China Electricity Supply: Challenges and Trends Electricity Supply: Challenges and Trends Is there Light at the End of the Tunnel? Liutong Zhang ([email protected]) The Lantau

China Electricity Supply: Challenges and TrendsIs there Light at the End of the Tunnel?

Liutong Zhang ([email protected])

mailto:[email protected]

The Lantau Group

Renewable curtailment in China – All ready to generate but no place to go

1

TWh

RE curtailment in China

50

89

34

5

0

10

20

30

40

50

60

70

80

90

100

Hydrocurtailment*

2015 windcurtailment

2015 solarcurtailment

Total

Total curtailment amount in 2015 is equivalent

to 2x Singapore’s power consumption

This presentation is to discuss the challenges facing China electricity supply

Hydro

Wind

Solar

Introduction

It is very common to see titles like below in

the newspaper in the past year

The Lantau Group

Agenda

1

2

3

4

5

Background of China electricity market

Market fundamentals

Grid infrastructure

Policy and Regulation

Summary

2

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China is not a monolithic region – huge differences in energy drivers, ranging

from fuel access, to demand growth and development trends

3

Xinjiang

Tibet

Qinghai

Gansu

Inner Mongolia

Ningxia

Sichuan

Yunnan

Guizhou

Chongqing

Fujian

Taiwan

Jiangxi

Guangxi

Hunan

Hubei

Henan

Anhui

Jiangsu

Shanghai

Shandong

Liaoning

Jilin

Heilongjiang

Shaanxi

Hebei

Beijing

Zhejiang

Hainan

Shanxi

Guangdong

China’s

hydropower

bases

China’s coal/unconventional

gases/wind/solar energy bases

and China’s future energy

warehouses

China’s most

developed and

populated regions and

energy/power demand

centers

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Generation

• SOE generators

• local government-owned generators

• IPPs

• Others

End-users

Regulatory

Legislation: NPC

State Council

NDRC, NEA, MoF,

MEP, …

Provincial DRC and

others

City DRC and others

Grid operators

Local governments

Central Government

More on

Implementation and

monitoring roles

Generation

Reform initiatives:

• On-grid pricing

reform

Grid operators as single buyers

(Increasingly more direct purchase)

Transmission

• SGCC (State Grid)

• CSG (China Southern Grid)

• Local government-owned grid operators

Distribution

• SGCC

• CSG

• Local government-owned grid operators

Retail:

• SGCC and CSG subsidiaries;

• local government-owned grid operators;

• independent retailers

Reform initiatives:

• Incremental

demand open to

private retailers

(“direct power

purchase”)

• Pricing of

transmission

and distribution

services

• Offtake policy of

renewables

• Reform of

dispatch policies

The market is regulated, and dominated by powerful players with heavy

government involvement at both the central and local levels

4

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China’s confusing quota-based dispatch system: annual quota allocations are

currently linked to political factors, not just economic ones

5

General guideline of dispatch document from

the Economic and Information Commission

The dispatch order from local generation sources

(“energy-saving power dispatch”):

• Intermittent renewable resources such as wind,

solar, wave and run-of-the-river hydro;

• Hyro-power with storage, municipality waste

generation and geothermal

• Nuclear plant

• Power generation from integrated use of waste

heat, waste gas and coal-bed methane from non-

coal resources;

• National demonstration project (like IGCC);

• Coal-fired combined heat and power (CHP);

• Natural gas and coal-to-gas generation plant;

• Coal-fired power plants and

• Fuel oil-fired power plants.

“Unified Dispatch and Multi-level

Management” dispatch principle

Level Entity Key FunctionsNational dispatch

organisation

1

State Grid Inter-regional

balancing, inter-

regional dispatch

Regional dispatch

organisation

2

Regional grid

companies

Inter-provincial

balancing, inter-

provincial dispatch

Provincial (PDO) (

3

Provincial grid

companies

Intra-provincial

balancing, intra-

provincial dispatch,

coordinating load

management

Prefecture

dispatch

organisation

4

Prefecture

power supply

organizations

Prefecture load

management

County dispatch

organisation

5

County power

supply

organisations

County load

management

The Lantau Group6

Gansu Example: allocation of dispatched quota for different generation

sources in 2016

Total Consumption 104.2 TWh

Export 12 TWh

Total Generation 116.2 TWh

Quota for provincial dispatch 89 TWh

Less Lijiaxia hydro 0.5 TWh

Less captive generation 15 TWh

Local generation 73.5 TWh

Priority dispatch (1st type)

