Period of Adjustment
China’s wind power industry is currently facing a rather unique period. Its period of adjustment began in 2011, as the newly installed wind power capacity began to experience a slowdown of its rapid growth. The increase in government regulations and requirements resulted in a consolidation across the market of turbine and related component manufacturers throughout China, but the move by the Chinese government was a necessary act to enable the power grid capabilities to catch up and begin establishing a smart grid system, by which wind energy could be properly harnessed
Source: Global Wind Energy Council
The government aims for 100GW of total installed wind power generation capacity in 2015 with 5 of those GW based off shore. Further off shore capacity is expected to expand to 30GW by 2020 with the help of subsidies and feed in tariffs to support the government’s self-imposed goals of greater overall reliance on wind power due to improved wind power connectivity.
Current Industry Overview
China is the world’s largest wind energy market boasting 25% of the total global installed wind capacity. However, the rapid growth was so misguided and unkempt that the lack of regulation resulted in an overheated market that drew significant investment despite the lacking infrastructure necessary to support the wind farms that were popping up all across China. Today, China’s wind power market is expected to plateau, but industry watchers believe there is hope for the recovery of the wind power production in a time horizon anywhere from 2 – 10 years. This, however, cannot be resolved until the infrastructure of the power grid is properly developed to harness energy from the rural countryside wind farms and bring it to the high demanding city centers and manufacturing industrial locations traditionally based in the coastal cities.
Before 2011, China’s wind power industry was unscrupulously managed as investments and farm installations were quickly and easily approved at provincial levels. Wind power facilities were built without being grid connected. Liu Mingliang, an analyst from the China Wind Energy Association remarks that this led to a serious shortage of grid connected wind power facilities as network planning was outpaced by the construction of these wind power farms. This triggered the central government’s need to contain the growth and ensure that the investments, indeed a form of the vast infrastructure stimulation, were being wisely put to use. In the case of the wind power facilities, this translated directly to a need to contain the provinces from issuing any more wind projects that were not directly aligned with the intentions or plans of the State Grid system.
Grid Connectivity Improvement
The reality in China’s wind power story is that a mere 1% of China’s total electricity is generated by wind power. This means the central government will be forced by potentially unpopular decisions to focus their attention, and indeed their funds, to energy production initiatives with more impact. The effort to harness wind power to a more elaborate grid system may not be the wisest investment given the weak return that can be expected in terms of electricity production output, which can be expected even with a proper grid system. Despite the fact that over 30% of total wind power generators are still waiting to get properly “hooked up” to the grid, the wind power generators who are successfully connected are suffering from transmission problems and curtailment, and this has nearly punctuated China’s position on needing to shift to alternative means of renewable energies.
To further illustrate the connectivity challenges that lie at the heart of China’s wind power story, China’s power transmission lines are insufficient and unable to distribute electricity long distances from their rural wind farm locations to the population centers due to a dated existing grid system. More long range transmission lines are needed to cover the massive size of this country, but again, the high cost doesn’t bring with it a structured ROI to justify the investment. This reality makes it easy to imagine that many projects will likely be stalled and remain unconnected as the power companies will not have a proper way to earn back the investments that would be required to connect the vast wind farms to the urban centers.
Chinese firms take the lead in smart grid technologies, and their involvement in partnership with other country stakeholders is required. As much as RMB 3.8 trillion is invested in 3 main stages: pilot which occurred in 2009 – 2010 and addressed standards establishment; construction which has been happening since 2011 and will continue to do so until later in 2015 and involves distribution networks and remote monitoring systems; and industrialization which will be the implementation of plans to be performed in 2016 and beyond.
While it’s clear the lack of grid connectivity is a major flaw in the architecture of China’s ability to rely in the future on wind generated energy, the state of smart grid technologies around the globe remain at a relatively nascent stage. As stated by Zhu Shunquan, China’s National Renewable Energy Centre’s analyst, it’s necessary to realize that smart grid technologies are still being developed internationally at an early stage. Given China’s power grid is a state run entity, the lacking liberal market system that may help to shape a flexible and demand-driven system may hinder China’s ability to create a value-added, profitable system by which to harness and utilize this energy.
Offshore Wind Capacity
China has extremely ambitious offshore wind targets. Currently, there are around 750GW of exploitable wind resources offshore – 3 times more than on land, admittedly larger than planned.
In July of 2010 the National Energy Bureau and the State Oceanic Administration issued rules for offshore development to try and curb the numerous offshore wind farms being built. Under these regulations, offshore wind farms must be constructed no less than 10 kilometres from shore, and in waters no less than 10 metres deep. The aim of this mandate was to limit the development of near shore stations (occuring primarily in Jiangsu and Shandong Provinces), creating further obstacles for developers to extend significantly in off shore.
The Industry Trends – Consolidation and Internationalization
Vestas, Goldwind, and GE Energy are the top three key players in China’s wind power industry and are each experiencing downsizing with sporadic upticks in their 2013 stock prices due to China regulatory announcements that seem promising for some of these companies. That said, local competitors are becoming more fierce as they adjust and revamp their strategies and operations with the potential to benefit from policies that could be of greater benefit to the Chinese producers. According to Liu Mingliang of China National Wind Energy Association, by the end of 2011 there were 80 domestic wind turbine enterprises in China, with its top 10 sharing 84% of the market, meanwhile only 3.5% of the market is occupied by a fragmented 60 other enterprises. By default of healthy competition, the least skilled with limited research capability firms are forced out of the game. To survive in this warfare, industry consolidation is hence occurring at all levels of firms scale.
With an eye on sustaining growth – regardless on what land it may be on, the domestic wind power installation slowdown has spawned an outward looking investment appetite on the part of large Chinese manufacturers who are aiming to expand their operations abroad. This phenomenon is likely to continue even in the case of a domestic market recovery. Those firms are quickly adapting to the international local content rules in the already politicised and regulated foreign markets in order to achieve any form of growth in these developed markets. Meanwhile, the foreign players who maintain their operating factories in China are expected to use it as a basis to expand into China’s neighboring countries at the early stages of development.
The unregulated and dynamic growth experienced in China’s wind power industry is indeed a thing of the past. In order to survive the downturn, or more appropriately, the equilibrium settling events in this market – the players who will be standing at the end of the day will be those who survived the consolidation amidst the highly competitive domestic market, while maintaining steady, albeit slower, growth in international markets despite the influx of Chinese wind power manufacturers.
Challenges for the future of wind power in China lie on the Chinese grid development and the continued postponement of offshore wind installations due to insufficient firms’ capabilities as well as coordination with the government bodies. Meanwhile, the opportunities in this industrial sector exist in the form of internationalization for local players, and advanced technology application that can be utilized by foreign players for the necessary advancement of China’s grid connectivity.
Articles in the Series
This article is based on Solidiance‘s recent study about China’s Renewable Energy. The complete report of the study is free to download here. Solidiance is a leading Asia-centric B2B growth strategy advisory firm with full fledged presence across the Asia region.
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