Doom and gloom, hope and glory
Prospex Research Ltd., London
Doing business in China is not an attractive prospect for any developer – a complex social and cultural environment and economic troubles make for frustrating times. However, with China`s current five-year plan calling for the addition of an astonishing 15 GW of capacity to the grid per year, and a stronger economic outlook for Asia in general, those willing to persevere may start to reap the rewards.
No Westerner who has lived in China can easily resist the spell it casts on barbaric minds. Arriving from our often crime-ridden and socially bankrupt home countries, we find an industrious, socially cohesive, and refined nation. Thousands of years of respect for authority, intense cultural pride, and illustrious history have made communist control of the country easier than it ever was in Russia, but also limited its influence to the surface.
Over the years, China has always thought and behaved like a civilised empire, not a revolutionary force, with the ugly exceptions of some warlords of earlier times. Even the country`s name in Chinese means “middle kingdom” – the centre of the world worth knowing.
But there is also the China that Western friends get to know when the initial euphoria wears off. Like so many fabled countries, it seems that the idyll we imagined does not exist, and the country`s people, once they overcome their pride and mistrust of foreigners, will tell you a very different story. China also has its problems – both politically and socially.
In addition, its people are refined, calm and collected. So calm it is sometimes impossible to “reason” with them, as one might in the West, unless one is ready to risk a long and embarrassed pause, followed perhaps by a fearful retribution.
All this may just appear to be background noise, yet it has everything to do with the power business. Those descending on China with mind-numbingly detailed contracts and precise project cash flow models, bent on narrow pursuit of “shareholder value”, need a reality check. You also need a six-month spell studying Chinese history and thought. Western ways and Western money are still a tool for most Chinese, not a model or a mark of admirable strength.
One word sums it up – “guan xi”, or “connections”. You need friends, not colleagues, and you probably will not make them with a bunch of legalisms or even a set of sparkling numbers. Our imperialist ancestors tried that with “unequal treaties”, and look how far they got, and what a terrible legacy they have left us to deal with.
But numbers, if not legalisms, are just what industry observers are interested in. Chinese power consumption is set to almost double this decade, hitting close to 1100 TWh in 2000. This makes the country`s requirements roughly equivalent to those of Germany and France combined, and one third of US requirements.
Yet the system serves a population some ten times larger than the combined populations of Germany and France, and more than three times larger than the US population. Clearly development is imperative if the Chinese are ever to enjoy living standards approaching those in the West. Any price, even a high environmental price, must be worth paying.
Indeed equipment manufacturers must fall out of their chairs every time they read the details. China`s current five-year plan calls for the addition to the grid of 15 000 MW per year, while many European equipment markets stagnate. Spending is estimated at some $15 billion per year; coal-fired plants costing around $1000 per kWe, and not cheap gas-fired plants, make up the bulk of capacity expansion.
China has three ambitious equipment groups capable of producing heavy-duty turbines: Harbin; Dongfang; and Shanghai Electric. However, they cannot provide the largest units, and are eager to learn from western counterparts.
Add in big wires business – getting power from coal-producing regions and good hydro areas to the booming coast – and you have a bonanza. Even the US turbine business boom cannot compete – it is bigger, but based on gas turbines rather than the steam turbines it is so hard to sell anywhere in the developed world these days.
But the financial crisis elsewhere in Asia has hit hard. Even if the Chinese economy is not built on shaky foundations, it is bound to suffer when key trading partners are in deep trouble, and financiers balk at taking risks in Asia.
There have been terrible mishaps in China too. The bankruptcy of GITIC, an investment group fuelling Guangdong`s boom, was perhaps the worst: it had backed important power projects, and seeing its name on sponsor lists had made financiers sleep easy. Now they toss and turn, wondering what other Chinese financial institutions might turn out not to be hard-headed development investment outfits, but speculators whose guarantees are worth even less than the thin prospectus paper they are written on.
Economic trouble and finance fears can cause the fundamentals to go wrong too. The power plant building binge from 1990 to 1997 has left some regions, such as Guangdong, with a burden many perhaps never imagined possible: overcapacity. Backers of projects that need to run at least 70 per cent of the time to make money are struggling to get the local grid dispatch orders they need.
Then there are customer fundamentals: state owned heavy industry is power hungry, but generally in poor shape. Thus economic growth may not be a positive signal, but a reflection of growth in private sector services that are in less need of copious amounts of power. Even heavy industry recovery may not be good news – perhaps energy efficiency can be significantly improved, allowing higher manufacturing output without higher power use.
But today project developers should not give in to undiluted gloom. The Asian Development Bank is forecasting China`s GDP growth to be seven per cent in 1999, compared to just 0.8 per cent in southeast Asia.