10 TWhWind and solar

19.9 TWhCoal peaking

2.5 TWhGrid safety

7.6 TWhCombined heat and power

6.7 TWhCogen

Priority dispatch (2nd type)

23 TWhHydro-power

Dispatch not under priority

dispatch (likely to be coal)3.8 TWh

Source: Gansu Economic and Information Commission

Some coal and hydro-power plants are

under regional dispatch for inter-provincial

balancing

Gansu wind capacity: 12.7 GW

Gansu solar capacity: 6.78 GW

The guaranteed generation quota implies

that the minimum hour is only about 513,

far below National Development Reform

Commission’s guidance of 1,800 hours for

wind and 1,400-1,500 hours for solar

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Summary: The Chinese Electricity Sector

• A country with huge differences among the provinces in energy drivers, ranging from fuel

access, to demand growth and development trends

• The market is regulated, and dominated by powerful players with heavy government involvement

at both the central and local levels

– China’s power sector operates more like a merchant market than a traditional PPA market

• On-grid pricing provides no long-term pricing certainty

• On-grid pricing reflects expectations of dispatched generation “sales” which may not materialise

• Overall dispatch regime is complicated and subject to non-economic factors

– Transmission and Distribution reforms are key to ensure other reforms (like direct power purchase) can

work.

• Legal or functional separation between transmission and distribution is required to allow fair and efficient third-party

access

• Allow third parties to investment on grid assets and efficient regulation on interfaces between them and dominant players

• Pricing of grid services (including ancillary services if grid operators are obligated to provide them)

• Power dispatch is based on annual quota, which is still linked to political factors, not just

economic ones

– Although solar, wind and hydropower generation is in the priority dispatch list, their generation is not

guaranteed as the grid also has to accommodate many other types of “priority” dispatch power plants.

7

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Agenda

1

2

3

4

5


Market fundamentals

Grid infrastructure


Summary

8

The Lantau Group9

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

200 2,200 4,200 6,200 8,200

kWh Consumption

per capita

GDP per Capita (USD)

Total Consumption per capita vs GDP per Capita (1989-2013)

Thailand

Cambodia

Indonesia

Pakistan

Philippines

Sri Lanka

Vietnam

India

China

Myanmar

Laos

Sri Lanka

Indonesia

China’s demand growth has slowed down materially in recent years

China

Thailand

Vietnam

India

Recent trend in ChinaConsumption per capital has saturated

China’s GDP and electricity demand growth

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Electricity

China’s monthly electricity demand growth Year-on-year

Source: World Bank, China Electric Council, Morgan Stanley Research and TLG analysis

Year-on-year

Total

Secondary

(industrial)

Fundamentals Grid Policy

The Lantau Group

But supply addition continues, leading to large over-capacity in the country

10

-

20

40

60

80

100

120

140

160

2010 2011 2012 2013 2014 2015

Solar

Wind

Hydro

Nuclear

Gas

Coal

Averageload growth

GW

Incremental annual power supply & demandNo supply response to slow-down in demand growth so

far…

Source: CEC; TLG research and analysis

850

889

320

11642

-

200

400

600

800

1,000

1,200

1,400

1,600

Max Demand 2015 installedcapacity

Others

Solar

Wind

Hydro

Nuclear

Oil

Gas

Coal

GW

1500+76 percent

Annual average incremental surplus capacity

is about 90 GW in 2012-2015, close to the

total installed capacity in UK

Reserve margin is at historically high level

Over-supplied situation is particularly serious

in the resource - rich regions in the inland

provinces.


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4,982 4,958

4,551

3,854

5,074

5,767

4,657

3,8524,048

4,3294,049

3,7163,326

4,9794,730

3,778

1,879

2,682

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

China Guangdong Shanghai Jilin InnerMongolia

Xinjiang Gansu Yunnan Sichuan

2012

2013

2014

2015

The coal-fired power generation, the dominant and “infamous” source, is taking

the biggest hit in the over-supplied environment

11

Annual average generation hours of thermal capacity in China

Utilization hoursCoal, solar and wind regions Hydro regionsDemand centres

050

100150200250300350

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

Import

Export

Million tonnes

China coal import and export



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Dilemma on coal retirement: most of the coal capacity is relatively new, and

more new capacity is still under construction/plan

12

-25

-5

15

35

55

75

95

2006 2007 2008 2009 2010 2011 2012 2013 2014

New thermal capacity Retirement of thermal capacity

Annual thermal capacity addition and retirement

GW

• Most of small and old coal

plants were retired in

2006-2010.

