The future of power in China by Peter Roberts, Mitch Dudek and Beth A. Bunnell, Jones, Day, Reavis & Pogue China, with its enormous population, sprawling landmass and high-energy demands (second only to the US on that count), does not have the luxury of doing things on a small scale. Indeed, this is a country that is hoping to maintain GDP growth of at least 7% through 2005, and expects its energy demands to increase some 4% to 5% annually through 2015. And China is certainly thinking big when it comes to developing its energy resources. Consider the size of some of the infrastructure projects that the central government is backing, including a 4,000 kilometre west-east natural gas pipeline that carries a suggested price tag of at least US$15bn, as well as a US$600m LNG regasification plant in Guangdong (China’s first), along with several other pilot projects. There are also big plans in store for the sector that the development of the China power sector, then must power all this development.Announced more examines the key players and the rules of the game, than five years ago and foreshadowed even earlier, the and finally takes a look at the path ahead. long awaited reforms of China’s power sector are Meeting the demand slated to include separating power generation and transmission facilities, creating a unified national grid, With an estimated 300 gigawatts of installed capacity, breaking up long-standing monopolies and, ultimately, if China is second only to the US in energy consumption the Chinese government’s vision is realised, instituting a and may well surpass the US in this regard based on competitive power pooling regime.As this article goes estimates of China’s future energy demands. Looking to press, details of the Chinese government’s plans to back at the growth in this sector, China’s installed implement at least a portion of these reforms are capacity was just 63 gigawatts in 1979, as compared reportedly being finalised.While such reports should with the 390 gigawatts that are forecast by the year be viewed with previous delays in mind, the potential 2005. Annual growth as set forth in Table 1 and Figure opportunities from what will be a massive hive-off of 1, clearly illustrates China’s steady increase in installed assets and industry reshuffling are generating significant capacity. interest. Industry watchers are also taking note of the Although China currently faces an oversupply of fact that, as the reforms proceed, issues that have long power in certain regions, this certainly has not always been in hibernation, such as the future of existing take- been the case. During the 1980s, China was plagued or-pay power purchase agreements and expected rates with chronic power shortages. During that time, local of returns on investments in a new competitive governments, in a frenzy to keep up with rising environment, will need to be addressed. demand, rapidly built up small (often less than 50 MW Dealing with these and the varied social and each) coal fired, and to a lesser extent, diesel fired, political issues tied up in the power sector reforms is plants. Under the State’s policy of “who builds, who a monumental task by any estimation. But, it appears owns, who operates, who benefits,” local and provincial that the year 2002 just may be a turning point for an governments were incentivised to invest in local power industry that has been virtually frozen in uncertainty construction that ultimately benefited their own and behind the scenes wrangling in recent years. provincial and local economies.A proliferation of Putting the opportunities along with the concomitant relatively small, often thermally inefficient and high obstacles into perspective, this article first surveys polluting power plants were quickly built and soon Table 1: Growth of the energy sector in China Y ear 1993 1994 1995 1996 1997 1998 1999 2000 2005* 18291.07 19989.72 21722.42 23654.16 25633.82 27728.90 29876.79 31932.00 39000.00 T otal (10MkW) Source : China Power Year Book published by www.chinapower.com in February 2002. *Estimate from The T enth Five-year Plan of China. 67
