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James Spence

Sithe China Holdings is one of the biggest foreign investors in the mainland's power sector, with US$1.5 billion invested in debt and equity in six power stations by the first quarter of 1999.

 Of the six, two are in operation, one will start in January and three others are under construction. The six have a collective capacity of 1,700 megawatts, or half the size of Hongkong Electric.

 Sithe China Holdings is an affiliate of Sithe Energies which became the largest independent power producer in the United States last month with its acquisition, for $1.68 billion, of the non-nuclear generating assets of GPU Inc in New Jersey, Pennsylvania and Maryland.

 James Spencer, president and chief executive of Sithe China Holdings, talks to Mark O'Neill.

China Business Review: Has the market turned out as you expected when you came to the mainland in 1993? James Spencer: It was not as we thought it would be when we came here.

 We thought that, as long as we had money, there was no end to the projects that we could build.

 The need for power in China is not as great as most foreigners anticipated. We underestimated the sophistication of China's power system.

CBR: Is the low growth in power output this year abnormal? Mr Spencer: I believe so. By our estimates, this balance of power is going to be short-lived. In three years, China will be in serious need of power.

 A lot of facilities with foreign investment from the early 1990s - such as Daya Bay and Shajiao in Guangdong - have come on line just as the economy started to slow down. No one anticipated it.

 Over the next three to four years, power growth will be about 3 to 4 per cent, half that of GDP. That means that over the next five years China will have to build one-fifth of its existing capacity.

 China will need to get rid of small and inefficient plants, many using diesel and built in the late 1980s and the early 1990s, to get capacity on line quickly. In Guangdong, there is an estimated 5,000 MW of diesel generation. Large plants are the most efficient, but they are expensive and need time to build.

 A third factor will be increased environmental concerns. China desperately needs gas-fired generation, through natural gas, LNG, reserves from the South China Sea or piped in from Russia.

 On the demand side, most people in the large cities could double their use of electricity if they could get the power into their homes. They cannot because of the lack of distribution.

CBR: The government recently announced an end to guaranteed hours and tariffs for foreign-invested power projects. How will this affect you? Mr Spencer: The government has said that existing agreements that allow for minimum offtake hours will not be disturbed. Our project in Wenzhou was the last in Zhejiang to have a guaranteed offtake and return. Zhejiang, Shandong and Fujian have been selected as pilot provinces to implement this.

 It remains to be seen how successful it will be. In theory it is a good concept but implementation in China will be difficult.

 Almost 80 per cent of what we generate in the US is built and operated under this scenario, in a competitive situation, sold to a pool and with no assured offtake. We are a little surprised that it occurred so quickly in China. We are concerned whether the apparatus will be in place to ensure that the pooling system is fair and that special interests will not come into play.

 In North China, for example, Datang [a power producer] is a subsidiary of North China Power Group. The utility will, on an hourly basis, be soliciting bids for electricity. Do we have confidence that they will not favour their own generating plants over other plants? We have concerns about implementation of an open-market system. Will the system take into account environmental benefits? The implementation of a truly fair, competitive market is easier said than done.

CBR: Will the new regulations make you reconsider your strategy? Mr Spencer: I think it is going to be difficult. It will work in an environment where the Chinese have the upper hand because there is not a tremendous need for foreign investment. There always will be a small number of companies that will take the risk. If China gets into a situation where they need a tremendous amount of foreign investment to build their capacity, this will be a hindrance.

 You now have a lot of capacity in China built, which is fully depreciated and has no debt as it was state-funded. We cannot compete with their cost of power. We have to finance projects and take an equity return. New capacity is almost more expensive than existing capacity.

 Will we be able to compete? In a situation where their current capacity can satisfy their needs, how can we build a new plant without an offtake contract? We cannot. What you will see is no new generation of capacity until this supply balance evaporates.

 The only way people will build is when they know it will be utilised. I think there will be a tremendous slowdown [in investment] for two to three years, although there are some areas that need power and are not interconnected with other regions because China has no unified grid.

CBR: Are you interested in buying existing power stations? Mr Spencer: The acquisition of existing facilities in an open-market scenario is much more feasible than building new capacity. We are absolutely interested in that. But it will be very, very difficult to come into China and have to deal with all the socio-economic factors associated with it.

 To come in and acquire the generating side of the company, including all the personnel, administration and the bloated payroll and making it more efficient, is not an easy task. The Chinese companies do not have the capital to do it.

CBR: How can China attract foreign investors to buy existing plants? Mr Spencer: The utilities are overburdened with personnel, current and retired. The staff burden kills them. There is no way that we can come in and assume that burden.

 At our Tangshan plant, the government feasibility study called for more than 900 staff and we operate it with 287. We could have done it with fewer. The government would have to take on the responsibility of the retired workers and allow us to staff the facilities efficiently.

 There needs to be a revamping of the tax structure. Power-generating facilities are taxed very heavily. We are earning less on our investments in China than in the US in the early days.

 We would rather be in China than almost anywhere else in Asia. Our turnover in China this year will be about $60 million and the company will turn profitable in 2002, considering that we started in about 1992.



Interview