It reminds observers that the Chinese are still obsessive savers and that exchange controls remain in place in China. The savings rate in China was over 40 per cent of GDP in 1998, while your average American spends just about every dollar he or she earns. This means that the capital to finance growth is available, rather than here today and gone tomorrow, like international capital.
And foreign financiers are returning to Asia. The Institute of International Finance (IIF) forecasts that net private capital flows to Asia will hit $28.7 billion in 1999, nowhere near the peak of $169.9 billion in 1996, but well above the crisis low of just $7.8 billion in 1998. China should fare especially well: the IIF expects it to receive net private flows of $22 billion this year. Again, this is well below 1997`s $62 billion, but still a sizable and welcome vote of confidence.
Whatever the near term variations in the economy, it is important to remember that Chinese authorities see power development as a very long term strategic effort, and like Japan and South Korea, the country remains committed to the mega project approach, if demand growth is there.
Most revealingly, while Western markets embrace decentralized generation, down to the micro turbine level, China is pressing ahead with the Three Gorges hydropower project. Equipment orders for the first 9800 MW phase were placed in 1997. If the second phase goes ahead, another 8400 MW will be added and the 18 200 MW installation will dwarf the largest plant in the world today, Brazil`s 12 600 MW Itaipu hydro plant. Three Gorges, when complete in 2009, should produce some 85 TWh per year – the equivalent of nearly all of the Netherlands` output from just one plant.
But Three Gorges is not the only big story. Countless Chinese projects breach the 500 MW mark, in the private as well as public sectors. Further mega projects may well go ahead in a big-is-better system.
Here are two ideas: run wires over Tibet from new plants exploiting Nepal`s vast and untapped hydro resources (Enron is a strong contender here), and run wires down through Mongolia to give the huge but underemployed Siberian hydro plants something to do. Or run pipelines to oil-and-gas rich Central Asia for fuel supply, neatly undercutting the Westerners who cannot find their way forward in this region, in their direction. Today`s far-fetched schemes may be tomorrow`s contracts, not least because the sheer scale of the opportunities will keep an army of salesmen and engineers hard at work for decades.
One question mark is nuclear power. Nowhere has China`s ambition and strategic interest in power development been more evident. Plans call for 20000 MW in nuclear capacity additions by 2010, and every nuclear engineering firm with half a claim to credibility is pushing ideas. China has employed or held advanced negotiations with several of them, including Framatome of France, Canada`s AECL, and Russian players.
US behemoths too are interested, and recently allowed in following a Clinton policy reversal, but before this spring`s Chinese nuclear espionage “scandal”. Yet overcapacity and high costs have taken their toll: the Chinese government recently announced a three year freeze on new nuclear project starts.
This pause is welcome. Strategic interest in nuclear technology may be no scandal, but unimpeachable statecraft, as practised first by the West. But it is surely economically flawed – successful nuclear programmes are ruthlessly standardised, not put together with pieces from five or more key suppliers with nothing in common but rivalry.
Safety too must be easier with just one operating system to learn. Will China change course? The supplier who wins the top role may be in line for a bonanza, leaving the others with slim pickings.
Life beyond coal
Another arguably bigger question mark is coal. It is China`s fuel of choice since the country`s reserves are ample, and is of deep strategic and political significance due to the mining industry.
Currently, around three quarters of electricity is coal-fired. Add in high demand growth and unwillingness to put China`s energy security at risk with imports of other fuels, and you have a recipe for a massive increase in emissions. Yet it is entirely unreasonable to ask China to fit emission abatement equipment to all those coal-fired plants, when big polluters like the UK cannot be bothered to make this the rule in their own systems.
But that is no reason to be complacent. Emissions-free hydro projects may deserve more support, especially if the state will let a little private money into this strategic sector. Environmentalists may have some good arguments against hydro, but they cannot stop it when coal or darkness are the alternatives, and the activists would be the first to choose coal, if they had to, to keep San Francisco or Berlin so comfortable.
Another idea would be to tackle energy security risks head on, and build up greener gas-fired capacity with more confidence. Analysts forecasting a Chinese dash for gas are thin on the ground, but more shame on them for having no courage and vision while studying a country that needs – and has – prodigious amounts of both.
If Three Gorges is going ahead, surely an enterprise as daunting as building a national gas network and permanently changing the dynamics of the electricity system is possible.
The difficult stage would be the first part – security. Many of Asia`s gas suppliers are conservative businessmen, in sometimes shaky countries, who cannot hope to reassure a Beijing planner of their reliability in a region where the Cold War has, in some ways, never ended.
Figure 1. China`s culturally complex environment can be overwhelming to visitors
Figure 2. Chinese electricity consumption 1990-1997 and forecasts to 2020, TWh
Figure 3. Chinese installed capacity additions, 1981-1997
Figure 4. Installed capacity in China
Figure 5. The ADB is forecasting China`s GDP growth to be seven per cent in 1999