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China's State Grid: too big to work?

Already the seventh-biggest company in the world, Chinese transmission giant State Grid is on a mission to become a global leader.

And with the full support of the Beijing government and almost unlimited funds, there are few limits to what this state-owned corporation could achieve.

Revealing the heights of its aspirations, company president Liu Zhenya recently announced plans for China to export clean electricity all the way from its western Xinjiang province to Germany, along ultra-high-voltage (UHV) transmission lines.

The blueprint, on a scale reminiscent of Soviet-era construction projects, stunned most of those listening to Liu’s speech at the International Council of Large Electric Systems (CIGRE) conference in Paris last August.

“It was really something to hear this; it’s a brand new idea,” says François Meslier, secretary-general of CIGRE, which counts State Grid as one of its most important members. “But why not? Technically, it’s feasible.”

State Grid’s ambitions are partly fuelled by its scale and dominant position in its home market. The company is virtually a monopoly, responsible for all transmission and distribution across the country, aside from five southern provinces. This means it controls almost all of the country’s wind market — the world’s largest — and most of its solar market too, which will soon be the global leader.

This alone makes it one of the world’s most important players in renewables. But with its recent purchases of stakes in grids in Australia, Portugal and Brazil — and an average of two overseas investments annually in recent years — its influence is growing globally.

China’s large state-owned enterprises (SOEs), including State Grid, have a political agenda to increase Beijing’s influence abroad and can call on an almost unlimited amount of capital.

“The government has admitted we have a huge amount of foreign-exchange reserves and we need to spend money overseas,” says Gary Liu, deputy director of the Luijiazui Institute of International Finance at the China-Europe International Business School (CEIBS). “The large SOEs are in a good position to spend this money.”

State Grid’s boss said as much during the National Party Congress in November last year, telling a media briefing that the firm wanted to more than quadruple its overseas assets from the current $8bn to $30-50bn by 2020. These holdings in 2020 would account for at least one tenth of State Grid’s total assets of about 2.3trn yuan ($370bn), Liu said, pointing out that foreign investments yielded higher returns than domestic operations.

So far, the company’s overseas investments have been focused on minority stakes in foreign electricity grids, but it has reportedly been in talks to acquire US wind farms from developer AES.

The firm’s capital will be very welcome in many parts of the world, particularly Europe, with governments seeking to offload assets to raise cash, says Gian-Marc Widmer, China manager at renewable-energy investment firm Ecolutions.

State Grid is hoping to sell its tried-and-tested UHV technology in Europe, bringing the company into much closer competition with its Western rivals.

“State Grid is evidently a very good candidate [to build UHV lines] but not the only one on the market in terms of equipment manufacturing,” says Meslier, pointing out that Alstom, ABB and Siemens also work in this area.

“But State Grid is the only one that has operating experience of a hybrid UHV AC [alternating current] and DC [direct current] grid. They have shown they have done it and it works very well.”

Last month, State Grid officials were pushing Liu’s China-Europe clean-energy export plan in meetings with European industry in Beijing, and seeking “more co-operation” with local companies through its Frankfurt office, a representative there tells Recharge.

Outlining his plans for the “intercontinental transmission highway for optimisation of global energy resources” last year, Liu, left, said State Grid would export wind energy and hydropower, along with natural gas, from China, Mongolia and former Soviet republics to Germany to help make up its renewable-energy shortfall.

“The annual transmitted power total could reach 66 terawatt hours [TWh], a huge relief and compensation for the electricity gap incurred by the denuclearisation of Europe, and a push for the European target of low-carbon development,” Liu said, referring to the EU’s aim for its energy to be 20% renewable by 2020.

“This is just the beginning,” believes Meslier. “They are very aggressive and they intend to participate in all important projects worldwide.”

Yet any progress on this plan is unlikely to happen soon, due to the sheer number of potential stakeholders along the length of the route.

But the company is unlikely to give up easily. “They’re incredibly arrogant about who they are, what they can do, and who they’re going to be,” says an energy analyst in Hong Kong.

State Grid is also interested in joining the Desertec consortium — which plans a transcontinental grid transferring clean energy from North Africa to Europe — according to a spokesman for the initiative. But State Grid’s Frankfurt representative says this is “not correct”.

Back in China, State Grid is planning a huge expansion of its transmission capacity, with a network of up to 20 UHV lines across the country, due in place by 2015. “With these, we can transmit 1,200TWh of power per year and accommodate 145GW more clean power into the grid,” Liu said.

