Bridging the supply gap

Power shortages in China are set to continue throughout 2004. This may not be good news for China, but spells opportunity for equipment manufacturers, writes Siàƒ¢n Green.

According to the China Electricity Council (CEC), continued strong economic growth will drive rapid growth in electricity demand in China in 2004. A forecast rise in electricity demand for 2004 of 12 per cent will mean that the country will experience a repeat of the blackouts and brownouts it suffered in 2003.

Electricity demand in China in 2003 reached 1891 TWh, a 15.4 per cent increase over 2002. In 2004, electricity demand will rise to 2100 TWh. However, according to the CEC, a supply gap of more than 10 GWh is likely, with robust industrial production, falling water supplies and disruption of coal supplies continuing to pressure electricity supplies.

In 2003, some 22 provinces, autonomous regions and municipalities ” mostly in China’s economically booming eastern and southern regions ” experienced planned blackouts. Power supplies to commercial and industrial consumers were cut or restricted during peak hours. The supply gap in 2004 will again be concentrated in the east and south, although certain parts of the north, northwest and central China will also suffer from inadequate supplies.

The fundamental cause of China’s electricity shortages is the rapid rate of economic growth, which in 2003 reached 9.1 per cent. Much of the economic growth is attributed to energy-intensive industries such as steel, aluminium, chemicals and construction. In 2003, this was exacerbated by an unusually dry, hot summer, which led to a rise in the use of air conditioning and reduced capacity at hydropower stations. In addition, coal supplies to some power stations were disrupted due to shortages and high fuel prices, while a lack of capacity in the transmission network meant that surplus power could not be diverted to areas with a shortage.

An underlying cause of the shortages is the moratorium on the construction of major power plants that was in place between 1999 and 2002, according to John Prosser, managing director, Asia Pacific, of Mitsui Babcock. “In 1999, they changed the focus of investment to the distribution of power in China,” said Prosser. “There was considerable investment in distribution but they stopped developing new power stations. They therefore had a period of about two and a half years where there were almost no new major orders for power stations, but by the middle of 2003, when everyone switched on their air conditioners, they realised that something was not right.

“Because they stopped building power generating equipment, they have been left with a backlog of capacity development. Capacity that they need now is not ready to come on line, plus they need to develop capacity to meet future demand,” said Prosser.

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These factors have caused a boom in orders for power generating equipment in China. According to China Power & Energy News, China’s government is planning to spend Yuan200bn ($24.2bn) in 2004 on the construction of 144 power plants with a capacity of 37 GW. “Last year, China’s five main generators ordered around 100 GW of new conventional thermal capacity,” said Prosser. “In reality not all of that has had the necessary approvals, but it is equivalent to three or four times the level of orders from the rest of the world for 2003.”

Whether all of this capacity will actually end up being approved and constructed remains to be seen, but China’s recent reforms mean that power generators have the autonomy to plan new plants and place letters of intent with suppliers.

Overseas manufacturers that have won major orders in China in the last six months include GE Energy, Mitsubishi, Alstom and Mitsui Babcock. GE has won orders to supply equipment for China’s Gas Turbine Power Plants Construction project, and recently established a joint venture with China’s Harbin Power Equipment Company to provide field services to those plants. Mitsubishi Heavy Industries is to supply components for four 1000 MW ultra-supercritical boilers, while Alstom has received an order to supply China Electric Power International with four supercritical 600 MW steam turbine generators. Mitsui Babcock recently won an order for a 2 x 600 MW supercritical plant.

Regulations in China mean that the role of overseas manufacturers in projects is restricted to supplying components for plants, rather than whole plant systems (unless the financing is external). Domestic manufacturers, however, have a manufacturing capacity of about 18 GW per year, said Prosser. This is being expanded to 20-25 GW/year, but Chinese manufacturers are increasingly looking overseas for suppliers. “Mitsui Babcock has recently signed a technology transfer agreement with Harbin Boiler Company actually and is transferring technology for our once-through supercritical units for their domestic markets,” commented Prosser.

Market pressures, however, mean that the restrictions on overseas suppliers could be lifted soon, a move that could help bring power plants on line faster. “Delivery is critical; they need the power now,” noted Prosser. “There is no spare capacity in China for key components such as pressure parts, but we have a global procurement capability and could source these components offshore. We would still have to buy most components in China to remain competitive, but would be able to reduce project lead time.”

According to Prosser, increasing environmental awareness is a key driving factor behind the type of technology that is being planned in China. For coal fired plants, around 90 per cent of orders are for supercritical equipment due to the fact that supercritical plants are more efficient and have lower emissions than subcritical plants.

Regulations for emissions of NOx, SOx and other emissions are becoming stricter, said Prosser, and this is driving a secondary market for retrofitting plants with flue gas desulphurization equipment and upgrading with burner and control technology.

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