Meizhou Wan: a BOOT to suit
When it achieved financial closure last year, the Meizhou Wan project was said to be the first wholly foreign-owned power project successfully financed outside of China`s state-sponsored build-own-operate-transfer (BOOT) programme. PEI looks at how the deal created suited both developers and government alike.
By Junior Isles
Developers have long tried to apply true project financing in China. But the necessity of local partners to ease the way, a lack of infrastructure regulations and the reluctance of lenders to rely solely on project revenues has always made this nigh impossible.
As an alternative, developers often financed joint venture contribution obligations offshore, made their equity contributions to the joint venture and relied on local partners for continuing support for joint venture operations. Since the debt financing was not often at the project level, this alternative did not allow sponsors to obtain the benefits of true limited recourse financing.
Last year, however, saw the closing of financing for the 2×362 MW (net) coal fired Meizhou Wan project. At the height of the Asian financial crisis, the definitive financing documents were signed in May 1998 and initial debt funding took place in October 1998. The way in which the financing of the project was put together could provide a useful model on how to create future projects in China.
The Meizhou Wan project was conceived in the early 1990s as part of a development called Tati City. This development incorporated commercial, industrial and leisure elements and was being carried out by the Lippo Group.
The project is considered a priority project for Fujian Province and is specifically listed in the PRC`s Eighth Five-Year Plan. It has received State Planning Commission (SPC) approval and has also obtained letters of support from the SPC, the Fujian Government and the Price Committee.
The site is located between load centres in Xiamen and Fuzhou. In 1980, Xiamen was appointed by the State Council as one of the Special Economic Zones. In 1984 Fuzhou was designated by the PRC government as one of 14 coastal open cities with authority to offer certain preferential tax and other beneficial treatment to foreign investors.
Fujian Province is a coastal province located between Guangdong Province and Zhejiang Province. It experienced an average GNP growth rate of 19.6 per cent per annum between 1991 and 1996. Growth has been export-oriented and the province was one of the first designated by the PRC government to pioneer the implementation of economic reform and open policy.
With double digit electricity demand growth in Fujian expected through 2010, there is a pressing need to increase installed generating capacity.
A different approach
The Meizhou Wan project, with its unique structure in a province which had no equivalent, presented many challenges. From initial SPC approval in 1993, the project went through changes in developers, in law and in economic conditions in Asia.
Early signs of what lay ahead came in 1996 when InterGen sought the government approvals that international lenders require to know that the project is viable. While most international projects wait for financing before beginning construction, in China companies are expected to start construction first and obtain permits as the project progresses.
The Asian financial crisis further complicated the project`s development. The project started out with four consortium members, with Lippo Group as the lead member. After many delays and changes, two of the original consortia members withdrew in 1996. But while other developers began pulling out across the continent, InterGen did the opposite and increased its ownership stake in the project from 15 per cent and broke ground.
Formed in 1995, InterGen has become a successful developer of greenfield energy projects. The company is 50 per cent owned by Shell Generating Ltd. and 50 per cent by Bechtel Enterprise Holdings, Inc.
InterGen (through its special purpose company, Meizhou Wan Generating Company) now owns 69.8 per cent of the plant; Lippo, 25 per cent; and ADB, 5.2 per cent. The total investment in the project is $755 million. Fujian Pacific Electric Company Limited (PRCCo) was formed as a PRC company to finance, build, own and operate the project.
Milbank, Tweed, Hadley and McCloy LLP, acted as international counsel to the project company, Fujian Pacific Electric Company Limited.
As more activity took place on-site, the smoother the project progressed and the project company formed a relationship of trust with the local authorities. By March 1998, the owners had secured $720 million in financing in the midst of the worst economy for emerging markets for decades.
As Ben Yau, new project general manager of InterGen explained: “Learning how to comply with Chinese regulations has been challenging. We spend a good portion of our time reviewing permitting fees, filing fees, registration fees, etc. to keep the project within budget.”