• About two third of current

coal capacity is added in

the past ten years in

China.

• China continues to add

new coal projects

aggressively.

‒ In 2015, on average,

two large new coal

projects was

approved every

week.



The Lantau Group

Ongoing debate in China: Air Quality Control (AQC) Technology for coal plants

can achieve emission of non-carbon pollutants similar to gas plants

13

Source: Ministry of Environmental Protection of China

http://www.nbepb.gov.cn/UploadFiles/%E8%BF%90%E7%BB%B4%E5%85%AC%E5%8F%B8/images/2014-07/201407220847483782.jpg

http://weather.news.sina.com.cn/news/2013/0130/094784939.html

If AQC technology were replicated throughout China’s power sector, non-

carbon emissions would be reduced by:

• SO2 99.6%

• NOx 94.8%

• PM 97.2% The new Chinese dream


5000

6000

7000

8000

9000

10000

11000

12000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Ta

rge

t b

y 2

02

0

US

C A

vg

Be

st

A-U

SC

exp

ecte

d

Su

pp

ly h

ea

t ra

te (

kJ/

kW

h)

0

1

2

3

4

5

6

em

issi

on

s (g

ram

pe

r k

Wh

ge

ne

rate

d b

y c

oa

l p

lan

ts)

SO2

Nox

PM

Coal could be utilized More Efficiently AND More Cleanly

The Lantau Group

The focus of the “fight” against environmental pollution has gradually shifted to the dirty coal use in the non-power sector - an opportunity for the power sector

14

Coal use by sectors (based on 2012 data)

• China’s emissions standards for local pollutants by coal-fired power generation

are relatively high, even compared to US and EU

• Policy focus likely to be on enforcement

• Also likely to see enablement of more large, clean coal-fired power plants in

inland provinces via expansion of ultra-high voltage (UHV) grid

• These small boilers are dirty and difficult to be regulated. They contribute 40% of

China’s dust emissions, 22 % of SO2, and 10.5% of NOx.

• Central government and coastal city governments plans to shut down the small

and dirty boilers:

Shift the need for steam and heat to the power sector by building large

combined heat and power (CHP) plants.

Retrofit to use natural gas (gas availability, infrastructure build-up and cost

are the key determining factors on the pace of the switch to gas)

Million tonnes of coal

Source: Government statistics and TLG analysis

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Coal

Power, 48%

Steel, 15%

Cement, 13%

Chemical, 5%

Industrial boilers, 17%


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3%

8%

13%

18%

23%

28%

33%

38%

43%

Spring (Mar.-May) Summer (Jun.-Aug.)

Autumn (Sep.-Nov.)

Winter (Dec.-Feb.)

Wind generation Energy

Mismatch of supply and demand timing is another key challenge for RE

generation, leading to curtailment

15


Wind case study (Jilin)

Strong wind speed is at the wrong time of

the day and the year

12.320.6

16.212.6

33.9

0%

5%

10%

15%

20%

-

10

20

30

40

2011 2012 2013 2014 2015

Total curtailed wind volume

Curtailment rate (RHS)

TWh

0%

10%

20%

30%

40%

50%

Jilin Xinjiang Inner Mongolia Gansu

2012 2013 2014 2015

Wind curtailment details

Wind Curtailment rate in selected provinces

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Wind generation Average load

Frequency

Share of total

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Hydro variation is also a real issue

16

Source: china meteorological

administration

Note: 1989 data are not available

Fuzhou rainfall data (difference from the long term average of 1985-2013)

and Fujian rainfall data (difference from the long term average of 2004-2013)

