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    China Business
     Jun 16, 2010
China's wind power has faulty connection
By Ryan Rutkowski

NANJING - China, the world's second-largest consumer of energy with more than 11% of global energy production, is turning to renewable sources, notably wind power, as it seeks to reduce its dependence on thermal energy derived from coal and other fossil fuels.

Thermal energy is the country's primary source of electricity production, representing 80% of electricity generation in 2009, followed by hydro-power at 16%, nuclear power at 1.8% and other non-hydro renewables at 1.24%.

China's energy consumption has already outstripped domestic reserves, making it a net importer of coal and oil. A water shortage due to pollution and limited per-capita water has also


effectively curbed the prospects of further large-scale expansion in hydro-electric power generation in China, although plans for large dams continue to be put forward.

China hopes to overcome its long-term energy challenge with investment in non-hydro renewable energy, especially wind power. According to Bloomberg New Energy Finance, China invested US$34.5 billion in low-carbon technologies in 2009, compared with $18.6 billion in the US.

In 2009, China increased investment in power construction projects by 20% compared with 2008, investing 755.84 billion yuan (US$110 billion), or 2.2% of gross domestic product (GDP) in 2009. Investment in wind power grew by 44%.

The National Development and Reform Council (NDRC) has set a goal for wind power to surpass nuclear power to become China's third-largest source of electricity production after thermal and hydro-power by 2020. There is ample room to grow as China only had 25.5 gigawatts (GW) of installed capacity in 2009, while the country has plans to reach 150 GW of wind power production by 2020.

However, China's policies designed to support domestic wind turbines have led to overinvestment and overcapacity. In 2001, the government launched several incentive programs designed to support domestic turbine manufacturers, including a "National Deb Wind Program" designed to compensate wind farm owners for use of domestically produced turbines, and a value-added tax reduction for turbines with locally produced parts.

This led many local governments to fund the creation of turbine manufacturing to break into the market. Today there are over 100 turbine manufacturers in China with the top 13 holding 98% of market supply. The three largest are Xinjiang Goldwind, Sinovel Wind and Dongfang Electric Corp.

In 2004, the NDRC responded by launching the "wind power concession project" to help consolidate the industry. This called for the creation of seven 10 GW wind farms across Gansu, Xinjiang, Hebei, Jilin, Inner Mongolia and Jiangsu provinces.

Rather than help consolidate the wind turbine industry large-scale wind farm development has led to massive output growth and overcapacity. By 2009, Chinese Premier Wen Jiabao singled out wind turbines as one of China's emerging sectors troubled by overcapacity. In 2010, Chinese companies were expected to produce equipment equivalent to 20 million kilowatts of capacity, but the country only installed 10 million KW of actual capacity.

Many internal experts have pointed to potential waste in China's large-scale wind power development. China requires extensive upgrades to its power grid to support large-scale wind farms. The country's geography means wind power resources are primarily concentrated in remote provinces in the far northwest, such as Inner Mongolia, Gansu and Xinjiang, while most of the energy consumption is along the coastline.

With about 4,000 kilometers separating Xinjiang province from Shanghai on the coast, transportation of wind-generated energy from west to east requires high investment in the latest generation of ultra-high voltage (UHV) transmission lines. China plans to spend over $600 billion to upgrade its power grid over the next decade. The State Grid Corporation will invest 83 billion yuan ($12.2 billion) in UHV transmission lines in 2009 and 2010 alone.

The stability of the power grid is already a problem because of weak inter-regional interconnections causing power shortages that hamper grid efficiency in different parts of the country. Large-scale wind power is all but impossible in the short run due to inconsistent changes based on prevailing winds. Irregular power generation can lead to rolling blackouts as grid operators are unable to compensate for periodic energy shortages.

To overcome this problem, China hopes to develop a smart grid system to be operational by 2020 at the earliest. Smart grid technology with a more intelligent monitoring system of power generation and consumption throughout the country is designed to predict potential electricity loads and adjusting generating needs, reducing the likelihood of rolling blackouts caused by reliance on renewable energy.

In an article in the China Security Journal this week, an analyst was quoted as estimating that "investment in smart grids over the next 10 years would total four trillion yuan, of which a huge portion will be devoted to electricity transmission".

Upgrades to the power grid continue to lag behind the expansion of wind turbines, leading many of China's existing wind farms to be left unconnected and unused. According the China Power Union, only 72% of the country's total wind power capacity is connected to the grid. The 10 GW wind project in Jiuquan in Gansu is among the biggest problems, with the wind farm located too far from the regional load-bearing center. This requires major infrastructure upgrades.

Jiuquan was one of the first 10 GW wind projects approved by the NDRC and is expected to have an installed capacity of 12.71 GW by 2015, with more than 120 billion yuan in investment. In Inner Mongolia, less than 2 GW of wind power is connected to the grid, with 8.3 GW sitting unused waiting to be connected in 2009.

Over-investment in wind power generation without a grid capable of absorbing the power is generating losses. Price caps on electricity costs means the cost of building transmission lines and producing energy is not built into the cost for consumers.

An amendment to the Renewable Energy Law requires grid operators to purchase resources from registered renewable energy producers. Grid operators then pay a premium on wind power purchased from wind farms in the form of an on-grid tariff. This means that grid operators pay more for wind energy than they do for coal-fired plants to help subsidize the development of wind farms across the country.

Theoretically, grid operators can be compensated for this premium through a nationwide tax levied on coal-fired plants. However, grid operators have been reluctant to build upgrades linking new wind farms because they do not want to absorb additional costs without the ability to fully utilize wind power resources. As a result, many wind farms are generating losses as they are slow to be connected to the grid and unable to recoup the losses of development.

With saturation in China's domestic market, many wind turbine manufacturers have looked to overseas markets for demand to meet their expanding output. Xinjiang Goldwind plans on spending 24% of share-sale proceeds on expansion overseas. While the company received 99% of sales revenue from domestic sales in 2009, it hopes to increase sales in Europe and the US. In December 2009, Shenyang Power Group announced plans to enter into a joint venture to build a 14,500 hectare wind power plant in west Texas, with China's A-Power Energy supplying cheap turbines for the project.

However, as high unemployment lingers in the US and the cost of China's turbines are driven up in Europe due to a sinking euro, China's top wind power manufactures will find it increasingly difficult to move into overseas markets. As with Chinese steel, cheap wind turbines may also face import tariffs as they flood foreign markets. China's A-Power Energy met resistance from US politicians when it sought to supply turbines for the Texas project last year.

China's investment in wind power is clearly long term as existing wind farms will not be fully usable until grid upgrades are fully implemented in 2020. In the short term, investment in large-scale wind development has created large-scale waste, and the sustainability of such projects is brought into question.

Ryan Rutkowski is a master's student studying international economics at the Johns Hopkins-Nanjing University Center for Chinese and American Studies.

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