Fair wind blows for China's Longyuan Power
By Ryan Rutkowski
China Longyuan Power Group's imminent sale of US$2.3 billion in shares to the
public and its listing on the Hong Kong exchange could hardly have been better
timed by what is the country's largest investor in wind power farms.
The government in Beijing announced on November 26, days after Longyuan Power's
listing plans were made public, that it aimed to boost the country's energy
efficiency as part of its contribution to the fight against global warming.
China pledged to cut carbon
dioxide emissions per unit of gross domestic product by between 40% and 45% by
2020 compared with 2005 levels. With coal still playing a predominant part in
the country's energy mix, that means an increased role for less-polluting means
of energy production - such as wind power.
Longyuan Power will list on
December 10 after closing
its heavily oversubscribed book to investors on December 2. The retail
tranche was more than 29 times oversubscribed.
The State Council announcement also came ahead of the December 7-18 Copenhagen
climate summit, which aims to set international targets for climate-changing
pollutants. Prospects of internationally binding agreements emerging from the
summit remain slight, but the event itself will increase public and investor
interest in manufacturers involved in less-polluting forms of energy
production, particularly those, such as Longyuan Power, based in the world's
largest country and fastest-growing economy.
China's energy demand is rising rapidly and it will overtake the US as the
largest consumer of energy by 2015.
China's willingness to raise the profile of alternative energy sources was
already made clear in its 11th Five-Year Plan (2006-2010), where it committed
to increase the use of alternative energy resources to 20% of total energy
production by 2020, from 7.86% in 2006. Hydropower makes up as much as 5.9% of
China's energy production, but extensive water pollution, dwindling water
resources and growing concern about the negative effects of large dams will
limit expansion of traditional hydropower generation.
At the same time, massive government investment has boosted the importance of
less controversial wind and solar technology and helped manufacturers in these
sectors become leading players in the global market.
China now ranks fourth in the world for total wind power capacity, and
installed capacity may jump tenfold to 100 gigawatts by 2020, from 10GW next
year, according to a 2008 plan by the National Energy Administration.
At the core of this growth, the government in 2006 started to establish wind
farms in the far-west region of Xinjiang, neighboring Gansu, northern Inner
Mongolia, Hebei province around Beijing, and coastal Jiangsu province, with the
aim of doubling installed capacity for four consecutive years. As a result, the
country has already exceeded its 10GW target for 2010, reaching 12.2GW of
installed capacity.
Solar power is also an increasingly important component of China's energy
strategy. More than two-thirds of China's land area has 2,200 hours of solar
radiation annually, especially in western provinces, such as Inner Mongolia,
Xinjiang and Yunnan. Installed capacity to capture this is expected to reach
20GW of installed solar PV (photovoltaic) power capacity by 2020, up from only
about 0.07GW in 2005. Recently, China announced plans to install more than
0.5GW of solar power projects over the next two to three years.
The lead-up to the Copenhagen climate conference has highlighted differences
between the world's largest polluters, notably the United States and China, but
away from the headlines Beijing's development of alternative energy involves
international cooperation.
In September this year for example, Phoenix, Arizona-based First Solar signed
an agreement to build the world's largest solar power plant in China's Inner
Mongolia region capable of providing power to three million homes. The project,
part of an 11,950-megawatt renewable-energy park planned for Ordos City, Inner
Mongolia, is due to be completed in 2019. There are also plans to build two
large solar power plants in Qinghai and Yunnan provinces along the Tibetan
plateau in the western China.
The national power grid has been mandated since 2006 to purchase renewable
energy at a subsidized rate, with a premium that is added on electricity
produced by coal-fired power plants put in a fund that reached 3 billion yuan
(US$440 million) by 2007 to support the subsidies for utility companies to buy
renewable energy.
Then in April 2008, the Ministry of Finance said it would give tax refunds for
companies importing key components for wind turbines larger than 2.5MW. In
August last year, the ministry gave a further boost to the wind-power industry
by saying all majority Chinese-owned domestic manufacturers would be awarded up
to $88 per kW for their first 50 wind turbines certified and connected to the
electricity grid.
The government in August last year also said it would subsidize 50% of
investments in solar power projects, while subsidies of up to 70% would be
given on the price of independent PV power-generating systems sold in remote
regions.
China now has the world's largest PV cell manufacturer, accounting for 30% of
global production, led by Suntech Power Holdings, which last year ranked third
in world production capacity. Smaller rivals Solarfun Power Holdings, Yingli
Green Energy Holdings and China Sunergy rank among the world's top 20 PV cell
manufacturers.
While the subsidies help domestic expansion, these companies export more than
98% of their panels to the likes of Germany, Spain, Japan and the US - Suntech
has been involved in power projects in the US (at San Francisco International
Airport and in Phoenix), in Murcia, southeast Spain, and in Abu Dhabi in the
United Arab Emirates.
In the wind turbine sector, the potentially vast domestic market and government
subsidies have helped Chinese manufacturers become global leaders, with the
country likely to become the world's largest producer of wind turbines by the
end of this year, reaching a market value of over $6 billion.
So far, China's domestic wind turbine market is primarily composed of foreign
companies and joint ventures, but wholly domestic manufacturers are on the
rise, led by Xinjiang Goldwind Science & Technology, Dongfang Electric Corp
and unlisted Sinovel Wind Co. The largest foreign manufacturers in China are
American GE, Danish Vestas, Spanish Gamesa and India's Suzlon.
Yet Chinese wind turbines are also developing in the global market, with local
products in 2007 being exported to 24 countries and regions, including the
Philippines, Pakistan, Argentina, Britain, the US and Australia.
This month, Shenyang Power Group announced it would enter into a $1.5 billion
joint venture with US Renewable Energy Group and Cielo Wind Power to build a
14,500-hectare wind power development in West Texas.
The turbines for this project will come from a new Chinese turbine
manufacturer, A-Power Energy, based in China's Shenyang City, Liaoning. A-Power
plans to deliver 240 2.4MW wind turbines with technology licensed by Danish
company Norwin and Germany's Fuhrlander.
While the outlook for domestic and international expansion of the Chinese
green-energy business looks positive, question marks remain over some of this
expansion and so-called cooperation.
A-Power Energy, for instance, as of June this year, had yet to produce a single
wind turbine, according to a filing to US regulators, while its US partners had
yet to decide where to build the proposed wind farm.
Meanwhile, First Solar, which last week confirmed that it expected construction
of its Inner Mongolia solar power plant to start next June, has seen its share
price crash to around US$102 from above $202 in May. The Phoenix company said
that its cells made of toxic cadmium-telluride may be banned in the European
Union, its biggest market. At the same time, its chief executive officer and
second-largest shareholder, Michael Ahearn, sold half his interest in the
company, bringing in $257 million between February 19 and May 16, Bloomberg
reported.
More recently, First Solar executive vice president and company secretary, John
Gaffney, is quitting - with the company taking a $6.9 million after-tax hit in
this quarter to cover his severance, Barron's reported last week.
As for the latest alternative energy market darling, Longyuan Power,
cornerstone institutional investors pledging to take a stake before next week's
listing will include China Investment Corp (CIC), the nation's sovereign wealth
fund, which may purchase $400 million worth of the $2.3 billion initial share
sale, according to Bloomberg.
That can be seen as a vote of confidence in the company, or as a means of
ensuring that control of Longyuan Power, itself a unit of state-owned China
Guodian Corp, remains firmly in the hands of the Chinese government, whatever
the interest of overseas investors.
Ryan Rutkowski is a masters student studying international economics at
the Johns Hopkins-Nanjing University Center for Chinese and American Studies.
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