Paying proper respect to risk in China

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As China's wind power rush continues unabated, improvements in equipment quality, better wind turbine warranties, and effective insurance against a multitude of risks are essential, delegates at a recent conference in Beijing were told

With a devastating earthquake rocking southwest China's Sichuan Province just four days earlier, there was a solemn air to the wind farm financing and insurance conference organised by the Sino-Danish Wind Energy Development Programme (WED) and the China Renewable Energy Industries Association (CREIA) on May 16. It kicked off with a moment's silence for the thousands of lives lost. Dongfang Electric, China's third largest wind turbine manufacturer, with offices and manufacturing base close to the epicentre of the earthquake, had been hit hard (page 55) "More than a dozen people are still trapped under the rubble," WED's Song Yanqin told delegates.

The need to minimise risk and insure against disaster, be it natural or commercial in origin, was never felt so strongly. While the business loss pales into insignificance compared to the scale of the human tragedy, conference delegates were reminded that investing in sound insurance policies and getting good finance frameworks in place are vital for a healthy and sustainable wind industry.

For financiers, wind project developers and operators, risk comes in many forms, most of them easily predicted and safeguarded against, several speakers said. Insurance covering losses caused by natural disasters such as earthquakes, typhoons, forest fires, and landslides must be used, they said, but while these are unusual in nature, other risks are more prevalent and require attention. These are traditional business risks and the worry is that in China's wind rush they are being forgotten or simply ignored by some.

With purchase prices for wind power lower in China than in more mature markets overseas, accurate wind resource measurements, selection of the best sites, and use of reliable and efficient equipment supplied with quality guarantees is essential, delegates were told. "The industry can be called mature only if we have a complete mechanism of insurance that helps reduce the risks of wind farm development and equipment manufacturing," said China Wind Energy Association Vice President Shi Pengfei.

Too often, technology limitations or inadequate measurements lead to inaccurate assessment of wind resources at specific sites, according to Shi. Projects are also built at sites without good wind resource for political or other reasons not connected with ensuring profitability, he warned. Once the wind turbines start turning, they are more likely to generate financial losses rather than profit, he warned. Shi called for better resource assessment in general.

Quality guarantees

Better quality guarantees from equipment suppliers are also needed, both to safeguard the interests of project owners and operators and to encourage the development of high quality, reliable products. Shi cited a case where 100 wind turbines had hardly begun operation before they were taken down and shipped back to the factory to fix problems. The shipping and hoisting company for the project was employed three times. "I have once joked that it would be very profitable to start a shipping and hoisting company in this sector," Shi said.

Turbine manufacturers and their component suppliers must be accountable, he continued. With many turbine suppliers in China having been engaged in the business for just a few years, with some exceptions, safeguards against poor quality must be implemented, he said. In Shi's opinion, too many machines are performing below expectations. Wind turbine warranty periods of just two years -- typical across the wind industry -- are not sufficient, he added.

A big problem in assessing the risk of a wind project is the difficulty of getting actual performance data about existing facilities, said Pan Weiping of Garrad Hassan's China office. A public wind farm database enabling wind industry participants to make informed decisions should be established, Pan said. At present, in conducting due diligence studies on manufacturers, you have to resort to relying on rules of thumb, he noted. These include examining the supplier's background, track record, technology source and supply chain and referring to industry benchmarks.

Insurance missing

While equipment suppliers must be responsible for improving quality, the insurance industry has a critical role to play, but as yet few Chinese insurers are interested the wind industry, said CREIA's Li Junfeng. They are unfamiliar with the sector. The wind industry needs to take the initiative, said Li.

Yang Xiaosheng of China's biggest wind energy developer, the Longyuan Electric Power Group, agreed. Developing an appropriate insurance product is the key to involving insurance companies in the wind power industry, he said. For Longyuan, insurance is not a problem as all of its wind projects are insured with other energy projects owned by its parent company, China Guodian Corporation. Longyuan's wind projects are covered by insurance at each and every stage: equipment procurement, transportation, construction, engineering and operation. "We have used the same insurance company for more than a decade," said the company's Li Hongmei. "With the business scale, we are in a good position to negotiate insurance fees." Even so, more insurance companies need to offer policies, he acknowledged, particularly products suitable for smaller, private wind developers.

Wary investors

Meantime, many of the big investment institutions operating in China are also wary of wind projects, said CREIA's Li. They want to see returns within three or four years. Seven years, a period acceptable to investors in other countries, is seen as too long and too risky in China, said Li. Some are changing their attitudes however, with speakers from China Merchants Bank (CMB), the World Bank's International Finance Corporation, Dutch Rabobank China, and Citibank all indicating a growing interest in the wind sector.

It is a sunrise industry that is fast gaining attention, said CMB's Kong Weiwei. "We are optimistic about the long term prosperity of wind energy," she said. "CMB plans to increase financing on wind projects in the future." In the first four months of this year, the bank had approved preferential loans to eight wind projects totalling CNY 2 billion ($290 million), she added.

Citibank's Ji Yehong, however, did not conceal that his bank favours big companies like Longyuan, because they have a strong track record in the business, sparking CREIA's Li Junfeng to call on banks and insurers to provide more support to small wind projects developers and smaller projects. "Investing in a wind project is like buying a coal mine," he said. "Do not look down upon small wind projects. They can become highly valued in a matter of four or five years." He stressed: "Back a decade, Goldwind was a small company. It is now a multi-billion business. Invest in a wind project early, when it is small, and you'll be rewarded with good returns in the future."

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