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This piece was written by Azure CEO Hubert Beaumont to share his opinions on the potential opportunities and challenges for international companies entering the Chinese offshore wind market, as well as advice on a few basic things to think about before entering. This article is also featured in Global Wind Energy Council's (GWEC) Asia Newsletter Industry Pulse, where you can find the latest on wind energy news in Asia.
I must admit I have been surprised to see the wave of developers and investors suddenly moving into the Taiwanese offshore wind market over the past five years, bringing along with them a comprehensive supply chain, financing and several hundred westerners who have established their homes in Taipei or in coastal cities. This is certainly comforting as such an appetite for investing in offshore wind despite the risks inherent to emerging markets reaffirms that we have chosen a viable line of business, but it also makes one wonder: while Taiwan is a fantastic place and has great wind resource, it is, in term of size and opportunity, only a fraction of mainland China. Taiwan has a total offshore wind pipeline of 10GW, whereas last year Guangdong alone, which is one of 12 Chinese coastal provinces, approved 30GW in just two weeks. So why is there in comparison so little foreign participation in the Chinese renewable energy market? Of course, there are many answers to this question, including that China does not lack the capital to do it on its own, but I believe part of the answer also lies in the fact that China is just so big and so different than most investors are not confident enough to approach it. Yet we are seeing more and more signs of change; developers that are already established in Taiwan cannot ignore the big neighbor, the Chinese central and local governments have renewed interest to attract foreign capital, and SOEs can benefit from partnering with foreign developers with strong references and expertise. In order to seize these opportunities, foreign participants will need to understand the rules of the Chinese game. Here are a few basic principles that can give you a head start:
1. Most players are State-Owned Enterprises (SOEs)
The establishment of the current power market structure in China can be dated back to 2002, when State Power Group, which until then was the sole owner of a majority of the energy infrastructure in China, was divided into five power generation companies (the “big 5”) and two grid companies (China State Grid Corporation and China Southern Grid). Today the “big 5”, namely China Energy, Huaneng, Huadian, Datang and SPIC, own about half of all energy projects in China, and the remaining half is in majority distributed among a number of smaller (yet still huge) specialized state-owned enterprises (e.g. Three Gorges, CGN, SDIC, China Resources) and provincial state-owned energy groups (e.g. Guangdong Energy, Fujian Energy, Zhejiang Energy, etc.). Only a small portion of energy projects is owned by private or foreign companies.
The distribution is similar for offshore wind, as the approved pipeline is currently developed by state-owned players, with a few exceptions—in cases where either local entrepreneurs or private wind turbine manufacturers have been able to secure project rights.
2. The rules are made for them (the SOEs)
State-owned players have an intricate relationship with central and local governments; state policies are generally addressed to them and designed for them, and SOEs are in the front line for receiving information and explanations regarding policy, and in return, they influence and participate in policy drafting. While this is an advantage, SOEs also carry a number of disadvantages compared to private or foreign investors which we summarize below:
Electricity prices are also suited to them. Indeed, until the recent introduction of market trading mechanisms under the on-going power market reform, and still today for a majority of electricity produced and consumed on the grid, every single energy-related price in China has been calculated and fixed by state regulators, from production of energy using different types of technologies, to transmission across various distances and different voltage levels, to consumption of energy varying per type of consumer, connection voltage, location, time of day, etc. There are three general guiding principles used by regulators in defining energy prices:
Reasonable returns are typically defined as follows:
Given that prices are regulated for a large number of projects, individual project performance may vary from that constant. Returns may be tolerated below the reasonable benchmark, especially in areas where further investment is not encouraged such as in the coal sector in general or for wind and solar in regions facing heavy curtailment, but generally, losses are to be avoided. Similarly, returns on single projects may largely exceed these benchmarks as well. There are examples of onshore wind projects in Yunnan or offshore wind farms in Fujian with excellent wind resource, no curtailment, and high tariffs, which have yielded excellent returns.
Therefore a private investor working on a smaller pipeline may be able to cherry-pick the best project locations, spend more time and resources to optimize project design, implement higher standard O&M practices, etc., while at the same time benefitting from the same prices. This approach has proven successful onshore for a small number of private and foreign investors, while the key challenge remains the ability to compete with SOEs in securing such pipeline, except for those who have chosen to partner directly with them. For offshore wind, the opportunity to optimize projects will also depend on the ability to work closely with the unavoidable local design institutes, the only entities accredited to design projects.
3. The rules are stable or predictable
Renewable Energy is a fully-grown and mature market in China that is way beyond its first exploratory trials and surprises. While there is on-going reform affecting a number of key market drivers, we consider that the regulatory and legal environment for renewable energy investors is generally stable and predictable. Of course, there are still a number of considerable risks and challenges, such as those listed below:
4. China is huge, diverse and ripe with opportunities
While this extract provides a simplified illustration of how the Chinese energy market works, it is important to keep in mind that in fact, nothing in China is simple. There are tremendous forces at play. The central government has engaged in a battle to reduce grid monopoly, which is creating great waves within the markets. Meanwhile, local governments, as well as local branches of SOEs, are protecting their own interests, which all need to be understood in their respective contexts. Opportunities, risks, interlocutors, resources, costs and other factors affecting your business plan will vary greatly from one province to another. In order to be successful as an investor in China, you will need to carefully pick your areas of focus, your projects, teams, and partners, as well as develop an understanding of China at all levels of your organization.
At Azure International we have worked with foreign investors in the Chinese renewable space for over 15 years, including in both onshore and offshore wind, helping our clients and partners to assess markets, projects, and players in this complex environment. While the road has not always been straightforward for foreign investors, with many feeling left on the sidelines of a booming market essentially shared between locals, we currently see a new window with tremendous opportunity for foreign players, due to a combination of three trends. First, as the Chinese economy is slowing down, the country has realized the need to attract more foreign capital. Second, the offshore wind brings a set of new challenges compared to onshore, a context in which having an experienced foreign partner can be a strong competitive advantage. And finally, the regulatory environment for renewable energy in China is strong and mature and designed to provide stability to state-owned investors, thus creating a safe framework for various players to evolve in.
P.S: We are currently working on a publication that will detail the history and status of Chinese energy players, regulation and policy, with the aim of helping foreign investors to develop a detailed understanding of the market. Subscribe to our newsletter mailing list and we’ll be sure to send you a copy!