Roaring ahead in China and India

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In 2005, Australia's leading renewables developer, Hydro Tasmania, turned its sights overseas, joining forces with an Asian counterpart to form Roaring 40s with the primary aim of developing wind farms in China and India. Two years on and the grand expectations behind that union are steadily being fulfilled

When in 2004 Australia's federal government ruled out increasing its 9500 GWh by 2010 target under its renewable energy support program, the Mandatory Renewable Energy Target, several local wind power companies soon turned their faces to the wall. Not so Roaring 40s, a 50:50 renewable energy development joint venture between Australia's Hydro Tasmania and Hong Kong's CLP Power Asia. Putting plans for Australia temporarily on hold, it went seeking new opportunities in neighbouring countries, culminating in a five-year strategic business plan to secure at least 1000 MW of wind and hydro capacity in New Zealand, China, India, Korea and other prospective Asian markets as well as Australia long term.

That was back in 2005. Today it has already made significant inroads into fulfilling its ambition, establishing itself as a key player in China's booming market and embarking on serious development plans in India. "When we first headed off from Australia, we did a lot of research looking at the size of the economy, the rate of economic growth, the support for renewable energy and the level of established wind energy," says Roaring 40s boss Mark Kelleher. "China came up number one."

China's renewable energy law, which came into force in 2006, sets a target for 16% of primary energy to come from renewable sources by 2020, which includes an ambitious wind target of 30,000 MW by the same time. Roaring 40s was intent on becoming an early leader in China's up and coming wind market. "We have set a specific market share goal," says Kelleher. "It seems small in a market that is sizeable but our initial target is for one thousand equity megawatts in the next five years. By that we mean equity share in projects so you are talking about fifty per cent of two thousand megawatt."

With three projects with a combined capacity of around 150 MW already underway and others totalling at least 150 MW soon to get off the ground, the company is taking an early lead as one of the few foreign wind developers to make significant progress in China. The local partnerships it has formed already seem set to cement that lead.

Roaring 40s has teamed up with China's largest energy generator, China Datang Corporation (CDT), for two projects: its first Chinese development, the 49.3 MW Shuangliao Wind Farm in Jilin Province where 54 of the 58 planned 850 kW Gamesa turbines are already operating; and the 50 MW Datong Wind Farm, also in Jilin, now under construction and with operation scheduled to start by the end of the year, although turbine supply contracts are still being negotiated. In addition, Roaring 40s and CDT have plans over the coming years to jointly develop the nearby Xiangyang wind project, with a 1000 MW build-out potential.

CDT is a state owned enterprise established as a result of the break up of China's former State Power Corporation. It is the largest power generator in China and controls over 55 GW of installed generating capacity -- more than in the whole of Australia. Highly active in developing renewable energy, it has set aggressive targets, with plans to commission over 2000 MW of wind capacity by 2010.

State links

Roaring 40s is not putting all its eggs in one state basket, however. For its third project in China at an advanced stage of development, the company has joined forces with another of China's leading renewables companies, Guohua Energy Investment Corporation. The 48.75 MW Rongcheng wind farm, comprising 1.25 MW turbines from India's Suzlon, is being built in Shandong province. Around 60% of the foundation work is done along with construction of the control room building and access roads.

As with CDT, the tie up with Guohua is likely to generate significant business for Roaring 40s. Guohua is a subsidiary of state company Shenhua group, China's largest coal producer, and has identified renewable energy development as its core business for the future, securing wind sites for 16,000 MW of development to date. Its initial development targets are for 1000 MW by 2010 and 4000 MW by 2020.

As well as Rongcheng, Roaring 40s is partnering Guohua on three additional 50 MW wind farms in Shandong province. Each is expected to cost around A$80 million. The wind farms -- Lijin, Hekou and Zhanhua -- gained Feasibility Study Review approval a year ago. Passing the review is a key part of the approval process in China and is akin to gaining construction approval, says Roaring 40s. Construction on each project is due to start in September, with commissioning targeted for the middle of 2008.

China is different

Doing business in China, says Kelleher, is a far cry from operating elsewhere. The company's success, he says, is down to its careful planning and foresight in wooing key local partners. "It really is a very different environment and we have been on a steep learning curve," he says. "There have been hard lessons learned by many foreign investors. It's important to have trust, to build solid relationships and to add value."

One obvious difference working in China is language, he says, while the legal framework is more about regulation and not so much case law. "Contracts are simpler, more a case of contracts reflecting the understanding of the undertaking. In the end, if the contract is seen to be unfair it will not be deemed binding." In addition, the financial side of things is different, he says, particularly arranging project finance, although the banking system is starting to open up. "The local partners are of great benefit in managing the approvals processes," he adds.

All of Roaring 40s projects in China are individual developments of just under 50 MW. As long as the rated capacity of wind projects stays below 50 MW, approval of them may be granted by local government. Larger projects must be sanctioned by central government and so far have only proceeded under China's program of government concessions for wind power projects in the 100-300 MW size range. To date, all contracts for construction of large concession projects have gone to Chinese companies, typically led by one of the five big state power firms. Foreign firms and independent Chinese developers complain that prices bid to secure the contracts are too low to make a project financially viable.

