Vast wind farms have sprung up in the Gobi Desert, born of China’s latest investment frenzy. But in the bid to hit renewable targets, financial risks have been ignored, says Lu Zhenhua, winner of the “biggest impact” category in the China Environmental Press Awards.
China's first Environmental Press Awards, jointly organised by chinadialogue.net, The Guardian newspaper and Tencent Inc., were presented today at a prize ceremony in Beijing. First prizes were awarded to Lu Zhenhua, winner of the “biggest impact” category, Yang Chuanmin, winner of the “in-depth reporting” category, and Meng Dengke, winner of the “investigative journalism” category.
Lu Zhenhua, a reporter for 21st Century Business Herald, covered the investment frenzy in China's wind energy market and found that in the bid to hit renewable energy targets, financial risks had been ignored. Yang Chuanmin, a journalist for Southern Metropolis Daily, reported from a chemical project near the Three Gorges Reservoir, which she discovered could pose risks to the environment and human health. Meng Dengke, in a report for Southern Weekend, investigated corporate links to waste-incineration advocates and revealed a powerful lobby taking aim at environmental-health researchers.
Special commendations were awarded to Yang Dazheng, Wang Peng, Lu Zongshu, Chen Tongkui, Liu Xia and Zhang Ruidan. The award judges were: Liu Jianqiang, chinadialogue.net's deputy editor in Beijing and former senior reporter at Southern Weekend; Jonathan Watts, Asia environment correspondent for The Guardian; and Li Yuxiao, director of the News Channel at QQ.com.
chinadialogue.net today publishes Lu Zhenhua's report on China's wind-energy bubble, winner of the “biggest impact” category. All of the award-winning articles will be published bilingually in the coming days.
This article was first published by 21st Century Business Herald on July 31, 2009.
The Chinese county of Guazhou, in north-western China, is famous for its honey melons. But it also produces wind. It blows in from the east through the high, narrow valley formed by the Qilian and Beishan mountains, on the southern edge of the Gansu Corridor.
When the wind reaches Yumen, a city east of Guazhou, it has an average speed of 7.9 metres per second and energy-density of 506 watts per square metre at a height of 70 metres. By the time it gets to the “world’s wind warehouse” of Guazhou, it has accelerated to 8.3 metres per second and its energy density has jumped to 703 watts per cubic metre. The two locations have combined annual average wind-energy reserves of more than 20 gigawatts.
Gansu province has resolved to turn these reliable winds into a constant profit flow. During the 11th and 12th Five-Year Plan periods, it aims to construct 10 gigawatts of wind-power generation across Guazhou, Yumen and Subei, which are all located in the province’s northern prefecture of Jiuquan. Plans will see 5.16 gigawatts of capacity in place by the end of 2010 and 12.71 gigawatts by 2015, with total static investment of more than 120 billion yuan (US$17.6 billion). Plans for the project were approved by the National Development and Reform Commission (NDRC) in April, 2008. If they are all seen through, Jiuquan’s wind turbines will generate more electricity than the Three Gorges Dam. Locally they are calling it the “Three Gorges of the Land”.
Across the country, seven wind-power zones, each with a capacity of 10 gigawatts, have been approved. In the space of just a few years, this previously overlooked source of energy has undergone a massive expansion, led by China’s “big five” power firms. Han Mingwen, the deputy chair of Guazhou’s reform and development committee, has said his region is leading the way: “We are pioneers,” he said on July 16, 2009. “A lot of management and technical issues will be solved here and large-scale projects in other provinces will be able to learn from that experience.”
At the same time, concerns about a national wind bubble are mounting. The losses visible in financial reports from Jiuquan’s emerging wind-power network prove that, without state assistance or more preferential policies, limitless winds do not translate into limitless profits.
An official from the State Grid Corporation of China says that wind farms would be loss-making for some time to come, with the only chance of profit coming from state subsidies – under the country’s new energy strategy, both turbine-installation and the sale of electricity to the grid are subsidised by the government.
So, unlike in most other industries, the primary consideration of those entering the wind-power sector should be not their ability to make a profit but their ability to withstand losses – from construction right through to operation. Whether or not they ultimately see a return on their outlay depends on the government’s policy towards and investment in renewable energy. In other words, it is a gamble.
But that gamble has brought both investors and special interest groups swarming to the sector. Within just a few years, an entire industrial chain has formed, from component manufacturers to turbine assemblers to wind-farm operators. The sector is more than doubling in size every year.
Shi Pengfei, deputy chair of the China Wind Energy Association, is blunt: “It isn’t that wind power is showing signs of over-heating. It has already overheated.” Stimulated by policy thrust, government interests and business investment – and with the emerging possibility of turbine manufacturing outstripping demand – the country faces the knotty task of macro-managing the wind industry.
