertise. But given the example of Intergen and FPE, it is debatable whether foreign companies will flock to participate in gas thermal projects that will almost certainly require higher tariffs than their coal-fired counterparts. |
