China pushes wind power, but no quick payoff for producers
HONG KONG (Reuters) - China will order its dominant electricity distributors to source up to 15 percent of their power from renewable energy including wind, but slow compliance means it may be years before the country's struggling wind power developers benefit, industry executives say.
The quota system will apply to State Grid Corp of China and China Southern Power Grid Co Ltd by the end of this year, the executives say.
China boasts the world's largest wind power capacity, but a third of it sits idle as renewable energy is a money-losing business for grid operators and network construction has lagged capacity expansion. As a result, China struggles to transmit electricity from generating zones in the northwest, north and northeast to population hubs in the south and east.
"With the roll-out of the quota system and acceleration of grid construction, the problem of distributors holding back on wind power purchases will ease," said Hu Yongsheng, president of China Datang Corp Renewable Power Co Ltd.
But until China reforms a pricing policy that makes selling wind power and other renewables like solar energy unprofitable, the country's powerful grid operators have little commercial incentive to follow the new quotas.
That means wind power developers such as China Longyuan Power Group Corp Ltd, Huaneng Renewables Corp Ltd, Datang Renewable and China Power New Energy Development Co Ltd will continue to struggle.
Chinese wind power developers posted worse-than-expected results for the first half of 2012, with grid operators increasingly reluctant to distribute the costly and unpredictable source of power amid a sharp economic downturn.
Their shares are languishing near record lows.
"Renewables should boom in China in two to three years but not now," said Joseph Jacobelli, an independent energy analyst who was formerly head of global cleantech research at HSBC Holdings PLC.
"The key barrier is the current tariff-setting mechanism gives no commercial incentive whatsoever to the grids to connect and dispatch renewables," Jacobelli said, adding that it would also take China several years to build ultra high-voltage lines needed to deliver the power produced at remote wind farms to users in the south and on the coast.
Grid operators buy wind power at government-dictated on-grid, or wholesale prices, of 0.51-0.61 yuan ($0.08-$0.10) per kilowatt-hour (kwh), while the prices of electricity purchased from coal-fired plants can be as low as 0.3 yuan.
The government subsidises grid firms for selling renewable energy to help shift China away from polluting coal, but the subsidies are not enough for them to make a profit.
China's waning power demand growth because of the economic slowdown has also reduced the subsidies, which are closely tied to electricity sales to consumers.
KICKING THE COAL HABIT
China wants to cut its heavy reliance on coal and has poured tens of billions of dollars into wind and solar farms over the last few years to boost renewable use to 9.5 percent of total energy consumption by 2015.
Over 70 percent of the country's electricity is currently produced by coal-fired power stations.
China aims to expand its installed wind power generating capacity to 100 gigawatts (GW) by 2015 and to 200 GW by 2020. The country currently has 62 GW of capacity, enough to light up all of Australia.
Beijing would force grid operators to buy wind power representing 5 to 15 percent of their total offtake, depending on locations, Xie Changjun, president of Longyuan, the world's second-largest wind power developer, said this month.
The quota system should underpin long-term demand for renewable energy like wind-generated electricity, but the earnings outlook for wind power developers will remain obscure for the next few years, people in the industry say.
Grid construction has so far not kept up with the rise in wind power capacity. In the absence of high-voltage lines, grid firms are unable to absorb all the wind power under their local networks.
Raising retail electricity prices would hasten the shift, but Beijing is extremely wary of increasing energy prices for fear of stoking inflation.
China's power producers and oil refiners have racked up huge losses in recent years as they are unable to pass on higher coal or crude oil costs to end users.
Chinese wind power developers say they are gaining from lower financing costs on domestic interest rate cuts and falling wind turbine prices, offsetting lower income from their projects registered under the United Nations' Clean Development Mechanism (CDM).
Optimism among analysts over the demand outlook for China's wind power developers is a main factor behind a string of 'buy' calls on their shares.
Of the 28 analysts who track Longyuan, nine rate the stock a 'strong buy,' 13 rate it a 'buy,' five recommend holding it and one calls it 'strong sell,' Thomson Reuters data shows.
"The majority of people think (purchase) curtailment is going to get better. In actual fact we argue that it is at least to stay where it is if not get worse from here," said Adam Worthington, head of regional utilities, renewables and coal research at Macquarie, citing the lack of high-voltage lines in China.
Grid operators will likely face delays in winning regulatory approval to build the multi-billion dollar ultra high-voltage lines partly because Beijing needs time to assess the economics and environmental impact of the projects, Worthington said. ($1 = 6.3430 Chinese yuan)
(Editing by Emily Kaiser and Ryan Woo)
- Scots spurn independence, vote to stay in the United Kingdom |
- Eight bodies found after attack on Guinea Ebola education team
- Scots independence polls close, UK's future in the balance |
- Alibaba IPO prices at top of range, raising $21.8 billion |
- Two adults, six children dead in Florida shooting: report