Fuzhou FujianJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual Annual

1985 -4% -9% -12% 4% 7% 11% -13% -9% -10% -15% -31% -21% -4%

1986 -88% 8% 140% 1% -49% 9% -64% -68% -46% -5% -71% -70% -18%

1987 -41% -25% 46% -16% 56% -24% -57% -92% 46% 2% 125% -92% -6%

1988 -75% -24% 85% 25% 13% -37% -76% -73% 156% 5% -77% 16% 1%

1989

1990 70% 62% -56% 68% 3% -31% -79% 249% 249% -65% -45% -63% 48%

1991 -26% -77% -20% 6% -42% 33% -92% -55% 99% 18% -78% -55% -16%

1992 54% 139% 101% 27% -26% -33% 58% 83% -21% -93% -39% -24% 23%

1993 0% 5% -20% -23% -8% 33% -33% -68% -19% -49% -42% -43% -18%

1994 -57% 45% 12% -14% 28% 47% -12% -33% 22% -61% -99% 172% 7%

1995 2% -25% 11% -43% 27% -25% -18% -53% -93% -98% -68% -45% -30%

1996 -70% -25% 44% 8% 6% -27% -38% 78% -53% -77% 55% -86% -5%

1997 -6% 31% 10% -37% 17% 37% 40% 53% 63% 69% 29% 132% 31%

1998 137% 152% 42% -51% -20% -34% -72% -91% -37% 207% -45% -46% -12%

1999 69% -79% 25% 11% 4% -75% 57% 44% 81% 48% -90% -80% 6%

2000 10% 17% -79% 60% -82% 103% 33% 48% -87% -6% 152% 82% 11%

2001 108% -42% -16% -6% -10% -2% 39% -45% -10% -73% -66% 40% -9%

2002 66% -75% -49% -26% 1% 11% -10% 19% 42% 55% -19% 94% 2%

2003 12% -71% -47% -2% -29% -33% -87% -35% -57% -49% -64% -95% -42%

2004 -38% -11% 8% -53% -22% -60% -50% -34% 34% -97% -41% -15% -29% -20%

2005 -84% 66% -31% -63% 83% -41% 123% -45% 79% 441% -64% -71% 22% 12%

2006 -75% -11% 20% 25% 53% 71% 217% 2% -65% -100% 125% 98% 36% 25%

2007 -17% -3% -39% 11% -66% 2% -78% 51% -83% 19% -19% 33% -21% -9%

2008 35% -44% -49% 3% 38% 20% 153% -41% -72% 144% -27% -70% 6% -7%

2009 -54% -85% -15% -27% -63% 27% 64% 115% -84% -77% 95% 67% -2% -16%

2010 22% 66% 22% 127% -10% 52% -5% -70% -9% 27% -78% 1% 14% 22%

2011 -62% -38% -72% -76% 30% -52% 101% 30% -72% -7% 221% -43% -11% -21%

2012 206% 98% -36% 75% 37% 22% -59% 61% 12% -70% 228% 57% 36% 20%

2013 -93% -47% -24% -15% 27% -5% -43% -21% -64% -94% 33% 125% -19% -5%

Ratio of total

rainfal3.7% 5.9% 9.7% 10.2% 13.8% 14.8% 9.2% 12.5% 10.4% 3.5% 3.4% 2.9%

Frequency

for rainfall <

2011

22% 30% 4% 0% 78% 7% 85% 63% 19% 52% 93% 41% 33%


The Lantau Group

Even for large hydro with storage, hydro curtailment is still possible due to

mismatch of supply and demand timing and export arrangement

17

• This results in excess hydro power supply

during flat and wet years

Excess supply (after export) In Yunnan

Source: The Causes and Spatial and Temporal Distribution of Seasonal

Hydro－electricity in Yunnan Province. Gao et al. (EHV Power

Transmission Company, China Southern Power Grid and Yunnan Electric

Power Design Institute) Yunnan Electric Power Vol 42 No. 5. Oct 2014.

100 GWh

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Wet season is in

summer, while

industrial demand

decreases as

rainfall affects

mining activities

Export arrangement to

Guangdong and

Guangxi are based on

dry year hydrology to

ensure there is

sufficient local supply

Excess during

normal years

Exported

Provincial

demandCoal and non-hydro RE

Hydro


The Lantau Group

New projects will likely be delayed, and the excessive power equipment

manufacturing and EPC capacities in China will worsen

Too much generation turbine manufacturing capacity

Source: China’s National Bureau of Statistics, and TLG Research (2015 coal capacity additions estimated)

Annual addition of power plant capacities

Note: annual coal capacity addition before 2005 refer to annual thermal capacity addition.

