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China’s wind power sector to see more headwinds

Weak power demand and too much capacity expansion in remote regions the main culprits

PUBLISHED : Wednesday, 27 January, 2016, 10:32am
UPDATED : Wednesday, 27 January, 2016, 10:32am

China’s wind power equipment makers and wind farm developers, beneficiaries of Beijing’s war against air pollution in the past few years, will face greater headwinds for years to come as lower wind power prices and installation volumes are expected to lead to dimmer growth prospect for the entire industry chain, analysts say.

Weak power demand and excessive capacity expansion in remote regions were the main culprits.

“We see multi-year headwinds for the China wind sector, including worsening curtailment [of output offtake due to power grid bottleneck], [power] tariffs cuts and slowing capacity addition,” Daiwa Capital Markets head of utilities and renewables research Dennis Ip said in a report.

He estimated that new wind farms’ equity investment return rate will fall from between 11 per cent and 17 per cent last year to between 9 per cent and 16 per cent this year and reach 10 per cent to 14 per cent in 2018, given Beijing’s cuts to power selling prices and projected steady wind farms construction costs in the next three years.

Wind farms’ returns vary according to their locations, which carry different subsidised power-selling prices. The subsidies are funded by a surcharge on consumers’ power bills.

Ip said a policy induced shift of wind farm installation from grid-congested northern regions to more developed but densely-populated coastal regions would increase installation costs.

That was because higher transportation and land acquisition costs would offset the benefits of lower material costs and savings from rising equipment production scale.

We expect the company to face lower sales volume as China’s wind industry could get into consolidation mode
Pierre Lau, Citi

Even equipment makers such as Shenzhen- and Hong Kong-listed Xinjiang Goldwind Science & Technology, China’s largest turbine maker and the world’s second largest, which has seen tremendous profit growth in the past few years, will not be spared.

“We expect the company to face lower sales volume [after this year] as China’s wind industry could get into consolidation mode amid [power] tariff cuts, leading to lower equipment demand,” Citi head of Asia utilities research Pierre Lau wrote in a report.

He forecast mainland China’s wind farm installation volume would fall from 26 gigawatts (GW) last year to 23GW this year and 20GW next year.

Daiwa’s Ip projected 25GW last year, 21GW this year and 23GW next year, citing lower returns and a rush to complete projects late last year before a tariff cut was implemented at the start of this year.

Investors have heeded the analysts’ caution.

Goldwind’s share price in Hong Kong has fallen 27.6 per cent since Beijing announced a cut to wind farm operators’ power prices late last month, compared with the Hang Seng Index’s 14.3 per cent fall.

Goldwind’s shares sank 29 per cent in Shenzhen in the same period.

In Hong Kong, China Longyuan Power, Asia’s largest wind farm developer, has dropped 25 per cent, while rival Huaneng Renewables has plunged 30.6 per cent since the announcement.

Wind power prices for this year and 2018 were cut due to the rising deficit of a Beijing-run fund to finance renewable energy subsidies and worsening oversupply in the mainland’s electricity industry.

According to Daiwa analysts’ calculations, wind farms in northern and some northwestern China regions will see tariffs cut by around 10 per cent between last year and 2018, while those in northeastern and some other northwestern areas will see cuts of 4.9 per cent to 8.9 per cent.

The divergent power price cuts reflect a policy of discouraging project additions in regions suffering from the highest power grid bottlenecks, such as Gansu and Inner Mongolia, where wind resources are rich but local power demand is limited.

BOC International analyst Lawrence Lau said the bottlenecks and weak power demand saw the mainland’s wind power industry’s plant utilisation fall 9 per cent to a historical low of 1,728 hours last year as generation capacity surged to a historical high.

Lower utilisation pares profit margins since higher fixed costs like maintenance and asset depreciation are borne by each unit of power sales.

Nearly half of the wind farms installed last year were in northwest China, which suffered some of the worst bottlenecks.

Ip said he did not expect the power grid bottlenecks caused by rapid growth of wind farm installation to see any “meaningful improvement” until the second half of next year, after several “ultra-high voltage (UHV)” high-capacity power lines are completed.

But the UHV lines were no “silver bullet”, and could only partly resolve the bottlenecks, given weakening power demand in coastal, developed regions and sustained increases in capacity growth in other competing energy sources like nuclear, solar and coal-fired power, he noted.

Besides, only 10 per cent to 20 per cent of the UHV lines’ capacity could be used to transmit wind power, since the intermittent nature of wind energy meant it needed to be mixed with conventional energy with steady output, like coal-fired power, when transmitted to avoid infrastructure damage, he added.

Ip forecast the “curtailment rate” – the portion of wasted wind power output due to insufficient transmission capacity – to have surged from 8 per cent in 2014 to 16 per cent last year and said he expected it would rise further to 18 per cent this year.

Investors would be better off buying wind farm operators that have fewer projects in the pipeline that are located in regions with the highest curtailment rates, he said.

But he added that he expected the most competitive turbine makers, such as Goldwind, to gain market share from weaker ones.