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EDF ready to push into biggest wind market

CHINA: With a parent company that has been doing business in the country for 30 years, buying a stake in a small Chinese developer marks only the start of EDF Energie Nouvelles' expanding market drive and its ultimate ambition in China may not be confined to land.

The portfolio EDF EN bought includes the 25.5MW Darongshan project in Guanxi province
The portfolio EDF EN bought includes the 25.5MW Darongshan project in Guanxi province

The recent acquisition of an 80% stake in Chinese developer UPC Asia Wind Management (UPC AWM), made France's EDF Energies Nouvelles (EDF EN) "Europe's first major energy company to move into the Chinese renewable-energy market", according to the company.

It seems a curious move given the trend is largely in the opposite direction, with Chinese wind companies heading west, but EDF EN sees the country as providing significant growth opportunities.

"We want to be a global player, and it is difficult to be considered a global player if we are not present in the world's biggest market," says Bruno Fyot, EDF EN's chief operating officer.

Global strategy

Last year, EDF EN adopted a new strategy for international expansion, identifying potential markets according to five criteria: the resource; regulatory framework; growth potential; whether EDF EN has a competitive advantage; and if it fits in with the overall strategy of the EDF Group, Fyot explains.

This approach identified China, India, Brazil and South Africa as priority markets, where the firm aims to have a total of at least 5GW of renewable energy operating or under construction by 2021.

This will represent 20-30% of EDF EN's global portfolio, according to Fyot. Wind currently makes up 87% of the company's installed capacity, while its geographical split is roughly 60:40 between the US and Europe.

The company expects to maintain its global footprint at "around 20 countries, 24 or 25 at most", and may sell assets in some smaller markets, Fyot says.

The priority now is to increase installed capacity in each country in order to benefit from economies of scale and capitalise on the initial investment.

While EDF EN now averages around 300MW (wind and solar) in each of its 21 countries, it aims to increase this average to reach at least 1GW in each of the four priority markets.

Such a strategy would also allow various synergies, such as greater clout when negotiating turbine deals, benefiting from the good relationships EDF EN has built up with institutional investors, and project optimisation offered by its Paris engineering centre, Fyot points out.

The company can also share expertise between countries and different activities of the EDF Group.

For example, with fewer major developments underway in Portugal, the very experienced team there is now supporting the work in Brazil, adds Frederic Belloy, EDF EN's new executive vice-president in charge of driving international strategic development, particularly in emerging markets, and optimising synergies.

The China connection

On the face of it, the attractions of the Chinese market are evident. The country added nearly half the world's wind capacity in 2015 and is targeting 200GW in 2020, up from around 140GW today.

In addition, EDF EN has "a very strong competitive advantage" based on EDF's presence in China for more than 30 years, Belloy says.

Active in nuclear, thermal and hydro generation, as well as energy services, EDF has developed good relations with the regulatory authorities and built up knowledge of the country. "Without this, (EDF EN's entry) would not have been possible," he notes.

In UPC AWM it also found what Belloy describes as the "right partner". The Beijing-based developer has a "good-quality" pipeline, mostly in the south where there is a low risk of curtailment, and works in partnership with Guodian, one of China's top-five power producers. "It is reassuring to have such a strong partner," says Belloy.

The acquisition brings EDF EN 174MW of operating capacity, jointly developed by UPC AWM and Guodian, with the latter holding a 51% stake.

The portfolio also includes 130MW under construction and around 1GW in development, and takes EDF EN's global installed wind capacity over the 10GW mark.

For its part, EDF EN brings its expertise to UPC AWM, notably its "capacity to optimise installation and improve conception and operation", Fyot says. The goal is to reach 2GW installed wind capacity in China within five years.

While UPC AWM will continue to work with Guodian, EDF EN is also open to partnering with other Chinese utilities or taking a larger stake and investing in projects up to 100%.

"We want to be very agile," Fyot says. Operation and maintenance (O&M) will initially be handled by its Chinese partners or the turbine manufacturer, but EDF EN is considering developing its own O&M business in China.

Market challenges

However, China is not without its problems, most notably falling tariffs and delays in subsidy payment, alongside high curtailment rates and unconnected wind turbines. These are mostly in the northern, high-wind-speed regions due to lack of grid capacity.

These factors "significantly hurt wind developers' financial performance", says Yiyi Zhou, China wind analyst for Bloomberg New Energy Finance. Shane Sun, Make Consulting's China analyst, agrees. "Internal rates of return are well under 8%, and under 5% in areas with curtailment," he says.

In addition, while growth in demand is close to zero, China is still building new power generation, which will result in an "obvious oversupply," Sun warns.

China is also a notoriously challenging market for foreign companies, and EDF EN will "face a lot of barriers because they are not Chinese", Sun says. Even though UPC AWM is registered in Hong Kong, such companies are treated separately from mainland-Chinese entities.

As such, it could run into a lot of "grey areas", such as securing grid connections, and find it "extremely difficult" if they try to develop projects on their own, he maintains.

"It is a very tough market," says Feng Zhao, senior director at FTI Consulting. EDF EN can certainly leverage off EDF's 30 years in China, and the close cooperation between France and China in nuclear power, but "it is not a guarantee for success", he says. "It depends how they play their cards in future."

On the other hand, Zhao recognises that EDF EN wants to grow and diversify into different markets. Even if it only achieves a 3% market share, 3% of the Chinese market still represents a significant volume in terms of a global footprint, he points out.

Eyeing offshore?

Sun believes EDF EN's long-term ambitions in China lie offshore. Indeed, the company has already been talking to offshore developers, he says, noting that "it makes sense to use onshore as a stepping stone to offshore ambitions".

While Chinese developers have the necessary resources and big ambitions offshore, they lack the technology and experience, Sun says.

Meanwhile, EDF EN offers expertise in offshore construction and project planning. The French company will be more expensive than local concerns, "but offshore risks are already pretty high and if (EDF EN) can reduce major faults, the cost is acceptable," Sun says.

It is also worth noting that China's leading offshore developer, Longyuan, is part of Guodian.

And, if EDF EN is looking offshore, it may be ahead of the curve. According to Sun, some European companies have held preliminary discussions in China, but none has made a firm move yet.

"The next three to five years could see more European developers moving into offshore in China," he says.

In this case, however, it would have to be in partnership with a local company, since offshore projects have to be majority-owned by a mainland-Chinese entity. Time alone will tell.

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