SECTOR BRIEFING number DBS Asian Insights DBS Group31 Research • November 2016 Renewable Energy in China Transiting to a Low-Carbon Economy DBS Asian Insights SECTOR BRIEFING 31 02

Renewable Energy in China Transiting to a Low-Carbon Economy

Patricia YEUNG Equity Analyst DBS Vickers (Hong Kong) [email protected]

Addison DAI Equity Analyst DBS Vickers (Hong Kong) [email protected]

Tony WU CFA Equity Analyst DBS Vickers (Hong Kong) [email protected]

Produced by: Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Chien Yen Goh Editor-in-Chief Jean Chua Managing Editor Geraldine Tan Editor Martin Tacchi Art Director DBS Asian Insights SECTOR BRIEFING 31 03

05 Introduction The Green Master Plan 06 Market-Oriented Energy Reform Wind Power – The Long Game 10 Brief History China’s 13th FYP and 2030 Wind-Capacity Targets The Era of UHV Transmission Wind-Power Production Bases China’s Wind-Power FIT Cuts IRR Study on China’s Wind-Power Projects Offshore Wind Sector Solar Power – Bright Sparks and Dark Spots 21 Solar Power Is Expected to Surge Centralised Versus Distributed Systems The Current Tariff System and Development Curtailment Risks in Certain Regions Subsidy Delay Hydropower – 33 More Opportunities for Small Plants Waste-to-Energy – 36 Grate Furnace or Fluidised Bed? Nuclear Power – 45 On the Verge of Take-Off DBS Asian Insights SECTOR BRIEFING 31 04 DBS Asian Insights SECTOR BRIEFING 31 05

Introduction

China is actively rolling out its renewable energy plan which will bring about abundant growth opportunities for renewable energy plays. The energy reform is also an important part of the Chinese government’s plan to go green because the reform will bring out a more efficient power network and allow more interactive matching of supply and demand through intelligent energy networks. This will in turn facilitate the usage of renewable energy. Cumulative installed capacity is expected to exceed 210 gigawatts (GW) and 110 GW for wind and solar power by 2020, respectively.

Curtailment has been a key challenge for the industry, but we expect the curtailment rate to improve due to the guaranteed purchase utilisation hours, the Renewable Portfolio Standard, and the roll-out of Ultra High Voltage power transmission lines from 2017 onwards.

After consulting with top wind industry consultants on a study on internal rates of return (IRR), we have a differentiated view that new wind installation growth in 2016-17 will temporarily shift towards Zone IV. We believe installation will eventually skew back again to Zone I and II, where the wind is strongest.

We also believe that the downward adjustment in solar feed-in-tariff will have minimum impact on project IRR because the continuous downtrend in construction cost can offset the negative impact. DBS Asian Insights SECTOR BRIEFING 31 06

The Green Master Plan

China’s 13th Five-Year Plan (FYP) (2016 -2020) is believed to be the country’s greenest ever, under which the government is shifting the economy away from fossil fuels and towards renewable and clean energy. This is positive for renewable-energy companies because of the enormous business opportunities offered under the plan. In particular, installed capacity of hydropower, wind power, solar power, and nuclear power is expected to grow around 6%, more than 45%, more than 156%, and 115%, respectively during the 13th FYP. Although waste-to-energy accounts for a small part of power production, increasing demand for municipal waste treatment will also drive robust growth for the sector.

After decreasing carbon intensity (i.e. amount of carbon emitted per unit of GDP) by 20% during the 12th FYP (versus its target of 17-18%), the government is aiming to lower it by another 18% in the 13th FYP. China also beat its energy intensity reduction target (16- 17%) by lowering the amount of energy consumed per unit of GDP by 18.2% during the 12th FYP. The target is set at 15% for the 13th FYP.

These targets are vital in achieving China’s pledges for the Paris Agreement, including:

1. Peaking of carbon dioxide emission around 2030 and making best efforts to peak early;

2. Reducing carbon intensity by 60-65% from the 2005 level;

3. Increasing non-fossil energy to 20% of its energy consumption by 2030; and

4. Increasing the forest stock volume by around 4.5 billion cubic metres from the 2005 level.

Diagram 1. Breakdown of electricity production in China (2015)

Source: CEIC DBS Asian Insights SECTOR BRIEFING 31 07

Diagram 2. 13th FYP targets 12th FYP 13th FYP

Water use intensity (%) (30) (23) Energy consumption intensity (%) (17) (15) Non-fossil energy (as percentage of total 12 15 energy consumption) (%) Carbon intensity (%) (18) (18) Air quality Proportion of days reaching good air quality in 76.7 >80 prefecture level cities (%) Emission of PM2.5 (%) n.a. -18 Surface water Water body reaching category III or above (%) 66 >70 Below category V water body (%) 9.7 <5 Emission amount (%) Chemical oxygen demand -8 -10 Ammonia nitrogen -10 -10 Sulphur dioxide -8 -15 Nitrogen oxide -10 -15

2015 13th FYP Installed capacity (GW) Hydropower 320 340 Wind power 145 >210 Solar power 43 >110 Nuclear power 27 58 Source: National Development and Reform Commission

According to data from CEIC, non-fossil energy accounted for about 26% of total electricity production in 2015. A majority came from hydropower, accounting for 19% of total electricity production. The National Energy Administration (NEA) has released “Guiding Opinion on Establishing Renewable Portfolio Standards” which requires each independent power producer to have non-hydro renewable-energy output of no less than 9% of the total output in 2020. These targets are underpinned by plans drafted by various provinces. For instance, Beijing aims to further increase the percentage of clean energy from 86% of primary energy consumption in 2015 to at least 90% by 2020, of which renewable energy will be around 8%. Gansu has set the percentage at about 19% while Jiangsu, Jiangxi, and Ningxia have a lower target of about 10%.

Beijing aims to further increase the percentage of clean energy from 86% of primary energy consumption in 2015 to at least 90% by 2020 DBS Asian Insights SECTOR BRIEFING 31 08

Diagram 3. Forecasting China’s carbon emissions

Source: US Energy Information Administration, International Energy Agency (IEA), Massachusetts Institute of Technology (MIT), Tsinghua University

Diagram 4. China’s carbon intensity reduction, relative to 2005 levels

Source: US Energy Information Administration, International Energy Agency (IEA), Massachusetts Institute of Technology (MIT), Tsinghua University DBS Asian Insights SECTOR BRIEFING 31 09

In fact, the International Energy Agency, Massachusetts Institute of Technology, and Tsinghua University projected that China would be able to meet or exceed its commitment for both the Copenhagen Summit in 2009 and the Paris Agreement in 2015, with accelerated effort and new energy policies. A slower pace in energy consumption under the new economic norm is also positive for the Chinese government in its shift towards renewable energy. Market-Oriented Energy Reform

The energy reform is also an important part of the Chinese government’s plan to go green because the reform will bring out a more efficient power network and allow more interactive matching of supply and demand through intelligent energy networks. This will in turn facilitate the usage of renewable energy.

After the Chinese government broke up the monopoly of the country’s two power-grid companies on power supply, there are now more players in the wholesale power market. Following a trial period of two years for power-pricing reform in selected regions, the reform will be expanded nationwide in 2017, with an aim to remove official interference in price- setting and allow for the market to set prices. Power will be sold through direct negotiation between generators and large users.

After the country’s power reform, direct power supply now accounts for around 20% of coal-fired independent power producers’ (IPPs) electricity sales; renewable energy IPPs are following suit. For instance, Longyuan Power and Huaneng Renewables, China’s two largest wind-farm operators, supply power directly to the customers. We estimate the direct power-supply ratio could reach 5-10% in 2016-17.

These reforms should result in lower electricity prices, particularly for industrial and commercial users. Inter-province electricity exchanges would also be encouraged. DBS Asian Insights SECTOR BRIEFING 31 10

Wind Power – The Long Game Brief History

China’s wind power industry started its large-scale development ten years ago, with policies in 2005 (for example, wind turbines need to have 70% domestic content) and 2009 (introduced feed-in-tariff, or FIT, for onshore wind-farm projects) that increased cumulative installed and grid-connected wind capacity to 114.6 GW and 96.4 GW, respectively, by the end of 2014.

The strong grid-connected wind capacity in 2009 led directly to turbine failures caused by technical malfunction (mainly transformer breakdowns). This in turn was due to an absence of low-voltage ride-through (LVRT) capability in wind turbines. This resulted in an industry downturn in 2011 and 2012 as the government tightened the approval for wind-power projects. The industry began to recover in 2013 after the LVRT issues were solved. China’s 13th FYP and 2030 Wind-Capacity Targets

China targets cumulative installed wind capacity to exceed 210 GW by 2020 and 450 GW by 2030. As of end-2015, China’s installed wind capacity and grid-connected wind capacity was 145 GW and 129 GW, respectively. In 2015, China installed 30.5 GW of wind power capacity and connected 32.6 GW of wind capacity. If history is any guidance, China usually over-delivers on its wind-capacity installation target (2010: actual 45 GW versus target of 10 GW; 2015: actual 145 GW versus target of 100 GW).

According to the NEA, China’s newly approved wind capacity increased by 7 GW to 43 GW by end-of 2015. In March 2016, NEA announced a plan for 30.8 GW of new wind- farm construction for 2016.

Our base-case scenario assumes that China will cumulatively install 270 GW of wind- power capacity as of end-2020, indicating installation of 25 GW per annum in 2016- 2020. The Era of UHV Transmission

In January 2014, the completion and commissioning of the Hami (Xinjiang) – Zhengzhou (Henan) transmission project marked China’s entrance into the age of UHV transmission. This links Northwest and North China, rich in wind and solar resources, to the East, Central, and South China with a large population and bad air pollution. The country has been accelerating approval for UHV projects since 2014. According to Notice regarding ‘Accelerating Construction of 12 Key Transmission Lines’ included in the Air Pollution Prevention Action Plan announced in May 2014, nine of the 12 lines are UHV transmission ones, in the context of the country’s high wind curtailment over 2011-13 (see Diagram 10). DBS Asian Insights SECTOR BRIEFING 31 11

Diagram 5. China’s installed wind-power capacity versus capacity connected to grid

Source: Chinese Wind Energy Association, DBS Vickers

Diagram 6. China’s cumulative wind-power capacity installed as a percentage of the world’s total

Source: Chinese Wind Energy Association, DBS Vickers

In May 2015, the newly approved Jiuquan (Gansu) – Xiangtan (Hunan) UHV line became the country’s first renewable-energy line, transferring wind and solar power from Northwest China to Central China. We estimate that China currently has 11 UHV lines under construction and expect most of the UHV lines to start commercial operation from 2017 onwards.

