IN DEPTH: China's changing winds

China’s emergence as the world’s biggest wind market has been the most significant development in the industry in the last decade.

But over the past year or so, headlines of heady growth have been replaced by an almighty hangover — curtailment has kept a mind-blowing 11GW of installed turbines from producing power, costing operators about $1.6bn in lost revenue.

Developers were forced to put countless projects on hold, and installations fell from 18GW in 2011 to 13.2GW in 2012.

Manufacturers, which had expanded rapidly in the boom years, were left with massive overcapacity, resulting in industry-wide consolidation and a series of front runners strengthening their grip on the market.

As with other sectors in China, however, the government has been far from idle, and has taken a series of aggressive steps to build the new grid infrastructure and ensure that withheld subsidies are being paid.

The question now is not whether China will be able to regain and overtake its previous rate of growth, but when.

Efforts are being made to tackle the bureaucratic inefficiencies that have played a large part in creating the curtailment problem. For example, State Grid is responsible for transmission across most of China, but the National Energy Administration (NEA) is responsible for approving transmission projects. The NEA is required to pass requests for project approvals over to the National Development and Reform Commission (NDRC) — the entity that sets electricity prices — for final review by the State Council, China’s top administrative body.

“Policies are difficult to co-ordinate, making everything extremely complicated,” says Megan Tang, executive vice-secretary-general of the Chinese Renewable Energy Industries Association (CREIA).

As well as top-down measures being taken to build new grid capacity, developers and manufacturers have adapted to the situation by moving from wind-rich, but grid-constrained areas in the north, to southern and eastern regions, which are closer to major population centres and have a denser transmission network.

This southern shift is being encouraged in provinces such as Yunnan and Guizhou in the southwest, where the authorities have been aggressively courting wind developers in recent years, adds Cai Fengbo, director of the Chinese Wind Energy Association (CWEA).

Lower-wind-speed regions in southern and central China account for roughly 70% of the country’s available land for wind development. However, Demi Zhu, a Beijing-based analyst at Bloomberg New Energy Finance (BNEF), argues that installations in the 20 central and southern provinces are likely to account for only 20-25% of the total installations in China.

Although authorities are now working hard to ease grid congestion and build more transmission lines, the once-blistering rate of wind-power growth in China has slowed significantly.

Cumulative installations grew from 1.27GW in 2006 to 62.3GW in 2011, with almost 19GW installed in 2010 alone, and a further 17.6GW in 2011, according to Global Wind Energy Council figures. But just 12.9GW were installed last year — small by Chinese standards, but still more than any other country except the US. A world-beating total of 75GW was erected by the end of 2012, but only 64GW were connected to the grid, according to the CWEA.

Analysts interviewed by Recharge agree that 13-14GW will be installed in China this year. However, the government target is markedly higher. The NEA revealed in January that the country is targeting 18GW in grid-connected wind this year. “It’s very ambitious,” says Tang.

But as a grid-connection goal it remains possible, adds Cai, pointing out that government calculations will include turbines that were erected in 2012 but not hooked up to the grid until this year.

“We don’t know when grid curtailment will be resolved,” he adds. “It’s hard to say because it’s a complicated issue.”

BNEF is more forthright, saying that grid-related issues will continue to stifle growth until 2016 — when it foresees 15.5GW in fresh capacity.

China is expanding its nationwide transmission infrastructure because the curtailment problem is mostly geographical. Most of the country’s best wind resources are in the sparsely populated north and northeast — far from the main population centres on the eastern and southern coasts.

And it is these regions of high wind-energy production — Inner Mongolia and the provinces of Jilin, Heilongjiang and Liaoning — where the grid is least equipped to accept wind-generated electricity. These areas account for about 60% of annual wind installations in China.

Inner Mongolia led the nation with 21.4GW of cumulative capacity in 2012. Yet the region accounted for 45% of national curtailment, according to consulting firm Azure International.

The authorities and State Grid are planning to build ultra-high-voltage (UHV) cross-country transmission lines to transmit electricity 1,500km from Inner Mongolia and northeast China to the load centres on the eastern coast.

But as Cai explains, the inability to connect wind power to the grid in the north is not the only consideration behind these new transmission lines. “It’s also about addressing broader energy-related problems, because the east coast needs more electricity,” he says.

State Grid intends to invest 620bn yuan ($100bn) by 2017 to build 20 UHV lines covering almost 20,000km. But analysts have estimated that its plans could cost up to $250bn. Construction is now proceeding apace, and some of the lines are already operational.

The grid operator first proposed the scheme in 2009, but the NEA has been slow to approve the plan.

And the scheme is by no means guaranteed. The NDRC and others have expressed concerns about the rapid expansion of transmission capacity, particularly over costs, safety and energy security.

The grid is not the only problem slowing the development of new wind farms. The government is severely behind in paying the subsidies it owes to renewable-energy developers.

The payment delays were partly triggered by a late-2011 change in the way funds are distributed. The government has since streamlined this process, which should expedite payments over the long term. But over the short term, this has contributed to delays as the policy shift is ironed out, says Cai.

Part of the problem is that the fund set up to pay for the subsidies — via a surcharge levied on electricity consumers — has never raised enough money. In 2011, the subsidy surcharge fund was 10.7bn yuan short, and the NDRC estimates this shortfall could balloon to 33bn yuan by 2015.

The surcharge was launched in 2008 at a rate of 0.02 yuan per kWh. This was doubled in 2009 and doubled again in December 2011. In August, the NDRC announced it would raise the surcharge to 0.15 yuan/kWh for businesses only, from 25 September. Some industry observers believe the surcharge is still too low.

Late last year, the government began aggressively making two years’ worth of back-payments to developers. Cai claims that the issue has largely been resolved and that it is only a matter of time before developers receive what they are owed.

However, the delays are exacerbating cash-flow issues throughout the supply chain.

If developers have not received payments and are short of funds, they have little choice but to defer payments to turbine manufacturers, which similarly hold off on paying their component suppliers.

Banks are reluctant to lend to these cash-strapped developers, further weighing on the development of new projects. The utilities — which are supposed to pay the subsidies to developers, regardless of whether they received the cash from the authorities — have been forced to cover their working capital needs through new sources of financing, such as short-term loans, bonds and internal resources, says Zhu.

Rising liquidity risks and a lack of financing for new projects will probably remain an issue until at least next year, possibly weighing on new installations into 2015, according to Zhu.

“The delayed redistribution of subsidies can’t be easily resolved,” she explains.

Another potential drag on energy policy is that the NEA leadership was changed in early 2013, partly because former director Liu Tienan was pushed from office due to bribery allegations. In the short term, the NEA’s future policy direction will remain uncertain as its new leaders articulate their agenda.

In addition, the State Electricity Regulatory Commission, the national power regulator, was merged into the NEA this year in a bid to reduce the entities’ overlapping responsibilities. In the short term, the merger may contribute to a lack of policy clarity.

The CWEA says 4.8GW of wind was installed in the first six months of this year. While this doesn’t appear to bode well for China’s chances of reaching 13-14GW by the end of 2013, analysts expect a rush of projects in the third and fourth quarters.

However, uncertainty remains about the feasibility of the government’s target for 100GW of grid-connected wind by 2015, when the new transmission lines are set for completion.

“It all depends on whether the grid problem can be resolved,” says Tang. “If it is sorted out and everyone can make money, new capacity will grow quickly.”

But even at these relatively sluggish growth levels, Cai remains confident that China will lead the world in wind development in 2013.

“China and the US both have great future prospects,” he says. “But I think China will still be number one for newly installed and cumulative capacity this year.”