"Eastern European countries are attractive for Chinese wind turbine manufacturers because they are relatively new markets with fewer incumbents," explains Dominic Fitzpatrick, a partner in the London office of international law firm Taylor Wessing. "If Chinese manufacturers team up with the right partners, there is room to expand into these markets," he adds. Fitzpatrick notes that projects using Chinese turbines are often offered financing from Chinese government-backed banks. "The project finance market in general is constrained, and even more so in eastern Europe, so the ability to provide finance can be a decisive factor in favour of Chinese suppliers."
Bulgaria has installed its first Chinese turbines, with the recent completion of a 4.5MW pilot project using Ming Yang machines. That project was completed through a joint venture between Ming Yang and Bulgarian developer W Power, which also has a fully authorised 120MW project in the country. Fellow Chinese manufacturer XEMC has also been aggressively seeking to develop projects in Bulgaria's wind market, although no plans to build specific projects have been announced.
Yet W Power and Ming Yang are now re-evaluating their 120MW wind project, says W Power chief executive Jonathan Mann, in the wake of the Bulgarian energy regulator SEWRC's decision to abruptly slash the feed-in-tariff (FIT) for wind power by more than 20% this summer. The cut came after a number of legislative measures making it more difficult to develop wind projects in the country. As the Bulgarian case indicates, expansion into some eastern European wind markets has clearly not proved to be an easy task for either Chinese or Western investors, both of whom are studying whether and how to remain in the market.
"We're trying to see if we could do the project at a lower cost, for example, by perhaps co-producing towers in Europe rather than shipping them here," says Mann, adding that it is also not clear whether an attractive financing package initially available from both Chinese and Western banks is still available under the new market conditions. "Chinese investors have also been stretched by the new tariffs," he says (see box below).
Chinese turbine manufacturer Sinovel seems keen to break into the booming wind market in neighbouring Romania. This summer it began negotiations to purchase a 1.2GW Romanian project pipeline from Iberdrola, says Christoph Kapp, chairman of Eolica Dobrogea, the Romanian firm developing these projects for Iberdrola. Negotiations between the two companies comes after a 1.2GW strategic partnership between Sinovel and Romanian firms C-Tech and Rokura - both with ties to Eolica Dobrogea - was prematurely announced earlier in the year.
However, these projects were part of a 1.5GW pipeline for which Eolica Dobrogea had signed an exclusivity agreement with Iberdrola in 2008. After Kapp intervened and pointed out that the Sinovel deal was invalid, Iberdrola and Sinovel began negotiations directly. Even if a deal with Iberdrola should fall through, Sinovel is also said to be well advanced in scouting out smaller investment opportunities in the country.
Ciprian Glodeanu, a partner at European law firm Wolf Theiss, points to expectations that Chinese manufacturers targeting the Bulgarian wind market may shift their attention to Romania in the wake of the Bulgarian FIT cut. Regulatory developments in Romania have been more positive. "According to a very recent amendment to Romania's renewable energy law, the number of green certificates wind projects receive cannot be modified before 1 January 2015 while there was previously a possibility of a change next year," explains Glodeanu. "This should help reassure Chinese manufacturers and other investors as well."
Sinovel has also been moving into markets in the east. In Turkey, it is supplying its turbines to two 54MW wind farms being constructed by Turkish renewables firm Beretek Enerji, the first of which is set to be operational later this year and the second in 2013. "We asked for offers from several turbine manufacturers, including European ones," says Beretek Enerji project finance manager Ozgur Erol. "We worked with a German adviser to evaluate which machines would produce most power and we saw that these turbines were just as good as the European ones from this perspective but that the price was also lower."
The price for Sinovel turbines was roughly 5-10% below that of European machines, Erol says, adding that Beretek was also reassured on the technological side after visiting Sinovel production facilities in China. "They also offered to arrange financing but in this case we didn't need it, because we are able to finance the project with our own resources and with financing from Turkish banks," he says. Beretek, which has been primarily active in hydroelectric power, was the first Turkish company to use Chinese hydroelectric turbines more than a dozen years ago, says Erol, opening the Turkish market to Chinese companies in that sector.