Figure 1: Installed capacity of power generating equipment 50000.00 40000.00 10MkW 30000.00 20000.00 10000.00 0.00 1993 1994 1996 1996 1997 1998 1999 2000 2005* Total (10MkW) Source : China Power Year Book published by www.chinapower.com in February 2002. *Estimate based on figures from The T enth Five-year Plan of China. began generating previously unseen revenue streams during the early developmental years (and continuing for local coffers.While the endemic power shortages today), little, if any, consideration was given to the were largely ameliorated with this build up, the potential for cross-province trading or systematic resulting system, with its provincial and local economic grid integration. Investment in and regulation of underpinnings, sowed the seeds for the local transmission infrastructure was also not traditionally protectionism that continues today. prioritised.Although this is changing, existing grid Further fragmenting the system was the fact that inefficiencies are so dramatic that, by some Figure 2: China’s power grids Source: State Power Information Network (www.sp.cm.cn) in February 2002. 1. Northeast Grid 5. Northwest Grid 9. Sichuan Grid 13. Yunan Grid 2. North China Grid 6. Tibet Grid 10. Middle China Grid 14. Guangxi Grid 3. Xinjiang Grid 7. East China Grid 11. Guizhou Grid 15. Guangdong Grid 4. Shangdong Grid 8. Chongqing Grid 12. Fujian Grid 16. Hainan Grid 68
Table 2.1: Installed capacity and electricity generation in provincial networks in 1999 Network & region Installed capacity Electricity generation T otal (MW) Hydro (%) T otal (TWh) Hydro (%) Shandong Provincial Grid (SDPG) 18017.8 0.31 91.21 0.06 Fujian Provincial Grid (FJPG) 9657.4 52.22 35.60 51.64 Guangdong Provincial Grid (GDPG) 30333.7 21.61 114.00 9.70 Guangxi Provincial Grid (GXPG) 5953.0 60.98 24.42 59.27 Chongqing Power Grid 3182.3 9.85 13.22 9.34 Sichuan Provincial Grid 14670.1 62.65 44.95 58.26 Yunnan Provincial Grid (YNPG) 6340.8 63.11 26.81 59.31 Guizhou Provincial Grid (GZPG) 5518.8 33.27 27.06 23.15 Hainan Provincial Grid (HNPG) 1663.6 32.16 3.87 27.01 Wulumuqi Provincial Grid (WLMQPG) 2144.0 6.25 11.49 4.60 Lhasa Grid (LSG) 159.0 68.68 3.05 65.57 Source : State Power Information Network (www.sp.cm.cn). Table 2.2: Installed capacity and electricity generation in regional networks in 2000 Network & region Installed capacity Electricity generation T otal (MW) Hydro (%) T otal (TWh) Hydro (%) North China Power Network (NCPN) 47025.80 6.76 230.99 1.56 Northeast Power Network (NEPN) 34576.30 16.20 137.38 5.89 East China Power Network (ECPN) 93430.30 14.19 420.19 8.22 Central China Power Network (CCPN) 81866.90 31.97 332.18 25.69 Northwest Power Network (NWPN) 24646.40 35.26 101.71 29.46 Southwest China Power Network (SCPN) 35255.40 56.55 136.46 52.77 Source : State Power Information Network (www.sp.cm.cn). estimates, grid improvement alone could save up to 1980s to spur investment.While this policy effectively 35% in lost efficiency in some areas. permitted front-loaded tariffs that were high enough to China currently has six main regional grids, as allow attractive returns on debt and equity, the well as a series of provincial networks which resulting tariffs were not necessarily always “affordable” effectively operate as independent grids (see Figure or uniform for similarly situated power plants serving 2).Tables 2.1 and 2.2 illustrate both regional and the same areas. provincial deviations in development levels, as well as By late 1998 and early 1999, the State Power the mix of thermal and hydro power. Corporation (“SPC”) had begun to openly condemn minimum off-take commitments (discussed in Chilling effects further detail later in this article).The situation was China narrowly escaped a recession during the Asian further aggravated by the fall out from the collapse financial crisis but could not avoid the aftershocks of of several provincial investment trust companies and the resulting economic slow down. Demand growth the pull back on government guarantees - all of reportedly fell from around 8% in 1996 to 4.5% in 1997 which served to raise questions among lenders and and 2.6% in 1998. For the power sector, particularly investors alike as to the creditworthiness and IPPs, this slowdown revealed the vulnerabilities of the viability of the single buyer in the China market. prevailing single buyer system as many power plants These factors, coupled with general economic began to experience payment and dispatch problems. conditions and bureaucratic jostling over proposed While verifiable data of the extent of these problems is reforms, lead to a dearth of new foreign direct hard to come by, the incidence of local and provincial investment in the China power sector in the late power bureaus opting to default on their take-or-pay 1990s. obligations under existing power purchase agreements, The players more often than not in favour of their own home grown plants which, predictably, had lower tariffs, were Governmental by no means isolated. Such instances of discriminatory In terms of the key regulatory players, the power dispatch illustrated the potential failings of the “new sector, like many other industries in China, falls within plant, new price” policy that was introduced in the the purview of numerous governmental entities. 69
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