A market of bubbles and bottlenecks

More and bigger business opportunities are bubbling forth in China than in any other wind market, but an obstacle course of bottlenecks ranging from acute skills shortages to a severe lack of quality components lies in the way. The mood at the Wind Power Shanghai conference last month was that everything is possible in China. But who will stay the course?

With China currently earmarked as the wind industry's golden goose, the key question on delegates' minds as they trod the five star corridors of Shanghai's Sheraton Grand Hotel for the Windpower Shanghai 2007 conference and exhibition last month was summed up by Arthouros Zervos, president of the Global Wind Energy Council (GWEC), a key sponsor of the event: "How far and how fast can China's wind market go?" Amid the buzz of excitement and the dreams of fortunes yet to be made, few had time to listen to the warnings that China's great wall of opportunity could still come tumbling down if the foundations are left unattended.

The clear consensus of the three day event, which drew 450-500 delegates to the conference and about 8000 visitors to the 130 exhibits on display, was that China's wind market can go as far as it wants and faster than ever. "It's going to be a massive market," said IW Power's James Pennay. How much of it in the long term will be served by local companies and how much by the global wind industry remains to be seen. "China is a market of bubbles and bottlenecks," said Alberto Mendez of turbine manufacturer Gamesa Energy China. But bubbles can burst and not everybody makes it through the bottlenecks.

China's potential is estimated at some 297 GW for wind power on land and 750 GW for offshore installations, said Shi Pengfei of the Chinese Wind Energy Association (CWEA), one of the organisers of the event along with the Chinese Renewable Energy Industries Association (CREIA) and GWEC. As Suzlon's Paulo Soares noted, that is an investment potential of around $2.4 billion a year or $35.5 billion to 2020. New installed wind capacity in China last year totalled 1337 MW, a 165% increase on the 502 MW installed in 2005, with cumulative capacity at end 2006 standing at 2600 MW. A further 2600 MW of new capacity is expected this year, up 105% on 2006 and doubling China's cumulative total. "China is a booming market," Shi proclaimed. "By 2020, there will be more than 100 GW in China I believe," agreed Zervos. "China will be the number one market in the world."

Much to do

As yet wind energy accounts for a tiny proportion of China's total power capacity at 0.4% of the country's installed power and just 0.1% of its electricity generation, noted Shi. More wind development is not a foregone conclusion, warned Zervos. "It will not happen automatically. It needs the right framework and political will. The renewable energy law got things started but more is needed," he said.

The law sets a framework for renewable energy to supply 10% of the country's electricity by 2010 and 16% by 2020. Within this, goals for wind are 5 GW by 2010 and 30 GW by 2020. That the first of these will be met this year is an accepted fact, as CWEA's He Dexin pointed out, while the 30 GW target is widely expected to be easily achieved well ahead of time. "Some 863 MW was installed in the second quarter of 2007 alone," Sebastian Meyer of consulting firm Azure International told delegates. This capacity is spread across 130 projects and took China's cumulative wind tally to 3.7 GW by the end of June, he said. Moreover, a pipeline of around 65 GW of firmly identified projects is in hand, 17 GW of which is "imminent," Meyer said.

The sheer speed of growth is causing concern. "There is European business and there is China business. The speed they have on is four times faster. The question is: can we control it?" asked Vestas' Thorbjørn Rasmussen. Proper risk assessment and good testing and certification for megawatt technology were identified as essential missing ingredients by CWEA's He. Qualified staff are at a premium as are quality components, and transmission capacity is lacking. Unless the bottlenecks ease, access to the many good business opportunities will remain blocked over the next few years, warned Gamesa's Mendez. "Potential is not everything," he said. "In terms of component supply there are serious quality problems associated with newcomers. This is a big bottleneck."

On a more positive note, he believes the bottlenecks are temporary and that a strong network of suppliers is getting established. "Chinese companies are facing operating problems, but the gap will be closed within five years," he said. "The largest bottleneck is energy transportation and distribution and grid integration." CWEA's Shi concurred. "The west and north of China have the best wind resources, but here there is not much need for electricity," he said. "There is a disconnection between the areas with the best resources and areas with most electricity need."

Shi Lishan of China's National Development and Reform Commission (NDRC), which regulates the wind market, acknowledged the concerns. "Most large scale wind farms in China are away from the larger load centres, therefore grid access has already become a major problem," he said. "More planning for large scale development within ten years is needed." The NDRC will take charge of this, he vowed, to ensure "tens of millions of kilowatts in capacity can be built." Upgrading China's energy mix is "a priority for the government," he added. "We have introduced clearly defined targets and subsidiary policies and created a favourable investment climate, but there are a lot of challenges ahead." Government will take a more proactive approach in helping the industry, he promised.

