Overseas investment in power needs strong boost ( 2003-11-24 08:46) (China Daily)
The country needs to further improve the investment environment in its power
sector to attract foreign companies who have withdrawn from the market due to
concerns over risks, experts say.
Market regulators should clarify objectives of the reform, stipulate
transparent contract terms and develop deep capital markets to finance and
manage the risks of power-related activities, they added.
China started a sweeping reform in the industry about this time last year,
breaking up the monopoly of the State Power Corp, setting up an independent
regulatory commission and changing the pricing scheme.
Michel Gantois, director of Deloitte Touche Tohmatsu's Energy and Resources
Group, said although the reform is moving in the right direction, the government
has yet to clarify the uncertain regulatory environment, which dampens the
confidence of foreign investors.
"There is a lack of transparency in what will happen in the electricity
industry," Gantois said.
"There are a few general principles. But when it comes down to the
implementation, there is tension between different groups with various
objectives."
One of the problems arises between the promoters of clean fuel such as
natural gas and clean coal, and the defenders of conventional coal.
The central government said it wants to reduce pollution by replacing part of
the nation's coal consumption with natural gas and renewable energy. But
provincial governments want to keep as many coal mines as possible open without
having to invest in clean coal technology, in an attempt to maintain local
employment and revenue and keep costs down, said Gantois.
Many foreign companies focus on clean energy, but they see no market
opportunities since the environmentally friendly clean energy is much more
expensive than coal.
Gantois said the time is right for the government to adopt incentives such as
tax subsidies and stricter environmental standards to encourage the transition
to clean fuel.
Foreign companies will be reluctant to invest until such incentives are in
place and the market rules are firmed up, he added.
Eddu Hassing, an energy expert with the Asian Development Bank, said there is
no level playing field for clean energy in China due to simple economics. Coal
is much cheaper.
Hassing said it is becoming particularly difficult for power companies to
invest in clean energy as the government is pushing to increase competition
among power companies.
Foreign companies started to tap into the Chinese power market in the 1980s
when the government guaranteed a fixed profit return to attract investment in a
bid to ease power shortages.
In the late 1990s, many foreign investors pulled out of the market, partly
because their long-term power purchase agreements had not been honored as the
market became somewhat oversupplied.
The direct investment of foreign investors accounts for less than 10 per cent
of the total production capacity of the country.
Wu Jingru, a power expert with the China Development Bank, said the local
market is not an attractive proposition for foreign companies because profits
are so low.
"The current profit return of the market for foreign investors is at about 8
per cent, much lower than the 12 to 15 per cent return previously," said Wu.
Gantois said even though a 10 per cent return on equity may be attractive to
domestic State-owned players, foreign investors do not believe such a level
justifies investment abroad.
The experts agree that it is correct for the government to scrap the fixed
profit return and encourage market competition.
Gantois said electricity and natural gas contracts should match, if China
wants to double its gas share in its overall energy consumption mix by 2010.
To support gas development and exploration, power producers - the major gas
consumers - have an obligation of purchasing fixed volumes of gas at a fixed
price for long periods of time. As a result, power producers also need long-term
Power Purchase Agreements (PPA) to sell their electricity at fixed prices and
volumes, said Gantois.
"PPA and fuel contracts that match each other are necessary to support the
development of the natural gas market in China," he said.
Gantois also said that risk management tools should be developed in the long
term.
