Cogeneration taking centre-stage in China

Shanghai is the city thought to offer the best opportunities for overseas equipment makers to bid for industrial-scale cogen projects

China’s new administration has ambitious cogeneration plans, with a target of 30 GW of new gas-powered plants, many of which will be CHP-based, by 2015. David Green scrutinizes the plans and highlights the opportunities for foreign manufacturers.

With the once-in-a-decade handover of power within China’s Communist Party government complete, the country’s new administration is beginning to find its feet. It is a process that has profound implications for the cogeneration/CHP sector in the world’s most populous nation.

At the heart of the opportunities related to cogeneration is a government plan entitled Guiding Opinions of the Deployment of Gas-Fired Distributed Energy. The document, jointly released by the National Development and Reform Commission (NDRC), National Energy Administration and Ministry of Finance, sets goals to develop 5 GW of gas-fired combined cooling, heating and power (CCHP) by 2015, and a total 50 GW by 2020.

While this document was released in 2011, it is only very recently that these notional goals have begun to manifest themselves as tangible projects for which companies have been invited to bid.

Importantly, these cogen targets are under pinned by detailed energy policies in China’s 12th Five-Year Plan for Energy Development, which notionally runs from 2011 to 2015, but essentially is a three-year programme. It includes a number of overarching policy targets with an indirect bearing on the market for cogeneration, and was unveiled in January by China’s State Council.

At its heart this plan is a blueprint for greater energy security and reduced energy intensity, just the kind of priorities that favour cogen. The latter aim is perhaps best encapsulated by a stated goal of reducing energy consumption per unit of GDP by 16%, and CO2 emissions per unit of GDP by 17%.

More specifically, there are a number of important targets related to the role of natural gas in the energy mix, primarily doubling its share of the total by 30 GW to 8%, but also that of raising proven conventional gas reserves by 3.5 trillion m3 and building 44,000 km of natural gas pipelines, as well as the production of 6.5 billion m3 of shale-sourced gas per year by 2015, increasing to 80 billion m3 by 2020.

These targets dovetail neatly with the explicit cogeneration goals made by the NDRC, National Energy Administration and finance ministry.

China has also tied these two policy goals in a policy paper released last June (2012) entitled the 12th Five Year Plan for the Development of City Gas, which notes that every 10,000 m3 of natural gas consumed in China saves annually the consumption of 12.7 tonnes of coal equivalent and 33 tonnes of CO2 emissions.

And while restrictions on gas supply and the high price of imported gas (relative to coal) have presented a major barrier to the accelerated construction of even mid-scale gas-fired power plants, China has already made significant moves to diversify its access to the fuel via the signing of agreements to import liquefied natural gas from neighbours overseas and pipe in supplies from Central Asia, Myanmar and, most recently, Russia.

In March, Moscow and Beijing signed an historic deal for Russia to pipe 38 billion m3 of natural gas to China each year starting in 2018, with an option for this to increase to as much as 60 billion m3 annually. In 2011, China consumed about 130 m3, which gives an indication of the importance of the agreement in terms of securing future supplies.

Foreign maunfacturers set to benefit

These aims and agreements are important because it is the gas-fired arena that offers the most enticing and realisable cogeneration opportunities, particularly for foreign equipment suppliers.

And with the new administration in place, all these energy policies are starting to translate into action.

‘From late last year China began opening the door to cogen. Several projects have been issued tenders but they did not fit our portfolio, but it’s a nice change to have people come knocking on the door asking for bids,’ says Luca Febbraio, north east Asia regional director and vice president for Power Plants at Wärtsilä China.

The Finnish company, which specialises in 30 MW to 100 MW trigeneration projects, has its eye on a couple of proposals but the relevant feasibility and cost-benefit studies have yet to be granted approval by the local authorities, in part a consequence of the lack of a clear policy framework for how this kind of industrial-scale cogeneration project should work.