We look for two UHV lines to commence operation in 2016, eight in 2017, and one in 2018, with estimated transmission capacity of 14 GW, 53 GW, 12 GW, respectively. These account for 10%, 37%, and 8% of China’s installed wind-power capacity as of end-2015. DBS Asian Insights SECTOR BRIEFING 31 12

Strategically, China has planned its UHV lines to be near renewable energy bases. Eight existing and six planned wind-power bases are situated in the north (including Inner Mongolia, as well as North and Northwest China). Only one planned wind-power base is situated in the south (Sichuan in Southeast China).

Diagram 7. Map of UHV lines under construction and China’s renewable energy (wind power) bases

Planned wind bases Existing wind bases UHV Lines (DC) UHV Lines (AC) HEILONGJIANG 6 11 NEIMONGOL (INNER MONGOLIA) JILIN 3 LIAONING XINJIANG 10 GANSU 4 BEIJING 7 TIANJIN 1 8 5 HEBEI NINGXAI QINGHAI SHANXI SHANDONG

SHAANXI HENAN JIANGSU XIZANG 2 ANHUI SHANGHAI (TIBET) SICHUAN HUBEI CHONGQING ZHEJIANG JIANGXI GUIZHOU HUNAN 9 FUJIAN TAIWAN YUNNAN GUANGXI GUANGDONG

HAINAN

Source: National Energy Administration, Chinese Wind Energy Association, National Bureau of Statistics, DBS Vickers

The project links Northwest and North China, rich in wind and solar resources, to the East, Central, and South China DBS Asian Insights SECTOR BRIEFING 31 13

Wind-Power Production Bases

On March 17 2016, the NEA set out a plan to construct 30.8 GW of new wind capacity in 2016 and halted the issuance of targets for wind-power installation for Jilin, Heilongjiang, Inner Mongolia, Gansu, Ningxia, and Xinjiang, which have high curtailment. However, this will not impede the construction of wind capacity in Northwest and North China, in our view, as the country’s 15 wind-power bases are located in these two regions, eight of which are existing bases and the remaining seven are being planned. Wind projects labelled wind-power bases are not part of the annual batch target for wind-capacity construction. We estimate that there are at least 30-36 GW of capacity that needs to be developed during 2016-2018.

Diagram 8. China’s renewable energy (wind power) bases

Wind power Province Approved Types Remarks bases wind power installed capacity (GW) 1 Hami (I & II) Xinjiang 7.2 Wind 4.1GW wind power capacity has connected to the grid 2 Jiuquan (I & II) Gansu 12.7 Wind + Aggregate target of 12.7GW is for wind and solar Solar capacity. Phase I with 3.8GW has started operation; 1st batch of Phase II with 3GW has completed the construction; 2nd batch of Phase II with 5GW is under tendering 3 Minqin, Gansu Gansu 1.2 Wind 0.6GW wind capacity has completed the construction 4 Wulatezhongqi IMAR* 1.8 Wind 0.4GW wind capacity has been on-grid connected; (west) construction of 0.2GW capacity has kicked off 5 Damao Lianhe IMAR (west) 1.4 Wind 1.4GW had connected to the grid by end-2015 6 Kailu IMAR (east) 3.3 Wind + Solar 7 Zhangbei (I & II) Hebei 1.7 Wind + Phase II of 1.7GW has completed; Phase III are planned Solar 6.8GW (1st batch of Phase III with 4.2GW capacity to connect the grid by 2018) 8 Chengde (I & II) Hebei 2.9 Wind + Target 1GW to connect to the grid by 2015, target Solar remaining 1.9GW to connect to the grid by 2017 9 Junggar Basin Xinjiang 7.7 Wind + Phase I of 5.3GW was approved in 2015 (east) Solar 10 Hundred Mile" Xinjiang 6 Wind + Under plan wind district " Solar 11 Tianzhu Songshan Gansu 1 Wind Under plan 12 Tongwei Gansu 2 Wind Under plan 13 Ningxia Ningxia 1 Wind Under plan 14 Xilingol League IMAR (west) 1.1 Wind Under plan 15 Liangshan Sichuan 10.5 Wind Under plan Note: IMAR denotes Inner Mongolia Autonomous Region Source: Company, DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 14

China’s Wind-Power FIT Cuts

Two rounds of wind-power FIT cuts announced in late 2014 and late 2015 (see Diagram 9) have largely locked wind-power tariffs till 2020. We see limited downside to the tariff policy, based on our study on the sector’s internal rate of return.

The FIT policy is deemed a promotion of renewable-energy consumption, in hopes that wind power might achieve price parity with coal-generated electricity in the long term.

In December 2014, the National Development and Reform Commission (NDRC) issued the Notice titled ‘Appropriate Adjustment of Onshore Wind Power Benchmark Feed-in- Tariff’ and trimmed the FIT for Tier-I, -II, and -III wind-resource zones by 0.02 yuan/kilowatt hour (kWh) to 0.49 yuan/kWh, 0.52 yuan/kWh, and 0.56 yuan/kWh, respectively, for wind capacity starting operation after January 1 2016. The FIT for Tier-IV zones remains at 0.61 yuan/kWh.

In December 2015, the NDRC issued the Notice and cut FIT for the first three resource zones to 0.47-0.54 yuan/kWh for projects approved during 2016-17 and 0.44-0.51 yuan/ kWh for projects approved from 2018 onwards. The FIT for Tier-IV zones was slightly revised down to 0.60 yuan/kWh.

The FIT policies led to a rush to get capacity installed and connected to the grid in Tier-I and -II zones in North and Northwest China (mainly Hebei, Inner Mongolia, Gansu, and Ningxia) in the fourth quarter of 2014 and 2015. As a result, in 2015, new wind capacity connected in the first three resource zones (including Hebei, Inner Mongolia, Jilin, Heilongjiang, Gansu, Ningxia, and Xinjiang) surged 91% year-on-year (y-o-y) to 21 GW. This accounted for 65% of the country’s total new capacity installed, compared to gains of 57% in 2014 and 47% in 2013. IRR Study on China’s Wind-Power Projects

We expect new installations in in 2016-17 to shift towards Tier-IV zones. However, we believe the shift could be temporary, given that the resource is strongest in Tier-I and -II zones.

In our view, the reason for the raft of new installations in Hebei, Inner Mongolia (East), Gansu, and Ningxia in the fourth quarter of 2014 and 2015 is that the IRR of the four areas are most sensitive to a downward adjustment of the FIT, compared to other regions. We estimate that the project IRR of the four areas will drop to 7.8% from 8.5% following the FIT cut.

Nationwide, we estimate the IRR of the average wind project in Tier-I, -II, -III regions will decline to 9.3%, 7.4%, and 6.6%, respectively from 10%, 8.0%, and 7.1%, previously, upon the tariff cut. DBS Asian Insights SECTOR BRIEFING 31 15

Diagram 9. China’s wind power feed-in-tariff adjustment

Zone Wind power Aprpoval Approval Approval Approval Areas project by 2015 and by 2015 and by 2016 and and approval by operation construction construction construction 2015 and starts after starts before starts after starts after operation 2016 2018 2018 2018 started before 2016 I 0.51 0.49 0.49 0.47 0.44 Inner Mongolia (West) (except Chifeng, Tongliao, Xinganmeng, Hulunbeier), Xinjiang Urumqi, Yilihasake, Changji Huizu, Kelamayi, Shihezi II 0.54 0.52 0.52 0.50 0.47 Zhangjiakou and Chengde of Hebei province; Chifeng, Tongliao, Xinganmeng, Hulunbeier of Inner Mongolia (East); Zhangye, Jiayuguan and Jiuquan of Gansu III 0.58 0.56 0.56 0.54 0.51 Baicheng, Songyuan of Jilin province; Jixi, Shuangyashan, Qitaihe, Suihua, Qichun, Daxinganling of Heilongjiang; Gansu province (except Zhangye, Jiayuguan and Jiuquan); Xinjiang Uyghur Autonomous Region (except Urumqi, Yilihasake, Changji Huizu, Kelamayi, Shihezi) and Ningxia IV 0.61 0.61 0.61 0.60 0.58 Remaining provinces

Source: NDRC, DBS Vickers

It is worth noting that, in the Tier-I resource zones, Xinjiang and Inner Mongolia (West)’s project IRR is still attractive at 9-10.7%. Meanwhile, project IRR of Ningxia is still acceptable at around 8.2%.

Project IRR in other provinces in Tier-I, -II, and -III zones look less attractive. Comparatively, Tier-IV resource zones are more compelling, given that the FIT remains unchanged. Provinces including Yunnan, Shanxi, Shaanxi, Shandong, Jiangsu, and Sichuan could provide project IRR of 9-10%.

According to our study, equity IRR of the wind projects for Tier-I, -II, -III, and -IV resource zones are in descending order, in terms of sensitivity to utilisation hours. This is because of the difference in the resource across the regions. Utilisation in Tier-I resource areas could reach 2,800 hours, compared to a cap of around 2,000 hours in Tier-IV zones.

Under non-curtailment circumstances, Tier-I zone’s average equity IRR is around 15%, providing utilisation of 2,300 hours. Tier-IV zone’s average equity IRR is 11% with utilisation of 1,900 hours. DBS Asian Insights SECTOR BRIEFING 31 16

All in all, investors can still get attractive returns with wind-farm projects in Tier-I regions, thanks to lower unit capital expenditure (capex) and curtailment being reduced gradually, supported by the government’s policies. We estimate unit capex for a wind farm in Tier-I Provinces regions to be 4%, 10%, and 16% cheaper than that in Tier-II, -III, and -IV regions. including The Chinese government’s policy toward the wind-power industry has recently focused on Yunnan, the mitigation of growing wind-power curtailment in Tier-I (mainly Xinjiang) and Tier-II (mainly Shanxi, Shaanxi, Inner Mongolia East and Gansu) resource zones. In 2015, China’s wind-power curtailment Shandong, deteriorated to 15% from 8% in 2014, due to growing grid congestion in the ‘Three-North Jiangsu, and Region’. The ‘Three-North Region’ covers Northeast (Jilin, Heilongjiang), Northwest (Gansu, Sichuan could Xinjiang, and Ningxia), and North China (Inner Mongolia). The wind power generated in these provide returns provinces accounted for 48% of China’s total wind power in 2015. of 9-10% The deterioration of wind congestion is mainly because of the rush of wind-capacity installation during the fourth quarter of 2014 and 2015 ahead of the lower FIT that came into effect on January 1 2016, and grid-transmission facilities of renewable energy are underdeveloped; UHV transmission lines would only commence operations from 2017 onwards.

