Growth in Chinese electricity consumption is projected at an average of 4.3 per cent a year through 2025, according to a report by the United States-based International Energy Agency. This increasing demand offers considerable opportunities for investors, with the agency putting the investment needs of the mainland's generation, transmission and distribution sector up to 2030 at US$800 billion. But industry analysts say securing anything near this level of financing could prove a problem for several reasons. Among these are uncertainty created by plans for the further restructuring and liberalisation of the power sector, and the possibility of radical reforms in the banking system. The mainland faces the 'dilemma of wanting a liberalised sector versus the risks to the economy of prices fluctuations,' says Josehh Jacobelli, vice-president of Asia-Pacific utilities research at Merrill Lynch. The mainland's central authorities want to introduce reforms to the electric power industry 'so as to render the whole sector more efficient operationally and financially', he says. To achieve this, generation companies need to be able 'to form long-term contracts with large users'. But opening up end-user tariffs to market forces would lose the central government control of an 'important macroeconomic tool'. Electricity prices have a keen effect on inflation, and if they become volatile 'they could destabilise economic growth and industrial activity', Mr Jacobelli says. What is more, the State Grid Corp of China and the State Southern Grid, formed from the break up of state-owned State Power Corp of China have heavy capital expenditure burdens and are 'generally not in strong financial positions'. Chinese power industry experts believe only 20 per cent of average end-user prices go to transmission and distribution, with 80 per cent going to the generating companies, according to a Merrill Lynch report last month. Mr Jacobelli says this will lead to long-term risks to investors, such as an inability to determine what long-term cash flows from a project will be. 'Even worse, if competitive bidding goes ahead without higher costs being passed on to end users and bid prices go up, there is a real threat the government could cap these,' he adds. Other analysts say opportunities in the Chinese power market open to foreign investors and companies are likely to be far more limited than the sector's vast size suggests, whether the firms are developers, lenders, equipment manufacturers or others. Equipment manufacturers have found it hard to penetrate the market unless they offer technology that is unavailable from local companies, and even these sales are only achieved thanks to competitive pricing, technology transfers or both. 'The proposed power sector structure, combined with the progressive extension of competition and the end to guaranteed returns for investors represents a further blow to the prospects for new stand-alone independent power production projects,' a Platts Global Energy Report says. 'The implementation and financing of [such projects] has become increasingly difficult for international investors and lenders, and will remain so at least until the impact of the reforms on market structure and prices becomes more apparent.' Mr Jacobelli believes a clearer picture of the long-term risks to listed sector participants will emerge by the end of the year. 'The catalysts will be the finalisation of amendments to the 1996 Electricity Law by the end of December, and the northeastern wholesale power market becoming operational in January next year,' he says. Nevertheless, China represents the largest single market for new power equipment and projects in the world. Even if opportunities for international players arise in only a small part of the market, they are likely to be substantial compared with prospects elsewhere. 'This is a very visible industry and the results are plain to see,' says Mr Jacobelli. This makes it especially attractive for equity investors considering shares being offered by China Resources Power in its listing on the Hong Kong stock exchange today. People close to China Resources Power, which is controlled by the state-owned China Resources Group, say the company offers any investor exposure to a market that is set to grow over the next few years. 'For reference, China Resources Power should have 38 per cent in the eastern market, based on media reports,' Mr Jacobelli says. China Resources Power will be the fourth Chinese power producer listed in Hong Kong after Beijing Datang Power Generation, Huaneng Power International and Shandong International Power Development.