Meizhou Wan did not have the benefits of a State-sponsored BOOT programme. This meant that the sponsors did not have the luxury of a comprehensive concession agreement with the provincial government, nor a pre-assembled regulatory approval and government support package.
However, the plus side was that the sponsors had the freedom to design project arrangements and a financing package tailored to the project.
From the outset, a different approach was taken with Meizhou Wan. The developers sought to have a wholly foreign-owned entity complete the development and obtain true limited recourse financing from international lenders.
This required insisting on world standard documentation that would form the basis of a true project financing. Without the benefit of the BOOT to speed up the approvals, the sponsors had to obtain all the appropriate approvals at both the provincial and state levels.
From the start, with the presentation of the power purchase agreement, it was clear that the Chinese had a different approach to drafting documents. At one point, the Power Bureau presented the sponsors with its own style power purchase agreement. The Power Bureau draft reflected a Chinese approach to written agreements in that it was considerably shorter and relied on open-ended, and therefore more ambiguous, language.
However, the two sides were able to reach a financeable version which was in the end, an amalgamation of the sponsor`s drafting in English (then translated into Chinese) and the Power Bureau`s drafting in Chinese (then converted into English). The PPA, dispatch agreement and operations and maintenance agreements were formally signed in May 1998.
A major issue facing the sponsors was receiving sufficient revenues from the project. Unlike other tariff arrangements, the project sponsors sought a detailed tariff protocol under which the Fujian Provincial Committee would approve tariffs.
The tariff protocol, including an interim adjustment mechanism for fluctuations in certain component costs, mitigated some of the concern with the annual tariff review process, which resets the price of electricity every year.
The tariff also included a foreign exchange indexation mechanism that provided further comfort to lenders. According to Milbank, Tweed, Hadley and McCloy, the structure embodied in the tariff protocol may become a model across the country.
The project will sell all of its output for a period of 20 years to Fujian Provincial Electric Power Bureau (FPEPB). After the 20-year period, PRCCo will transfer ownership of the project to the PRC Government at no cost.
The facility will occupy a nearly 1.1 km2 site at Talin, on the southwestern portion of Zhongmen peninsula. Each unit will have an actual average net electrical output of 362 MW. Each unit will consist of: one pulverized coal fired steam generator; one tandem compound, single reheat, condensing steam turbine generator set; a seawater-cooled condenser; a flue gas electrostatic precipitator; a 220 kV switchyard and associated auxiliary systems.
The entire plant will be controlled from a control room provided on the turbine deck. The primary control system for each unit will be a Bailey Infi-90 microprocessor based digital distributed control and monitoring system (DCS) interconnected by a high speed, redundant data highway. Separate and independent DCS systems and highways for units 1 and 2 will be provided for reliability.
The coal fired boilers will be fuelled by coal brought in from Indonesia. The project owners have entered into a coal supply agreement with PT Kaltim Prima Coal (KPC), an Indonesian mining company. The coal will be transported from the mine by ocean-going vessels of up to 75 000 DWT capacity. At base annual quantity, the plant will need 1.4 million tonnes per year of coal.
The boilers are reheat steam, drum type boilers and include coal pulverizing and feeding systems. Each boiler will be designed to deliver a maximum throttle flow of 1151 tonnes/h at 17.37 Mpa[g] and 540.6 degreesC at the superheater outlet.
The steam turbine cycle design is rated at 16.65 Mpa and 538 degreesC steam conditions measured at the main steam stop valve inlet and 538 degreesC at the reheat steam stop valve inlet.
Advanced low NOx burners will reduce NOx emissions by 30 to 50 per cent. Low sulphur content bituminous coal has been selected to conform to SO2 emission limitations while ESPs will ensure particulate emission limits are met.
The net electrical output of each unit will be exported to the utility interconnection for dispatching through the 220 kV switchyard.
The site is near the junction of three 220 kV lines. Because of its location, the project is expected to improve the stability of the Fujian grid and reduce system transmission losses.
