China's Power Sector Tests Foreign Investors

Foreign investment in China's power system is increasingly difficult, and unnecessary

Foreign investors hoping to cash in on the estimated US$2.74 trillion that China will invest in its power infrastructure between 2006 and 2030 may find their services are little needed.

"It's now getting very difficult for foreign investors," said one foreign-based independent power producer (IPP). "I can honestly tell you, there's not much advantage [that foreign firms have] over local players in China."

China's power sector is increasingly self-sufficient in supplying the capital, technology and management skills it once required from foreigners. Thus, while legal and regulatory barriers to foreign investment in power are low, such investment is by no means a sure bet.

The promise of entering a huge market has allowed Chinese players to extract concessions from foreign companies. China permitted early agreements with companies such as GE and Siemens on the condition that those firms would share their technology with Chinese partners. Now, the IPP said, foreign companies only maintain a technological edge in areas such as nuclear and wind power.

In addition to the difficulty of proving their worth over local firms, foreign players investing in China must contend with a system that puts greater risks in the hands of producers.

In most Asian countries, generators sign long-term power purchasing agreements (PPA) with the grid to guarantee a return on their investment, said CLSA analyst Manop Sangiambut. The PPA obliges the grid to purchase a certain amount of power from the plant at a specific tariff, effectively reducing the plant's investment risk. China, however, does not use long-term PPAs. Instead, the grid signs interconnection agreements with plants to dispatch power without specifying quantities.

Rapidly growing demand for power works to offset some of the risk of building a new plant. But the IPP noted that foreign investors accustomed to operating with PPAs may find the lack of guaranteed returns worrisome. That is especially true, he said, in less developed provinces, where generators may face delays in recouping money from the grid.

The IPP said there are still some opportunities for foreign investors in areas like cogeneration plants, which provide both electricity and steam. Thanks to regulations allowing plants some freedom in the pricing of steam, cogeneration facilities can be more profitable than traditional power plants.

Ultimately, the best way to mitigate risks is to ensure that investment goals align with the government's power priorities. "Anyone going to China must first understand what the government really wants," said the IPP.

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