The “Three Gorges of the Land” is being built in the vast Gobi Desert. Amid the dry and barren landscape, sits Guazhou city, with a population of just 40,000. The terrain is flat and stony. Not far out of town, on the road heading north, is China Power International’s 150-megawatt Beidaqiao wind farm.
Two hundred white turbines are lined up, east to west, across a 30 square kilometre area of desert. The towers stand 40 metres tall and the spinning blades have a diameter of 50 metres. The power generated is fed through transformers and into the grid, all the way to the city of Lanzhou, 800 kilometres away.
This wind farm was built in two stages. The first tranche of 134 turbines started feeding power into the grid in October 2007 after a lengthy installation process. The second stage, which saw the construction of an additional 66 turbines, was completed by July 2008 and this time construction only took 100 days. The turbines, which are maintained by a staff of 17, were all sourced from Goldwind Science & Technology and generate 750 kilowatts of energy each.
“This is still small-scale,” says the 37-year-old facility manager, Xu Qinghui, who is wearing China Power International uniform and knows every turbine here. Services have been connected and the ground levelled to make way for the fifth Beidaqiao wind power plant, where the turbines will be larger – the blades will have a diameter of 77 or 82 metres rather than the current 50 – and each will generate 1500 kilowatts.
The farm may be vast in size, but it’s the yield that counts. Although the facility is designed to produce 150 megawatts of power, only around half of that can be delivered to the grid due to capacity constraints. In 2008, more than 70 million kilowatt hours of electricity were wasted, equivalent to lost profits of 17.7 million yuan (US$2.6 million). But Xu is sure that “things will gradually get better”.
Guazhou currently has three wind farms hooked up to the grid. Besides Beidaiqiao, there is also China Guangdong Nuclear Power Group’s Daliang wind farm, which opened in November 2008, and the Gansu Haoyuan Xiangyang wind farm, which was completed in November 2007. Total, combined capacity is 300 megawatts. So far, 701 million kilowatt hours have been generated, with 680 million of those delivered to the grid for income of 328 million yuan (US$48 million) – more than half of Guazhou’s GDP in the first half of 2009.
Han Mingwen adds that work on a further seven wind farms started in the area this year, with an investment of 1.4 billion yuan. When completed, they will have a combined capacity of more than a gigawatt.
According to figures in the NDRC-approved plan, Jiuquan will have total wind-power generation capacity of 12.7 gigawatts by 2015 – half the capacity of the Three Gorges Dam. Some 8.25 gigawatts of this capacity will be in Guazhou, 2.51 gigawatts in Yumen and 1.95 gigawatts in Subei. The plan will see Guazhou install 2.5 gigawatts of wind-power capacity by 2010 – a surge of 250% and 133% on 2008 and 2009 figures respectively. And second-stage plans for Guazhou are already being drafted.
These grand plans are being copied down the road in Yumen. There, the Gansu Haoyuan Yumen wind farm and the Diwopu wind farm are already up and running, with a combined capacity of 310 megawatts. And six new projects are to start over the course of 2009, with one gigawatt of wind power already under construction. The first wave of building work will see 1.3 gigawatts of capacity built, with a further 1.2 gigawatts planned for the second stage.
But even this is not enough to satisfy Yumen’s appetite. The city is striving to reach five gigawatts and the local planning department says nine more wind farms are already planned, with a total capacity of 11.4 gigawatts.
In 2003, the NDRC started inviting bids for concessions to operate wind farms with generating capacity of more than 50 megawatts, starting the first wave of large scale wind-power investment and construction. The subsequent enactment of the Renewable Energy Law was responsible for a 254% leap in wind-power capacity in 2005.
In September 2007, the “Medium-to-Long term Plan for Renewable Energy” brought another rush of wind investment. Its target was the installation of five gigawatts of wind-power capacity by 2010. By the end of 2008, 12.15 gigawatts worth had been constructed across 24 provinces – 143% above target and two years ahead of schedule.
As a result of all this, an enormous new industry is taking shape. The logic that capacity will create the market, the market will set the price and the price will bring the profit is certainly playing its role. Almost every investor believes that, once wind power reaches an industrial scale, the profits will roll in – and capacity is growing by 30% to 50% each year. But amidst the fervour, three simple questions have been meticulously ignored: who is going to buy all the electricity? How is it going to be delivered? And who will ultimately benefit?
Industry insiders believe that investing in the majority of these projects is a gamble on how the government will direct the industry. “We’re taking a relatively long-term view,” says Han Mingwen. He points out that the economic-stimulus measures and promotion of clean-energy sources were prompted by the financial crisis – and after the recovery, policy adjustments can be expected. “There are already strong calls for that to happen,” he says.
