China’s sprint to become a wind power leader

In the first of a series of articles on China’s wind power industry, Tristan Edmondson, partner at Mint Research, describes how China is building wind turbines faster than any country in history – its rapidly growing economy is desperate for more green power. However, China’ sprint to become the world’s wind power leader could have unforseen consequences. The original version of this article can be seen here at Vestas’ magazine Win[d]

China’s rapid development of its wind power industry is globally unprecedented. Never before has a country attempted to stimulate its domestic wind market on such a scale or speed. The government is building seven huge “wind bases”, each with a minimum capacity of 10GW, half the size of the controversial Three Gorges Dam, the Chinese hydropower station, which is the world’s largest electricity-generating plant of any kind.

The Chinese government has promised an investment of $265 billion to achieve a renewable energy target of 15% by 2020, excluding hydro power. Wind is already a crucial part of China’s energy mix and is China’s second largest source of renewable energy. In just a few years, China has become the world’s fourth largest producer of wind energy and its domestic turbines have already reached a reasonable level of quality.

However, China is facing some serious challenges in meeting its wind power goals.

Explosive growth and hard lessons

The speed of China’s wind capacity development has led to some teething problems. State owned utility companies must comply with targets for renewable energy, and there have been accusations that since a large proportion of China’s wind capacity lies idle, the utility companies are uninterested in actually producing electricity from wind, and that turbine quality is partly to blame for this.

According to research conducted by Morgan Stanley, about 29% of installed wind capacity in China may be lying idle. Citigroup estimated about 30% of wind power capacity in 2008 was not connected to the electric grid.

Sebastian Meyer, director of Research and Advisory at Azure International, a clean energy consultancy, says that it is wrong to think of the big state owned utility companies as disinterested in the investment returns on their wind turbine projects.

“There is no one throwing money away on wind farm development in China, but they may not have the best expertise in siting, installing or maintaining turbines and there are big problems in obtaining grid connections.”

He says that the methodology for calculating the commercial viability of wind projects is “influenced by an emphasis on payback period, since much of the industry is not familiar with the subtler elements of project financing, including investment analysis tools like looking at internal rates of return, which are better at taking risk into account.”

The mitigation of turbine failure is one area where foreign manufacturers have a clear advantage, but other differences are less clear.

“We have carried out due diligence on Chinese wind turbine manufacturers on behalf of project developers, and it is very difficult to say that Chinese wind turbine quality is bad.”

According to a report by New Energy Finance, a clean energy research firm, foreign made turbines saw higher average capacity factors than projects deploying domestic ones, in part due to the relative inexperience of Chinese turbine manufacturers and wind farm developers. Capacity factor is the actual production of electricity compared with a turbine’s maximum capacity for power generation.

Justin Wu, senior wind analyst at New Energy Finance says “We are seeing a dramatic increase of capacity factors for projects deploying domestic turbines, and we should not underestimate their quality and rate of improvement.”

China’s wind industry is young and rapidly changing – it is only around six years old and has been doubling in size every year.

Structural problems remain in the way that some wind turbine projects are implemented, with many remaining unconnected or producing the wrong frequency of electricity, but the speed at which Chinese government officials and wind developers are gaining knowledge is equal to the pace of industry growth.

According to Meyer, “given the scale and pace of turbine installation, anything that happened before 2003 is basically ancient history. However, we are starting to see a feedback loop that will allow the Chinese wind industry to learn from past mistakes.” He thinks that closer central coordination of grid interconnection will benefit the seven wind bases, and that prioritized dispatch of wind electricity, as mandated in the 2005 Renewable Energy Law, which so far has been difficult to enforce, will happen more frequently.

Challenges for foreign entry

Although there are no legal barriers to foreign wind turbine manufacturers entering the bidding process for wind farms, projects contracted by the central government have so far only been won by domestic manufacturers with low turbine prices. Many foreign firms are concerned about the lack of transparency in the government’s wind plans.

Jim Mahoney, director of Clean Technology Investments for Baryon Capital, is positive about the development of China’s wind industry, but says that some foreign companies are wary of joining the market. “I have recently been advising three foreign wind turbine component manufacturers on whether or not to enter China.  I advised two of them that the time was right, but all three decided that the challenges that exist in the Chinese wind market were too great right now.”

He tells me that the market is changing as fast as it is growing “I see a lot of consolidation ahead as the market matures. There are many small companies competing with each other. Stephane Grand, managing partner at SJ Grand, a financial advisory firm, tells me that the industry is shifting its focus onto China.“Some foreign manufacturers are telling their component suppliers to come to China if they want to carry on doing business with them, and we are seeing more and more international suppliers attempting to understand the Chinese wind market.”

Although China is storming ahead with wind power, government is very much driving development of the industry. For foreign companies trying to understand the Chinese market, predicting the trajectory of policy development is hard and has dissuaded many from entering. Foreign turbine firms already working in China are helping to build a strong industry by contributing to the creation of a healthy ecosystem of quality component suppliers and increasingly sophisticated project developers.

Domestic wind turbine companies are reaching the stage where they will soon be able to sell in overseas markets. Once that happens, in order for Chinese domestic turbine companies to win overseas contracts, the Chinese government would likely have to open up its own market to foreign companies on a more transparent and equal footing. This level of international collaboration would be the final catalyst powering China’s wind industry to be a global leader.