‘There’s a plan from the Shanghai government to give an allowance per kWh of CHP. But it takes a clear price and a sustained policy framework for an investor to put his hand in his pocket,” says Tim Scott, commercial marketing manager for Caterpillar’s Electric Power division.

However, that landscape is now starting to change.

The Shanghai government has released a draft plan seen by Cogeneration & On-site Power Production that stipulates gas-fired CHP projects will be offered a subsidy of CNY1000 (US$162) per kWh of installed CHP capacity, and have priority when it comes to supplying power to the national grid. hat incentive rises to an additional CNY2000 if after two years the project can prove it has been operating at more than 70% efficiency.

Moreover, such CHP projects will also benefit from receiving a preferential price for the gas they use, although the details of how this might work have yet to be determined by the Shanghai authority.

In March, the State Grid Corporation of China, the country’s largest state-owned utility, provided a further indication of the momentum in this area by saying that it would permit easier access to the power grid for small distributed energy resource (DER) power projects of no more than 6 MW that are fuelled by natural gas, wind and solar energy, and which could also be cogeneration plants.

At present, experts estimate there is no more than several hundred MW of installed gas-fired cogen capacity that fits the type of DER project called for by the government’s plan, indicating the scale of potential opportunity in the field as the market begins to open up.

Opening up of market

At the time of going to press that is exactly what was happening in Shanghai, where foreign and local players were in the process of bidding for a project at the Shanghai Disneyland site, the details of which are not available to the public as they are commercially sensitive.

Elsewhere in the city, the Caterpillar-owned MWM brand recently secured orders for two sets of its super-efficient TCG 2032 V16 natural gas engines for running a CCHP plant at the Shanghai Expo Convention Centre.

In Beijing, GE announced in January that it had won the contract to supply China National Petroleum Corporation with five Jenbacher cogen systems to power a 16.7 MW on-site CCHP plant for a new data centre in the city, the largest gas-engine CCHP project in the country. The project is something of a coup for GE, as it will likely be used as a model for similar facilities going forward.

The US company is particularly well placed to benefit from the development of the gas-fired cogeneration sector, after it signed an agreement to create a $100 million joint venture developing aeroderivative gas turbines, core devices used in distributed energy systems, with the China Huadian Group. This in turn helped the US firm secure a contract from Huadian to supply a 100″120 MW cogeneration system for an industrial park in Fujian.

Slow on policy front

But such examples of concrete projects are still few and far between due to the slow progress on the policy front. In Beijing, there is another set of draft guidelines circulating, but according to Wärtsilä’s Febbraio it is very light on detail, though there is apparently mention of dropping a current 10% tax levied on imported power equipment.

‘Every municipality is looking at a different policy. That’s why so far there is no private investment ” people are waiting for these drafts to be finalised, but it’s not fast enough,’ explains Febbraio. ‘There is momentum but I doubt this is going to result in 50 GW by 2020.’

Even so, Japan’s Mitsubishi Heavy Industries (MHI) just last month moved to take advantage of any openings by signing an agreement to license its KU gas engine technologies to ZGPT Diesel Heavy Industry, a Chinese manufacturer of stationary and marine engines. MHI has said that the licensing agreement envisages the manufacturing and marketing of its 14KU30GSI 4450 kW-class gas engine, which is widely used for DER projects in Japan, but would probably be expanded to include other models and would also probably be used in cogeneration projects.

China favours the use of domestically-produced equipment over imports. Against this background, MHI’s agreement with ZGPT gives the Japanese company greater scope to sell its products in the Chinese market.

Interest in large-scale cogen/CHP

Febbraio also suggests that because it is imperative, at least in terms of saving face, for the government to meet the stipulated 50 GW target, there is a very strong possibility that incentives may be widened to apply not just to small-scale DER projects, but also larger gas-fired cogeneration plants, as this will have the effect of ratcheting up relevant installed capacity figures.

‘All the current DER projects are officially pilots, so the government can assess the economics,’ Febbraio says. ‘Yet the assessment process is bound to take at least two years, leaving precious little time for the government to meet its 50 GW installed capacity target via DER alone.’ This potentially opens the policy incentives to larger gas-fired cogeneration plants, and with it a broader spectrum of equipment and suppliers, he explains.