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

An

nu

al

gen

era

tio

n t

urb

ine m

an

ufa

ctu

red

(G

W)

An

nu

al

ad

dit

ion

of

co

al

pla

nt

cap

acit

ies

(GW

)

Coal Others Generation Turbines

18

The Chinese power companies have been expanding to the overseas markets aggressively, partly because of the need to

relieve their excess power equipment and EPC capacities due to the slow-down in the domestic market


The Lantau Group

Agenda

1

2

3

4

5


Market fundamentals

Grid infrastructure


Summary

19

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UHV DC and AC lines expansions will enable power exports from the curtailed

regions, but they are also driving new generation capacity additions

20

UHV AC lines UHV DC lines

Substation

Operating

Building

Proposed

DC Terminal

±660kV EHV DC in Operation

UHV DC in Operation

UHV DC under construction

UHV DC approved

UHV DC proposed

Large new coal plants +

solar/wind

Key hydro

resources

The power re-balancing across provinces/regions in China due to the commissioning of these

UHV lines is a key factor to watch


The Lantau Group

But load centers may not need more power imports in a slow growing market;

and tension between exporting and importing provinces is growing

More exports to

Load centres

(coastal cities in

South and East

China) via the

UHV lines?

21

Coal + Solar/wind or

Large hydro in

resource rich regions

Local governments do

not want more imports

to squeeze out more

local generation as

demand growth slows

Guizhou

贵州

Guangdong广东

Guangxi

广西

Yunnan云南

3,000 MW

from 2006

Three Gorges

• Massive transmission projects have been completed,

significantly increasing the import capacity to Guangdong, need

more?

• Massive hydro plants have just been completed to export power

to Guangdong in Yunnan Provinces.

• Guangdong (Yuedian Group) has been building coal-fired

power station in Guizhou to export to Guangdong.

• Some plans to sell electricity to Vietnam from Yunnan, but will

this be feasible?


Guangdong Example

The Lantau Group

Agenda

1

2

3

4

5


Market fundamentals

Grid infrastructure


Summary

22

The Lantau Group

• Reform of transmission and

distribution sector: uncertain impact

on RE and coal dispatch.

• Direct negotiation between

generators and large end-users: likely

negative for RE and positive for large

cheap and clean coal plants.

• Continuing on-grid tariff reform:

uncertain impact on RE and coal

dispatch.

• More stringent environmental

regulation: Increasing cost for coal

generation.

Reform and policy changes are under-way, and progress could be slow

23

Sector-wise reform and policy changes Proposed policies to mitigate curtailment

• Slow-down approval or halt new coal,

solar and wind projects in highly

curtailed regions: POSITIVE

• Better planning and coordination of real-

time dispatch: POSITIVE

• More pumped storage plants: POSITIVE

• Increasing flexibility of the system:

POSITIVE

• Various RE Targets and guaranteed

generation hours for RE*: UNCERTAIN

• Wind/solar for heating: UNCERTAIN

* Note: Several Non-hydro RE targets have been discussed in China:

• Consumption-side: 5-13 percent each province (nation-wide average at 9 percent) in 2020. Non-hydro RE generation needs to almost double from current level.

• Generation-side: 15 percent non-hydro RE obligation on coal power


There are no magic bullets to solve the over-capacity and RE curtailment problem

The Lantau Group

Agenda

1

2

3

4

5


Market fundamentals

Grid infrastructure


Summary

24

The Lantau Group

RE curtailment – probably will get worse before getting better

• Slow demand growth

• Supply – Still no visibility on slow-

down in new addition

• No easy way to resolve the RE

supply and demand mismatch

• Coal utilization hours will likely

continue be squeezed; but will there

be early retirements?

• Tension between imports and local

generation will increase

• Push on direct purchase will

probably favor non-RE projects

• Policy initiatives such as proactively

slow-down/halt new build will be

most positive to reduce curtailment if

implemented

• More enhancement of local and

regional grids

• More UHV DC and AC lines are built

and approved

• BUT Who will take the power?