UHV transmission has been under development since the 1970s, but was not commercialised until State Grid began building the first line in 2006. The company now operates three UHV lines and has several more under construction.

UHV is important for renewables because raising the voltage makes long-distance transmission more efficient, with less energy lost in transit — especially as most major renewables projects are built in sparsely populated areas far from the demand centres of the big cities. In China, most of the wind farms are in northern and western provinces, while most of the demand is on the eastern coast.

Up to 40% of the wind power in these regions does not reach the grid, as local network operators prioritise other forms of power — usually coal — during cold winters or periods of surplus generation. A west-east UHV line would solve this problem, says State Grid.

For example, the 23.4bn-yuan 800kV line from Xinjiang’s Hami prefecture — an area with 10GW of wind planned and several solar plants under construction — to Zhengzhou, capital of the central Henan province, runs 2,210km and is designed to have transmission capacity of 8GW when finished in 2014.

By 2015, State Grid aims to complete a UHV AC backbone network that connects State Grid’s three regional networks in north, central and eastern China. It also plans to complete 15 transregional DC transmission projects, adding 260GW of capacity per year.

In total, these AC and DC projects are expected to require investment in excess of 1trn yuan.

Formed after the break-up of the State Power Corp in 2002, State Grid was destined to become a group of regional grid operators. But while those regional units still exist, they are all controlled by State Grid.

The company has ministry-like status, overseen directly by the State Council, China’s cabinet, rather than the National Development and Reform Commission (NDRC) — China’s top economic planning body, which runs the National Energy Administration (NEA).

State Grid’s elevated rank is obvious in discussions with energy officials, says a wind industry insider. “They show that they’re above the NEA.”

Yet despite its power and success, serious questions are being asked about State Grid’s ambitious projects and its position in the domestic market.

Many industry watchers say there are doubts over whether the grid operator can pull off integration of such a vast UHV network in China. And if it fails, the group’s credibility will be questioned both at home and abroad.

Mike Thomas, a consultant at Hong Kong-based Lantau group who co-wrote a recent report on the UHV plans, believes that even if State Grid accelerated construction, the new lines in China would not necessarily increase transmission capacity as planned.

“It isn’t a technical problem, or a construction one, it’s a modelling one. The increased complexity of the Chinese power system in the last five years is unfathomable — the system is growing so fast, the models don’t keep up. You can design it one way, but to deliver it is very difficult.”

Thomas maintains that the UHV network design will require a major overhaul to the entire grid and the way it is organised. “It affects all other lines. And if those lines don’t have the ability to absorb it, you can’t run the network efficiently. They need to strengthen the system from the ground up.”

Some people believe that opposition to the UHV plan has slowed its implementation. Two years ago, a group of 23 experts voiced their disapproval in a letter to then-prime minister Wen Jiabao, according to the respected business magazine Caixin. Their concerns, largely related to safety and cost, were ignored. Consultants at Beijing-based research firm Azure International note that the UHV lines brought into operation so far have proved expensive, considering that they are running well below full capacity.

There are also unspoken political objections. “The UHV system is a grand design that almost compels an equally massive State Grid,” says Thomas. “There isn’t large-scale support for that.”

Reform of China’s electricity market has been under discussion for at least ten years, but there has been little will to push it through.

“In recent years, the State Council has put forward several plans to break the monopoly of state-owned companies, but there is strong resistance,” says CEIBS’s Gary Liu.

“Some people still feel they are an economic pillar of our socialist system.”

Yet last year, the State Council again called for trials to split State Grid into separate transmission and distribution companies or into smaller, regional businesses.

Most insiders are sceptical that these will take place, although there has been some speculation that China’s new government, headed by reformist Li Keqiang, may push harder for such drastic changes, particularly with growing social pressure to tackle SOEs’ outsized share of the Chinese economy.

In the meantime, State Grid has been amassing assets and gaining influence in related sectors — in a way that would probably breach competition rules in the West. It currently has a wind farm investment arm, with a pipeline estimated by Azure consultants at 7.5GW. It even bought a majority stake in turbine maker Xuji in 2010 — much to the chagrin of the industry — but Xuji has struggled to achieve its international expansion plans.

But as long as State Grid maintains its position in China, it will keep investing abroad and its global influence will continue to grow.

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