In April, Agaoglu Energy, the power production arm of Turkish construction group Agaoglu, announced a 600MW framework agreement for Sinovel turbines. But the agreement is not yet definitive, says Burhan Erdem, wind farm project manager at Agaoglu Energy. Whether it goes forward depends partially on Sinovel setting up local production facilities in Turkey, he says, where a higher FIT is awarded for projects with local content. Sinovel has pledged to do just that.
"We are watching the Beretek project and would also like to see how the Sinovel turbines work before we decide to use them on our projects," adds Erdem. If all goes well, the first Sinovel turbines on Agaoglu wind projects could potentially be seen in 2014. Before then only Agaoglu wind farm extensions using turbines already in its existing portfolio are planned, says Erdem.
Greece's power company PPC Renewables and Sinovel last year announced plans for a 200MW onshore wind farm in Greece using Sinovel turbines, with the possibility of financing from the China Development Bank. This strategic partnership also foresees Sinovel establishing a manufacturing presence in Greece. Despite the economic difficulties that have roiled Greece, Sinovel confirmed recently that it plans to go ahead with both the Rodopi project and the factory.
In June, Chinese manufacturer CSIC Haizhuang also revealed it was planning to invest EUR400 million to acquire and expand a wind farm in eastern Europe, although it didn't reveal the location of the project.
Turkey's Agaoglu is hardly the only company waiting to see how Chinese turbines perform, but quality concerns appear to be easing amid a growing number of deals with Chinese turbine makers being announced in eastern Europe and elsewhere. "China has invested very heavily in technology and some serious developers have signed deals with Chinese manufacturers to deploy their turbines in international markets," says Fitzpatrick of Taylor Wessing.
"I don't think there are any reasons for concerns about Chinese turbine manufacturing technology," adds W Power's Mann. "Most of the technology comes from Germany and there is supervision from German institutions. Western companies are trying to convey the idea that the Chinese technology is weaker."
ESTABLISHING THE BRAND CHINESE FIRMS ARE LEARNING AS THEY GO, WRITES WU QI
In eastern Europe, Sinovel is eyeing development potential in Hungary, Bulgaria, Romania and Poland. Deng Yan, vice-president of the European business department of Sinovel, says that this region has more opportunities for wind than the western European market.
"Some countries, like Romania, provide good incentives for wind projects," she says. "Their incentive is much higher than western European markets. This means huge potential for Chinese manufacturers."
But brand image or track record is the first challenge for Chinese suppliers. "People in eastern Europe do not know us much because we are a new player in the market," says Deng. "We need to build up our brand image."
"Second, we need to understand local regulations. Eastern European grid systems sometimes are not as good as those in western Europe," she says. "Each country has its own specialities. We need related knowledge.
"Financing is another key issue in the east. There are few successful cases for Chinese banks in eastern Europe, which delays the evaluation process. There are lots of projects still waiting for financing solutions before they really start."
Chinese manufacturers should work broadly with local technical consultants and related authorities to understand local regulations more deeply, she says.
"We need to set up a good market image and track through some successful projects. Meanwhile, if possible, we must try to bring some financing solutions, which is helpful in those markets," Deng adds.
Policy risks in eastern Europe remain a big challenge. Ming Yang, lured by the preferential industrial policies and feed-in tariffs, signed contracts with Bulgaria's W Power and A1 Development for a total of 124.5MW projects in February.
However, the Bulgarian government's announcement of a 20% cut in subsidies in July has shaken its confidence.
Li Long, general manager of Ming Yang overseas business department, says the company has not decided whether to go on with the project. "Now, we have to reassess the economic values of the project," he says.
Under the previous contract, Ming Yang promised to supply capital support to W Power for the 120MW project, valuing EUR150 million. Ming Yang and W Power would supply 20-30% of the capital funds, and Ming Yang would find the remaining 70-80% funds through loans from the China Development Bank.