Diagram 10. Wind-power curtailment in China (2010-2016)

Source: NEA, DBS Vickers

The government’s policy of ‘guaranteed purchase utilisation hour’ was officially announced in May 2016. In response, on May 31 2016, China’s NDRC and NEA jointly released the official ‘guaranteed purchase utilisation hours’ notice for renewable DBS Asian Insights SECTOR BRIEFING 31 17

energy with high grid curtailment, requiring a mandatory minimum power-purchasing agreement between the grid and renewable-energy producers.

The official announcement is pursuant to the NDRC’s ‘Document 625’ on renewable energy announced in late March 2016. It mandates the ‘guaranteed purchase utilisation hours’ for wind power for the provinces (including Gansu, Xinjiang, Jilin, Heilongjiang, Inner Mongolia, and Ningxia) with high grid congestion. The guaranteed purchase hours are around 236-616 hours (or 15-52%) higher than their 2015 utilisation.

Here are the key takeaways of the official announcement of ‘guaranteed purchase utilisation hours’ for wind power:

1. ihe ‘guaranteed purchase utilisation hours’ could be adjusted based on on-grid power-operation status and cost changes;

2. Excessive power generation out of the guaranteed utilisation hours could be traded using the power-market mechanism and is entitled to renewable-energy subsidies (representing the difference between the wind-power FIT and coal-fired tariff);

3. A shortfall of the guaranteed utilisation hours could be plugged using the FIT system and power generation; and

4. Wind-farm operators should sign the annual priority power-dispatch contracts with the grid company at the end of the preceding year.

As the execution of guaranteed utilisation hours in the provinces with high grid curtailment (mainly Tier-I and -II zones) is to be tested in the short term, we think wind- farm operators are likely to benefit from the mandatory policy, which is expected to be gradually implemented from 2017 onwards.

The NEA announced on July 21 2016 a warning system to alleviate high curtailment in the “Three-North Region”. A red warning is given to provinces with wind-power utilisation that failed to reach the guaranteed purchase utilisation hours. An orange warning means that curtailment in the province has exceeded 20%. Any province slapped with a red alert must postpone new projects and any province labelled orange could be excluded from the annual wind-power project development plan (see Diagram 11).

According to the above criteria, Xinjiang, Gansu, Ningxia, Heilongjiang, and Jilin would be labelled red, and Inner Mongolia would be labelled orange, based on statistics of utilisation hours and curtailment in the first half of 2016. Nevertheless, given that provincial governments are strongly motivated to build more wind projects to support local GDP, we think the central government would have play a proactive role in dealing with the high curtailment issues over time. DBS Asian Insights SECTOR BRIEFING 31 18

Diagram 11. The wind power industry’s investment warning system (based on 1H16’s utilisation hours)

Red alert Orange Alert North China Northeastern China Northwestern China Eastern China Central China HEILONGJIANG 23% Southern China JILIN 39% NEIMONGOL (INNER MONGOLIA) LIAONING XINJIANG GANSU 30% 19% 45% 47% HEBEI NINGXAI SHANXI 12% 22% 12%

YUNNAN 4%

Source: National Energy Administration, Chinese Wind Energy Association, National Bureau of Statistics, DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 19

Diagram 12. Key policies (2014-2016)

Policy Release Release Key takeaways month Agency China's 13th five-year plan for power industry Nov-16 NDRC China targets cumulative wind capacity to exceed 210GW at end-2020. & NEA The country targets a curtailment of around 5% for renewable energy. National Development Reform Commission Jun-16 NDRC A pursuant to ''Document 625'' announced in late-March, mandating release the official guaranteed purchase & NEA a minimum power purchasing agreement between the grid and utilisation hours for wind power in regions with renewable power operators. The guaranteed purchase utilisation high grid curtailment hours target for those Three-North regions with high grid congestion is around 236-616 hours (or 15-52%) higher than their FY 15’s utilisation. National Energy Administration released Notice Apr-16 NEA Plans to establish mandatory policy to require Independent Power of Renewable Portfolio Standard for renewable Producers (IPPs) to generate power with allocation of non-hydro energy renewable energy : thermal power at 15:100. National Energy Administration released Notice Mar-16 NEA The planned capacity is primarily located in regions with low or zero of Planned Wind Power Projects of 2016 to curtailment (South: 67%, North: 20%, Northwest : 10%, Northeast: construct 30.8 GW of new wind capacity 3%) National Development Reform Commission 16- NDRC But did not release the details for guaranteed purchase utilisation released ‘Document 625’ on renewable energy, Mar & NEA hours. aiming at reducing the perennially high level of curtailment of renewable energy Notice for the increase of the Supplementary Jan-16 MOF Starting on 1 Jan 2016, the levy for provinces and autonomous regions Tariff on Electricity for Renewable Energy (other than Xinjiang and Tibet) will be increased from Rmb0.015/kWh to Rmb0.019/kWh. A draft of 13th Five-Year Plan for wind power Jan-16 NEA China sets a target of 250GW of accumulated connected wind capacity by 2020 as a means to reach the country’s commitment to source at least 15% of its primary energy from non-fossil fuels by 2020 and 20% by 2030. Notice for the Improvement of Onshore Wind 15-Dec NDRC The feed-in-tariff for the first three energy categories and the fourth Power Benchmark Feed-in Tariffs energy category will be reduced by Rmb0.02/kWh and Rmb0.01/kWh respectively for new projects approved starting in 2016; and will be further cut by Rmb0.03/kWh and Rmb0.02/kWh. Jun-15 NEA Guided the wind power heating project in Three-North region to ease off high wind curtailment. Notice of Improved Administration of the Annual 15- NEA Prohibits new projects in provinces with over 20% curtailment; Wind Power Development Plan May planned projects must be approved within the same year.

Notice of the Fifth Batch of Planned Wind Power 15-Apr NEA Released the fifth batch of centrally planned wind projects which Projects of the Twelfth Five-Year Plan totalled 34GW. Guidance on Continued Progress on Drafting the 15-Apr NEA Set out the focus and timeframe for each stage of drafting, and submit Thirteenth Five-Year Plan for Renewables Growth a finalised draft for approval before 31 December 2015 Notice regarding Wind Power Grid-connection 15- NEA Improve on areas including better pre-construction works, faster grid and Consumption Works for 2015 Mar construction and growth in southern regions. Notice of Appropriate Adjustments to Onshore 14-Dec NDRC Reduced FIT of Class I-III, effective for those approv ed post-2014 or Wind FITs connected post-2015. Notice of Requirements for Standardising the 14-Sep NEA Required turbines to be type certified by 30 J un 2015 and set final Wind Power Equipment Market acceptance regulations for out-of-warranty turbines Notice of the State Policy for Offshore Wind Jun-14 NDRC Introduced offshore wind FITs of Rmb0.75/kWh (inter-tidal) and Power FITs Rmb0.85/kWh (near shore) Notice regarding Accelerating Construction of 12 14- NEA 9 of the 12 are UHV transmission lines and included detailed Key Transmission Lines included in the Air May construction plans and expected year of commissioning. Pollution Preventional Action Plan

Source: NEA, NDRC, MOF, DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 20

Offshore Wind Sector

In 2015, China’s offshore market increased 58% y-o-y to 361 megawatts (MW) after surging nearly five-fold to 228 MW in 2014. As of end-2015, cumulative offshore wind capacity reached 1,015 MW, with inter-tidal and near-shore construction accounting for 60.3% and 39.7% of the total, respectively. As of end-2015, China has ten offshore wind-turbine original equipment manufacturers (OEMs) with cumulative installed capacity exceeding 100 MW. The top four Wind turbine generator (WTG) OEMs are Shanghai Electric, Xinjiang Goldwind, Envision, and Sinovel.

Despite the strong growth in 2014-2015, the total installed offshore capacity fell short of the 12th FYP’s target of 5 GW. While policies supportive of onshore power remain in place (including introduction of offshore FIT and announcement of 10.5 GW of planned projects in 2014), we see obstacles for offshore development at least until 2018, namely due to high capex and lack of construction expertise. In particular, cables and foundations are bottlenecks due to their high construction cost (MAKE, 2014). Although contractors have switched from imported cables to domestically-made ones since 2013, the cost of locally-made cables is still high. In addition, offshore turbine technologies are still immature, yet to be tested through existing operational turbines.

The planned projects released by the NEA in 2014 are primarily in coastal provinces including Jiangsu, Zhejiang, Fujian, and Guangdong, with Jiangsu playing the leading role with more than 3 GW worth of planned projects.

Diagram 13. China’s offshore wind power: Drivers and barriers

• Offshore FITs introduced in • Lack of mature turbine 2014 technology

• Strong investment in logistics • Insufficient construction and Barriers O&M expertise • Focus on offshore turbine R&D

Drivers • Low visibility of profitability • 10.53GW of planned projects were submitted by IPPs for • High risk and high O&M approval costs from unplanned turbine outages

Source: MAKE, NDRC, NEA, DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 21 Solar Power – Bright Sparks and Dark Spots Solar Power Is Expected to Surge

The global solar-power industry has grown rapidly over the last couple of years, especially in China. The total installed solar-power capacity in China grew from 0.9 GW in 2010 to 43 GW in 2015, representing a compound annual growth rate (CAGR) of 117%. According to Bloomberg New Energy Finance (BNEF), the global installed solar capacity also experienced robust CAGR of 41.7% from 2010-2015.

Diagram 14. Cumulative installed solar capacity in China

Source: NEA,CPIA, Wind, DBS Vickers

According to BNEF, global solar-power installation is expected to increase to 482 GW in 2018 from 247 GW in 2015, representing a CAGR of 25%. The growth will come mainly from additional capacity in China, India, and the US. Upstream players in the solar supply chain will benefit from the strong growth of solar-power installation in the coming years.

China’s NEA announced its target to install at least 110 GW of solar capacity by 2020. It has also set the quota for solar installation at 18.1 GW in 2016. This target is split into two parts, i.e. 12.6 GW will be used for utility-scale solar plants and 5.5 GW will be used for ‘Top Runner Projects’ that will need to adopt solar equipment that meets criteria such as conversion efficiency and deterioration rates. Roof-top projects and six regions (Beijing, Tianjin, Shanghai, Chongqing, Xizang, and Hainan) will have no installation limits.

