Investing in China

   SINCE the early 1980s, China's efforts to develop its electric power industry have attracted the interest of a large number of foreign companies. Burdened with its enormous population and huge electricity demand growth, China has been unable to finance its power development programme alone and has used private foreign finance to make up the domestic investment shortfall.

   Privately funded power plants have been established in various provinces and cities using investment mainly from Hong Kong, Asia, the US and Europe. The size of privately funded projects has varied considerably, ranging from small stations under 100MW to large projects of several thousand megawatts. Most independent power producer (IPP) schemes involve a single power station though some IPP projects have been established covering several power plants.

   Until now almost all foreign financed power projects in China have been build, operate and transfer (BOT) schemes. Under the BOT concept, the foreign developer builds and operates one or more power stations for an agreed number of years during which time the company recovers its investment and earns a profit from generating electricity and selling it to the local power grid.

   At the end of the Ninth Five Year Plan (1996-2000) China's installed generating capacity reached 319,320MW and the nation's power output reached l,368.4 TWh, both figures ranking second in the woi after the US. Although China boasts the world's second largest electricity industry per capita electricity consumption nationally is still below the world average, while t situation is worse in rural areas.

   In announcing the tenth Five Year PI (2001-2005) the government has targeted 7% increase in GDP and a corresponding 6% growth in power output. During I current five year plan period, electric industry development and restructuring will focus on the construction and transformation of the power grid and the establishment of regional power grids which will interconnct to form a national grid network and facilitate the west-east transmission of electricity from China’s interior to the fast developing east coast region.

   Coal accounts for about 75% of the total electricity generated in China and about 67% of primary commercial energy consumption. Hydroelectric power is the second largest sources of power generation accounting for about 18% of total power generation followed by oil-fired stations. Nuclear power and other fuel sources account for 1 % of power output.

   While coal is China’s largest primary energy resource, the government is concerned about serious atmospheric pollution from coal-burning that affects most large cities. Plans to reduce coal-fired pollution include promoting the development of hydro power and renewable energy during the current ninth plan.

   During the past 20 years, hydro power has fallen as a proportion of China's total installed generating capacity and power output due to the rapid increase in coal-fired generation. The government is hoping to reverse this trend as part of its pollution reduction programme.

   In 1990, for example, hydro accounted for 26% of China's total installed 137.890MW generating capacity, while a decade earlier hydro had represented 30% of the nation's 65,869MW capacity.

   Hydro power has also dropped as a proportion of total electricity generation during the past two decades. In 1980 hydroelectric schemes generated 19% of China's total 300.6TWh electricity output, rising to 20% of the total 621.3 TWh electricity generated in 1990.

   At the end of 2000 hydroelectric schemes totaling 79,352MW installed capacity were in service accounting for 24.7% of China's total 319,320MW capacity, while thermal power plants totalling 237,540MW represented 74.3% of capacity.

   According to government statistics, hydroelectric dams generated 243.1 TWh in 2000 accounting for 17.8% of China's total l,368.5 TWh electricity output, while thermal power generation reached l,107.9TWh -81% of total output.

   Government plans to increase hydroelectric power to its former importance during the current five year plan include major projects such as the 18,300MW Three Gorges scheme to develop western China's substantial hydro power potential for transmission to electricity hungry east coast provinces. In addition, smaller schemes will promote the use of hydro in areas around the dam site.

   FOREIGN INVESTMENT
   Although thermal power generation has attracted most overseas investment in China, several foreign companies have already invested in hydroelectric power development.
One company active in the hydro sector js Meiva Power Co. Ltd. Original1y established in Hong Kong in 1994 as a regional office of PSEG Global to develop power generation investment opportunities in Asia, Meiya is 50% owned by New York-listed Public Service Enterprise Group (PSEG), which operates power plants totaling 16,OOOMW in the US and worldwide.

   Meiya's two other shareholders are the Asian Infrastructure Fund with 30%, whose co-sponsors include the Asian Development Bank and the World Bank's International Finance Corporation, and Hydro-Quebec International with 20%.

