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).