Alstom has sold five of its E-class gas turbines into China since the start of FY 2012″13 for a combined contract value of about €100 million Credit: Alstom

Irrespective of how this pans out, and it is impossible to say with so much still on the drawing board and each local government rolling out its own polices, there has already been a substantial amount of recent project approval activity for larger gas-fired cogeneration plants on the scale of several hundred to >1000 MW.

‘There is a phenomenal amount of new gas-fired combined-cycle capacity coming on line, beyond what you would expect to be supported by the economics,” says Gavin Thompson head of Wood Mackenzie’s China Gas and Power research team in Beijing.

Almost all of this is in coastal provinces and is a response to rising peak demand, which power suppliers are finding it difficult to meet when relying on electricity transmitted from interior provinces and seasonal hydroelectric power. The CCGT plants are a lot more flexible and allow the power suppliers greater leeway to regulate their power supply, Thompson said.

‘So there are a number of non-pure economic factors driving this, as well as subsidies. These come in the form of preferential pricing when selling to the grid, though the way this works varies from province to province.’

Major foreign equipment suppliers must leverage their official and unofficial agreements with Chinese counterparts to get a look in on these projects, which represent a substantial policy shift that has drawn the attention of a wide selection of companies.

‘The reality was that China used to be a very small market, as there were restrictions on gas availability,’ says Pascal Radue, Alstom’s Singapore-based area vice president for Gas. “But with the increased environmental concerns the mindset changed and suddenly there was an opening of the market ” it opened at the same time as we started to be more aware of it.’

Since the start of the FY 2012″13, Alstom has sold five of its E-class gas turbines worth about €100 million ($130 million) into China, all via a project-specific relationship with Harbin Turbine, which in turn is a supplier to leading power utility Huaneng Power.

Alstom is keen to formalise the arrangement, which it deems essential to doing further business in China. This will bring the company into line with the other major suppliers of gas-fired equipment, all of which have signed similar agreements. Aside from the aforementioned tie-up between GE and Huadian, other examples include MHI and Dongfang Electric, as well as Germany’s Siemens with the Shanghai Electric Group.

Access to projects led by Huaneng would be a boon for any overseas gas turbine supplier, as in a little over a year the company has signed off on three cogeneration plants, the largest of which is a massive 1500 MW facility in Chongqing, and aims to raise this to five projects in the near future.

‘There’s no specific plan yet, but gas-fired cogeneration is encouraged by the government,’ says a Huaneng spokesman surnamed Zhou. The company has already worked out cooperation agreements with gas suppliers, and is positioning itself to move away from coal and towards gas. However, the scenario remains a nightmare for potential investors, as there is again something of a policy vacuum at the center of the projects.

‘The tariff level [of the generated electricity] has not been determined,’ says Zhou. ‘Each project will have a different tariff based on the local price of gas and the profitability of the plant.’

While this presents obvious problems, power companies appear content to push on, safe in the knowledge that the government will construct policy around their projects in a way that makes them economically viable.

As a case in point, GE, which is the largest supplier of heavy-duty gas turbines to China with an installed capacity of 15,000 MW, in September last year was commissioned to supply three of its 9FB gas turbines for the Datang Gaojing combined-cycle cogen power plant under construction in Beijing. The plant, which is scheduled to start commercial operation in stages beginning October 2013, will generate more than 1.3 GW of electricity and operate in tandem with a district heating solution provided by Harbin Electric Corp.

The confidence to proceed with such projects without the necessary financial details is in part borne of a firmly held belief that the government is serious about its stated commitments to improving the environment, and air quality in particular. ‘I was surprised because for the first time meetings started with officials citing environmental concerns ” I don’t know if it’s their own drive or they expect policy support to come from that direction, but it was a significant change,’ notes Alstom’s Radue.

