Fair wind blows for China's Longyuan Power


By Ryan Rutkowski
Asia Times
Dec 2, 2009


China Longyuan Power Group's imminent sale of US$2.3 billion in shares to the public and its listing on the Hong Kong exchange could hardly have been better timed by what is the country's largest investor in wind power farms.

The government in Beijing announced on November 26, days after Longyuan Power's listing plans were made public, that it aimed to boost the country's energy efficiency as part of its contribution to the fight against global warming. China pledged to cut carbon dioxide emissions per unit of gross domestic product by between 40% and 45% by 2020 compared with 2005 levels. With coal still playing a predominant part in the country's energy mix, that means an increased role for less-polluting means of energy production - such as wind power.

Longyuan Power will list on December 10 after closing its heavily oversubscribed book to investors on December 2. The retail tranche was more than 29 times oversubscribed.

The State Council announcement also came ahead of the December 7-18 Copenhagen climate summit, which aims to set international targets for climate-changing pollutants. Prospects of internationally binding agreements emerging from the summit remain slight, but the event itself will increase public and investor interest in manufacturers involved in less-polluting forms of energy production, particularly those, such as Longyuan Power, based in the world's largest country and fastest-growing economy.

China's energy demand is rising rapidly and it will overtake the US as the largest consumer of energy by 2015.

China's willingness to raise the profile of alternative energy sources was already made clear in its 11th Five-Year Plan (2006-2010), where it committed to increase the use of alternative energy resources to 20% of total energy production by 2020, from 7.86% in 2006. Hydropower makes up as much as 5.9% of China's energy production, but extensive water pollution, dwindling water resources and growing concern about the negative effects of large dams will limit expansion of traditional hydropower generation.

At the same time, massive government investment has boosted the importance of less controversial wind and solar technology and helped manufacturers in these sectors become leading players in the global market.

China now ranks fourth in the world for total wind power capacity, and installed capacity may jump tenfold to 100 gigawatts by 2020, from 10GW next year, according to a 2008 plan by the National Energy Administration.

At the core of this growth, the government in 2006 started to establish wind farms in the far-west region of Xinjiang, neighboring Gansu, northern Inner Mongolia, Hebei province around Beijing, and coastal Jiangsu province, with the aim of doubling installed capacity for four consecutive years. As a result, the country has already exceeded its 10GW target for 2010, reaching 12.2GW of installed capacity.

Solar power is also an increasingly important component of China's energy strategy. More than two-thirds of China's land area has 2,200 hours of solar radiation annually, especially in western provinces, such as Inner Mongolia, Xinjiang and Yunnan. Installed capacity to capture this is expected to reach 20GW of installed solar PV (photovoltaic) power capacity by 2020, up from only about 0.07GW in 2005. Recently, China announced plans to install more than 0.5GW of solar power projects over the next two to three years.

The lead-up to the Copenhagen climate conference has highlighted differences between the world's largest polluters, notably the United States and China, but away from the headlines Beijing's development of alternative energy involves international cooperation.

In September this year for example, Phoenix, Arizona-based First Solar signed an agreement to build the world's largest solar power plant in China's Inner Mongolia region capable of providing power to three million homes. The project, part of an 11,950-megawatt renewable-energy park planned for Ordos City, Inner Mongolia, is due to be completed in 2019. There are also plans to build two large solar power plants in Qinghai and Yunnan provinces along the Tibetan plateau in the western China.

The national power grid has been mandated since 2006 to purchase renewable energy at a subsidized rate, with a premium that is added on electricity produced by coal-fired power plants put in a fund that reached 3 billion yuan (US$440 million) by 2007 to support the subsidies for utility companies to buy renewable energy.

Then in April 2008, the Ministry of Finance said it would give tax refunds for companies importing key components for wind turbines larger than 2.5MW. In August last year, the ministry gave a further boost to the wind-power industry by saying all majority Chinese-owned domestic manufacturers would be awarded up to $88 per kW for their first 50 wind turbines certified and connected to the electricity grid.

The government in August last year also said it would subsidize 50% of investments in solar power projects, while subsidies of up to 70% would be given on the price of independent PV power-generating systems sold in remote regions.

China now has the world's largest PV cell manufacturer, accounting for 30% of global production, led by Suntech Power Holdings, which last year ranked third in world production capacity. Smaller rivals Solarfun Power Holdings, Yingli Green Energy Holdings and China Sunergy rank among the world's top 20 PV cell manufacturers.

While the subsidies help domestic expansion, these companies export more than 98% of their panels to the likes of Germany, Spain, Japan and the US - Suntech has been involved in power projects in the US (at San Francisco International Airport and in Phoenix), in Murcia, southeast Spain, and in Abu Dhabi in the United Arab Emirates.

In the wind turbine sector, the potentially vast domestic market and government subsidies have helped Chinese manufacturers become global leaders, with the country likely to become the world's largest producer of wind turbines by the end of this year, reaching a market value of over $6 billion.

So far, China's domestic wind turbine market is primarily composed of foreign companies and joint ventures, but wholly domestic manufacturers are on the rise, led by Xinjiang Goldwind Science & Technology, Dongfang Electric Corp and unlisted Sinovel Wind Co. The largest foreign manufacturers in China are American GE, Danish Vestas, Spanish Gamesa and India's Suzlon.

Yet Chinese wind turbines are also developing in the global market, with local products in 2007 being exported to 24 countries and regions, including the Philippines, Pakistan, Argentina, Britain, the US and Australia.

This month, Shenyang Power Group announced it would enter into a $1.5 billion joint venture with US Renewable Energy Group and Cielo Wind Power to build a 14,500-hectare wind power development in West Texas.

The turbines for this project will come from a new Chinese turbine manufacturer, A-Power Energy, based in China's Shenyang City, Liaoning. A-Power plans to deliver 240 2.4MW wind turbines with technology licensed by Danish company Norwin and Germany's Fuhrlander.

While the outlook for domestic and international expansion of the Chinese green-energy business looks positive, question marks remain over some of this expansion and so-called cooperation.

A-Power Energy, for instance, as of June this year, had yet to produce a single wind turbine, according to a filing to US regulators, while its US partners had yet to decide where to build the proposed wind farm.

Meanwhile, First Solar, which last week confirmed that it expected construction of its Inner Mongolia solar power plant to start next June, has seen its share price crash to around US$102 from above $202 in May. The Phoenix company said that its cells made of toxic cadmium-telluride may be banned in the European Union, its biggest market. At the same time, its chief executive officer and second-largest shareholder, Michael Ahearn, sold half his interest in the company, bringing in $257 million between February 19 and May 16, Bloomberg reported.

More recently, First Solar executive vice president and company secretary, John Gaffney, is quitting - with the company taking a $6.9 million after-tax hit in this quarter to cover his severance, Barron's reported last week.

As for the latest alternative energy market darling, Longyuan Power, cornerstone institutional investors pledging to take a stake before next week's listing will include China Investment Corp (CIC), the nation's sovereign wealth fund, which may purchase $400 million worth of the $2.3 billion initial share sale, according to Bloomberg.

That can be seen as a vote of confidence in the company, or as a means of ensuring that control of Longyuan Power, itself a unit of state-owned China Guodian Corp, remains firmly in the hands of the Chinese government, whatever the interest of overseas investors.

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