   Since 1993 Meiya has invested in seven operational power plant projects in China. Two are hydro power schemes while the rest are coal-fired thermal plants. Meiya has invested US$300M in China's power industry so far and expects to invested US$300M in the next two years. By the end of 2007, Meiya plans to have invested US$1.6B in China's power sector. Most of the additional investment will be used for hydro power development and gas-fired generation schemes.

   'Our focus is hydro power and gas-fired generation in the west,' commented Colin Tam, chairman and CEO of Meiya Power. 'Also, we are investing heavily in infrastructure to transmit electricity from west to east where the load is growing fastest. Load development has a lot to do with insufficient transmission. There are no hydro power resources on the east coast. They are all in western China.'

   Meiya Power has invested in three medium size hydro projects so far, of which two are in operation. Both the operational hydro-electric schemes are located jn Guangxi Province in one of China's less developed regions. The two plants are the 54MW(3x 18MW) Fushi dam and the 72 MW(3x24MW) Zuojiang scheme.

   The smallest scheme is the 45MW (3xl5MW) Mianyang project, now under construction in Sichuan Province and due for completion by mid-2005.

   'Meiya's approach is to go and look for suitable projects. Both Fushi dam and Zuojiang dam were under construction for about 10 years by the local government,' Tarn explained. 'In the traditional manner they built when they had the money and stopped when it ran out. We found the projects and negotiated to invest and help pay off the debts. We were supported by the local government. Both dams are in autonomous minority peoples regions and did not get central government support.'
Meiya's interest in investing in existing hydroelectric projects is that the company does not have to get involved in rime consuming project preparation.

   'For greenfield hydro power projects it takes too long. Relocating residents and other tasks are hard to do,' Tam said. 'Mianyang dam is different. The local government completed construction of a multipurpose dam for navigation, irrigation and flood control, but ran out of money and looked for an investor to complete the hydro side of the project.'

   Meiya is the majority shareholder in all three of its hydro power projects. The company has agreed a project structure with local governments for each of the three schemes similar to its thermal power schemes in China.

   'As a private investor we can only invest in small and medium hydro projects, so it is not much different to thermal power scheme,’ Tam said. ‘Under 50MW is small while above 300MW is large'.

   All three schemes are BOT type projects ranging from 20 to 25 years in duration after which Meiya will hand the plants over to government. Although there is no minimum guaranteed return on any of the schemes, the power purchase agreements for Fushi and Zuojiang specify a minimum kWh purchase.

   'However, with a small hydro project, unless there is an unusual situation they will take what we generate,' Tam remarked. 'All are small dams, hut because of irrigation and navigation requirements they are like run-of-river type schemes. Typically hydroelectric dams run for 3000 to 4000 hours a year, and over 4000 hours in a good year. They will use the electricity in the same provinces where the dams are.'

   WORKING IN PARTNERSHIP
   Meanwhile, Meiya is working to form partnerships to develop three other power projects, two of which involve hydroelectric power. The company is focusing on regions where it has already invested in power projects.

   'The government is looking for us to help restructure hydroelectric power company financing by consolidating their debt and bringing in long term finance for old and new projects,' Tam said. 'We are looking for hydroelectric projects nationwide. Hydro power is a strategic power source as Hydro-Quebec is our shareholder. Most hydro potential is in west and southwest China. We are emphasising regions where we already have business relations in northwest, central and southwest China and the eastern region around Shanghai.'

   In Hubei Province in central China, Meiya is currently working on the acquisition of a cascade hydroelectric scheme that will exceed 3000MW installed capacity once the three planned construction stages are completed. Although Tam declined to identify the project, he revealed that the existing dam has an installed 1700MW generating capacity and that work is underway to install additional turbines capable of generating almost 400MW.

   The cascade dam project belongs to a state-owned company under Hubei provincial government. The river where the cascade scheme is being developed has the potential to generate a further 1000MW at least.

   'There is substantial hydro potential on the same river,' Tam explained. 'They are bringing us in as the strategic partner. Our money will be used as their equity for new plants. They are looking to us to bring in modern management skill for a phased hydro development project that requires certain skills and systems.