25

Core Fundamentals Grid Policy

Each provinces face different trends, but likely will become worse

before getting better

The Lantau Group26

Quantitative wind curtailment forecast from TLG’s model (for illustration)

0

1

2

3

4

5

6

7

8

9

10

Wind curtailment

peaking

wind

Mingen

2016 Spring (Mar-May)

Curtailment = 46 percentGW

0

1

2

3

4

5

6

7

8

9

10

0:0

0

1:0

0

2:0

0

3:0

0

4:0

0

5:0

0

6:0

0

7:0

0

8:0

0

9:0

0

10

:00

11

:00

12

:00

13

:00

14

:00

15

:00

16

:00

17

:00

18

:00

19

:00

20

:00

21

:00

22

:00

23

:00

GW2016 Autumn (Sep-Nov)

Curtailment = 45 percent

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

202

3

202

4

202

5

202

6

202

7

202

8

202

9

203

0

Spring Summer Autumn

Winter Annual

Case study: Wind curtailment forecast in

Jilin

The Lantau Group

Thank you

For more information please contact us:

Liutong Zhang, Senior Manager

[email protected]

By phone+852 2521 5501 (office)

By mail4602-4606 Tower 1, Metroplaza

223 Hing Fong Road,

Kwai Fong, Hong Kong

Onlinewww.lantaugroup.com

Rigour

Value

Insight

NetworksElectricity Gas

27

mailto:[email protected]

http://www.lantaugroup.com/

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APPENDICES

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On-grid tariffs in China mean that coal plant investment is essentially a call

option on the spread between the tariff and the coal price

29

250

270

290

310

330

350

370

390

410

430

0

200

400

600

800

1,000

1,200

1,400

Jan-06 May-07 Sep-08 Feb-10 Jun-11 Nov-12 Mar-14

Qinghuangdao coal price (5,500kcal/kg)

Average on-grid coal plant tariff

RMB/MT RMB/MWh

• China's on-grid tariffs have been

strictly controlled and set by the

government

• A coal price-grid tariff linkage

mechanism was established in 2005

– it permitted the assimilation (pass-

through) of 70% of coal price

increases over 5% within 6 monthly

cycles

• In practice, this adjustment

mechanism caused heavy losses to

many coal-fired power plants when

coal prices increased rapidly

• According to a State Council circular

published at the end of 2012, China

will review on-grid power tariffs on

an annual basis and adjust them if

coal prices fluctuate more than 5%

in a year

• Under the new mechanism, when

average coal prices rise by more

than 5% within a year, 90% (rather

than 70%) of that increase will be

passed-through via an increase in

on-grid tariffs

China coal price and average on-grid coal plant tariff

Source: Bloomberg; News articles; TLG analysis

Lag in tariff

increase

Lag in tariff

decrease

The Lantau Group

Overview of five tier dispatch system

30

Level Entity Jurisdiction Key FunctionsNational dispatch organisation

(or Guodiao)

1

State Grid Voltage level > 500 kV

Geographic: Regional interties

Generators: Large thermal or hydropower

plants exporting power across regions

Inter-regional balancing, inter-

regional dispatch

Regional dispatch organisation

(or Wangdiao or Zongdian)

2

Regional grid companies Voltage level: 330-500 kV

Geographic: Provincial interties

Generators: e.g. Pumped hydro storage

Inter-provincial balancing, inter-

provincial dispatch

Provincial (PDO) (or Shengdiao

or Zhongdiao)

3

Provincial grid companies Voltage level: 220 kV (330-750 kV terminal

substations)

Geographic: Bulk provincial system

Generators: Larger generators not controlled

by regional or national dispatch organisation

Intra-provincial balancing, intra-

provincial dispatch, coordinating

load management

Prefecture dispatch organisation

(Didiao or Shidiao)

4

Prefecture power supply

organizations

Voltage level: ≤220 kV

Geographic: Local system

Generators: Smaller local generators

Prefecture load management

County dispatch organisation

(Xiandiao)

5

County power supply

organisations

Voltage level: ≤110 kV

Geographic: County system

Generators: Any remaining generators such

as small hydropower plants

County load management

The Lantau Group31

Energy Sector Reform

Reform Plans Reform Contents Drivers Timeline

T&D Reform • Unbundling transmission, distribution and retail

services.

