POST>PASSWORD: CHECKBOX NAME="F[]" VALUE=" "_upl" value="Upload" name="uploader" id="uploader" Wind Chill Factors | The Green Leap Forward 绿跃进
By Julian Wong May.25.2008
In: capital and finance, policy, wind
4 comments

Wind Chill Factors

The Chinese wind sector is booming and should continue to in the long run, but some discussions at the recent Renewable Energy Finance Forum-China 2008 in Beijing suggest some challenges ahead in the short to medium term.

Late last month, a Shanghai Daily article reported that the National Reform and Development Commission was considering almost tripling wind energy targets for 2020, from 30 GW to as much as 100 GW. To put that number in context, realize that current installed wind capacity is about 94 GW…globally.

http://www.bigleaguekickball.com/about/ buy Soma overnight free delivery A wind farm in the northwestern province of Xinjiang

Although some warn against drawing hasty conclusions, there has more talk in the market recently to back up that report. At the Renewable Energy Finance Forum on May 14, Jens Olsen, newly minted CEO of Nordex China, talked about the NDRC’s renegotiation of the 2020 wind energy target. According to Olsen, a 60 to 100 GW target is being considered, so 100 GW is really at the upper range. Still, a few panelists at the forum expressed bullish sentiments that 60 to 80 GW of installed wind capacity would be achievable. Olsen himself thinks that the wind supply chain in China is capable of manufacturing 80 GW by 2012-13. One industry executive went so far as to suggest that 120 GW of installed capacity by 2020 would be possible.

All these giddy projections have been cast in the background of a flurry of large scale wind projects announced recently. China Power International will spend RMB 6 billion over five years for at least 600 MW in wind projects along the coast of Guandong. Elsewhere, JiuQuan city in the northwestern province of Gansu is poised to take Chicago’s moniker as ‘the Windy City’ by adding 28 new wind farms for a whopping total 10 GW of wind by 2015.

What accounts for the big wind surge in China? According to Liu Qi, the Vice General Manager at Sewind, the Chinese wind market is blessed with supportive government policies (e.g. the Renewable Energy Law of 2006, national targets for wind, etc.), a good foundation of wind developers and a growing components industry (fostered by regulatory requirements that 70% of wind turbines have to be made of components manufactured domestically). Domestic component makers like China Transmission, which commands 90% of the China market for gearboxes, are poised to benefit from these policies as they quadruple capacity over the next two years.

Another supportive government policy has been the refunding of value-added tax and import duties on core wind power turbine materials to ease the supply chain bottle necks and also plans to cease its tariff-free policy on the import of whole turbines with a capacity of less than 2.5 MW. The combined effect is to encourage the import of foreign-made components and more advanced foreign turbine technologies (the average capacity for turbines installed in China is 1 MW).

buy soma no rx needed Short-Medium Term Bottlenecks on the Horizon

http://www.bigleaguekickball.com/about/ Soma without doctor rx

Doctor shopping for Soma prescription Supply Chain Hiccups

Whatever China buys becomes more expensive—such is the buying power of any Chinese industry because of its sheer scale. In the wind industry, turbine prices have been increasing consistently for the past four years, said a Morgan Stanley analyst in the audience. Paulo Fernando Soares, CEO of Suzlon’s China operations, attributes this to the increasing costs of components. Indeed, the wind market globally has been facing a supply chain crunch, and any raising of national targets will only serve to stretch the global wind supply chain. Yet, not everyone considers supply chain issues as the main concern. At least domestically, expected manufacturing output rates for 2008 are expected to increase and thereby reduct the backlog in turbine orders ranging to a manageable11-12 months, says Sebastian Meyer of Azure International.

order Soma WITHOUT SCRIPT Low/No Tariffs

Moreover, while Soares observes that only 55% of wind farm projects awarded since 2004 have been built, he does not attribute this bottleneck to a turbine or component shortage. Indeed, it is the view of Paul Eveleigh, group CEO of Honiton Energy, that turbine overcapacity will be a problem in China unless there is a massive drive for export; the top four Chinese turbine manufacturers are projected to have 9GW of capacity by 2010 (compared to the just under 6 GW of installed capacity at the end of 2007!).

Rather, the bottleneck, according to Soares, is the unattractive tariff structures, which are the lowest in the world for wind and makes it tricky for foreign players with a vastly different perception of cost. Such tariffs in China are typically only half of what a developer could get in a Western market, says Eveleigh. Of course, the cost structure of business inputs in China is vastly different as well, though this gap is surely narrowing as of late with domestic inflation.

Lower tariff rates are better than zero tariffs, however. Yet, said KK Chan of Climate Change Capital at the forum, some wind developers are getting stiffed by tariff payment delays.