While the increase in gas-fired cogeneration plant approvals is primarily a consequence of the government’s desire to shift away from dependence on heavily polluting coal and hence improve air quality in major cities such as Beijing and Shanghai, there is also another factor at play, suggests Yang Fuqiang, senior adviser on Climate, Energy and Environment at the US-based Natural Resources Defense Council’s China Programme.

‘During the recent economic slowdown and consequent weaker demand for power, utilities believed that cogeneration projects would be protected and have first access to power sales on the grid,’ Yang says. Under a long-standing policy to encourage CHP development, cogeneration projects are guaranteed a smoother approval process but also priority to sell their power to the grid, prompting utilities to back such projects to ensure they can sell their power even during lulls in economic and industrial activity.

Yang also provides a useful perspective on how the cogeneration landscape will probably develop going forward. ‘At the moment about 95% of installed cogeneration capacity in China is thermal coal. The gas projects have been slow to catch up for the simple reason that there have been restrictions on gas supply,’ he says. ‘But in the major cities that are suffering from air pollution there is now a shift to gas for environmental reasons. It is also a lot easier to regulate the use of gas-fired cogeneration facilities to match demand for both heat and power, making these systems more attractive.’

Asked about the outlook for coal, Yang suggests new capacity is no longer approved near major cities, but that it would remain cost effective to develop coal cogeneration projects in China’s regional mid- to lower-tier cities. Under an ongoing government drive to phase out smaller, less efficient coal plants, only those coal CHP plants in the range of 200 MW to 300 MW or larger now receive the necessary local government approvals, wherever they may be.

China aims to have 30% of its coal-fired power capacity operating as cogeneration by 2015, against Yang’s estimate of about 27% currently, allowing scope for the approval of such projects in smaller cities to make up the gap. However, Yang is quick to point out that the big five Chinese power companies (Huaneng, Datang, Guodian, Huadian and the China Power Investment Corporation) dominate this area, and that they are experiencing a number of operational difficulties that have yet to be resolved.

‘There are problems in terms of distributing the heat from these projects: Who will pay for the pipe networks? Who is responsible for maintenance and quality of heat supply, and who is responsible for collecting the payments for the heating?’ he asks, adding that a major benefit of the smaller gas-fired DER projects is that having only one consumer eases the logistics of pricing and payment.

In Yang’s view, it is Shanghai and the southern manufacturing hub of Guangdong province that will offer the largest opportunities in terms of small-scale DER. ‘The [local] governments there are much more open to foreign involvement in such projects,’ he says. ‘On the other hand, it is harder to secure the gas supply than in Beijing, where political factors often restrict foreign competition from entering the market.’ Yang also highlighted that the warmer climate in China’s south will probably ensure that the majority of projects there will require trigeneration, or CCHP, systems.

Meanwhile, although secondary in importance to the other major policy drives, another significant plan found its way into the public domain just last month, when the Ministry of Industry and Information Technology released its own Five-Year Plan for Industrial Energy Saving.

While it is again light on crucial detail on how sticking points like grid and heating connection issues might be overcome and paid for, the plan shines a light on the next step for the promotion of CHP in China. The plan calls for the development of cogeneration in the iron and steel, nonferrous metals, chemicals, light industry and others.

It also references the development of urban infrastructure to support the production and distribution of the generated heat and electricity, and promotes the use of back-pressure and exhaust-condensing steam turbines, micro turbines, screw expansion generators and other equipment.

Given the lack of policy progress in the more highly favoured area of gas-fired cogen, it is tempting to label such calls as specious. However, as World Resources Institute senior associate Sarah Forbes suggests, China has a strong precedent in integrating waste products produced from industrial process in coal-to-chemical plants, where it is a world leader, suggesting that doing similar with industrial cogeneration may not be such a remote possibility.

‘There’s more coal-to-chemical going on in China than anywhere else in the world, and it is all incredibly integrated. The growth in the energy sector here presents an opportunity to truly integrate energy across the board.’

David Green is a China-based freelance journalist, who writes on energy matters.

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