According to the Secretary-General of China Photovoltaic Industry Association, newly installed capacity exceeded 20 GW in China in the first half of 2016. Considering China’s strong track record in adding solar power, we believe it will be able to reach its target in 2020. In addition, quota allocation for ‘Top Runner Projects’ has increased to 30% in 2016 from 4% in 2015. We DBS Asian Insights SECTOR BRIEFING 31 22

believe the proportion will continue to increase as the government pushes for more advanced technology in the industry. Thus, industry leaders will benefit. Centralised Versus Distributed Systems Centralised Photovoltaic (PV) systems The Centralised PV system refers to utility-scale solar farms, which are capable of providing energy to a large number of users. Due to their scale and land-use requirement, they are often located in remote areas that demand long-distance electricity transmission.

There are a few types of centralised PV systems in China. The most common is the ground-mounted PV system, which involves installing solar panels on frame supports that are attached to the ground. The elevated PV system has also become popular; an elevated solar system can be used for breeding fish, growing crops, and breeding cattle. A third system is the floating solar system, which is gaining popularity.

Diagram 15. An example of a centralised PV system

Source: Yonghui New Energy Technology Co., Ltd.

PV distributed generation systems The PV distributed generation (DG) system is smaller in generation capacity than utility- scale systems. Its operating capacity can range from a few kilowatts to several megawatts. Most DG systems are located near the facilities they serve. DBS Asian Insights SECTOR BRIEFING 31 23

There are three main categories of the PV DG system: The off-grid PV system, the on-grid PV system, and the hybrid microgrid power system. The off-grid PV system is used in remote regions and islands that are not connected to the grid; it supplies power directly to the user. The on-grid PV system is installed near users and connected to the state grid; users can buy power from or sell power to the state grid. The hybrid microgrid power system consists of multiple micro-electrical systems that include other alternative energy sources such as wind and hydropower.

Diagram 16. An example of a distributed generation system

Source: Habitissimo

Diagram 17. Comparison between centralised and DG systems

Advantages Disadvantages

Centralised system • Higher power output • Higher curtailment risks • Economies of scale • High capex requirement • No complaints from users • Loss of power from transmission • Easier financing

Distributed generation system • Close to point of consumption • Ownership confusion • Low land usage • Limited space for installation • Higher flexibility during peak/ • Lower user acceptance non-peak hours • Easier management Source: DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 24

Leaning towards PV DG systems The PV DG system is the most prevalent PV power system. According to BNEF, distributed PV systems account for approximately 52% of the total installed capacity globally in 2015. PV DG systems dominate in developed countries that have cutting-edge solar industries. For example, in Japan, Germany, and the US, PV DG systems accounted for 73.6%, 73.5%, and 48.5% of their total installed capacity, respectively, in 2015.

Diagram 18. Centralised versus distributed PV installations

Source: BNEF, DBS Vickers

Germany and Japan have a long history of developing PV DG systems. We believe their success came largely on the back of private individuals and corporations that have adopted solar power. Approximately 80% of the PV DG systems in Japan are installed in residences. In addition, the majority of the installed capacity in Germany are owned by individuals and farmers while the remainder belongs to enterprises, funds, banks, and project planners.

The centralised system dominates China Most of the solar power in China comes from centralised systems. According to the NEA, utility-scale solar plants accounted for 86% of the accumulated on-grid power in 2015. We believe the Chinese government had wanted to speed up the development of PV DG systems because of the proximity of the source of power to the point of consumption. In the 13th FYP, the government targets to increase the installed capacity for PV DG systems to above 60 GW. While the target is ambitious, it is difficult to achieve in our view. Before this, the government also tried to hasten the pace of installation by setting a categorised installation quota in 2014, when DG systems accounted for about 57% of the installation quota. However, DG systems merely added 2.1 GW (19% of total installation) for the year. DBS Asian Insights SECTOR BRIEFING 31 25

There are multiple obstacles for China developing PV DG systems. The type of housing in China is very different from that in countries such as Germany and the US. Most residences are apartments or condominiums, which have limited rooftop space per person for PV DG systems. Moreover, financing for solar projects is also relatively difficult to obtain in China as its financial institutions are reluctant to lend to smaller project developers and individuals.

The ownership problem is another impetus for PV DG systems. A company or an individual that wants to use solar power may not own the commercial/residential building and they are not permitted to install the systems. In addition, if the user ceases to own the rooftop space or goes bankrupt, project owners may be forced to sell the electricity to the grid company, which has a lower tariff.

Even though the curtailment rate can be lowered by increasing the proportion of distributed system, it will be difficult for China to overcome obstacles such as housing infrastructure. But we think the Chinese government’s poverty-alleviation programme will increase the proportion of distributed systems, albeit to a limited extent. Although China will not be able have the same share of PV DG systems as Germany or Japan, we believe PV DG capacity will continue to climb, driven by the implementation of the poverty alleviation programme, which can boost engineering, procurement and construction revenues of solar power developers. The Current Tariff System and Development Development of the FIT system The solar power industry in China has adopted the FIT system since 2011. The NDRC divides the FIT into three categories, according to available resources and construction costs. There are two parts to the tariff structure, which consists of a tariff for basic local coal-fired power and tariff-adjustment subsidies. The subsidy is the difference between the coal-fired power tariff and the FIT. The tariff for local coal-fired power is paid by the state grid and the subsidy is paid by the renewable energy development fund.

The government has reduced the FIT a few times since its introduction when it stood at 1.15 yuan/kWh. In the latest adjustment announced by the NDRC in 2015, the FIT for zones I, II, and III were lowered by 11%, 7%, and 2%, respectively. As a result of the higher curtailment rate in zones I and II, the government has cut the tariff more in those zones. Favourable tariff adjustment will support project IRR in Zone III.

For DG systems, users will receive 0.42 yuan/kWh of subsidy, in addition to not having to pay for the locally-generated electricity. If the system is connected to the grid, the extra electricity generated can be sold to the state grid at the same price as local coal- fired power plus the subsidies. Users have the option to sell all the power generated DBS Asian Insights SECTOR BRIEFING 31 26

Diagram 19. FIT adjustments

Benchmark Regions Tarif f (Rmb/kWh) Zone I 0.9 > 0.8 Ningxia, Qinghai Haixi, Gansu Jiayuguan, Wuwei, Zhangye, Jiuquan, Dunhuang, Jinchang, Xinjiang Hami, Tacheng, Altay, Karamay, Inner Mongolia region not respecified in Zone II Zone II 0.95 > 0.88 Beijing, Tianjin, Heilongjiang, Jilin, Liaoning, Sichuan, Yunnan, Inner Mongolia (Chifeng, Tongliao, Xinganmeng, Hulun Buir), Hebei (Chengde, Zhangjiakou, Tangshan, Qinghuangdao), Shanxi (Datong, Shuozhou, Xinshou), Shaanxi (Yulin, Yanan), Qinghai (excluding regions in Zone I), Gansu (excluding regions in Zone I), Xinjiang (excluding regions in Zone I) Zone III 1 > 0.98 Regions not specified under Zone I or Zone II

Note: Tariff in Tibet region will be determined by other means Source: NDRC, DBS Vickers

As solar to the state grid. Since the price of electricity is usually higher than that of coal-fired components power, users will have a higher return by using self-generated electricity. account for approximately Cuts in FIT had minimal impact on IRR The government would like solar-farm operators to maintain reasonable returns. Going 50% of the total forward, we believe the gradual decline in FIT is inevitable as construction costs continue to construction drop, which is driven by the decline in solar component prices. However, we reckon that falling costs, price FIT will have minimum impact on IRR. fluctuations of solar components As solar components account for approximately 50% of total construction costs, any price have a substantial fluctuations of solar components will have a substantial impact. Over the past five years, the impact price of solar modules has declined by more than 60%. According to BNEF, the price of solar multi-cell dropped 70% from US$1.32/watt in 2010 to US$0.32/watt in 2015, which helped domestic construction costs to decline by more than 55% from 2009 to 2015.

We believe that the tariff adjustment in 2015 will not have significant impact on the IRR of projects in zones II and III in 2016. We estimate that a 5% downward adjustment in on-grid tariff will have a 1% impact on a solar project’s IRR. The global blended price for a solar module is expected to drop 5% annually by 2020, according to GTM Research. Project IRR is expected to remain steady, assuming that average construction costs decline at a rate of 5% a year. Thus, if construction costs decline by 5% per year, the FIT will need to be revised down by more than 10% in order for the project IRR to fall by more than 1%. As the FITs in zones II and III were cut by less than 10%, project IRR dipped only marginally. DBS Asian Insights SECTOR BRIEFING 31 27

Diagram 20. IRR sensitivity to latest FIT adjustment

Region FIT movement Construction cost change

Before After (no change) (5% drop)

Zone I 0.90 0.80 -2.0% -1.20% Zone II 0.95 0.88 -1.2% -0.50% Zone III 1 0.98 -0.3% 0.40%

Source: DBS Vickers

It is possible that tariffs would be slashed further as the NEA has started to push for competitive solar power prices recently. In January 2016, the NEA issued a notice that sought to accelerate the implementation of competitive bidding for solar projects. We saw several provinces issue their competitive-bidding criteria for 2016’s installation quota. On-grid tariff, technology, investment ability, maturity of preliminary work, and land utilisation are examples of the criteria to be considered in the competitive bidding process. On-grid tariff will be one of the most important factors with a weighting of at least 20%. We believe that the framework for competitive bidding could be finalised in 2017.

The competitive bidding for normal ground-mounted projects have not caused significant downward adjustment in the FIT. The NEA granted additional quota of 5.3 GW of solar power installation in September 2015, which included 20 MW of competitive tariff projects in Hohhot. These projects will be operating at a tariff of 0.85 yuan/watt, which is 5.6% lower than the FIT for the region. In March 2016, Hebei approved the first competitive tariff project with capacity of 100 MW at 0.83 yuan/watt, which is 5.7% lower than the FIT for the region. Anhui province also began the tender for 600 MW of projects under 2016’s installation quota, with competitive pricing, in July. The lowest FIT was submitted by Xinyi Solar – 0.945 yuan/watt, which is 3.8% lower than the FIT for the region. We estimate that the impact on project IRR is under 1.5%.

However, the downward pressure on FIT as a result of competitive tariff bidding is likely to be limited due to three reasons. First, pricing is estimated to account for 20-30% weightage in the tender evaluation. The other important factors include technology, track record of the bidder (e.g. financial capability, ability to deliver), etc. Second, there is a limit to the FIT decline to reach the maximum score for the category. Thus, power companies have no incentive to submit lower FITs. Third, with the current high curtailment rate, project IRR in zones I, II, and III are already quite low at just 5-8%.