The transmission interconnection facilities supporting the project will connect with the grid through four 220 kV feeder circuits: two circuits connecting with the 220 kV Hushi substation (located 21 km northwest of the site), one circuit connecting the 220 kV Jiaowei substation (located 50 km northwest of the site). One circuit will dead-end the 22 kV Zhongmen distribution substation (located 6 km northeast of the site).
The transmission interconnection project will be carried out on a schedule to match the power plant commissioning under the jurisdiction of the FPEPB.
Bechtel is responsible for the complete turnkey design, engineering, supply, construction, commissioning and testing, and handover of the project. The owner issued full notice to proceed in March 1998. The contract programme for commercial operation is 34.5 months for Unit 1 and 39 months for Unit 2. Bechtel Overseas Corporation, under an EPC contract, is currently on target to meet the target programme of 31 months for unit 1 and 35 months for unit 2.
Philip Stone, the site project manager/owner`s representative said: “Every power project has its own unique challenges. We had to source and bring to the table a wealth of experience from multi-national seasoned professionals and work together as a homogeneous team in order to stay on track.”
Bechtel began limited construction in the form of site clearance and some essential early design work in late 1997 following the issuing of a limited work package order from the owners.
The project owners executed the EPC agreement with Bechtel in February 1998. In addition to achieving the performance guarantees set out in the turnkey agreement, Bechtel is required to provide a facility which will, with reasonable certainty, have a useful life of at least 35 years. It must also be able to achieve a minimum availability of 93 per cent (excluding planned outages) with an electric output of 724 MW (net) at an inlet water circulating temperature of 20 degrees C (equivalent to 720 MW (net) at an expected average inlet circulating water temperature of 23 degrees C).
In early March 1998, the owner gave Bechtel full release to proceed with the turnkey contract, and the contract project month started ticking. The main power island area is being built on piled foundations, with some 1400 reinforced concrete piles being driven at an average depth of 18 m.
In China, the “first pouring of boiler foundation concrete” signifies the start of construction. First concrete was poured in May 1998 almost three months ahead of the contract milestone date. Erection of unit 1 boiler steelwork commenced in September 1998, unit 1 steam drum was lifted in February 1999 and the setting of unit 1 turbine-generator base plates started in July 1999. All of these milestones were achieved well ahead of the milestone dates.
Compared to traditional western practices, construction activities at Chinese plants are very labour intensive. There are currently some 2400 manual workers at the plant and this figure is expected to peak at around 5000 personnel. In the west, 900-1400 workers would probably be sufficient.
At the end of June 1999 the project was 60 per cent complete and three to four months ahead of the contract schedule. According to InterGen, the next big target dates are back energisation, where 220 kV power is supplied from the grid to facilitate commissioning. This is scheduled for mid-October 1999. The Power Bureau is constructing a 220 kV system outside the plant boundary. One of the HV lines will be used as the plant`s energy source for start-up activities.
The unit 1 boiler hydraulic test is planned for the end of 1999. First synchronization with the grid is scheduled for July 2000, followed by commercial operation in September 2000.
The owner has entered into a contract with the Power Bureau for them to carry out the operation and maintenance of the power plant. The O&M contractor has already been mobilised and is currently carrying out preparatory work and undergoing training. Bechtel will utilise the operators during the commissioning phase.
The successful completion of the Meizhou Wan project will be an important landmark with regard to future investment in China`s power industry. If China moves toward providing less government support with fewer BOOT projects, project sponsors and lenders will be able to draw on the experience gained from Meizhou Wan.
Figure 1. Artist`s impression of the Meizhou Wan power plant
Figure 2. Ownership structure
Figure 3. Project commercial structure
Figure 4. The site is located between load centres in Xiamen and Fuzhou
Figure 5. In Fujian province most of the unskilled manual work is carried out by women
Figure 6. Work in progress at the site. At the end of June 1999 the project was 60 per cent complete