What is the shape and size of the market for cogeneration equipment in China, and how is it growing? Jessie Xi Jiang summarizes a report from GCiS China Strategic Research that suggests the Asian giant’s CHP market is poised to boom despite forecasts of lower GDP growth in the near future.

As the world’s leading consumer of energy, and facing deteriorating environmental conditions, China plans a massive promotion of alternative energy over fossil fuel dependence in its newest five-year plan. At the end of 2015, alternative energies, including solar, wind, biofuel and hydropower, is expected to account for 30% of total generation capacity.But while attention has been focused towards new energy sources, cogeneration, a traditional and more technically mature way of energy saving, is being neglected. In contrast with new energy, where lack of scalability presents a major obstacle to profit, cogeneration can offer significant efficiency gains at existing fossil fuel power plants.

China needs to find a way of meeting its emission targets and avoiding electricity shortages that inhibit growth. Over the next five years of economic development, could cogeneration provide an answer?

CHINA CHP OVERVIEW

Ever since Pearl Street station, the world’s first commercial cogeneration, or combined heat and power (CHP), plant was built by Thomas Edison in 1882, the world has seen the potential for efficiency increases through utilizing waste heat from conventional power production. China began to use cogeneration in the 1980s, when a central government policy that encouraged cogeneration in North China’s district heating plants was pronounced. The commercial development of CHP, starting in the late 1980s, quickly spread through China.

In the last decade, China has experienced colossal investment in its power generation sector. The installed capacity of thermal power stations – fired with coal, oil and gas – has grown from 210 GW in 2001 to 710 GW by the end of 2010. The figure is poised to overtake the USA’s 875 GW of thermal power generation capacity in the near future.

In the meantime, CHP installation capacity reached 167 GW in 2010, accounting for 23% of total thermal power capacity. This has presented significant opportunities for large Chinese equipment suppliers such as Harbin, Dongfang and Shanghai Electric, as well as their foreign partners, GE, Mitsubishi and Siemens.

COMPETITIVE LANDSCAPE

China’s CHP equipment market is worth about RMB 28.1 billion ($4.5 billion) as of year-end 2011 (or RMB 30 billion when including exports), according to a report from GCiS China Strategic Research. The domestic market, which is the focus of the report, grew by more than 20% in 2011, faster than the GDP growth of 9.2%. Imported products from foreign companies play a significant role in the market, valued at about RMB 3.6 billion, most of which are gas turbines and reciprocating engines.

About 75 companies currently provide CHP equipment to the Chinese market. Most local manufacturers supply large, coal-fired cogeneration equipment and enjoy significant market share. Foreign suppliers, such as GE and Caterpillar, focus on smaller scale gas turbines and internal combustion engines, where technological requirements are high and customers are willing to pay a premium. The GCiS report estimates that the market has 15 notable foreign players, with high market share in gas turbine and reciprocating engine segments. Foreign suppliers – generally recognized as providers of superior technology and higher quality products – control around a quarter of this market.

CHP is a nebulous market. Each system is configured in a unique way that optimizes the existing equipment.

COGENERATION IN COAL-FIRED PLANTS

China’s thermal power plant investment totalled RMB 105 billion in 2011, including coal-fired and gas-fired power stations. While this is a large-sounding number, it is less than half of investment in 2005. The drop is mostly due to a slowing of construction of coal-fired power plants.

As of year-end 2011, thermal power plants accounted for about three quarters of total electricity generation capacity. China’s government plans to lower this ratio to 65% by 2015, when total generation capacity will reach 1437 GW. It is implicitly clear that new coal-fired power plant construction and related equipment sales are set to increase at a slower pace over the coming years.



Figure 1. China total electricity generation installed capacity (GW)

Coal-fired CHP plants use back pressure and extraction steam turbines, power station boilers and generators. According to GCiS, orders for coal-fired cogeneration equipment have constantly grown as a percentage of coal-fired power generation investment. By 2015 it is expected that nearly 30% of total coal-fired installed capacity will be cogeneration power plants.

Although utility power plants will remain the major application for coal-fired cogeneration equipment, most equipment supplier revenues will come from industrial end-users. Industrial end-users – in sectors such as metallurgy, cement, paper and pulp – see CHP as an appealing solution for large-scale power and heat in light of increased coal prices. The technology and skills for setting up cogeneration projects are also commercially available. However, higher equipment costs and grid and heat pipeline connection issues must be overcome before industrial end-users fully adopt CHP.