The National Development and Reform Commission (NDRC) issued a draft document seeking opinion on adjusting the FIT for solar power. The FIT may cut to 0.55 yuan/kwh (-31%), 0.65 yuan/kwh (-26%), and 0.75 yuan/kwh (-23%) for zones I, II, and III respectively. The fixed subsidy for distributive PV (self-generation and self-consumption) may also be adjusted down from 0.42 yuan/kwh to 0.35 yuan/kwh, 0.35 yuan/kwh, and 0.4 yuan/kwh for zones I, II, and III respectively. The FIT for those distributive PV directly feeding to the grid will align with solar power stations. DBS Asian Insights SECTOR BRIEFING 31 28

Even though the magnitude of the suggested cuts is larger than expected, the actual FIT cut may be lower as large power companies and industry leaders met the NDRC in October to express their and concerns. We reckon the FIT cut will not cause a significant decline in the IRR for zone-III projects. Assuming the FIT for zone III is cut to 0.75 yuan/kwh and the construction cost is lowered by 20% in 2016 and 2017, the negative impact on IRR will not exceed 1%.

Since the on-grid deadline of the FIT cut is expected to be in September 2017, an installation rush is likely to occur in the first half of 2017. During the installation rush in the first half of 2016, solar component manufacturers enjoyed higher sales and margin expansion of 3-14%. Thus, we expect a similar scenario to take place in 2017, which will be positive for upstream solar component manufacturers in the short run. Curtailment Risks in Certain Regions

In the early days of solar power development, Chinese developers focused on constructing new solar farms in northern and north-western China, where utilisation hours were high. However, due to the rapid growth of power supply and lack of grid infrastructure, curtailment became a major issue. Curtailment rates in Gansu, Xinjiang, and Ningxia, rose to 39%, 52%, and 20%, respectively, in the first quarter of 2016. While the three regions accounted for 34% of total on-grid capacity in 2015, data suggests they accounted for 95% of total curtailment in the first quarter of 2016.

Diagram 21. Curtailment in China (Q1 2016)

Source: National Energy Bureau, DBS Vickers

However, due to the rapid growth of power supply and lack of grid infrastructure, curtailment became a major issue DBS Asian Insights SECTOR BRIEFING 31 29

Tackling curtailment On May 31 2016, the NDRC and NEA jointly announced details of the ‘minimum utilisation hour’ policy for wind and solar power plants in specific regions. The circular stated clearly the details of the policy and the minimum utilisation hours guaranteed for regions with high curtailment rates. These regions include Inner Mongolia, Xinjiang, Hebei, Gansu, Jilin, Heilongjiang, Ningxia, Shanxi, Qinghai, Liaoning, and Shaanxi. The guaranteed utilisation for solar is between 1,300 and 1,500 hours.

Diagram 22. Annual radiation by region (kWh/m2)

<1,050 <1,050 - 1,400 < 1,400 - 1,750 >1,750

Source: China Meteorological Administration

The minimum utilisation guarantee will have a significant positive impact on project IRR if the policy of ‘minimum utilisation hour’ is executed well. We analysed the effect on projects in Gansu and Xinjiang, where most of the curtailment existed in 2015. The average utilisation hour in Gansu and Xinjiang for 2015 implied that the project IRR (category 1) was about 5% and 4.8%, respectively. With the minimum guaranteed utilisation hour, the project IRR is expected to go up by 3% and 5%, respectively. Even after the implementation of minimum guaranteed utilisation hour, project IRR of solar projects – at only 8-10% – is still not particularly high. DBS Asian Insights SECTOR BRIEFING 31 30

The government is trying to tackle curtailment by halting construction in high-curtailment regions. We believe this will effectively control the root cause. The NEA said it will investigate the conditions for the construction of solar-power infrastructure. Local governments that would like to apply for quota to build solar-power infrastructure will need to satisfy the following: 1) Ensure that curtailment rate does not exceed 5% in the region; and 2) issue detailed plans on the scope and standards for land tax levied on solar-power plants. For regions with curtailment, local governments will need to submit detailed plans to solve the problem. The construction of UHV lines is also expected to relieve the curtailment problem.

Diagram 23. Guaranteed utilisation hours for solar power

Resource Regions Guaranteed Area utilisation hour Ningxia 1500 Qinghai Haixi 1500 Gansu : Jiayuguan, Wuwei, Zhangye, Jiuquan, 1500 Zone I Dunhuang, and Jinchang Xinjiang : Hami, Tacheng, Altay, and Karamay 1500 Inner Mongolia (except Chifeng, Tongliao, Xing'an 1500 League, and Hulunbeier) Qinghai (excluding Zone-I areas) 1450

Gansu (excluding Zone-I areas) 1400

Xinjiang (excluding Zone-I areas) 1350

Inner Mongolia : Chifeng, Tongliao, Xing'an League, and 1400 Hulunbeier

Zone II Heilongjiang 1300 Jilin 1300 Liaoning 1300 Hebei : Chengde, Zhangjiakou, Tangshan, and 1400 Qinhuangdao Shanxi : Datong, Shuozhou, and Xinzhou 1400 Shaanxi : Yulin, Yan'an 1300

Source: State Grid, DBS Vickers

Subsidy Delay There is no lack of policy supporting the industry The Chinese government implemented favourable measures such as FIT, value-added tax (VAT) discount, tax reduction, and the Golden Sun programme to support the solar-power industry. Even though the magnitude and implementation of supporting policies aren’t comparable to that of developed countries such as Germany, the measures have played a crucial role in the rapid development of the solar industry in China. DBS Asian Insights SECTOR BRIEFING 31 31

Back in 2009, the Golden Sun programme was jointly introduced by the Ministry of Finance, the Ministry of Science and Technology, and the NEA. Qualified solar-power projects received 50% of the investment amount in subsidies; the amount could be as high as 70% for projects in remote regions without power supply. The programme ended in 2013. In the same year, the Ministry of Finance introduced the VAT refund policy for the solar industry. The 17% VAT is reduced by half to 8.5%, which is estimated to lift solar-farm projects’ IRR by 1-2%. The VAT rebate policy has just been extended to the end of 2018. Qualified solar-power plants also enjoy six years of corporate-tax discounts under the tax law in China. The plants are exempted from tax for the first three years after they start contributing to a company’s revenue, and enjoy a tax discount of 50% for the next three years.

Subsidy delay is the main issue We believe the FIT subsidy payments from the renewable-energy fund is one of the most important subsidy measures currently in effect; the payments account for more than half the total FIT. The renewable energy development fund was established mainly to support renewable energy research and development. Its major source of revenue is the renewable energy surcharge paid by end-users.

The delay in FIT subsidy payments has been one of the major issues in the industry. The fifth batch of FIT subsidies was issued in 2014 for solar projects which connected to the grid before August 2013. In January 2016, the Ministry of Finance opened the application for FIT subsidy payments for solar-power plants connected before February 2015. The sixth batch of FIT subsidies was announced in September 2016, which included 19.5 GW of solar power projects. The outstanding subsidies within the sixth batch is expected to be paid within the next few months and subsequent subsidies incurred will be paid quarterly.

Two to three years of delay has resulted in the tightening of cash flow, increasing financing costs, and lower project IRR for solar-farm developers. According to the Ministry of Finance, revenues from the renewable-energy surcharge amounted to 51.5 billion yuan in 2015, and it is expected to grow to 65.2 billion in 2016. The amount distributed to the solar-power industry in 2015 was 8.2 billion yuan.

In terms of project IRR, we believe the delay in payments would not have a significant impact. Assuming that the government starts paying subsidies in the fourth year, we expect project IRR to decline by about 1%. Thus, the impact on earnings is bearable. However, solar-power developers will get into trouble if they don’t manage their cash flow well. They could over- borrow easily if they need money and their cash flow is low.

Renewable-energy surcharge to increase The NDRC increased the surcharge for renewable-energy by 0.4 cents/kWh to 1.9 cents/kWh in December 2015. Demand for FIT subsidies will increase as total solar-power capacity increases. The surcharge hike will help meet this demand. From an initial charge of 0.2 cents/kWh in 2006, the surcharge has been going up. DBS Asian Insights SECTOR BRIEFING 31 32

As mentioned earlier, the FIT is expected to decline gradually until it reaches grid parity. This will result in a drop in FIT subsidy, which will alleviate the funding gap of the renewable energy fund. Even though we believe the current 1.9 cents/kWh will be enough to meet the subsidy payments for projects included in the first six batches, it will not be sufficient for projects built after February 2015. The funding gap will widen in the coming years due to the robust growth in renewable energy. In order to satisfy the subsidy demand in 2020, the energy surcharge will need to reach between 4.7 cents/kWh and 5.2 cents/kWh, according to our estimates. Therefore, we expect the renewable-energy surcharge to increase again within the next two years to narrow the funding gap. DBS Asian Insights SECTOR BRIEFING 31 33 Hydropower – More Opportunities for Small Plants Hydropower is China’s second-largest energy source after coal. With a utilisation rate of about 40%, hydropower accounted for 19% of total electricity generated in 2015. As hydropower is one of the main ways to replace fossil fuels and reduce toxic smog, its installed capacity has been growing steadily.

As hydropower is In 2015, China installed 19 GW of hydropower capacity, accounting for about 57% of global one of the main new installed capacity. With a capacity of about 320 GW at the end of 2015, China has ways to replace largely met its ambitious goals for hydropower development set out in its 12th FYP, even if the installed pumped-storage capacity of 23 GW fell short of its target of 41 GW set under the fossil fuels energy plan. Although China’s total hydropower capacity already accounts for at least a quarter of the and reduce toxic global capacity, more hydropower plants are expected to be built in the next five years. In fact, smog, its installed the Chinese government wants to raise the installed hydropower capacity in the country to 340 capacity has been GW during the 13th FYP, implying an addition of 4 GW per year. growing steadily

Diagram 24. Global newly installed hydropower capacity in 2015

Source: International Hydropower Association

In addition, China’s government is exploring opportunities to promote regional hydropower development in Eurasia and Africa through the ‘One Belt, One Road’ initiative. Sponsored by China Three Gorges Corporation, the Karot project, which has an installed capacity of 720 MW and average annual electricity output of 3,436 gigawatt hours, is located on Jhelum River in Pakistan with its upstream in the Azad Pattan Hydropower Project and downstream in the Mangla Dam. It is also the first project to be financed by the Chinese government’s Silk Road Fund. DBS Asian Insights SECTOR BRIEFING 31 34

Opportunities for small-scale hydropower stations Small-scale hydropower stations (SHP) (i.e. with capacity of less than 50 MW) is estimated to account for about 24% of the total installation in China, down from a third in the past. Installation of SHP has allowed isolated mountain villages to have access to electricity and water supply and has helped the economies of remote areas, as well as lifted the living China’s standards of rural residents. Rural electrification also increased from 94.5% at the county government level, 86.8% at the township level, and 61.1% at the village level in 1978 to 100%, is exploring 99.7%, and 99.7%, respectively in 2008. In addition, “The Management Approaches of opportunities to Small Hydropower Substituting for Fuel Projects” promulgated by the Ministry of Water promote regional Resources and the NDRC helped 800,00 farmers replace fossil fuels with SHP, contributing hydropower to energy conservation and emission reduction. development At the end of 2014, there were over 47,000 rural hydropower stations in operation in in Eurasia and China. Most of them are SHP with a total installed capacity of more than 73 million kW Africa through and a total power output of 220 billion kWh. These are concentrated in Guangdong, the One Belt, Sichuan, Fujian, Yunnan, Hunan, and Zhejiang. The potential of SHP remains strong One Road because China has the most SHP resources in the world – totalling 128 million kW – and initiative it is estimated that less than half of these resources have been developed. Under the 13th FYP, the government plans to add 10 million kW of capacity to bring the total SHP capacity to over 83 million kW by the end of 2020.

