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Will Chinas IPPs Alter the Global Renewables Landscape

Will Chinas IPPs Alter the Global Renewables Landscape

Subject Matter Expert 
Ric O’Connell: 
OConnellRM@bv.com
Black & Veatch Lead for Renewable Energy 
in Southeast Asia

 

 

Global Renewables Perspective

By Ric O’Connell

Over the past few years, both renewable generation and renewable equipment manufacturing have surged in China. Now, a combination of government initiatives, macroeconomic shifts and market forces could drive Chinese renewable energy independent power producers (IPPs) onto the world market at a much larger scale than before. This shift could mean increased competition for established IPPs, but could also provide new opportunities for cooperation in international sustainable development.

In 2006, Germany was the world’s wind power leader, with an installed capacity of approximately 20 gigawatts (GW). By comparison, China’s installed wind capacity at that time was just 2.6 GW. But by 2015, while Germany’s installed wind power had more than doubled to nearly 45 GW, China’s had grown to 145 GW, a 56-fold increase, according to The Global Wind Energy Council’s 2015 report.

By many accounts, the rapid growth of the Chinese wind industry can be traced to a 2005 renewable energy law that required grid operators to purchase a percentage of their electricity from renewable energy providers. A feed-in tariff for wind energy was set by the National Development and Reform Commission, a regulatory department of the State Council. The cost of purchasing renewable energy was distributed among consumers. As the renewable source with the lowest cost per kilowatt-hour at the time, wind power benefited.

Compared to wind, solar generation in China was slower to take off. Even as the nation became a global leader in the production of solar panels, a relatively high per-kilowatt-hour cost kept solar from penetrating the domestic Chinese market for a number of years. As late as 2010, Chinese solar capacity was only 0.3 GW. However, even as domestic solar power generation lagged behind wind, solar equipment manufacturing for the global market surged.

Years of robust economic growth encouraged many Chinese companies, both private and state-owned, to incorporate capital investment as part of their growth strategies. Given the transitional nature of the economy, many of these nascent capital investment efforts focused on promising industries and led to what has been termed the “Wave Phenomena” and overinvestment in sectors such as solar manufacturing.

The result was a collapsing price of solar panels. As the price of panels fell, the government responded by passing a feed-in tariff for solar power generation, in part as a way to support the industry and absorb excess manufacturing capacity. By 2015, China had an installed domestic solar generation capacity of 45.5 GW.

A Slowing Economy in China

The solar equipment industry, however, was not the only manufacturing sector in China that had surplus capacity. As of 2016, many analysts were reporting a significant slowdown in the broader Chinese economy, with excess industrial production, from sectors including iron and steel manufacturing to downstream industries such as equipment and machinery manufacturing, bearing at least part of the blame.

In response, China has been looking at macroeconomic policies and initiatives abroad. The recent creation of the Asian Infrastructure Investment Bank (a Chinese-led international institution that aims at financing infrastructure throughout Asia) and the Silk Road Infrastructure Fund (a state-owned investment fund) underlines the idea that China continues to look beyond its borders to tackle domestic capacity issues.

However, this trend is not new. Since becoming a member of the World Trade Organization in 2001 and with the onset of globalization in general, China – and its infrastructure development companies – has been exerting influence overseas on energy and other infrastructure projects. Many new Chinese international contracting companies have emerged. In terms of revenue, 62 of the top 250 international contractors were Chinese, according to Engineering News-Record.

The power generation sector, in particular, has been active overseas and was boosted on the back of the 2008 financial crisis when the Chinese government channeled the largest portion of its ¥ 4 trillion RMB stimulus package (37.5 percent) to the Transport and Power Infrastructure sector. Chinese companies, both contractors and equipment manufacturers, have aggressively targeted international coal-fired power generation projects overseas. In recent years, they have played significant roles in many projects around the world, particularly throughout Asia and Africa.

Official government communication at the end of 2014 sent a signal to Chinese lenders to ramp up financing for Chinese companies that are “going global,” noting it would help “make more use of excess production capacity.” According to recent estimates, international investments make up almost one-fifth of China Development Bank’s loans.

New Possibilities for Independent Power Producers

In late 2015, The Times of Africa reported on the rapid growth of independent power production in Africa. While the focus of the article was on the opportunities in the market for the South African renewables sector, it also pointed out that China has pledged $60 billion for development on the continent.

China’s commitment to invest both private and state funds into international infrastructure projects, engineering and sustainable development, coupled with a slowing domestic market for such projects in China, suggests that Chinese renewable IPPs could soon be expanding globally as well.

Such growth will likely come not from large, state-owned enterprises, but from more nimble, publicly traded global companies. For example, Goldwind Americas, the American arm of the Chinese wind turbine manufacturer, recently acquired the 160 megawatt Rattlesnake Wind project in Texas from RES Americas. In the last few years, Goldwind has acquired or developed wind projects in six continents.

Canadian Solar provides another example. Although technically a Canadian company, Canadian Solar produces the bulk of its solar panels in China and has customers around the world. The company is building utility-scale solar power plants in a number of countries, including India, Japan, the United States, Brazil and the U.K.

Challenges and Opportunities

If Chinese renewable energy IPP growth does take off globally, it could provide a competitive challenge for many established or traditional IPPs but could also provide real opportunities for cooperation between nations to meet the global climate challenge.

In December 2015, 191 countries and entities negotiating at the U.N. COP21 (Conference of the Parties) climate change conference in Paris reached a landmark agreement calling for global reduction in greenhouse gas emissions. At the same time, 2015 marked the end of the first period of the U.N. millennium development goals, an initiative that aimed to eradicate extreme poverty through sustainable development in the poorest parts of the world. Its successor, sustainable development goals, adopted in September 2015, explicitly linked climate change to the initiative and called for access to renewable energy as one of its 17 sustainable development goals.

China’s renewable energy IPPs could play a crucial role in helping the world make progress on both of these important initiatives. Just as low-cost Chinese solar panel production has helped spur a solar boom in the United States and elsewhere, greater competition from IPPs could push the costs of utility-scale projects down, making renewable energy even more viable in both the developed and developing world.

However, this potential expansion is not without risk. A new wave of Chinese engineering, procurement and construction (EPC) contractors could pose risks to international developers and project owners in the future. In the past, a number of international power generation projects struggled as inexperienced contractors won contracts based on low-cost bids and unrealistically aggressive schedules leading to cost overruns, delays and long-term maintenance challenges. Procuring Chinese power equipment has called for tight quality and supply chain control as well as an understanding of how to resolve different Chinese and international engineering codes and standards.

Such risks could be mitigated by the fact that the new breed of Chinese IPPs are public, internationally traded companies with an explicitly international focus and thus may have nimbler business models and approaches than earlier state-owned players. These new approaches could present new opportunities for a blend of international EPC contractors, owner’s engineers and equipment manufacturers.

No matter which players are engaged in the international renewable IPP market, utilities and their partners will need to continue working together on best practices for successfully integrating renewable IPPs and distributed generation into the grid. As the COP21 conference highlighted, the need to develop robust and sound renewable energy policies has never been more urgent.


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