TLG on China: Wind. curtailment could come back 2,200 2,074 2,100 2, % 17.1% 1,920 1, % 1, % 10.7% 10.0%

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1 March 2014 TLG on China: Wind Why grid curtailment could come back Over the past few years, China has established and raised a number of ambitious clean energy targets to tackle its air pollution problems. Many may be inclined to give China the benefit of the doubt when it comes to achieving these targets. After all, there is so much rhetorical momentum behind the initiative. Newspapers are quick to point out the severity of air pollution in China. China s party leaders have emphasized and reemphasized plans to improve air quality. But for China, achieving its clean energy goals will require more than political willpower. It will have to overcome a series of hurdles that stem from its vastly imbalanced energy system. Statistics such as generation growth are often available to track the progress of China s clean energy strategy, but these often fail to point out and may even mask underlying issues that lay behind the scenes. China s wind power curtailment is a classic example, and in this piece, we take a first look at the prospects of China s wind power generation sector and highlight what trends are actually driving progress and what events to look for going forward. Based on a number of statistics, it looks like China s wind power curtailment problems turned the corner in Last year, China s national average wind power curtailment rate is estimated to have dropped from 17.1 percent in 2012 to about 10.7 percent, the lowest in the past three years. The national average utilization hours rose from 1,890 in 2012 to more than 2,000 hours, the highest in the past three years. Some might even be as bold as to say that China s wind curtailment issues have been resolved. But have they really been resolved? China wind annual utilization 2,200 2,074 2,100 2,000 China wind curtailment rate 1,920 1,900 2% 15.0% 1, % 12.0% 10. 1% 1,800 1, % 1,600 1, % Source: Government releases 1

2 China wind power annual There are a number of possible reasons that could be pointed to and credited with spurring the impressive turnaround in China s wind power generation industry. There reportedly has been more pressure from the government for grid operators to absorb renewable energy, and the NDRC improved funding for the grid s purchase of renewables. 1 These are supportive policy measures that should continue to support the development of wind power. But there also has been improvement in the planning and approval process of wind power projects, delay or no approval of new wind power projects in regions with severe wind power curtailment problems. Annual (GW) olia Provinces with curtailment Provinces w/o curtailment Source: CWEA, TLG analysis China wind power annual The result has been that the total amount of in provinces without curtailment has actually surpassed that of provinces with curtailment since Source: CWEA, TLG analysis 1 by increased the renewable energy surcharge from RMB08/kwh to RMB15/kwh and decreasing the coal-fired on-grid tariff by an average of about RMB13/kwh without an associated decrease to retail tariffs 2

3 China wind power annual Yet in the context of China s 2020 wind power capacity target and longer term wind power development, this strategy may not be sustainable. Based on the current 2020 grid-connected wind capacity target of 200GW, China would need to add an average of 17.5GW of grid-connected capacity each year over the rest of the decade. This would require an acceleration of the rate of capacity expansion not seen since 2010 and 2011, when a large share of capacity came from northern China. Annual installed capacity additions (GW) Source: CWEA, press releases, TLG analysis When target was released under the Renewable Energy 12th FYP in August 2012, twothirds of the targeted 200GW of grid-connected capacity was allocated to those provinces in northern China that are now considered grid constrained. These provinces were to hold six of the nine large-scale wind bases with at least 10GW of grid-connected capacity by China 2020 wind power capacity target China 2020 wind power capacity share Grid-connected capacity (GW) olia Provinces with curtailment Provinces w/o curtailment iangsu 29% 6 Source: Government releases 3

4 China wind power annual It is hard to believe that China can continue to decelerate and avoid construction in provinces with grid curtailment. Although this strategy has likely eased pressures on the grid in northern China, and helped to lower curtailment rates in 2013, odds are that china would at some point need to start building capacity back in provinces with grid curtailment because that s where resources are most available. If the 2020 targets and currently approved projects are any indication, that point may come sooner than some may think. On both accounts, wind farm construction in grid constrained regions is going to accelerate in the next few years. Annual grid-connected capacity additions (GW) olia Additions 2013 Currently approved target Provinces with curtailment Provinces w/o curtailment Source: Government releases, TLG analysis In 2013, only 35 percent of newly grid-connected capacity was added in grid constrained regions. But if china were to reach its stated 2020 targets, nearly 70 percent of newly grid-connected capacity over the rest of the decade would need to come from those provinces. Share of new wind power gridconnected capacity in 2013 Share of new wind power grid-connected capacity from target 2 11% 1 3 3% 1 9% 1% 3 69% 9% Source: Government releases 4