Challenges amidst opportunities However, there are a few challenges. Firstly, the ‘three-self’ principle of “self-build, self- manage, self-use” is part of the government’s efforts in encouraging local governments and the people to develop rich SHP resources in mountainous areas. However, these are the same regions that find it tough to finance infrastructure projects.

Secondly, development of these resources is not well planned, resulting in unsustainable development. Efficiency of SHP stations is also low. Thirdly, as a result of stricter environmental policies, the impact of hydropower projects on the soil, climate, and ecological systems has raised questions on whether hydropower is truly environmentally sound.

To resolve the issues, the government has a few priorities in the development of SHP under the 13th FYP. Firstly, hydropower will be used to provide electricity to rural areas as well as be part of the government’s programme in poverty alleviation. Under the scheme, the central government will provide subsidies of about 4,000 yuan per kW (estimated to be 40-50% of required investment) to SHP plants while the rest of the financing will be arranged by the project company (likely through banks). The pilot projects under this scheme will be in Chongqing, Yunnan, Hubei, and Shaanxi, and new capacity will total about 2 million kw by 2020.

Secondly, SHP will be used to replace biomass fuel, which has caused severe air pollution. Thirdly, improvement in efficiency will be emphasised through the upgrading and DBS Asian Insights SECTOR BRIEFING 31 35

expansion of the existing SHP plants. In fact, an expansion project is more cost-effective given that its estimated outlay is only one-third of that of a greenfield project. In addition, expanding old stations generally takes a shorter time (usually less than a year) and does not cause environmental problems or displace people. Currently, only about 10% of existing SHP plants have been upgraded. DBS Asian Insights SECTOR BRIEFING 31 36 Waste-to-Energy – Grate Furnace or Fluidised Bed? Waste-to-energy (WTE) is the process of generating energy, usually in the form of electricity, from the treatment of waste. We consider WTE to be renewable because the fuel, i.e. municipal or hazardous waste, is consistently replenished and the energy recovered preserves the natural resources. In addition, WTE can avoid secondary pollution on the environment.

Mounting municipal solid waste leads to strong demand for WTE Massive amounts of municipal solid waste (MSW) is generated as a result of China’s rising population and better living standards. From 2009-2014, the amount of MSW collected and transported in China grew at a CAGR of 2.6% to 178.6 million tonnes. We forecast MSW collected to grow at a CAGR of 3% from 2014-2018 to reach more than 200 million tonnes. The growth is underpinned by rising urbanisation and improving garbage- collection systems, particularly in towns and villages. We reckon that if uncollected MSW in urban areas and MSW generated in rural areas are also included, the total amount of MSW generated in China would be at least 30% more than the above figure.

Diagram 25. Volume of MSW collected in China

Source: China Statistical Yearbook on Environment, DBS Vickers

The uptrend in treatment rates is the result of the government’s rising investment in waste treatment. Among the methods of treating MSW in China, landfilling and incineration have the largest share, representing 72.6% and 24.7%, respectively. Although landfills remain the top treatment method, the use of WTE is preferred. In fact, this is particularly true for countries with limited space because WTE can reduce garbage volumes by 80- 90%. In addition, energy can be generated in the process and adopted as an alternative energy source. Many countries, such as Germany, Japan, and Switzerland have a high percentage of MSW treated by WTE.

The use of incineration grew rapidly from 2009-2014, with the number of WTE plants in China increasing from 93 to 188 and capacity to process daily waste climbing from DBS Asian Insights SECTOR BRIEFING 31 37

71,300 tonnes to 185,957 tonnes. The volume of MSW treated by WTE is also increasing continuously. In 2014, that number increased 15% to 53 million tons – accounting for 32.5% of total treated MSW – up from 14% in 2006.

Higher market share under the 13th FYP The 12th FYP set a target for MSW incineration-facility capacity to account for 35% of the nation’s capacity for processing harmless MSW; in the east, the number should reach 48% by 2015. It also aimed to have incineration capacity of 300,000 tonnes daily.

Diagram 26. Percentage of incineration capacity in 2014

<=35% 35-50% >50% HEILONGJIANG

NEIMONGOL (INNER MONGOLIA) JILIN LIAONING XINJIANG GANSU BEIJING TIANJIN HEBEI NINGXAI QINGHAI SHANXI SHANDONG

SHAANXI HENAN JIANGSU XIZANG ANHUI SHANGHAI (TIBET) SICHUAN HUBEI CHONGQING ZHEJIANG JIANGXI GUIZHOU HUNAN FUJIAN TAIWAN YUNNAN GUANGXI GUANGDONG

HAINAN Source: China Statistical Yearbook on Environment

According to data from China Statistical Yearbook on Environment, WTE treatment capacity already accounted for 35% of total MSW treatment capacity in 2014. However, only Jiangsu, Zhejiang, and Fujian were able to surpass the target of 48%; Shanghai, Anhui, and Shandong needed to catch up. In particular, Jiangxi province still does not use incineration to treat MSW. In addition, incineration capacity is expected to reach only 233,000 tonnes per day by 2015, falling short of the target by 67,000 tonnes. DBS Asian Insights SECTOR BRIEFING 31 38

Although China is a couple of steps behind its 12th FYP targets, we believe the Chinese government will continue to shift its focus to incineration and set higher targets. MSW treatment capacity should reach at least 400,00 tonnes per day and account for at least 50% of total treatment capacity by 2020.

In addition, new rules on emissions have been in place since 2016. In particular, for plants with daily treatment capacity of less than 100 tonnes, the new standard allows the emissions of dioxins to be as high as 0.5ng/Nm3 or 1.0ng/Nm3 which is considerably higher than the 0.1ng/Nm3 required by the Euro standard. There is also no requirement for TOC (total organic carbon) and hydrogen fluoride under the new standard. Thus, we believe further tightening of the emission standard in China will continue. In fact, we believe the rising requirement in the emission standard is one of the major considerations in choosing incineration plants. Diagram 27. Emission standards for waste-to-energy plants

Daily average values (mg/m3) Old New EU2010/75/EC GB18485-2001 GB18485-2014 Total dust 80 20 10 TOC n.a. n.a. 10 carbon monoxide 150 80 50 Hydrogen chloride 75 50 10 Hydrogen fluoride n.a. n.a. 1

Sulphur dioxide 260 80 50

Nitrogen oxides 400 250 200

Mercury & its compound 0.2 0.05 0.05

Cadmium & its compounds 0.10 0.1 0.05

Lead & its compounds 1.6 1 0.05 Dioxins and furans (ng/Nm3) >100 tons/day 1 0.1 0.1 50-100 tons/day 1 0.5 0.1 <50 tons/day 1 1 0.1 Source: Environmental Protection Bureau, Official Journal of the European Union

Advantages of fluidised bed In China, the moving grate furnace (MGF) and the fluidised bed (FB) are the two mainstream incinerator types with an estimated market share of 63% and 36%, respectively, in 2014. While both the MGF and the FB have their pros and cons, we expect the market share of the MGF to remain higher than that of FB going forward.

FB technology in China was developed mainly by Zhejiang University, the Chinese Academy of Sciences, and Qinghua University in China to meet the specific needs of China’s MSW market. The major advantages include: DBS Asian Insights SECTOR BRIEFING 31 39

1. Its ability to accommodate large variations in the moisture content and the calorific value of MSW;

2. Its uniform temperature gradient throughout the bed and intensive turbulence which help combustion to be more efficient;

3. It produces less dry slag;

4. Ash can be easily removed and used to produce cement;

5. Shorter combustion time; and

6. Slightly lower initial investment, including pre-treatment facilities.

As coal is needed as an auxiliary fuel to maintain the temperature of a FB incinerator, some plant operators have been lured to input a higher portion of coal than necessary in order to sell more electricity at a higher on-grid tariff, turning FB plants into small coal- power plants that enjoy the beneficial policy of WTE projects. The authorities later set a 20% upper limit for the proportion of coal to be mixed with the feedstock. A new on-grid tariff scheme, which allows only the first 280 kWh (for every tonne of MSW) processed to enjoy a higher tariff, was also implemented in 2012. These measures have reduced the incentive for FB plant operators to add more coal as feedstock. The fervour for building new FB plants has also died down.

Advancement in FB technology has allowed the amount of added coal to be reduced significantly, with auxiliary fuel blending ratio at below 5%. In some cases, coal is not required but bed temperatures may be unstable.

Advantages of MGF MGF has been used for over a century and more than 1,000 such plants are in operation globally. Compared with FB plants, which total less than 300 now, MGF has a larger global market share. We reckon the following advantages have led MGF to be the preferred technology for MSW incineration:

1. It has a sound track record with stable performance; in particular, it has the best proven record in large MSW treatment with capacity of more than 3,000 tonnes/day;

2. It is the most robust thermal technology which is capable of treating different amounts and quality of MSW;

3. It does not require pre-treatment or prior sorting of MSW;

4. It is the least complex system to operate; DBS Asian Insights SECTOR BRIEFING 31 40

5. Operating cost is lower, with less maintenance work required;

6. No auxiliary fuel is required, thus the amount of total dust produced is small; and

7. Amount of fly ash produced is small.

Nevertheless, when the first large-scale MGF incineration plant was built in Shenzhen, it encountered several issues including high water content or low heat content in MSW, lower efficiency in electricity generation, etc. The use of imported equipment also made MGF less price-competitive. The system eventually improved dramatically and could cater to the specific needs of the Chinese market. In addition, more domestic production of MGF equipment has also lowered set-up costs. More importantly, not only are MGF plants able to meet the Chinese government’s latest emission requirements, they can meet the more stringent standards of the Eurozone’s. The number of MGF plants has increased in China.