The right people

Denmark's Vestas, the world's largest wind turbine supplier, has taken on around 1000 new employees in China in the past 16 months and steadily increased its factory capacity. "One of the biggest challenges is getting qualified people," said the company's Rasmussen, words that were to be echoed by company managers throughout the three day event. "It will be an issue for some years ahead. Chinese people are bright people, but do not necessarily have the wind experience we require. It is a great, great challenge every day to get qualified people and maintain them." He urged Chinese firms to take note. "You need the technical expertise. It is not that simple to just make a turbine."

Suzlon's Paulo Soares agreed. "It's like the Wild West here in China," he said. "There is an ongoing fight for human resources among all the manufacturers and this fight is going on as the whole country's infrastructure is being built up at the same time, often demanding the same skills as the wind industry requires."

The supply chain is "where the problem really starts" for China, he continued. With some 8.6 GW of wind power capacity on order, but not yet implemented, meeting demand is going to be tough. "There will be huge pressure from all players to develop the pipeline," he said. With a 60-strong sourcing team now in place in China, Suzlon already gets shafts, forged parts, bearings and bearing cases from local companies, along with gearboxes supplied by Winergy China, part of the German Siemens concern. The list does not include towers, he says, because project developers "think they can get some parts, like towers, cheaper than Suzlon can supply them." Suzlon, however, insists on checking the quality of towers from third parties before completing delivery of its share of an order.

According to Soares, "There are suppliers in China which can do everything you want." Even so, "Local supply chain expansion is crucial to China if it is to sustain the current boom," said Keith Hays of Emerging Energy Research. In particular, he said, there is a massive bottleneck for bearings and gearboxes, especially for machines over 1 MW. Azure's Meyer agreed. With current manufacturing capacity, the 8.6 GW backlog results in a 30 month time lapse between order placement and project completion. Based on 2008 planned output rates, the lag sinks to just 12 months.

Domestic industry

Several speakers said China should adopt a more Western approach to building a healthy wind power industry. While foreign firms are gradually getting to grips with the Chinese way of doing business (box), the government should apply Western standards to wind farm performance, they felt. The market drivers in place should shift from promoting construction of megawatts to promoting generation of megawatt hours. Some speakers said they had seen rows of inoperative wind turbines in the field.

"I want a [wind] target based on produced power," said Soares, who believes around 40-60 GW of wind is achievable by 2020. "China lacks the transparent, long term guarantees and profitability focus of more mature markets," agreed Hays. "There needs to be a longer term focus on gigawatt hours rather than capacity." The consensus was that this would lead to the installation of better quality wind turbines than has been seen in several cases to date.

In a market that requires 70% of wind stations to be made domestically (table page 62), more than 40 Chinese turbine manufacturers have appeared, although as yet sales of Chinese technology remain dominated by the big three, Goldwind, Sinovel and Windey. Chinese turbines made up 41% of newly installed capacity in the country last year. Traditional engineering and electrical companies in China are also moving into wind power, with several of them represented on the exhibition floor.

Most of them, as CWEA's Shi pointed out, "are not experienced enough yet." Gamesa's Mendez expects to see a "Darwinian process" of consolidation, both in terms of manufacturing and development. "Only a few will survive. The national champions will go global and very successfully. I have no doubt about it," he said.

By 2012, China could be producing as much as 12 GW of wind turbines, said Azure's Meyer. For his part, Soares prophesised that by 2020 the top ten wind turbine suppliers will be providing 8 GW of annual installed capacity." He also believes that local companies will be capable of supplying the entire Chinese market for wind turbines. "Foreign players will face a very stiff price competition and will need to develop export plans," said Soares.

Hideous profits

The quality issue surfaced throughout the event. "Our concern is if this huge expansion is at a cost of declining quality," said Vestas' Rasmussen. While domestic demand is currently outstripping supply, it will not be that way for long. "There are a lot of new competitors and a lot of new technologies that are not as proven as others, but offered at prices we can't compete with," added Thomas Richterich of Nordex. Turbines supplied by Chinese firms typically cost 25% less than in Europe or the US, confirmed Pennay.