5 Based on the currently approved list of capacity, which would account for about half of the capacity required to reach 2020 targets and include a large share of potential capacity in low resource regions, 40 percent of newly grid-connected capacity to come in the next few 3-4 years would have to come from grid constrained regions. Contributions to 2020 wind power capacity target from 2013 Share of new wind power grid-connected capacity based on current approvals % Grid-connected capacity (GW) Source: Government releases, TLG analysis In short, China has reached a point where going forward the share of new capacity will start to shift back towards the northern China s grid curtailed regions, meaning construction in those regions is going to accelerate, rather than decelerate as it has been. And unless sufficient transmission capacity is in place to handle supply from more wind farms in northern China, accelerating construction in northern China could bring about the same set of circumstances that initially caused curtailment problems in first place, and make the turnaround in 2013 short-lived. The implication is that the pressure is on the grid to keep up with the next phase of wind power capacity expansion and maintain or improve operating conditions of wind power generation. In particular, the following developments will be most critical: UHV line construction for increasing export capacity from high resource yet grid curtailed regions in the north to eastern and southern provinces with energy deficits; Wind power capacity expansion in areas surrounding the UHV lines to provide sufficient surplus electricity supply; and Additional grid capacity around UHV sending points to prevent bottlenecks between wind farms and UHV lines. Wind power generators who build in northern China s high resource regions cannot simply rely on recent declines in curtailment as evidence that they will be able to achieve current throughput levels and returns on investment. 5

6 About the Authors Liang Zhang Consultant Liang joined our team from Sanford Bernstein in Hong Kong, where he advised institutional investors on stock selection in the Asia Pacific region. He brings with him experience across a broad range of sectors including energy and finance, with particular expertise in quantitative analysis and financial modelling. Liang holds a B.S. cum laude in Economics and Biomedical Engineering from Yale University. He is fluent in both English and Mandarin. Dr Xinmin Hu Manager xhu@lantaugroup.com Xinmin is an expert in the Chinese power sector and energy economics having advised clients on generation, transmission and energy supply issues as well as regulatory developments and cost trends. He is a former lecturer at University in Changchun and at Zhongshan University in Guangzhou. He combines his knowledge of China s power sector with over a decade of experience as a consultant in the Australian and other power markets and as an associate director of RepuTex (AU) focusing on environmental and greenhouse gas emission issues. He is a regular reviewer for several international energy, operations research and optimization journals. He holds a PhD in operations research with a minor in economics from the University of Melbourne and an MSc in Applied Mathematics from University of Technology, China. Xinmin is fluent in both English and Mandarin. Mike Thomas Partner mthomas@lantaugroup.com Mike has advised energy sector stakeholders on sensitive regulatory, commercial, and strategic matters for over 25 years. He is an expert in the rigorous analysis of energy sector decisions including: how or whether to regulate; how and when to rely on market forces; and what value to place on opportunities and risks. Prior to co-founding The Lantau Group in 2010, he headed the Asia Pacific Energy & Environment practice of a global consulting firm. Mike has an MPP from Harvard Kennedy School and a BA in economics from Carleton College. Subscribe This newsletter is available to our China power and gas service subscribers. For more information, please contact Dr Xinmin Hu at TLGonChina@lantaugroup.com TLG on China The Lantau Group (HK) Limited Cover image imagestock/kinugraphik Disclaimer: This newsletter has been prepared for general information only. It is not meant to provide consulting advice and should not be acted upon without professional advice. If you have questions or require further information regarding these or related matters, please contact the author or your regular TLG advisor. This material may be considered advertising. For more information about The Lantau Group, please visit The Lantau Group (HK) Limited 6