As China’s vast energy sector moves towards real-market conditions, teething problems are widespread
Wind energy is China’s third-largest power producer, behind coal and hydropower. In 2012, the nation installed almost 16GW of the clean energy source – a staggering 35% of global onshore wind capacity and a feat that reaffirmed China as the world’s premier renewables market. The nation’s drive to be the world’s biggest in all areas of energy production is typified by the seemingly endless construction of wind farms across the country.
However, China’s immature energy infrastructure is also exemplified by the fact that around 25% of installed wind capacity remains unconnected to any grid. According to Bloomberg New Energy Finance, more than 15GW of wind power is unused. Poor planning, stricter environmental requirements, local opposition and greater government scrutiny are but a few of the reasons as to why so much of the nation’s wind capabilities remain untapped.
Such problems are nothing new in China. What is novel, however, is how energy companies are addressing these concerns. In the past Chinese energy conglomerates didn’t have to deal with environmental, technical or social issues, as project concerns were usually silenced through bribery. And if that didn’t work, the project went ahead, regardless.
Today China is very different place. Largely due to the efforts of President Xi Jinping to oust corruption from all areas of government and the private sector, as well as the president’s goal of aligning China’s industrial markets with those of the rest of the world, the nation is undergoing rapid change. Yet, many industry experts argue China is maturing too quickly and that the pace of development is causing more harm than good. The nation’s move towards being more open and transparent is also presenting hierarchical challenges to its leaders – many of whom are used to getting their own way and are unfamiliar with being told otherwise.
In August 2013, China National Petroleum Corporation (CNPC) Vice President Wang Yongchun was accused of corruption by state authorities. Wang wasn’t alone. A week later former CNPC Chairman Jiang Jiemin was too accused the same offense, along with three other senior executives from CNPC subsidiary PetroChina. In order to contain the fallout from the affair, all CNPC middle- and top-management were ordered to surrender their passports as investigators probed the affair.
Widespread corruption in China’s energy sector has been rife since the establishment of the People’s Republic of China (PRC) in 1949. Yet, for the first time in its history, authorities took decisive action against those alleged to have been involved in corrupt activities. Indeed, the stern actions of state authorities reinforced the no-tolerance policy of President Xi and showed that China’s intent is real and not mere lip service, as it once was. This is a new experience for the nation’s corporate leaders. In the past executives could simply bribe their counterparts through cash or lavish gifts.
Such behaviour was not only widespread within China, but also common abroad in places like Africa and Latin America.
As CNPC’s woes continued to escalate, fellow state-owned oil major Sinopec was also engulfed in its own problems. Of particular note, the conglomerate lost a tribunal over drilling rights to an oil field in Gabon, West Africa, worth around US$1 billion. While the news created cataclysmic shock waves in Beijing, the fact that the case was adjudged by the International Chamber of Commerce – rather than by a golden handshake – showcased China’s new and uncharacteristic willingness to play fair when operating abroad.
Sinopec and PetroChina also took hits earlier in the year when China’s Ministry of Environmental Protection declined plans by both companies to construct new refineries and upgrade existing facilities. Both companies have a history of bullying environmental officers. But today times are different and their chiefs do not have the political clout they once possessed.
China’s Ministry of Environmental Protection isn’t the only organisation growing in stature. For the first time in PRC history the views of International NGOs are starting to be considered, albeit in a limited capacity.
In August 2013, Greenpeace accused state-owned coal miner Shenhua Group of depleting groundwater supplies and illegally discharging wastewater in Inner Mongolia. The environmental NGO’s relationship with China is tempestuous, at best, due to China’s strict anti-protesting laws. However, in a move uncharacteristic of Shenhua and the Chinese Government the conglomerate admitted to both illegally discharging wastewater and for over-extracting local water resources. Furthermore, the company said it would hire a consultancy firm to help correct its actions.
While Greenpeace claims many questions remain unanswered, the outcome confirms that NGOs do indeed have a voice within the country – something they are not used to having. In addition, the incident exemplified the willingness of state-owned conglomerates to engage in dialogue with international movements, which is likewise a new experience.
May 2013 saw China’s State Grid Corporation (SGCC) acquire power grid assets in Australia at a cost of US$7.5 billion. SGCC, which owns and operates both high-voltage power transmission and low-voltage distribution assets in all but five of China’s southern provinces and administrative regions, purchased 60% of SPI (Australia) Assets Pty Ltd and a 19% stake in SP AusNet. The deals are highly significant as they will provide state-owned SGCC with first-hand experience at operating within a deregulated market, where multiple distribution companies vie for customers.
Previously in 2005, the Chinese mainland conducted deregulation trials where local generators competed with one another to sell their output to regional grid operators. The trial lasted several months and was not implemented beyond the nation’s northeastern and eastern regional power grids. The experience was nothing short of catastrophic with generators and operators suffering significant financial losses caused generation shortages and high selling prices.
Today, however, China’s power supply and demand is more evenly balanced across the country. Therefore, deregulating the nation’s power sector should prove less troublesome. SGCC must however prepare itself for commodity spikes like those experienced in the late 2000s. Otherwise regional power generators will once again find themselves on the verge of bankruptcy. In addition, much of the nation’s grid will need to be upgraded as around 15% of the nation’s electricity output is lost in transmission and distribution, according to Bloomberg New Energy Finance.
The removal of government support in all energy matters is likely to be the most troublesome move for the new regime. Indeed, as a result of being heavily subsidised, China’s US$30 billion solar industry is all but closed for business. The market is overbuilt, heavily in debt and highlights the negative repercussions that stem from state over-funding.
According to research conducted by Energy Business Intelligence, almost 200 Chinese solar manufacturers went out of business or merged with other firms in 2012. Apart from overcapacity and fierce competition, other reasons for the industry’s present-day glut remain. For instance, the price of silicon fell from around US$400 per kg in 2008 to around US$15 today. And because of this, crystalline-silicon panel prices dropped from around US$1.90 to US 60 cents during the same period.
The sector’s woes is exemplified by Suntech Power Holdings. Once the world’s largest solar firm, which boasted revenues in excess of US$3 billion per year, Suntech was declared bankrupt by a Jiangsu province court in March 2013. The reasons behind Suntech’s demise are multifold and complex, but ultimately they can be attributed to a slowdown in state support. China’s solar market, however, is showing signs of a revival. In September 2013 several of China’s solar giants – including Yingli Green Energy, Trina Solar and JinkoSolar – reported profits for their Q2 activities, boosted by increased demand from neighbouring Asian markets.
Solar firms have thus learnt that in order to survive in today’s lowly subsidised market, they must adapt, innovate and become self-sufficient – a feat all Chinese energy firms must work towards.
The influence of President Xi on China’s vast economy has been colossal. Corruption, environmental degradation, market monopolisation and state subsidies will diminish over time. But, it is unlikely that they will completely disappear. It will take years – if not decades – for China to move its industrial base towards real-world market conditions.
The changes currently underway in China’s energy sector are equally monumental. And it will take many years for companies and their leaders to adjust to the market’s new operating environment. What is certain is that for the next decade energy conglomerates must go about their business in a clear and transparent manner, coupled with competitive business models that can survive without state intervention.
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