We have also obtained professional opinion on the various MSW technologies from Dr Kaimin Shih1, Associate Professor of Environmental Engineering, the University of Hong Kong. While the expertise of an operator is the key factor behind smooth and efficient operation of an incineration plant, Dr Shih reckons that MGF is the preferred technology for MSW incineration treatment, from a technical point of view. This is because FB requires pre-sorting of MSW but MGF allows a large variation in the characteristics of MSW, in terms of heat value, composition, moisture content, etc. The design of the MGF also allows incombustible materials such as sands and rocks to be pushed down to the ash discharger with minimum damage to the reactor. Even though the Chinese government is trying to get MSW to be separated at the source, Dr Shih reckons this will only improve rates of waste recycling and not change the characteristics of MSW much and MGF is still preferred.

Growth potential of cement kilns Cement kiln incineration currently accounts for only 1% of China’s WTE market. The system was originally designed for processing cement. However, waste – including sewage sludge, hazardous waste, used tyres, and MSW – can be used as fuel in the production process. Thus, we should not ignore the potential of waste co-processing in cement kilns.

There are currently 2,000-2,500 lines producing cement in China, the majority of which adopts the pre-calcination process2, which is suitable for co-processing waste. However, less than 1% of these production lines have facilities to co-process MSW, treating only 2 million tonnes of MSW per year. Even after including production lines under construction, the percentage is estimated to increase to under 2%, still far behind the target of 10% set by the Chinese government under the 12th FYP. We reckon that the major obstacle for the development of cement kiln co-processing is the lack of policies. DBS Asian Insights SECTOR BRIEFING 31 41

While we agree that cement kilns powered by WTE sources have limitations (such as higher operating costs, lower capacity, etc), this technology fulfils the ‘Reduce, Reuse, Recycle’ principle. The efficient combustion process also emits minimal hazardous emissions. All hazardous residuals from MSW are captured in the production of cement, reducing the amount that goes into landfills and minimising the risk of secondary pollution. In addition, using alternative fuels can cut carbon emissions drastically in the cement industry. Some advantages of a cement kiln system:

1. It does not require prior sorting or shedding of MSW;

2. It can accommodate large variations in waste characteristics, in terms of size and heat value;

3. It has the most efficient combustion because it has uniform temperature gradient throughout the bed and intensive turbulence;

4. All ash and dry slag can be recycled for the production of cement; and

5. Minimum emissions of dioxins.

Outside China, the number of such cement kilns is also increasing, because of high fossil- fuel costs, which typically account for 40% of operational costs. Although crude oil prices have now come down substantially, the push for the cement industry to cut its carbon emissions will continue to drive the substitution of fossil fuels by alternative sources.

According to the World Business Council for Sustainable Development, the global average replacement of fossil fuel was around 13% for the cement industry in 2011, compared with only 2% in 1990.

In China, a typical cement production line with a daily production capacity of 5,000 tonnes can burn 300-400 tonnes of MSW per day. This is about the daily MSW volume of a Tier-3 or -4 city, where most of the country’s cement-production lines are located. In addition, they are usually quite far from residential areas. This could substantially reduce the chances of protests by residents – major risk for WTE projects. Thus, cement kilns are an ideal solution for resolving the MSW problem in more remote areas.

With the promulgation of “Standard for pollution control on co-processing of solid waste in cement kiln” 《水泥窑协同处置固体废物污染控制标准》(GB30485-2013), the use of cement kilns for co-processing waste is getting more attention from the public. Under the recently released “Soil Pollution Prevention and Control Action Plan”, the Chinese government will start pilot projects that will treat MSW in cement kilns. Six cement companies have been put under the pilot scheme and eight pilot projects have been selected for 2016. The success of these projects will set the standard for co-processing of solid waste in cement kilns in the future. DBS Asian Insights SECTOR BRIEFING 31 42

Although grate furnaces will remain the mainstream channel for treating MSW, we reckon that co-processing in cement kilns could still account for 10-15% of the MSW treatment market by 2020; we assume that 8-10% of cement kilns have daily MSW treatment capacity of 350-400 tonnes.

Diagram 28. Cement companies under pilot scheme and pilot projects

Cement company under pilot scheme: Province Company Anhui Anhui Conch Cement Co. Ltd. 安徽銅陵海螺水泥有限公司 Guizhou Guiding Conch Panjiang Cement Co. Ltd. 貴定海螺盤江水泥有限責任公司 Guizhou Zunyi Sancha Lafarge Shui On Cement co. Ltd 遵義三岔拉法基瑞安水泥有限公司 Hubei Huaxin Environmental Engineerging Co. Ltd. 華新環境工程有限公司 Hunan Huaxin Environmental Engineerging (Zhuzhou) Co. Ltd. 華新環境工程(株洲)有限公司 Jiangsu Liyang Sinoma Environment Co. Ltd. 溧陽中材環保有限公司 Pilot projects: Province Project Guizhou Zunyi South Region Co-processing of MSW in Cement Kiln Project 遵義市南部城區生活垃圾利用水泥窯協同處置項目 Guizhou Zunyi City Center Co-processing of MSW in Cement Kiln Project (sub project) 遵義市中心城區生活垃圾利用水泥窯協同處置項目（北部子項） Guizhou TCC Anshun Cement Co-processing of MSW in Cement Kiln Project (Daily Capacity 200 tons) 台泥（安順）水泥有限公司 200 噸/日水泥窯協同 處置城市生活 垃圾項目 Guizhou Yuping County Co-processing of MSW in Cement Kiln Project 玉屏縣利用水泥窯協同處理城市生活垃圾項目 Guizhou Guizhou Guiy ang Conch-Panjiang Cement Coprocessing of MSW & Sludge in New Dry Process Cement Kiln Project 貴州貴陽海螺盤江水泥有限公司利用水泥工業新型 干法窯處置 生活垃圾及污泥工程 Guizhou Shuicheng County Co-processing of MSW in Cement Kiln Project 水城縣利用水泥窯協同處理城市生活垃圾項目 Guizhou Guiding County Co-processing of MSW in New Dry Process Cement Kiln Project 貴定縣利用水泥工業新型干法窯處置生活垃圾工程 Guizhou Xishui County Co-processing of MSW in Cement Kiln Project 習水縣利用水泥窯協同處理城市生活垃圾項目 Source: Ministry of Industry of Information Technology DBS Asian Insights SECTOR BRIEFING 31 43

Healthy IRR Both MGF and FB plants have two revenue sources, i.e. the waste treatment fee and the sale of electricity to the grid. However, all electricity generated from cement kilns will be for internal use. Thus, cement kilns’ sole income is the waste treatment fee. This has also caused the waste treatment fee of co-processing of MSW to be a lot higher than that of MGF and FB (Diagram 30). Despite the differences in waste treatment fees, we reckon that projects of these three technologies are able to maintain project IRR of more than 10%. In fact, the treatment fee is not the only the factor that affects IRR. Other considerations include the investment amount, the heat value of MSW, and operational efficiency.

Although there have been instances where the treatment fee has fallen as low as 18 yuan per tonne – substantially lower than the usual 50 yuan per tonne – these are isolated cases and are usually awarded through open tenders. We reckon that they do not represent the general trend of the overall WTE market. The percentage of greenfield projects being awarded through open tenders is still small, with most of them negotiated directly with local governments; there is a lot less pricing pressure. In addition, some governments also set a minimum treatment fee, even for open tenders, to ensure service quality and treatment standards. In fact, the Guangdong government has stipulated that the MSW treatment fee cannot be lower than 80 yuan per tonne.

Diagram 29. Comparison between different technologies Moving grate furnace Fluidised bed Cement kiln

Description Waste is introduced by a waste The furnace is filled with a Waste is fed, with other raw of process crane through the tunnel at bed of quartz sand with a materials, at the higher end of one end of the grate, and it temperature of over 600˚C. Air an enormous rotating pipe which moves down the descending hotter than 200˚C is blown from is heated by an internal flame of grate – with drying, combustion, the bottom of the furnace, 2000˚C. As the pipe rotates, the and complete combustion separating sand particles to let combusted raw materials slowly sections – to the ash pit at the the air through. When the waste reach the bottom end, where other end. The hot exhaust gas is introduced, it is mixed with the they are quickly cooled to form is then treated to remove toxic sand and burnt. clinker. The clinker is used for the components. production of cement. Heating 1,200 kilocalorie/kilogramme 800 kcal/kg (3,360 kJ/kg) or 1,200 kcal/kg (5,040 kJ/kg) or value of (5,040 kilojoules/kg) or above above above Waste Auxiliary Fuel Nil (Diesel needed to ignite Coal (Diesel needed to ignite Nil (Waste is used as alternative incinerator) incinerator) fuel) Estimated 400,000-600,000 400,000-500,000 300,000 (additional investment) investment (yuan/tonne) DBS Asian Insights SECTOR BRIEFING 31 44

Advantages 1. Mature technology adopted 1. Lower initial investment; 1. Lower requirements of worldwide; 2. Higher waste combustion waste’s composition and 2. Lower requirements of efficiency; solid mass; waste’s composition and 3. Longer service life; and 2. Lower requirement for solid mass; waste pre-treatment; 4. Higher heat efficiency. 3. Lower requirement for 3. Very high heat efficiency; waste pre-treatment; 4. All ash and dry slag can be 4. Lower fly ash production; recycled for the production 5. Easier to operate; of cement; and 6. Lower cost of operation; and 5. Complete trapping of heavy metals, sulphur, and other 7. More stable in operation. pollutants within clinker with minimum emission of dioxins. Disadvantages 1. Higher initial investment; 1. Higher requirement on 1. Higher operating cost; and 2. Higher requirement on waste pre-treatment; 2. Limitation by cement maintenance; 2. More fly ash production; production. 3. Core technology relies on 3. More difficult to operate; imports; 4. Shorter duration of full load 4. Higher heat resistance operation; and requirement on incinerator; 5. Higher cost of operation due 5. Lower waste combustion to requirement on auxiliary efficiency; and fuel and pre-treatment of 6. Larger volume of facility. waste. Waste 50-80 40-60 140-170 treatment fee (yuan/ tonne)

Source: Euromonitor compiled from desk research, DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 45 Nuclear Power – On the Verge of Take-Off In November 2014, the State Council unveiled “Energy Development Strategy Action Plan 2014-2020”, which pledges to modernise the country’s energy structure. The action plan targets China’s installed nuclear capacity to reach 58 GW and those under construction to top 30 GW by 2020. It is expected that the country’s installed nuclear capacity would reach 120-150 GW by 2030. China’s installed nuclear capacity increased to 27 GW at the end of 2015 from 21 GW a year earlier. We project that 8.8 GW and 4.9 GW of new capacity will be added in 2016 and 2017, respectively.

