China changes tack and goes for tender system -- Premium fixed tariff definitively dropped by government

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Companies which a short time ago were rushing to invest in wind projects in China are having second thoughts after the government announced last month it would not be introducing a premium wind power tariff, as widely expected. Instead, the market structure for meeting the aims of China's Renewable Energy Law will be a competitive bidding process controlled by government.

While project developers confess to being troubled by the news, wind turbine suppliers appear undeterred and say they will continue with plans to establish manufacturing plant in the country. The renewables law, which came into force at the start of the year, requires that 70% of wind power equipment be made in China to be eligible for government contracts.

"The zeal for wind development in China is likely to cool down," says Zhu Junsheng of China Renewable Energy Industries Association (CREIA). "Investors will choose to wait and watch, and will take extra precautions in making investment decisions." That is not necessarily a bad thing, says Zhu.

China Longyuan Electric Power (CLEP), the country's leading wind player, agrees, is more concerned. "A fixed tariff system would have demonstrated government support. The message would have been clear and definite. Now, it is obscure," says a rattled spokesman for the firm. "There are too many uncertainties. Nothing is clear. We do not know what to do. Not just our company, but many companies will have the same reaction."

Cost control

The government's stated aim in electing competitive tenders is to control the overall cost to China of developing wind power. "Development of wind energy is a complicated issue," says Zhang Guobao of the National Development & Reform Commission (NDRC), which published the market policy. "Wind conditions in different places vary greatly, as does the level of economic development. Therefore, introducing a fixed feed-in tariff for projects would be unfair to investors. Also, public tendering is more likely to achieve fairness than the government picking developers."

The indication from NDRC in recent months was that a premium purchase price for wind would be based on an incentive of CNY 0.25/kWh ($0.03/kWh) added to a benchmark rate based on local coal-fired energy, as many in the industry had lobbied for. "I'm totally confused," says Shi Pengfei of the China Wind Energy Association, who pushed for a dual pricing mechanism for wind power consisting of both fixed tariffs and tendering. That approach now applies only to biomass energy.

As it is, NDRC will continue to grant government concessions for large scale wind plant development, as it has done in the last few years. Bidders proposing to generate the cheapest electricity will have best chance of winning a concession. Details of tax incentives for renewable energy will also be released soon, says Zhang Guobao, while a national survey of wind resources and selection of wind farm sites will be concluded this year.

Not everybody agrees that tenders are a bad approach. "Fixed tariffs have their own problems," says Zhu. "The tendering route is not without reason and, personally, I believe the thinking of cutting down wind cost through tendering is correct. However, the practice of tendering as shown by the concession projects in the past three years has not been healthy."

Previous concession projects have almost exclusively gone to the lowest bidder, at prices many commentators have suggested are not high enough for the project to succeed. "Many bidders were not aiming at profit-making, but eyeing something else, for instance, company image. That was very damaging to the industry," says Zhu. "If tenders in the future go on like this, China's wind industry will be dead."

The tender system would be workable, Zhu adds, if it runs smoothly and investors are allowed a reasonable profit margin. "This means the lowest price will not determine the choice of champion," says Zhu. "Setting a floor and ceiling on bidder's price quotes might help. But it will not be easy, probably more difficult. But if tendering cannot solve the problem, no other measures can."

A system of lower and upper bounds for bids, however, is not likely to become a general regulation, according to an expert source at NDRC's energy research institute. "It may come with specific projects as one of the tendering requirements," says the source.

At CLEP the fear is that investors will decide the rewards do not outweigh the risks and the Chinese wind market will grind to a halt. That view is supported by CLEP competitor Farsighted Group (Huarui), the only private company in China awarded a wind concession project so far. Huarui is developing the Dongtai 200 MW project in east central China's Jiangsu province, scheduled for completion in May 2007. It bid for a concession project last year too, but missed out. The company is now hesitant about bidding for a project this year.

Manufacturers undeterred

Danish turbine manufacturer Vestas is supplying the 2 MW machines for Dongtai. Because the project was awarded in 2003, the local content requirement is 50% rather than the 70% required since last year. A week after last month's pricing announcement, Vestas announced it plans to establish a nacelle and hub assembly plant in Tianjin, near its new blade factory now being established. The EUR 19 million facility will churn out 350 nacelles and hubs a year, starting in 2007.

Just a day earlier, commenting on the new pricing system, the company's Asia Pacific director, Thorbjørn Rasmussen, said: "We have to see what our customers think of the new system, but we can fear that the new rules might delay new projects. On-going projects will not be affected." Jens Olsen from Vestas' Beijing office agrees the tendering mechanism is likely to concern investors. The fixed tariff is definitely to be preferred, he adds, and would bring investors at home and abroad forward faster. According to Olsen, however, it is unlikely the market will slow dramatically: "Perhaps a little bit of a slowdown until things are clarified on how the system should work on the practical level." He adds: "We are still very optimistic on the future of renewable energy, especially wind. But it's not going to be so easy as we thought it would be, especially from the investor's point of view."

Supply network

Other manufacturers with facilities or planned facilities in China are Germany's Repower and Nordex (page 34), Spain's Gamesa, India's Suzlon, and America's GE Energy. They all say they can meet the 70% content requirement. Gamesa is pursuing a two-phase product strategy, says the company's Alex Otaegui. It will create a component supply network in China for its 850 kW turbine before moving to its 2 MW machine.

GE expects to start operations this month or next at its assembly facility for 1.5 MW turbines in Shenyang in north-east China. The first order the factory will meet is for 100 turbines destined for the Jiangsu Rudong Concession II wind project in Jiangsu province. Around 67 turbines will be built in 2006, and the other 33 in 2007, says the company.

Repower's Thomas Schnorrenberg doubts the continuation of a tendering system will seriously affect the company's business in China. What is important, he says, is the renewable energy law. Suzlon, which has recently established a manufacturing plant in north China's Tianjin municipality in the same region chosen by Vestas, says it is studying the implications of the new market structure.

"It is difficult to say what effect a tendering system would have on Chinese and foreign joint venture turbine manufacturers," adds Jens Drillisch from German technical support organisation Deutsche Gesellschaft für Technische Zusammenarbeit. "Transparency in picking the winner will be very important for a tendering mechanism."

China recently increased its wind target to 30 GW by 2020 (Windpower Monthly, December 2005). Current installed capacity is under 1000 MW.

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