Richterich was not the only member of the international wind turbine industry to note the low prices offered by Chinese competitors, a comment that drew fire from the floor. "If your prices are high how can the Chinese be expected to accept that?" asked CREIA's Zhu Junsheng. His view was supported by Eddie O'Connor of wind project developer Airtricity, a potential wind turbine customer in China. He lauded the prices offered by domestic manufacturers.

"Prices elsewhere from other suppliers are too high," he said. Berating the industry's leading turbine suppliers for expectations of "hideous profits," he added: "I welcome local manufacturers because there is room for them and there is a need for them... I wish they would impact our business," he said. "Competition keeps everyone honest. The world needs a lot more manufacturers. We need to get 150,000 units a year, ten times what we have now." Richterich agreed. "The more competition the leaner you are."

Quality worries

Quality of wind plant in China, however, has to be assured, continued Richterich. "The installed capacity does not produce the energy it should," he said. It was a claim backed by others. According to Zhou Heliang of the China Electrotechnical Society, about 20% of China's wind turbines -- and half of all wind farms -- are not even operating for 2000 hours year, or for less than quarter of the time. "Less than 2000 hours and we make losses," he said. "I asked a top wind farm operator why this is and his answer was that the wind farm has good feng shui," said Zhou, clearly alarmed. "Wind farms should really be operational 2800 hours or over 3000 hours a year."

From consultant company Garrad Hassan, Richard Whiting said that international experience demonstrates that during the first three months of operation, a wind station would be available to operate for 93% of the time, but that from year two and for the following ten years, availability of 97% is the norm. In China, there is insufficient access to long term data to make definitive conclusions about availability, he said. But from what the company has seen so far, "Yes, there is much lower availability than one would expect of other teething projects elsewhere."

Wind resource assessment is also under suspicion. In some instances in China the forecast output is often 20-30% higher than the actual output, said Gamesa's Mendez. For both Mendez and Zhou, the answer to the quality problems lies in China adopting the international standards which the wind industry must comply with in its traditional markets in the West.

Zhou also linked quality problems to the low prices being paid for wind power. He favoured the government setting fixed standard prices, or "strong feed-in tariffs" for wind power. "Government should supply the same subsidies to wind as it does to coal," he said. Zhou also called for establishment of a national wind development fund to help local manufacturers and developers meet international performance standards.

Others advocated letting market forces eliminate poor quality projects. Mark Kelleher of Australian company Roaring 40s, one of the few foreign wind project developers to have put wind turbines in the ground, said the machines were regularly achieving 4200 operating hours a year. "We aim and are achieving 98.5% resource utilisation," he said. "Our aim is always for optimal generation. Ninety-seven per cent is the norm, so that extra one and half per cent we achieve makes a big difference to returns on investment, which is especially important under tight tariffs as we have here in China."

The key to high availability, he said, is highly trained personnel, particularly in the use of system software for maintenance. "Asset management is our core competency," he said. "But I must emphasize, of course, that it is crucial to select reliable turbines in the first place." Roaring 40s turbine choice for China so far has been technology from Indian company Suzlon.

Domestic suppliers

Representatives of three Chinese turbine manufacturers, lead supplier Goldwind, main competitor Sinovel and Shanghai Electric's wind division, Sewind, defended their products from the platform. All three admitted that mistakes have been made, but all were at pains to stress that quality is their top priority (box). "Quality is the foundation of our company's success," said Goldwind's Wu Gang. "Without quality how can we sell our turbines?"

And selling they are. Goldwind, soon to list on the stock exchange, took 33.3% of China's 2006 market, ahead of Denmark's Vestas with 23.6%. Local firms are steadily increasing their market share. Their main clients -- and China's main wind project investors -- are major state-owned enterprises such as Datang, Guodian and Shenhua. While some 250 Chinese developers are active in the country, most are owned by one of 38 parent companies, according to Azure International. In 2006, these 38 firms were responsible for 90% of the capacity installed, said Meyer.

Soares pointed out that 43% of China's installed wind capacity to date is owned by four of its big five state generating companies along with state-owned grid companies. In contrast, the 30 international investors operating in the sector have an installed capacity of just 195 MW, Meyer pointed out. He believes there will be growth for international companies and for private companies, predicting each will take a 20% share of the market, but it will take time.