Diagram 30. China’s nuclear power industry: Addition of installed capacity

Source: China Electricity Council, DBS Vickers

After the incident at Fukushima Daiichi Nuclear Power Station in Japan on March 11 2011, the Chinese government temporarily suspended approvals for new nuclear power stations and conducted a detailed safety review of nuclear power stations that were in operation. It was not until October 2012 that the State Council decided to steadily resume the construction of nuclear power plants. In November 2012, CGN Power’s Yangjiang Nuclear Power station obtained approval to start construction. In December 2014, the Unlike coal-fired National Nuclear Safety Administration approved the construction of Tianwan Phase II or natural gas nuclear project. utilities, nuclear power stations Unlike coal-fired or natural gas utilities, nuclear power stations do not pollute the air or directly emit sulfur dioxide, nitrogen oxide or greenhouse gases. According to the “Notice do not pollute on the Measures for Energy Conserving Electricity Dispatch” issued by NDRC and other the air or directly departments and circulated by the General Office of the State Council, electricity generated emit greenhouse using nuclear power is entitled to grid-dispatch priority over electricity generated using gases fossil fuels. DBS Asian Insights SECTOR BRIEFING 31 46

Unlike renewable energies like wind and solar whose supply is affected by weather and seasonality, nuclear power stations provide base-load power sources to meet demand 24 hours a day, seven days a week. Thus, we deem nuclear power to be the most efficient, low-carbon utility source for China to develop.

Diagram 31. Greenhouse gas emissions of different sources of energy

Source: International Atomic Energy Agency, DBS Vickers According to data from the International Atomic Energy Agency, nuclear generation accounted for 11.3% of total global generation in 2013; in 13 countries, nuclear power accounted for more than 20% of total generation. In France, nuclear energy is responsible for 73.3% of power generation. In comparison, China’s nuclear power only accounted for 2% of total generation in 2014, according to statistics from China Electricity Council.

Diagram 32. Nuclear power as a percentage of total power supply (2014)

Source: World Nuclear Association, DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 47

As of end-2015, China’s nuclear plants made up around 7% of the world’s 437 units in operation. There were 66 nuclear power units under construction as of end-2015, of which China accounted for 36.4%.

Chinese nuclear power companies are involved in nuclear power projects overseas as well, either through direct investments (i.e. capital from the Chinese government) or exports of China’s nuclear technology. China owns the complete intellectual property rights of Hualong One, a GIII nuclear technology jointly developed by state-owned entities, the China General Nuclear Power Group (CNGPC) and China National Nuclear Corporation (CNNC). The technology will further pave the way for China’s nuclear power industry to go global. According to Xing Ji, chief designer of the Hualong One nuclear reactor, CNNC is negotiating for projects in Saudi Arabia, South Africa, Singapore, and Sudan, all of which are interested in the technology. CGNPC is also negotiating to export Chinese nuclear technology to South Africa, Romania, Turkey, Czech Republic, and Poland.

The market was worried that the nuclear FIT might be reduced over time, after tariffs were cut for coal and wind power during 2015-2016. In our view, China is most likely to keep its nuclear FIT stable, considering: i) Higher unit capex of third-generation nuclear technology (eg. GIII French-derived technology for CNGPC’s Taishan Unit with a unit capex of 20,909 yuan/kW versus GII technology with a unit capex of 12,000 yuan/kW; ii) steady nuclear-power tariffs over the past two decades; and iii) the Chinese government’s ‘stability’ policy towards nuclear power as a base-load utility.

The market is also sceptical about China’s rush to build nuclear power plants using the third-generation ERP (European Power Reactor) technology created by France’s EDF. CGNPC’s Taishan project is deploying the GIII ERP.

Diagram 33. Levelised cost of energy for nuclear and wind power based on 2015 statistics

Wind power China nuclear power Cumulative Installed capacity (GW) 145 27 Project design life (y r) 20 40 Unit capex (Rmb/kW) 7,180-8,580 12,000* Average lead time of construction completion (yr) 0.75-1.0 5 Equity share (%) 20% 20% Cost of debt (%) 5.40% 4.50% Unit depreciation & amortisation (Rmb/kWh) 0.216 0.052 Unit fuel cost (Rmb/kWh) zero 0.057 O&M (Rmb/kWh) 0.011 0.017 LCOE (Rmb/kWh) 0.35 0.204

Source: CGN Power, China Longyuan, DBS Vickers *Note: China’s average capex for second generation (GII) and upgraded GII+ is around Rmb12,000/kW DBS Asian Insights SECTOR BRIEFING 31 48

Diagram 34. China’s nuclear power industry: Government policies

Date Policies

Nov-14 The State Council unveiled "Energy Development Strategy Action Plan 2014-2020", which pledges to modernise the country's structure. The action plan targets China's installed nuclear capacity will reach 58 GW and those under construction will top 30 GW by 2020. Jun-14 Chinese president Xi Jinping re-emphasised the importance of construction of nuclear power stations in the eastern coastal areas during the 6th Central Finance and Economy Leadership group meeting. May-14 The NDRC promulgated the 'Guiding Opinion on Strengthening and Improving the Adjustment and Management of Power Generation Opeation" which reiterated the priority on grid connection should first be given to renewable energies, including hydro, nuclear, co-generation units and comprehensive resource utilisation power generation units, and various levels of government authorities should actively promote the replacement of coal-fired power generating units with clean energy generating units. Apr-14 Chinese premier Li Keqiang presided over the opening of the first meeting of the new session of the National Energy Commission and expressed the government's intention to construct new nuclear power stations in coastal regions applying the highest international safety standards. Mar-14 PRC government's 2014 work report indicated that China would commence work on a number of additional nuclear power projects. Aug-07 The State Electricity Regulatory Commission published the "Notice on the Measures for Energy Conserving Electricity Dispatch issued by the NDRC and other departments and circulated by the General Office of the State Council". Pursuant to the notice, nuclear power's dispatch priority ranks behind renewable energy such as wind, solar, hydropower, but generally ahead of electricity generated using fossil fuels.

Source: NDRC, Public media, DBS Vickers DBS Asian Insights SECTOR BRIEFING 31 49 Appendix: Electricity tariff – Coal-fired versus nuclear power China on-grid tariff: Nuclear versus coal-fired power

Date Policies Coal-fired tariff* Nuclear tariff (Rmb/kWh, incl.VAT) (Rmb/kWh, incl.VAT) Nov-14 The State Council unveiled "Energy Development Strategy Action Plan Northern China Grid: 2014-2020", which pledges to modernise the country's structure. The action plan targets China's installed nuclear capacity will reach 58 GW and those Beijing 0.375 n.m** under construction will top 30 GW by 2020. Tianjin 0.381 n.m** Jun-14 Chinese president Xi Jinping re-emphasised the importance of construction Hebei (North) 0.397 n.m** of nuclear power stations in the eastern coastal areas during the 6th Hebei (South) 0.391 n.m** Central Finance and Economy Leadership group meeting. Shanxi 0.354 n.m** May-14 The NDRC promulgated the 'Guiding Opinion on Strengthening and Shandong 0.419 n.a.*** Improving the Adjustment and Management of Power Generation Opeation" which reiterated the priority on grid connection should first Northeast Grid: be given to renewable energies, including hydro, nuclear, co-generation Liaoning 0.386 0.414 units and comprehensive resource utilisation power generation units, Jilin 0.380 n.m** and various levels of government authorities should actively promote Heilongjiang 0.386 n.m** the replacement of coal-fired power generating units with clean energy generating units. Inner Mongolia (East) 0.307 n.m** West Inner Mongolia Grid: Apr-14 Chinese premier Li Keqiang presided over the opening of the first meeting of the new session of the National Energy Commission and expressed the Inner Mongolia (West) 0.294 n.m** government's intention to construct new nuclear power stations in coastal East China Grid: regions applying the highest international safety standards. Shanghai 0.436 n.m** Mar-14 PRC government's 2014 work report indicated that China would commence Jiangsu 0.410 0.455 work on a number of additional nuclear power projects. Zhejiang 0.445 0.414-0.464 Aug-07 The State Electricity Regulatory Commission published the "Notice on the Anhui 0.407 Measures for Energy Conserving Electricity Dispatch issued by the NDRC Fujian 0.407 0.414 and other departments and circulated by the General Office of the State Council". Pursuant to the notice, nuclear power's dispatch priority ranks Central China Grid: behind renewable energy such as wind, solar, hydropower, but generally Hubei 0.442 n.m** ahead of electricity generated using fossil fuels. Hunan 0.472 n.m** Henan 0.400 n.m** Jiangxi 0.440 n.m** Sichuan 0.440 n.m** Chongqing 0.421 n.m** Northwest Grid: Shaanxi 0.380 n.m** Gansu 0.325 n.m** Qinghai 0.337 n.m** Ningxia 0.271 n.m** Southern Grid: Guangdong 0.473 0.420-0.430 Guangxi 0.442 0.430 Yunnan 0.356 n.m** Guizhou 0.371 n.m** Hainan 0.453 0.430

Source: China Electricity Council, DBS Vickers Note: *Coal-fired tariff incl. the extra cost for desulfurisation and denitration **There is no nuclear power unit under operation in the province ***Nuclear projects in Shandong incl. Haiyang Power Station and Shidaowan Power Station are expected to commerce commercial operation in 2017 at the soonest DBS Asian Insights SECTOR BRIEFING 31 50

References

1. Dr. Kaimin Shih is an Associate Professor in the Department of Civil Engineering at the University of Hong Kong. He received his M.S. and Ph.D. degrees in Environmental Engineering and Science from Stanford University in the US. His research work is mainly on the engineering and employing of material properties for innovative waste and water treatment applications.

2. In a wet process kiln, calcining takes place after the water has been driven off, about a third of the way down the kiln. In the more modern pre-calciner kiln, the feed is calcined prior to entering the kiln. Thus, pre-calciner kiln is more suitable for co-processing of waste. DBS Asian Insights SECTOR BRIEFING 31 51

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