With an expected policy shift on the one hand, a rapidly-accelerating construction programme on the other and a host of competing interests added into the mix, the fate of the wind-power sector is uncertain. But the real problem, as always, is in the details: the grid itself has not been adequately prepared to receive a massive amount of energy from wind. And the nascent wind industry is therefore unable to efficiently deliver its product, making financial losses inevitable.
Guazhou’s Beidaqiao wind farm has lost 17.7 million yuan (US$2.6 million) over two years of operation. “The main reason is that grid capacity is inadequate and we have no choice but to limit output,” says manager Xu Qinghui. Only 50% to 60% of the 150 megawatts generated can normally be delivered to the grid, and at times as little as 30%.
According to Xu, the electricity grid in the north-west of China is weak and the amount of energy it is able to carry relatively low. In Jiuquan, there are just two transmission lines, with respective capacities of 110 kilovolts and 330 kilovolts – not enough to export the wind, coal and hydropower generated there.
Yumen faces the same problem. Its energy exports rely on the same 330-kilovolt line, which can only handle around half of the volume of electricity that Yumen’s turbines are capable of producing. As a result, the wind farms are operating below maximum capacity. Moreover, the planned construction of a further four gigawatts of coal power and two gigawatts of solar power in the area over coming years will only put further pressure on the grid.
Shi Pengfei of the China Wind Energy Association has said in the past that the State Grid needs to spend a lot of money preparing the network for wind power, because of its low-output and irregular nature. But there is no government subsidy for this and the State Grid is not enthusiastic.
As a consequence, faster expansion of the grid in north-west China has become the straw to which the wind farms cling. According to official information, a 750 kilovolt line is to be completed and in use by the end of 2010.
But this is only one of the wind sector’s problems. Data from the China Electricity Council shows that less than three quarters of China’s 12.21 gigawatts of wind-power capacity was feeding into the grid last year, meaning that 28% of turbines were, for whatever reason, lying idle. This bottleneck is unlikely to be resolved in the near future.
Besides this, the quality and reliability of wind power is a major concern for the grid. When a wind farm is constructed, twice as much generating capacity of a more reliable source of electricity will typically be built in order to meet peak demand when the wind is not blowing. So if you build five gigawatts of wind power, in theory you need to build 10 gigawatts of capacity generated by some other source.
A Yumen government report obtained by this newspaper says there is an urgent need to build that peak capacity. But, right now, Yumen only has 260 megawatts of coal-fired power and 110 megawatts of hydropower. Meanwhile, solar-power construction is only just getting started. The lack of auxiliary peak capacity is stark.
This means that investment levels need to be stepped up. But the local government doesn’t have the necessary cash – all it can do is provide incentives through policy. Han Mingwen gives an example: on their own, the 200 turbines at the Beidaqiao wind farm take up some 80,000 square metres. But due to the gaps that need to be left between them, the space occupied by the farm is actually 30 square kilometres. Since Gansu’s wind farms are built in the unpopulated Gobi desert, away from the high prices of the cities, the operators only pay 25.2 yuan (US$3.70) per square metre of land. And Han says the power companies got a great deal.
The capital outlay for wind-farm operators depends on manufacturing costs, scale and location, according to people in the industry. Generally, costs are lower for larger-scale farms and there are big subsidies for purchasing equipment. As for land, local governments “virtually give it away” for the sake of attracting investment. For capital-rich, state-owned power firms, this means that they can make a profit if the government provides larger subsidies for wind-power tariffs, and this has led corporations to operate at a loss while waiting for government subsidies to bring in a profit. Capital has gathered in the desert in anticipation of these preferential policies.
Waiting for payback
It is July 16 and turbines are being installed at Yumen’s 200-megawatt Changma Wind Farm, a China Energy Conservation Investment Corporation project, now in its third phase. Head technician Du Yurui tells me that a single 1.5-megawatt turbine costs 12 million yuan (US$1.8 million), a 10-megawatt project would require investment of 100 million yuan (US$14.6 million) and this 200-megawatt project is costing 2 billion yuan (US$293 million).
The only opportunity to turn a profit is when electricity is sold to the grid. Even then, say industry insiders, the ability to make money depends on national tariff-setting policies and subsidies: “If there’s no subsidy, there’s no hope of a profit,” one says.
This creates conflict. The high costs of wind power have long held back growth of the sector. But the grid operators, for their own reasons, are also unwilling to buy wind power.
