China Wind’s Booming…Or Is It?
Despite the dire international financial straits and the tightening of credit markets, the consensus at a CEO panel at the Global/China Wind Power conference two weeks ago (Oct 29) is that China’s wind industry will continue its torrid growth in the long term. China’s installed wind capacity has grown rapidly in recent years, doubling roughly from 3 GW at the end of 2006 to just under 6 GW at the end of 2007. There are estimates that as much as 7 GW will be added by the end of this year alone. The government’s 10 GW by 2010 target will easily be shattered, as will, by all indications, its 30 GW by 2020 target. But here at The Green Leap Forward, we’d like to dig a little deeper beneath the rosy predictions of the wind industry CEOs.
Seated from L-R: Arthoures Zervous of Global Wind Energy Council; Zhang Dingjin of China Composites Group; Wu Gang of Goldwind; Andreas Nauen of Siemens Wing; Hang Junliang of Sinovel; Thomas Rochterich of Nordex China; and Lin Junfeng of CREIA.
Both Andreas Nauen, CEO of Siemens Wind, and Li Junfeng, Secretary General of the China Renewable Energy Industry Association (CREIA) agreed that wind is a long term priority for the government and a temporary financial crisis should not pose much problems for the wind industry over such a time horizon.
Wu Gang, CEO of Goldwind even suggested that wind might benefit from a downturn to the extent that the government decides that renewable energy is a strategic sector in which to re-position a cooling economy for future growth (see David Tyfield’s response to the last question in this post). [It will indeed be interesting to see how the recent RMB 4 trillion bailout package by the central government will affect the energy industry. To the extent it results in upgrade to grid infrastructure (see discussion on interconnection issues below), that could be good for wind.] Han Junliang, CEO of Sinovel, was of the opinion that the big five power companies in China have no choice but to continue their own buildout of wind power because of the long term trajectory of coal prices.
The financial crisis may pose benefits for different reasons. If the crisis actually leads to a slow down in demand for wind projects, this may ease supply-chain bottlenecks for components, allowing production capacity for such components to catch up to demand. Uncertain economic times may also increase the “flight to quality” as far as capital and credit are concerned, channeling funds to projects with high quality turbines, and exert a general pull on the industry towards turbine performance optimization.
With the wind industry growing practically at 100% per year over the past few years, wind turbine prices have increased markedly as demand outstrips supply. Other factors contributing to turbine price increases are the increase in raw materials prices as commodities like steel have sharply increased in recent years (recent ebb in commodity prices notwithstanding), and supply-chain bottlenecks for certain components. For instance, a ball bearings shortage has resulted in 25% of manufactured gearboxes missing ball bearings, accounted Thomas Richterich, CEO of Nordex China.
China’s Renewable Energy Law of 2006 and other follow-on renewable energy policies have created a favorable policy and business environment for the wind industry. Whereas a few years ago no Chinese company was capable of making a wind turbine, there were at the end of 2007 some forty Chinese companies in the wind turbine manufacturing business, with Sinovel and Goldwind catapulting into the top ten turbine manufacturers today. Such an explosion of domestic manufacturing capacity has been spurred by the requirement that 70% of a turbine’s parts have to be domestically manufactured. This policy has, of course, also spurred a whole ecosystem of wind component manufacturers, and contributed to a cost of turbines that is more competitive than anywhere else in the world.
All That Glistens…
But all that glistens is not gold. When you dig below the rosy numbers of installed capacity growth, it is clear that significant fissures exist, primarily in terms of wind turbine quality, and interconnection (or more precisely, the lack thereof). Because demand has outstripped supply, there have been little incentives for wind manufacturers to focus on quality and optimize the performance of their wind systems. Anything the made would be bought up, so why bother? A recent industry report by New Energy Finance found that Chinese-made turbines performed poorer than foreign turbines. This has contributed to lower operating capacities for wind farm projects in China, which are dominated by domestically manufactured turbines. Said the report’s author, Justin Wu, to The Green Leap Forward :
Overall the average capacity factor of all projects in China was 23%, which is very poor compared to other leading wind markets such as Spain at 25% or the U.S. at 32%. This is actually becoming a serious issue, that despite all these wind installations, China’s actual electricity production from wind is quite poor. One reason we discovered why domestic turbines underperform is because they have long scale up periods. For instance with some new Chinese turbines, it took many of them 4-5 months before they reached a threshold of 10%+ capacity, while foreign turbines reach a normal production level the day they got started. People are also now saying that even foreign turbines manufactured in China have poorer quality than their overseas counterparts.
Of course, there is a significant price difference between domestically and foreign-made turbines, which are more expensive. And even if turbine quality problems are resolved, a glaring problem remains. A significant proportion of wind projects–anywhere from 25% to 50%, depending on who you ask–remain unconnected to the grid. The reasons, as gleaned from The Green Leap Forward’s conversations with various wind industry professionals, seem to consist of a mixture of technical and political reasons. In some cases, there is a lack of grid infrastructure too cope with the extra load, or transmission networks to connect the grid to wind farms situated in remote areas. Even if infrastructure is not an issue, there is little financial incentive for grid companies to connect to wind farms. They are unable or simply do not want to deal with the hassle of coping with the intermittent nature of power geenrated byt he wind installations. In other cases, it is simply a case of different stakeholders–the project developers, turbine manufacturers and grid companies–not working together to ensure that the turbines can be connected to the grid. “There are extra technologies out there that can make turbines more stable when connected to grids,” explained Mr. Wu, “[but] right now very few turbines are going the extra mile to equip themselves with it.”
The Road Ahead
Despite these underlying systemic problems, the executives at the CEO forum maintained a bullish outlook on the sector. Han Junliang of Sinovel predicted an average of 7GW per year of added installed capacity over the next 5 years, while Zhang Dingjing of China Composites Group more optimisitcally predicted 9 to 10 GW per year over the same period. Mr. Han’s view was that it would take two to three years for the supply and demand for turbines to come into balance, while the supply-demand balance for other wind components could be achieved by next year.
The way forward, for the industry, is vertical integration along the supply chain towards the kind of “full industrialization” that has been witnessed in the automobile industry, said Mr. Han. Mr. Zhang concurred, noting that China’s unique growth market provides a suitable environment for the supply chain to develop more quickly than elsewhere. One hopes that such verticial intergration will bring quality control issues to the fore. Just as crucially, policymakers and wind developers also have to do their part to sort out the grid interconnection issues.
Related Post: Wind Chill Factors (May 25, 2008)
November 16th, 2008 at 1:08 am
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November 21st, 2008 at 5:31 pm
Julian - despite the difficulties that you highlight of developing wind farms, CDM wind projects still command premium prices in the CDM primary market. Perhaps the higher prices can be attributed to the “green” image of wind farm projects, but for a CDM compliance buyer wind represents significant risk.
In light of the findings you hghlights, can wind projects continue to command premium CDM prices in China?
November 24th, 2008 at 2:40 pm
Responding to Nick’s question about wind projects commanding premium CDM prices in China - yes absolutely. Wind is a flagship RE sector for China, the government is looking into ways to encourage higher CER prices for wind projects and the trend we see so far is wind CER prices increasing. Barring a significant CER demand shortfall in Europe (due to the global economic crisis), this upward trend should continue.
November 26th, 2008 at 7:07 pm
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