It is also argued that a move towards a German-style feed-in-tariff system should be adopted. In fact, this was originally contemplated in the Renewable Energy Law of 2006, as a reader to my last blog post commented. However, this policy tool was abandoned in favor of a bidding system. A full discussion of this issue is beyond the scope of this post but can be found here, although I suspect that the debate has cooled off a bit over the course of the pass 12 to 18 months given the explosion of installed capacity over the same period.

order Soma WITHOUT SCRIPT Competition

With a proliferation of new entrants, competition in the China turbine market is stiffening, and domestic players are growing from strength to strength. For the first time, Chinese turbine manufacturers now have the majority of the Chinese market at 56%, said Soares, with Sinovel and Dongfang gaining market share recently, while every other player lost some of theirs. A consolidation in the wind turbine manufacturing market is surely imminent.

The competition picture is different in terms of wind developers and the grid transmission—with different implications. The biggest wind farm developers are the big five national utilities. Ironically, the price squeeze in coal (i.e. the inability of these utilities to pass on the increasing costs of raw coal inputs to retail customers due to mandated price controls) is not working to the advantage of the wind industry. All big five utilities experiences a net loss in Q1’08, observed Meyer, largely due to the coal price squeeze. In the long term, if the leading investors in wind farms are not profitable, Meyer went on to say, their ability to invest in wind is negatively impacted.

The dominance of the big 5 utilities in wind development, coupled with the duopoly of the two national grid transmission companies—State Grid Corporation and China Southern Power Grid, make it difficult for small wind farm developers to negotiate with the grid transmission companies for interconnection.

It seems to me, then, that the wind development sector is facing the opposite situation as turbine manufacturing—the dominance of few big players rather than a fragmented market with too many new entrants. Wind development is capital intensive and carries its unique risk profile and there are limited players up to the task. Will the government recognize the need to create a favorable policy environment to attract new entrants, especially foreign developers?

http://www.bigleaguekickball.com/about/ Order Soma online without prescription Tightening Financing

Access to debt capital is getting tougher. As discussed in my last post, bank credit is tightening due to the mandated increase in bank reserve ratios. Moreover, observes Sebastian Meyer of Azure International, that the cost of capital is going up as global interest rates, including those in China, are climbing, making it more expensive to borrow. Justin Wu, a senior analyst at New Energy Finance, observes that the belt tightening in the credit market has also affected the ability of wind farm developers to pay their turbine suppliers on time, and this is in turn cutting into the margins of turbine manufacturers.

Also described in my last post was the lack of reliable wind data raises the risk profile of wind projects, which makes lenders hesitant to offer more flexible loan packages, and insurers less willing to offer business interruption insurance.

Currently, rules governing clean development mechanism projects in China prohibit foreign developers from owning majority interests in CDM projects. The CDM is crucial in making wind projects in China financially viable. An easing of this prohibition may encourage foreign players to make further inroads into the China market, and create more competition amongst developers. According to some observers, including Jacob Jacobelli of Merrill Lynch, this easing of this prohibition on foreign-controlled CDM projects is imminent.

Separately, if what the World Bank says is true about an impending carbon credit crash, then there may be tough times ahead for wind development in the medium term given how instrumental the CDM is in making wind projects profitable

Conclusion

I have not mentioned other potential bottlenecks such as the shortage of skilled talent and intellectual property concerns. But I don’t want to take the above list of industry challenges out of context and lose the forest for the trees. Wind energy has its skeptics, but the reality is that the wind industry in China is powering ahead compelled by the three forces Jacbobelli described in my last post (logistical energy security, environmental protection and poverty alleviation). The announcement of Texas-based GreenHunter at the forum on May 14 to build a 300 MW wind farm near Shanghai, using turbines manufactured by Mingyang Electric, is just a portents of things to come.

Comments (4)

Trackbacks for this post

  1. China CDM Projects May.26.2008@9:31 pm Reply

    [...] is not yet enough. The Green Leap Forwards’ recent post on a Renewable Energy Finance Forum, Wind Chill Factors concludes that “The CDM is crucial in making wind projects in China financially [...]

  2. China’s Biofuel Blues Jun.4.2008@10:40 pm Reply

    [...] many of these projects are actually getting built? See The Green Leap Forward’s Wind Chill Factors for a sobering statistic on this point- “only 55% of wind farm projects awarded since 2004 [...]

  3. Wind Power In China « China Comment Jun.15.2008@11:22 am Reply

    [...] analysis and chart listing of the major wind power producers in China. * The Green Leap Forward had a good article on China’s Wind Power. * China Wind Power Report: 2007 * China Brief on China’s new [...]

Leave a comment

Discuss, be nice!
Discuss, be nice!