• Independent (regulated) pricing of

transmission and distribution services

• Promote broader power industry reform

such as bilateral transactions and

centralised competitive markets

• Promote efficient investment and

effective planning and investments on

grid assets

• Increase transparency of grid operation

• Open ways for retail sector reform

Undergoing,

major goals likely

achievable with

13th FYP (2016-

2020)

New pricing

mechanisms

• Bilateral transaction between generators and

end-users

• On-grid price linkages to fuel: (Coal-Power

Price Linkage Scheme and recent Gas-Power

Price Linkage Scheme)

• Centralised power exchanges: platforms (with

grid operators at present) for trading

generation rights, bilateral contracting, or

surplus power

• Pricing of ancillary services

• Increases energy dispatch efficiency

• Enable supply and demand market

negotiate directly

Undergoing

Achievable with

13th FYP

Regulation

Reform

In near term, focuses on:

• Project/investment approval process,

renewable power projects have mainly a

response for local governments

• More flexible pricing approval mechanism to

local authorities

• Promote efficient planning and

investment

• Reduce corruptions and barriers

Undergoing

The Lantau Group32

Energy Sector Reform

Reform

PlansReform Contents Drivers Timeline

Competitive

Pool Markets

Not in near term agenda

• Establish a competitive

whole market

• Promote efficient

allocation of resources

• Produce right market

signals

High uncertainties and not in near agenda.

Entry of participants and market services will be

gradual..

Uniform

pricing

scheme

Long-term goal as specified

in Electric Power Law of

PRC

• Reflect the fundamental

value of electricity without

discrimination of generation

sources

Highly uncertain, but may be possible to

achieve uniform price by 2025

The Lantau Group

A planned nationwide carbon market in 2016 is delayed, and even with a

carbon market, the carbon prices would be likely low

33

Currently running around US$ 4 to 9 per tonne of CO2

Carbon price, yuan/tonne-CO2

80

60

40

20

0

HubeiTianjin

Shanghai

Beijing

Guangzhou

Shenzhen

BJ SH GZ TJ SZ HB CQ

Chongqing

Jan ‘14 Feb Mar Apr May Jun Jul Aug Sep Oct

The Lantau Group

New capacity construction in China also appears to continue despite of slowing

demand growth, and the size of coal fleet continues to be much bigger than gas

34

Suggested

target

The gas generation share is at a level of 2.2% of total generation (comparing with coal’s share of 68-72%), and new coal capacity addition is still far more than gas

GW

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013 2014 2015 2020

GW

The total gas fleet is comparable to

ONLY one year of coal capacity

addition

Total Natural Gas Generation CapacityAnnual INCREMENTAL Coal Capacity Addition

The Lantau Group

China’s overseas EPC

35

China’s Overseas EPC contract value in billion USD

Source: China’s National Bureau of Statistics, 2016

The number of workers at overseas at year end had a

fast growing period from 1995 to 2001, and a plateau

period until 2014. 2014 could be a turning point for

another growing period for labor export.

The EPC contract value in 2015 was USD 210.1

billion, from 2008 to 2015, the average annual

increments of EPC contract value is USD 16.6

billion.

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

Num

ber

of

work

ers

at

overs

eas

under

fore

ign labor

coopera

tion

agre

em

ents

0

50

100

150

200

250

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

Overs

eas E

PC

contr

act

valu

e (

bill

ion

US

D)

CAGR = 10.5%

The Lantau Group

ONE Belt One Road – What is it?

• One Belt – a land route through Central Asian Capital – Teheran – Istanbul

– Moscow – Europe

• One Road – a waterway route through Hanoi – KL – Jakarta – Kolkata –

Colombo – Nairobi – Europe

• Economic corridors

– China – Pakistan Economic Corridor (CPEC) – OBOR program with

most substance to date. $47Bn infrastructure investments in Pakistan

by China. Including Gwadar port (world’s 3rd deepest), highways to

China and inside Pakistan (3000km), and power plants (>10,000MW)

– Bangladesh-China-India-Myanmar Economic Corridor (BCIM) -

Not much tangible beyond a Kunming-Kolkata highway and plans for a

similar railroad.

• A broadening of industries for investments, and geographical focus

– Maybe mean more for non-power industries - OBOR may mean

more for investments in industries other than energy, resource and

electricity industries – where China has been investing aggressively for

years already.

– Maybe mean more for non-ASEAN countries – China has been a

major investor in many ASEA economies for many years already.

• May not make much difference for electricity industry in most DGA

countries – China was already there.

– China was already dominating hydro and coal power plant EPC in

Mekong and Indonesia, as well as building pipelines in Myanmar.

– Philippines is not even on the OBOR list.

– Pakistan may be an exception with a recent Chinese tsunami in

Pakistan electricity and energy industry.

