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Eric Ng

Beijing’s recent raft of directives to address chronic over capacity, fuel type and regional capacity imbalances in China’s power generation mix is a step in the right direction, say analysts.
If it is successful, over time, there will be revenue and profit gains for wind and ground-mounted solar farm operators. And that will be detrimental to bottom-line coal-fired power generators.
“We believe the utilisation protection scheme would not completely offset the [grid bottleneck] problems in the three northwest provinces,” Daiwa Capital Markets’ analysts said in a report.
Industry regulator National Development and Reform Commission (NDRC) early last week released a directive setting out detailed measures for a long-awaited minimum quota system for the purchase of renewable power by power grids.
China’s Huadian Fuxin will slow wind farm expansion and seek power-swap deals
The directive aims to bring relief to worsening wastage of renewable power due to grid bottlenecks, slow power demand growth and fast increase in renewable power generating capacity.
It was supplemented with a separate policy announcement last week to ban new coal-fired power projects approvals in nine regions and slow the pace of approvals of new projects and construction pace of those under construction in 15 others.
This came after China last year recorded an average utilisation of coal-fired power plants of 4,329 hours, or 49.4 per cent, the lowest since 1978. Excess capacity is estimated by Citi’s analysts to amount to 20 per cent of the total.
Last year the nation also saw some of the worst wastage of renewable power due to weak power demand growth, excessive addition of wind and solar farms in remote areas and a shortage of long-distance grid transmission capacity.
In the worst hit areas like Gansu province and Xinjiang Uygur autonomous region, over 30 per cent of wind power generated could not be absorbed by the grids on average and wasted last year, rising to 70 per cent or more in the months when priority to use the grid transmission capacity was given to coal-fired plants that can generate both heat and electricity to meet heating demand.
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“This directive is the most concrete, most protective [to renewable energy generators] issued by a central government authority,” China Datang Corp Renewable Power vice chairman Zhang Chunlei told reporters last week. “It will hold local authorities responsible for implementation with consequences in cases of non-compliance.”
Currently, China’s renewable energy law stipulates that all renewable power generated must be purchased by the power grids, but law suit against the nation’s two giant monopoly grid operators State Grid and China Southern Power Grid for failing to do so are unheard of.
Zhang expected Beijing to soon announce specific annual minimum renewable energy plants utilization hours for each region suffering from renewable power wastage, to be contractually guaranteed by the region’s government.
They will vary according a region’s power supply-demand balance, level of development of the local grid infrastructure. They will be subject to annual revisions.
Daiwa’s analysts cited industry experts as saying the minimum utilization hours would give generators a minimum project return of 8 per cent in principle.
For volumes above the quotas, the directive also for the first time officially allowed renewable power generators to compete for customers with power generators of other fuel types.
Previously, renewable power generators are given subsidised tariffs that are higher than coal-fired power, but their sales volumes are subject to allocations from the grid operators.
The directive follows close on the heels of renewable energy wastage curbing measures announced by the National Energy Administration (NEA) under the NDRC mid last month.
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They include the selection of Gansu and Inner Mongolia Hui autonomous region as pilots to launch renewable energy minimum plant utilisation quotas.
The NEA also banned new wind farms constructions in regions with the worst power grid problems, and demanded the regional governments to come up with ways to reduce coal-fired plants’ output to let more renewable power be absorbed.
“Renewable energy [like] wind, solar [and hydro] has its advantages [due to their zero fuel cost and] low marginal costs in generating electricity,” Daiwa’s head of utilities and renewables research Dennis Ip said.
“Its participation in the electricity trading market should help to improve the overall power generating efficiency, and should be negative for traditional coal-fired power producers in areas [with grid bottlenecks].”
Still, Daiwa’s analysts calculated that if the wind power wastage rate is to be maintained at last year’s elevated level of 15 per cent this year, it would mean that wind and solar power would contribute 15 to 20 per cent of the total power output in regions suffering from the worst grid bottleneck problem.
This is already much higher than these two kinds of renewable energy’s combined 4 per cent contribution to national power generation of last year.
Raising it further would present a tremendous technical challenge to the power grid operators, whose priority is to maintain steady and reliable supply.
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Due to their intermittent supply nature, with solar energy generated only during the day and wind power’ output at its strongest at night, they need to be supplemented by so-called base-load power such a coal or nuclear-fueled plants that can generate power consistently.
But in China’s northern and western regions where renewable resource is the most abundant, power demand is relatively small due to the sparse population and small industrial base.
This means substantial excess power generated needs to be exported to the central, eastern and southern regions in order to maintain or lower the wind power wastage ratio, given more new wind farms will be installed this year, albeit at a slower pace than last year.
Meanwhile, some renewable energy firms are giving up on developing new projects in northern China this year due to severe grid bottlenecks.
China’s coal-fired power producers face tougher times after record profits this year
Jimmy Yu Chon-man, financial controller at Hong Kong-listed China Singyes Solar Technologies, which builds solar farms for third parties and has also invested in some itself, is focusing on developing projects in Guangdong instead, where power demand is strong although the land requisition time has proven to be longer than it had expected.
It is also seeking to sell some of its 207 mega-watt of grid-connected projects and 99 MW of solar farms still waiting to connected to the grid to improve its cash flows.
Yu said the NDRC’s directives are well-intended, but low power demand and weak grid transmission infrastructure in the remote northern and western regions mean implementation will be challenging.


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