Mainland wind power industry undergoes painful shake-up
After years of rapid and disorderly growth, the entire industry is forced to rationalise that results in transmission and revenue losses
The entire supply chain of the mainland's wind power industry - from the manufacturing of components to the generation of power - is undergoing painful rationalisation after years of overly rapid and disorderly expansion.
And the pain will not go away any time soon, analysts say.
The enforced shake-up of the industry may last at least two years, industry spokesmen and analysts warn, since a transmission bottleneck will prevent suppliers from getting all their power to the market until the distribution network is expanded.
"Seven or eight ultra-high voltage transmission lines are planned for sending surplus power from the remote northern and western regions to the main consumption regions in the east and the south," China Longyuan Power Group's president Xie Changjun said last month.
"But it will take three to five years to fully resolve the transmission problem since each of these lines will take at least two to three years to build.
The shortage of transmission capacity meant that 16 per cent of the power generated by wind farms last year in the northern, northeastern and northwestern regions - accounting for 87 per cent of national output - was wasted since it could not be delivered to consumers, according to the State Electricity Regulatory Commission. That translated into revenue losses of 6.6 billion yuan (HK$8.09 billion).
The combination of fast growth in new wind farms, transmission capacity shortages and weaker power demand due to a slowdown in industrial activity this year saw plant utilisation decline. Profits also fell, since lower utilisation means higher fixed costs per unit of output.
Longyuan, Asia's largest wind farm operator, reported that average year-on-year plant utilisation dropped 6.3 per cent, while the rate for China Datang Corp Renewable Power fell 17.3 per cent and that for Huaneng dived 23.4 per cent.
Pierre Lau, the head of Asia utilities research for investment banking group Citi, attributed Longyuan's outperformance partly to it being a first mover in the industry - it had secured better located projects in Inner Mongolia, the nation's biggest wind power producing region, but where the transmission bottleneck was also the most severe.
Longyuan posted a 3.6 per cent rise in net profit in the first half, while Datang saw profit plunge 76.3 per cent and Huaneng Renewables' profit dived 63 per cent.
Power suppliers must shoulder some of the blame for the distribution bottlenecks that have developed, since they ramped up wind farm construction over the past few years, facilitated by approvals from local governments that were eager to meet their clean energy development targets.
This resulted in demand for transmission capacity that far exceeded new capacity added by power transmission and distribution monopoly State Grid Corp of China, which operates power grids in all but five southern provinces.
Building a wind farm takes a year, but connecting it with a power grid takes two.
Given that wind energy is intermittent, it is not considered "grid friendly", unless the wind turbines are installed with technical features to cut the challenge they pose to the stability and reliability of the power grid.
After multiple incidents of "drop-outs" of power sourced from hundreds of wind turbines, the government issued technical regulations and standards and compelled power companies to upgrade their systems to comply with the new regulations. This has reduced the hiccups to the power supply from wind farms.
In August last year, Beijing also stripped local governments of their authority to approve new projects, and centralised the approval process, with the result that new projects added to the grid since then were only given clearance if transmission capacity could be assured.
Previously, wind farm developers truncated their wind farms into multiple 49.5 megawatts projects to avoid having to go through approval applications in Beijing, since projects smaller than 50 MW did not require central government approval.
The "growing pains" of the wind power sector are not limited to power generation. In upstream turbine generator and parts manufacturing, firms have also built too much production capacity, often in low-end products whose profitability was battered by vicious price wars.
Shanghai-listed Sinovel Wind Group, the nation's largest wind turbine maker, reported a 97.6 per cent plunge in first-half net profit and Shenzhen and Hong Kong-listed Xinjiang Goldwind Science & Technology, the second-largest producer, reported an 83 per cent drop in interim earnings.
Goldwind summed up the predicament facing the wind power sector well in its results statement last month.
"The rapid emergence of China's wind power industry gained global acclaim as the industry took the lead in meeting China's new energy development goals," it said. "However, irrational competition resulted in problems that necessitated stricter national regulations."
To stimulate greater demand for wind power, Xie said Beijing was expected to impose quotas on power grid operators no later than the middle of next year, compelling them to source certain minimum percentages of their electricity from wind farms. The shares could range from 5 per cent in the southern regions to 15 per cent in Inner Mongolia.
The aim of the incentives would be to spur power distributors into stepping up grid network expansion to absorb more wind power, he said.
However, Lau said the quotas were unlikely to be large enough to have a significant impact, since State Grid, a state-owned monopoly, was powerful and would not agree to high quotas.
"Ultimately, solving the infrastructure bottleneck requires lengthy construction time. Imposing unrealistic quotas will not be meaningful," he said.
Macquarie Securities analyst Patrick Dai said he expected the wind power generation sector to see at least two more years of low profitability, given that most of the high-capacity ultra-high voltage power grids saw construction delays because of technical, economic and political challenges.