   'It will take over 10 years to develop the 3000MW. We are hoping to complete the acquisition by third quarter 2003 as there is a lot of government and regulatory issues to deal with. The evaluation process of the state assets is now underway so the investment needed is not known nor our final shareholding. Our requirement for all projects in China is to have either majority control or operational control,' he said.
Apart from the Hubei cascade hydroelectric project, Meiya plans to participate in a combined hydro power and thermal power scheme spread over several sites in Guangxi Province that will total about 2000MW installed capacity. The Guangxi scheme will include a 600MW hydroelectric dam of which 200MW installed capacity is being installed to replace old coal-fired plants that are being taken out of service.

   MAJOR RESTRUCTURING
   Meiya is stepping up its investment drive in China at a time when the government is about to implement a major restructuring of the electricity sector. The reform programme will involve breaking up the State Power Corporation, which owns about half of China's generating capacity, into four or five independent generation companies (gencos). In addition, various state power plants will be sold to three Hong Kong-listed Chinese power generation companies. Huaneng Power International is the largest, followed by Beijing Datang Power Generation, while Shandong International Power Development Co is the third.

   The government aims to complete the restructuring programme by mid-2003 and then list the new genco companies on the Hong Kong or Shanghai stock exchanges. All gencos will be national power suppliers as each genco's power stations will be scattered across China. This will prevent a single genco from dominating any of the six new planned power supply regions.

   Breaking up State Power will also involve establishing a new company to take control of the state-owned utility's transmission and distribution activities. A national power grid company is due to be formed covering all areas except southern China. This is because State Power owns most of China's transmission and distribution facilities except the southern grid, for which Guangdong provincial government has provided most the necessary investment.

   Power sector reform is likely to bring further opportunities for Meiya to expand hydro portfolio in China. Following t break up of State Power into gencos, considerable reorganisation and consolidation is expected among other power plant operators. Opportunities to purchase power stations are expected to occur as those operators unable to compete in the new power market decide to sell their plants.

   'You have to reach 4000MW to 5000M installed capacity in China to be competitive,' Tam said. 'Now we are at 2016M Projects we are working on now will reach our goal.
'For Meiya, China is one of the best markets to get into. Speaking today I cannot see any other market with a higher potential the next 10 years. The installed per cap generation capacity is still low among developing countries. China's economic grow will require a substantial addition in generating capacity.'

   NEW INVESTMENT
   Apart from Meiya, China Light & Power Hong Kong (CLP) is one of the largest foreign power plant investors in China w various power plants in service and under construction in Guangdong, Shandong a elsewhere including hydro power dams.
In Guangdong Province, CLP is involved in Huaji hydro power scheme, Daya Bay nuclear station and the associated Conghua pumped storage scheme that uses surplus from Daya Bay at night to fill its reservoir for peak load generation.

   CLP, with Exxon, owns 50% of I 1200MW Phase I of Conghua pump storage scheme (4x300MW). This entitles CLP to 600MW of hydro power generation capacity to supply customers in Hong Kong.

   Daya Bay was constructed as a 20 year BOT project while Conghua pumped storage has been built as a 40 year BOT scheme. The Huaiji hydroelectric scheme was also set up a BOT basis, based on a 30 year BOT contract.

   Established in December 1997, Huaiji hydro scheme is the most recent of CLP’s investments in Guangdong's power industry. CLP owns 41.5% of the scheme through subsidiary, CLP Hydro Power Ltd, while Sun Hung Kai China Development Fu Ltd, a subsidiary of Sun Hung Kai of He Kong, owns 8.5%. The remaining 5C stake is held by Huaiji County Huilian.

   Huaiji consists of nine hydroelectric power stations totalling 99MW of which five were commissioned between 1975 a 1996 while four new stations were completed at the end of 2001 .The largest of the n stations is the 36MW Gaotang scheme while the smallest is the 1.5MW Longzhongtan scheme. With all nine hydro power plants completed, the Huaiji scheme is expected generate 390GWh annually.

   (Source:JANUARY 2003 INTERNATIONAL WATER POWER & DAM CONSTRUCTION)