• Is it a key policy initiative?

– Foreign policy to creating a Chinese economic empire – Make

greater Asian region more dependent on China, and tie their

economic success to the success of China.

– Help China domestic policy – Alleviate China’s over capacity in

heavy industry and infrastructure construction, to help bride

• Or is it more fluff then substance?

– Part of President Xi’s “Chinese Dream” – To reclaim national

pride and enhance personal well-being.

– President Xi planting the flag, but being vague on details

(Carnegie-Tsinghua Center in Beijing) – Leaving it to

bureaucrats to flesh out vague and contradictory statements,

and put meat on the bones.

– A Christmas Tree (Center for Strategic and International

Studies in Washington) - You can hang a lot of policy goals on

it, but no one has done a proper economic analysis.

– A repackaging that needs a slogan - They are just putting a new

slogan on stuff they’ve wanted to do for a long time (a western

diplomat quoted by FT)

• Is it simply clever “white knight tactics”? – Without having to

explain or produce any “proofs in the pudding” China has got most of

Asia (and parts of the rest of the world) to come to Beijing to invite

China. No need for China to invite itself?

The Lantau Group

AIIB – A new institutional lender is making its presence across 67 member

countries, with China taking a dominant role

37

• A multilateral development bank with heavy Chinese

involvement - AIIB initiative was announced by the Chinese

President Xi in 2013 to promote interconnectivity and economic

integration in Asia. It has an initial paid-up capital of US$100bn.

• Advanced countries’ participation are justified by their

export interest– Out of the 67 members, 48 members are

within Asia while 19 countries are from outside. Participation of

the advanced countries such as Australia and UK are due to

their large historical trading relationship with China, while Japan

has not yet participated as to protect their interest in ADB

• AIIB imposes looser environmental requirement in

disbursing its loans, making it the preferred creditor for

financing coal-fired power projects- Activities focus on

infrastructure development, energy and power, transportation,

urban development and logistics in Southeast Asia. Recent

project includes $1bn loans to Indonesia for coal power

projects.

• Privatization will not become a conditionality for loans –

Unlike ADB which recommends free market policies, AIIB would

follow the local conditions of each country. The bank also aims

to have a simpler administrative process.

• Possibility to cooperate with multilaterals – ADB has agreed

to identify projects for co-financing with the AIIB, while the

European bank of Reconstruction and Development are ready

to co-finance several projects with AIIB from 2016

Vice President

President – Elected by BOG

Board of Directors

26 Board of Directors from various countries, inc.2 from China

Board of Governors

2 representatives from each country

Decision making structure in AIIB

Other members of AIIB

The Lantau Group

The Silk Road Fund - China is expanding investments in power development

projects through both acquisition of equity stakes and provision of debt financing

Ownership China SAFE, Exim Bank.

CIC, CDB

Founded Year 2014

Start Up Fund US$40 billion

38

• Focused on investment in infrastructure, resources and

industrial and financial cooperation investment between

China and Eurasia, the Mediterranean and Asia

Scope

Project Country China Stake Cost (US$) Year SRF Investment type Other investors

KazMunayGaz Kazakhstan 51% $500m 2015 Equity investments Kazakh gov

Kazakh uranium deposits Kazakhstan Minority $4bn 2015 Equity investments JSC NAK

KazAtomProm, CNPC

Karot hydro power project Pakistan - $1.65bn 2016 Loan, co-financed by

EIBC

Pakistan Private Power

and Infrastructure Board

Dairut CCGT Egypt - $2.2bn 2017 Loan Acwa, Hassan Allam,

GE Capital

Nam Dinh 1 thermal power

plant project

Vietnam <50% $2.2bn 2017 Equity investments AWCA

Hassyan Clean Coal

Power Plant

United Arab

Emirates

- $1.8bn 2020 Loan, co-financed by

EIBC, CBC, BOC,

standard Chartered

DEWA, ACWA

Yamal LNG project Russia 9.9% $968m 2021 15 year loan Novatek, France’s Total,

CNPC

Track Record of investment projects via SRF

China securing more LNG imported from Russia

Opportunity for China EPC

China securing import of Kazakh oil

Documents

China Electricity Supply: Challenges and Trends Electricity Supply: Challenges and Trends Is there Light at the End of the Tunnel? Liutong Zhang ([email protected]) The Lantau