In conclusion, accounting for more sluggish investment in coal-fuelled power plants, market participants have a moderate outlook on coal-fired cogeneration equipment, with less than a 10% compound annual growth rate after 2011.

COGENERATION IN GAS-FIRED PLANTS

Gas-fired power plants were traditionally used in offshore oil drilling platforms, or as peak load power plants. But recent years have seen a strong trend towards gas-fired power plants as a main electricity and heat resource. Going forward, given rising coal prices versus the increasing availability of natural gas, equipment such as gas turbines and heat recovery steam generators (HRSG) are expected to grow at a much faster rate.

In 2011, gas-fired power plant capacity reached 33 GW: a growth of 24% from 2010. By 2015, the installed capacity of gas-fired power plants is expected to reach 60 GW, implying a compound annual growth rate of about 20%. GCiS forecasts a total spend of RMB 60 billion on gas turbine and HRSG equipment for cogeneration between 2011 and 2015.

By 2011, China had economically recoverable natural gas reserves of 3.8 trillion m3 (and an additional 25 trillion m3 in recoverable shale gas), ranking third in the world. Several long-distance pipelines were completed between 2010 and 2011 as overall construction peaked with plants, pipelines and supply stations coming online at the same time.

Gas turbine orders have shown significant growth in 2011 and this trend is likely to accelerate over the forecast period. Apart from gas supplies from inland China, expanding offshore gas drilling and import liquefied natural gas (LNG) will also increase gas supply. Gas-fired power plant construction will continue in China’s east and south coastal provinces, which have huge electricity demand.

District heating is also expected to drive considerable growth in gas-fired equipment demand. As of 2010, district heating with CHP supplied more than a third of all construction in northern cities and towns, the rest being heat-only boiler stations fuelled by coal or natural gas. To reduce energy waste and pollution from coal-fired localized boilers and to improve energy efficiency, cities including Beijing, Tianjin and Taiyuan have planned to restrict new heating plants to gas-fired technology. As shown in currently released plans, new heating plants in these areas have all adopted gas-fired cogeneration.

DISTRIBUTED ENERGY RESOURCE

According to the US Department of Energy, distributed energy resources (DER) – also called distributed generation, decentralised energy, and distributed power systems – are small, modular, grid-tied or off-grid energy systems located in or near the point where energy is used.

Deploying DER creates a vast demand for medium to small-sized gas turbines, microturbines and gas internal combustion engines. These needs present an opportunity for international suppliers. While DER does not account for a large proportion of cogeneration, it maintains a fast growth rate.

Power company Huadian has announced several gas DER projects for a pipeline located in Guangdong and Jiangsu, most of which are for combined heat and power. Funding for these types of projects usually comes from power group equity investment and bank loans.

Figure 2. China CHP equipment market segments Source: GCiS

Currently, most of China’s DER projects are found in coal bed methane applications in mining, and in gas-fired uninterruptible power supplies for public buildings. However, this may well change if China realizes its target of 50 GW of gas-fired DER by 2020. Current installation capacity stands at 5 GW.

Ambitious as this may sound, multinationals and state-owned power groups are moving on it. GE and Huadian formed a joint venture company after President Hu Jintao’s visit to the United States in 2011, where he saw GE’s aeroderivative gas turbines. The efficiency and durability of Chinese equipment is far behind foreign products.

Financially, the unit cost of small gas turbines and internal combustion engines remains an obstacle for DER deployment. Integration with the grid may not be an immediate problem but when installation capacity reaches a higher level, it could potentially inhibit further development of small-scale power generation. This has happened for China’s wind and solar farms.

Figure 2 illustrates the size of the market segments for cogeneration equipment within China.

CONCLUSION

Emissions reduction and energy efficiency initiatives are the major drivers behind China’s cogen equipment market. In addition to adopting alternative energy, both local and central governments have the incentive to implement cogeneration when building new power plants or retrofitting old ones.

With foreseeable economic growth rates as high as 8%, China is facing 30–40 GW of annual electricity shortages. Cogeneration will continue to contribute to overcoming this problem. It enables stable economic growth with a more efficient and balanced fuel consumption.

Even though Chinese companies are playing catch up with foreign suppliers’ technology, the latter must build joint venture corporations with domestic partners to further penetrate the market. Achieving the right balance of technology transfer and commercialization spells big things for this market.

Jessie Xi Jiang is an analyst with GCiS China Strategic Research, Beijing, China. Email: Jessie@gcis.com.cn

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