For now the bulk of the wind market action lies with China's state-owned industrial giants. The top 15 companies investing in the sector are responsible for around 78% of near term development (9018 MW of 11,535 MW) and 81% of long term development (17,452 MW of 21,455 MW), said Soares. What it means is that most of these companies are well positioned to meet government requirements for them to source 1% of their generation from renewables by 2010 and 3% by 2020, he pointed out.

profit motive absent

There is, however, a problem "They do not care about making losses. These developers and local governments just want more capacity to meet targets and do not care about how good the wind resource is," said CWEA's Shi. Li You of Asia Renewable Energy Holdings, a small private company established in 2005 with a target for 400 MW of wind plant, agreed. "The state-owned companies do not care about losses," he said. For small private sector companies like his, it is a very different matter. "We can't afford to do that."

The government, Li noted, "Treats different investors equally at the policy level but this is not necessarily so in terms of implementation." Referring to the central government's program of awarding concessions to develop large wind projects of 100 MW and more, he said: "Private companies do not stand a chance of winning bids." Soares pointed out that not one wind plant concession has gone to a foreign company and since 2005 no turbines from international suppliers have been considered for a concession project.

CWEA's Shi said the current system is "unfair to overseas investors." Soares called for the government to "correct the course of its central concession projects." He pointed out that the government has granted concessions to companies bidding to supply electricity from their wind plant in a price range as low as CNY 0.04479-0.05092/kWh, considerably lower than the NDRC approved range of CNY 0.540-0.61/kWh for projects being built with provincial government approval. The Chinese, he said, have a "quick buck mentality" that does not fit with the need for long term power planning.

Soares noted that just 37% of the 850 MW of concession projects awarded in 2004 have been built so far and none of the 1600 MW awarded in 2005 and 2006 has seen the light of day. But of the 450 MW awarded to foreign turbine suppliers before 2005, 30.5% has been installed. Of the remaining 2000 MW of concession projects, all to use turbines from domestic suppliers, just 8.9% has been completed.

Soares' presumption is that local companies awarded concessions are banking on government extending the construction period for projects in the next concession round or perhaps readjusting power purchase rates and implementing them retroactively to previous project rounds. "I hope the government does not do this," Soares said. The deadline for bids for the next four concession projects on offer, totalling 950 MW, was November 30.

Sinovel's Chen Danghui defended the performance of local firms. He, too, said the government should make adjustments to its concession system, although with a different approach to that taken by Soares. "Government should invest a lot more in terms of cash, or as clients, in domestic manufacturers to help us compete with international companies," he said.

NDRC's Shi Lishan recognised the concerns with prices under the concession system, but said it was difficult for the government to introduce uniform pricing for wind power, given the different resource at different sites. "Bidding is theoretically the best option, but because some investors have been reckless, bidding is sometimes unfair," he said. "We will have to tackle this problem."

Reputation at risk

If technology quality and wind plant efficiency continue to be sacrificed on the alter of the government's capacity building ambitions, the China wind bubble could burst prematurely, warned many at Wind Power Shanghai, both Chinese and foreign players. A market collapse would not only cost the industry and China significant sums of investment capital, but also wind power its reputation. But if minimum quality and production standards are applied, "you have a world class industry," said Gamesa's Mendez.

Mark Kelleher agreed. "In five year's time we will see consistent application of reliable turbines here in China. But we are concerned that because of the pressure here now the rush will see some less than optimal wind farms going up," he said. "Typically the requirements of investors would address this, but the rush here could see units not proven being used. That's not good for the investor, the public or the industry."

Cai Zhongyong of the Shanghai Electrical Applications Research Institute agreed. "We need a proven standard," he said. "It is a messy situation right now, but I believe in a few years we will have fixed standards." NDRC's Shi again acknowledged the problem. "We must develop compulsory testing," he said, noting it is on the cards. Soares, however, voiced caution. Agreeing that international quality standards need to be upheld in China, he criticised government plans to enforce compliance to a Chinese standard. "Why is there a need for a Chinese certification requirement when we have perfectly good international standards?" he asked. "Why should I give the blueprint of my machine away?" He was not the only foreign manufacturer to fear for its property rights if the Chinese insisted on thoroughly examining each make of turbine to make sure it complied to a Chinese standard before the machine was allowed on to the market.

Number one market

Despite the much discussed obstacles, the mood in Shanghai was one of eager anticipation and determined optimism to make the most of a huge wind market. But doing business in China required putting faith in both central government and provincial government to keep the market on track. "It is a political drive towards the future," said Rasmussen. "We have to be a little bit patient and things will fall into place. The good thing I have seen in the last year is that China takes this challenge very seriously." Drawing on three decades of experience in the wind power business, GWEC's Zervos was not in doubt. "We can see something much bigger happening here," he said. "China is going to be a number one market of the number one markets in the world."