In contrast, the smaller locally regulated projects have tended to attract higher power purchase rates and lower bureaucratic hurdles. Smaller local projects give Roaring 40s "a secure site that is within our control -- and we can get on with things," says Kelleher. In contrast: "With the concession projects there is a whole bureaucratic process. There are many levels of government involved and decisions about all aspects of the project and so the process is slower."

Unrealistic market

Kelleher is dubious about the viability of the concession system. "The major utilities fought very hard for those contracts because there was an expectation that there would be a quota requirement and they would be required to have a certain number of megawatts of wind. That resulted in some pretty unsustainable tender outcomes and subsequently requests for cross subsidies. It seemed a good approach at the time but drove the market down into an unrealistic situation. It wasn't providing the industry with the right signals," he says. The government has made some changes to its tender rules, putting less emphasis on lowest tender price and focussing more on technical quality and project profitability. The changes, however, do not seem to be fully filtering through. "Most of those projects don't produce the commercial rate of return appropriate to make the investment but that will change over time," says Kelleher.

Echoing calls made by the Global Wind Energy Council for a change of policy in China, Kelleher says the Chinese government would attract greater investment and stability in the marketplace by reviewing its pricing structure for large projects. "Strengthening the transmission network is necessary but it is really the tariff arrangements that are holding things back and this is a major concern for the industry," he says. "The tariff arrangements are a bit murky and what is needed is transparency. The government would do well to strengthen them." He says a fixed purchase price for the full term of the investment is needed, just as was granted to biomass.

Kelleher notes, though, that for Roaring 40s an additional revenue stream for its wind projects will come via the Kyoto Protocol's Clean Development Mechanism (CDM). Its Shuangliao wind farm is already successfully registered as a CDM project, with the Australian government signed up to buy carbon emission reduction credits generated by the development. While Kelleher will not disclose the rate the project is getting for these credits, saying it is "commercially sensitive" information, he does say "the numbers are holding up well." He adds: "We expect all our projects to qualify for CDM revenue."

In India too

Meanwhile, Roaring 40s is taking forward its development plan in India, its number two target market, having already established an office in Mumbai. "There are similarities [between China and India] and of course there are going to be when you are talking about larger economies," says Kelleher. "There will be huge demands on energy and there are local pollution issues which are strengthening measures for renewable energy."

There are also marked differences between the two countries, requiring Roaring 40s to take distinctly different approaches. "We saw that manufacturers were doing everything from providing turbines to selling off projects and we wanted to be part of the next phase," he says. "China has a strong central government presence. India has a high level commitment to renewable energy at central government level but the states do their own thing. The financial and legal requirements [in India] are more like we are used to, more like the West, for example, with long term power purchase agreements."

He says that tax deductions on wind equipment are so attractive in India that turbine manufacturers are selling units in ones, twos and threes to wealthy individuals who can take advantage of the tax breaks. "But in the next phase, the government has specific renewable energy tariffs in various states and I am not sure what the mechanism will be, but the depreciation value of that will be able to be captured."

The company is initially aiming for 300 MW of wind capacity in India by 2010, focusing its efforts on the states of Maharashtra and Gujarat. It has already signed a deal with Enercon (India) for turbines from the German company for a 50.4 MW project at Khandke in Maharashtra. The A$80 million development recently started construction. It will be wholly owned by Roaring 40s, with full commissioning expected by December.

Non recourse financing

Significantly, the A$45 million financing for the Khandke project represents the first non-recourse financing delivered by an international bank in the rapidly developing Indian wind power sector. HSBC was the lead arranger and underwriter for the deal, with financial close achieved in early May. "The Maharashtra project represents a significant milestone for Roaring 40s and reinforces the company's strong and continued growth in the Asian region," says Kelleher.

He is coy about other projects in the pipeline in India. He is also reluctant to be drawn into commenting on speculation of a stronger tie-up between Roaring 40s and India's leading turbine manufacturer, Suzlon. All he says is the two companies have a good relationship and he expects to do a lot of business with the Indian firm.

Dan Hansen of Suzlon Energy Australia agrees, stressing the two firms would make great project partners. "We have worked with the Hydro Tasmania team in Australia for a number of years. Teamed up with CLP, with its strong commitment to renewables, they have a formidable combination of detailed expertise, real wind farm development and operational experience and the broad market presence and balance sheet strength of a truly global energy player," he says. "Suzlon is already working with Roaring 40s in China, and is keen to expand this relationship in India and Australia/New Zealand. The international fit between our organisations is an excellent one."

Back in Australia

Hansen may well get his wish. While keeping a watching brief on Korea and Thailand, Roaring 40s is back in action on home turf in Australia. It is just about to complete commissioning of the 75 MW Stage 2 Woolnorth wind farm at Studland Bay in Tasmania, while two other projects with a combined capacity of 250 MW are all set to go -- the 130 MW Musselroe wind farm at Cape Portland in north-east Tasmania and the 120 MW Waterloo wind farm 100 kilometres north of Adelaide in South Australia.

"Things are much more positive in Australia now," says Kelleher, pointing to the introduction of the Victorian Renewable Energy Target and similar legisltive initiatives by other states. "We are looking at a number of other sites in Victoria and New South Wales. I feel very optimistic about the Australian market," he says. In New Zealand, the company is developing a wind farm up to 150 MW in capacity at Hawkes Bay in partnership with Unison Networks, while three other sites are also under investigation.

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