A rush of energy

China's economic reform programme is cascading down like the waters of the Yangtze River – into the country's fast-growing power generating sector.

It has done so at a pace which is leaving so-called "old Asia hands" breathless, because of the suddenness with which the Beijing government has pushed open its doors to foreign power sector investors – to the point where the knowledgeable investor can own up to 100 per cent of a power generating company.

"New China hands", however, are taking the reform programme in their stride in the hope of capitalising on a bonanza which could see up to 100,000 MW of new power capacity added to the Chinese power system by the year 2000.

The working figures for the new capacity; say Chinese energy officials, call for the addition of 12,000 MW – 15,000 MW to be added each year. This would be on top of the existing capacity level of 165,000 MW, of which 70 per cent is generated by coal and most of the rest by hydropower, with oil, diesel, biomass and the fledgling nuclear sector bringing up the rear, and with gas waiting in the wings.

This means that China's capacity for power generation should rise to at least 265,000 MW. If accomplished, it would still leave the country's per capita electricity supply at about one-fifth of the standard which holds in Europe, possibly even less given the country's 17m per year population increase on top of its current 1.2 billion.

According to the World Energy Council (WEC), population growth will be one of the driving influences on future energy demand.

In a report published late last year, it stressed that China has not yet achieved the level of modernisation desired. "With only 7 per cent of the world's cultivable land and 23.5 per cent of the population, modernisation of agriculture and of industry is of a high priority.

"Prices of all forms of energy are quite low, and the reform of the pricing structure is needed to promote proper energy production and conservation."

It added that China planned to double its GDP by 2000, but warned that China's ability to address its energy problems "will be curtailed by the problems of raising finance."

At this early stage, there is little evidence of concern. In March, Zhou Heliang of the Ministry of Machinery and Electronics said China was ready to allow 100 per cent foreign ownership of power stations in order to curtail energy shortages caused by explosive economic growth.

Economic growth in the first quarter was 14.1 per cent up over the same period last year. 1992's total growth was 12.8 per cent. The official expansion target for this year is 8 per cent but this will almost certainly be exceeded. Impressive though this is, not all energy planners are happy, simply because they fear the screws could be tighteneed to curtail the outflow of foreign exchange needed to buy in new projects for boosting regional economic development.

According to an IMF account, China's economy is now third in the world. GDP increased last year from US$1,430bn to US$1.3 trillion and per capita income soared from US$370 to US$1,450.

Energy experts from the overseas ethnic Chinese community, visiting the country recently, expressed concern that the economic growth, not to mention the huge capacity additions, would cause a growing disparity between coastal rich and the poor, living in the hinterlands, many of whom still did not have electricity.

Said the WEC, in its report, "a total of 32 countries remain without electricity supply. The average electricity price paid by urban consumers is only about 3 cents/kWh, well below the cost of production."

In Singapore, a local consultant who had just visited China said late last month that the capacity build up in the south and along the industrialised east coast could stimulate a further migration of rurals to the cities, thereby aggravating rather than easing social conditions. "China will have to proceed carefully with this or there could one day be a serious political price to pay," said the consultant.

Words of caution notwithstanding, the power capacity programme is racing ahead at a pace that rivals that of recent years, when China exceeded all its neighbours, most notably India with which it is most often compared because of its size and population. In the 1986-90 five-year period, China's energy planners saw the installation of 50,000 MW of new capacity, some 15,000 MW above target. Capacity additions of 10,000 a year have continued for the first part of this decade.

Commented an official of the US Mission Energy group of California, whose parent is Southern California Edison, a large US utility, "China's capacity additions on a yearly basis equal all that we have installed. The scale is a little difficult to digest."

Mission is one of a number of western companies pouring into China to negotiate independent – power project contracts, usually in partnership with local and foreign groups. Such contracts entail the establishment of commercial tariffs at which the IPP sells electricity to the local utility, the repatriation of profits to the parent group in exchange for the operation and maintenance of the power complex for a negotiated length of time.

The formula is known as build-operate-transfer (BOT) and there have been some notable case studies of it, particularly the Shajiao B (700MW) and Shajiao C (1,800 MW) coal-fired projects in southern China for which the Hong Kong Hopewell Group is responsible. There are now indications that build-own-operate (BOO) is being considered, in which foreign companies can own and operate plant in perpetuity.

The BOT-BOO phenomenon was analysed recently at a seminar in Beijing by R.T.Fox, vice-chairman of Kleinwort Benson, the UK merchant bank group. Its attraction lay in the following four aspects:

* a desire to restrict public expenditure and conserve the government's cash. * a desire to reduce sovereign debt and improve the government's borrowing position.
* a requirement to build and operate infrastructure facilities, notably power, more efficiently and imaginatively than the public sector.
* an expectation that the private sector could cover the associated risks in a more cost-effective way.

Fox pointed out that considerable government commitment was required if BOT was to be successful, such as providing an equitable regulatory regime.
Essential to BOT's success was the negotiation of fuel supply and power purchase contracts. Without BOT, this can not happen.

"Ownership of a power project can vary from 100 per cent Chinese to 100 per cent foreign; the life of venture can be 10 years, 20 years or with no transfer date foreseen, ie. Just build and operate. Even the tariff is flexible with a definite trend for consumers in high-growth areas being both prepared to pay to their power."

The lion's share of projects will continue to be coal fired, coal maintaining 70
per cent of all power generation projects. But with 100,000 MW foreseen for the rest of the decade, at least 30,000 MW will be from other sources, led by hydro but with an increasing input from the gas-turbine sector, presently a minute player in China. China's huge coal reserve – it produced 1.1 bn tonnes in 1992 and foresees 1.4bn tonnes by 2000 – are its backbone, but it is understood that it may have to import coal to fuel power projects in southern and coastal areas simply because of internal coal delivery problems which will not be able to keep pace with the demand – the sources are far distant from the end user, with resultant rail transport problems.

China's ambitions are underlined by the recent yuan 1 trillion outline package for the development of the Yangtze River basin, the main recipients being the power supply and general energy as well as others sectors, such as airports and transport. A State Planning Commission official was quoted as saying that the scheme was part of Beijing's strategy for economic development in the Yangtze with "rare chances for foreign investors and a tremendous market for foreign manufacturers."

Significantly, the Three Gorges hydro project of 17,000 MW, the largest hydroelectric project anywhere is being earmarked for a tranche of state investment funds, although Beijing would like to find a way to get the private sector involved in the scheme. The government is also planning the second phase of the 300 MW Qinshan nuclear power station south of Shanghai, the first phase having gone on line last year. Qinshan is China's s first commercial nuclear facility, through the Anglo-French built 2 x 950 MW Daya Bay project in Guangdong will start to be phased in the autumn.

The fact that the burden of nearly all power projects has fallen on the regional and central government's exchequers is the driving force behind the privatisation programme.

The need for funding from outside prompted Guangdong province officials in the south to declare that 68,000 MW of new capacity would be open to BOT-type deals. At present, its capacity is 10,000 MW, mostly state-owned.

As has been pointed out by senior officials inside and outside China, it is not as if Beijing has "gone private" but rather that the command economy central to China's economic policymaking has simply broadened its focus.

As a senior Chinese coal official said of his sector and which applies to the country as a whole, "the Chinese coal industry shall adapt itself to the market economy system and further enlarge the scope." *