Electricity generated by wind in Jiuquan is currently sold to the grid for about 0.53 yuan (US$0.08) per kilowatt hour, higher than the 0.20 yuan (US$0.03) and 0.35 yuan (US$0.05) paid for coal and hydropower respectively. In Inner Mongolia, Hebei and the north east of China, the wind-power tariff has risen to about 0.60 yuan (US$0.08) per kilowatt hour and, in Jilin, to about 0.70 yuan (US$0.10), creating an even bigger gulf between the price of wind and that of coal and hydropower.
A State Grid employee tells me that, without encouragement from government policy, widespread use of wind power would be unlikely. But, in spite of this, there is still a rush to construct wind farms. The reason is simple. At least 60% of China’s wind-power capacity is funded and operated by the five main state-owned power companies. The industry consensus is that, for these firms, profit is not the primary motive. Rather, they want to gain a foothold in the sector and be the first to meet government renewable-energy targets.
This helps to explain another issue. Since 2003, firms wanting to run wind farms with a capacity of more than 50 megawatts have had to bid for concessions, with NDRC approval required for both the operator and the tariff. In order to secure the best locations, the state-owned power firms have tendered tariffs that are clearly too low to cover their costs. And so, since the lowest bid wins, almost every project so far has made a loss – or has simply been unable to get started.
The 150-megawatt wind farm at Beidaqiao was Guazhou’s first such tendered project. Han Mingwen explains that the project was secured with a price of 0.4616 yuan per kilowatt hour. And that is not the most extreme case – in Inner Mongolia, wind-power schemes have been won with bids as low as 0.38 yuan (US$0.06) per kilowatt hour.
Shi Dinghuan, an adviser to China’s State Council and the chair of the Chinese Renewable Energy Society (CRES), has warned that bidding by tariff may not be the best method and could “kill the chicken for the sake of the eggs”. To avoid that happening, the government has implemented a number of policies, the most recent on July 24, when the NDRC announced a move to replace tariff tendering with fixed regional prices. This saw the nation divided into four zones according to wind resources and construction conditions, with tariffs respectively set at 0.51 yuan (US$0.075), 0.54 yuan (US$0.079), 0.58 yuan (US$0.085) and 0.61 yuan (US$0.089) per kilowatt hour. The announcement said that the grid would purchase power from onshore wind farms at the local rate while offshore wind farms would have tariffs set separately. However, it did not explain how the four zones had been designated.
“Our experience in Guazhou suggests that at least 0.50 yuan (US$0.07) or 0.60 yuan (US$0.09) would be best,” says Han Mingwen. At 0.52 yuan (US$0.08) per kilowatt hour, it will take 20 years to recover the investment in Guazhou’s wind farms.
That’s a long payback period – but it has done nothing to slow investment. The most direct explanation for this lies in a particular interpretation of government policy, which sees the plain message as being that development of clean energy is a national priority, investment will increase annually and wind power is the most commercially viable form of clean energy.
Another explanation is the pursuit of government subsidies. The industry believes that policy will continue to drive development of new energy sources and that the high cost of wind power will force the government to increase subsidies. If they don’t, people say, financial constraints will hold back the entire industry and this is something the government is not willing to see. And so people expect more stimulus measures for the clean-energy sector to be forthcoming.
These are all just hopes. On paper, at least, there is no sign that this will actually happen. Yet wind power investment continues to increase across the country.
At the local government level, the huge investment and real tax income that wind power brings mean that officials are encouraging businesses to invest in wind. Guazhou alone already earns 20 million to 30 million yuan (US$2.9 million to 4.4 million) in tax from wind power every year. If plans to increase generation to 8.25 gigawatts by 2015 are realised, this annual revenue will soar to 600 million to 700 million yuan (US$87.9 million to 102.5 million) in tax alone. Local interests and corporate enthusiasm are in harmony. But the actual results still depend on government policy.
There are already reports that these efforts to grab a slice of the wind-power cake are leading the sector to overheat. In Inner Mongolia and elsewhere, there are examples of installed turbines not being hooked up to the grid for up to six months. And preliminary results from a wind study conducted by CRES show that a lack of preparatory work before projects begin and too much emphasis on speed mean that 70% to 80% of wind farms are operating far below the capacity predicted in planning documents. It found that some rushed projects did not even complete a serious feasibility study and that most wind-farm operators are set to make long-term losses or only minimal profits.
But amid all the fervour, these subtle signals are being ignored. The wind still blows through Yumen and the Three Gorges of the Land remains under fevered construction. Meanwhile, there is talk in Jiangsu of building an offshore Three Gorges, on an even bigger scale.
Lu Zhenhua is a reporter at 21st Century Business Herald and winner of the “Biggest Impact” prize in chinadialogue’s Environmental Press Awards.
This article was first published by 21st Century Business Herald on July 31, 2009.
Homepage image by Tian Tian