Manufacturer pull-out signals start of consolidation

CHINA: A well-known manufacturer has abandoned development of wind turbines just over a year after it launched into the sector, citing too much competition and government control in the Chinese wind industry. The long-expected shake-up of the Chinese wind sector may now be under way.

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Harbin Air Conditioning, a major Chinese maker of air conditioners which just over a year ago launched a research and development unit to develop wind turbines, is closing its wind unit at a loss of CNY 2.8 million ($425,267). It must also cancel component orders worth CNY 22 million ($3,347,790) and technology partnerships worth $2,732,400.

The company says pursuing Chinese wind energy is now too risky with so many rivals having jumped into the industry and the government tightening control.

Experts had anticipated that weaker elements of China's wind manufacturing sector would begin to bow out after the government, in late 2009, issued a rule discouraging new wind turbine manufacturing plants and driving development of bigger wind turbines rated 2.5MW and larger.

Pressure on suppliers mounted last March, when the Ministry of Industry and Information Technology released draft rules tightening standards for wind turbine suppliers. The moves were widely interpreted as aimed at squeezing all but the strongest from the domestic wind sector.

More to come

Now that Chinese wind turbine manufacturers have mushroomed from around ten in 2005 to above 80 today, more exits are certain. China Wind Energy Association (CWEA) vice president Shi Pengfei says: "It is a wise choice for companies to retreat early from the wind turbine sector - considering the backdrop of surplus capacity - if they are inferior in technology, market shares and development funds."

Comments by government officials throw more cold water on the wind sector at a politically sensitive time. The National People's Congress, China's national parliament, is holding its annual meeting this month and it is understood that the country's 12th five-year plan for energy, spanning 2011-15, will be on the agenda.

Shi Lishan, deputy director of the new energy and renewable energy department of National Energy Bureau, says: "Compared with wind power and solar power, which suffer from problems accessing the grid, Chinese hydropower has enjoyed complete and sound operation. Hydropower has favourable conditions to develop even faster."

China has firm plans to install about 20GW of hydropower between this year and 2015. Shi opines that because wind is variable, hydro can only serve to support grid stability.

Elite club

Li Junfeng, deputy director of energy research at the National Development and Reform Commission, which oversees China's energy policy, remarks that it is "enough to have three to five wind turbine makers in the Chinese market".

China's top three wind turbine makers, Sinovel, Goldwind and Dongfang Electric, have locked up about 60% of the domestic wind turbine market. The top producers of wind blades - Zhongfu Lianzhong, Zhongcai and Baoding Huiteng - have together secured a similar market share.

The outlook for Chinese manufacturers is cloudy, even without official cynicism stirring up worry. Manufacturers have had to slash prices for turbines in recent calls for proposals, in turn squeezing profit margins and accelerating the move towards consolidation. This has made the waters choppy for firms trying to raise funds on equity markets.

In December 2007, turbine supplier Goldwind made headlines with its initial public offering (IPO) on the Shanghai Stock Exchange, watching its stock soar to CNY 131 ($19.94) a share from the CNY 36 issue price.

The market has soured since then. On the first day of Sinovel's IPO on the Shanghai Stock Exchange in January, its record stock price of CNY 90 dropped by nearly 10%. The slump in prices has continued into the following weeks.

Although they are the buyers of turbines, developers have not been immune to the dark mood. By the end of 2010 Huaneng, one of the top five state-owned power companies, shelved plans to float its renewables division on the Hong Kong Stock Exchange. Datang, another top-five power company, pressed ahead with an IPO in Hong Kong but the stock closed below its issue price on the first day.

Line losses

Chinese analysts agree that slow integration of wind onto China's grid causes bottlenecks and limits the effect of the government's generous support for the sector. Wind farms profit largely from preferential fiscal and taxation policies, but these are broadly viewed as unsustainable.

According to the State Electricity Regulatory Commission (SERC), in the first six months of 2010 China failed to purchase 2.8 billion kWh of generated wind farm output due to grid constraints. About 75% of the unsold wind power came from Inner Mongolia. SERC says the main problem is that grid construction has not been harmonised with wind farm construction, resulting in wind blocked from the grid. Transmission system operators echo the complaint.

Nevertheless, CWEA secretary general Qin Hainan remains optimistic about the prospects for wind power in China. He says China needs to expand its wind capacity to about 200GW in 2020 if it is to meet the Chinese government's aim of sourcing 15% of primary energy that year from non-fossil sources.

With just over 40GW of wind installed today, China needs to add an average of 16GW a year. Whether that translates into headline-catching annual growth rates is unimportant, insists Qin. "Even if China installs 20GW of wind power in 2011, the annual growth rate will only be about 50%," he says. That is well below the more than doubling of capacity repeated over recent years.

"In the future, as the base number becomes increasingly bigger," he says, "the growth rate of newly installed capacity will be reduced year after year."

He adds that overcapacity in wind turbine production today does not necessarily mean industrial resources will go to waste. China, he assures, will continually encourage boosting wind power as an emerging industry of strategic importance. It may be too early to predict an end to China's wind power surge just yet.

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