APPROACHING THE GIANT: CHINA
by Chris Gadomski

China's size, rapid economic growth, and huge appetite for new electric generating capacity have attracted many power project developers in recent years, producing a bonanza of letters of intent and memorandums of understanding among Chinese provincial power bureaus, municipalities, and developers. Although most of these projects are queued in a protracted and uncertain approval process, long-term optimism prevails. Analysts close to the market suggest that the development process should uncork this summer with several financial closings.

But some projects are already well on their way and may provide strategic clues to investment success in this enormous yet tricky energy market.

King Coal
Community Energy Alternatives (CEA), a subsidiary of Public Service Electric & Gas, is developing two 300-megawatt (MW) coal-fired units in the northwest province of Gansu through China-U.S. Power Partner L.P., its China subsidiary. CEA has a 30-percent, $108-million stake in the project. Jinyuan Phase II, which China's State Planning Commission approved last December.

Jinyuan represents a promising market in China--the development of large-scale coal-fired facilities. CEA managing director Colin Tam says that the company's maiden Chinese power project will be one of the first and largest U.S. Investments of its kind approved by China's government and financed through capital debt. CEA has partnered with the State Energy Investment Corporation of China, which holds 50 percent of the project, and Gansu Electric Power and Gansu Electric Power Construction Investment and Development Company, which hold 20 percent.

Although Tam has said that the negotiated rate of return was consistent with the government's suggested level of 15 percent, he negotiated terms that "enhance the returns" under certain condition.

Coastal LNG Projects
The Wing Group, a Houston developer representing the interests of several utilities, has signed memorandums of understanding for three proposed liquid natural gas (LNG) projects, totaling 7,200 MW, to be located in China's coastal provinces--Jiangsu, Shanghai, and Zhejiang. The Group also signed a letter of intent with the Shanghai Electric Power Bureau to build a 650-MW liquid petroleum gas plant near Shanghai City.

LNG projects are relatively low-cost and, using combined-cycle gas turbines, require only a short lead time. According to the Group, they are an effective alternative to building coal-fired plants on the coast--hauling the coal would burden an already strained transportation system. Taking into account the required rail costs (mostly China's responsibility), the capital cost of a coal facility that uses the best technology would be between $2,300 and $2,800 per installed kilowatt, significantly more than the $1,700-$2,200 estimated for an LNG project.

Strategic Alliances
To pursue those coastal projects and expand cooperative efforts in other countries, the Wing Group formed a strategic alliance with Mobil last March to develop independent power projects.

Recognizing the value of a complementary partner, Exxon Energy and Duke Energy have also allied, agreeing to pursue greenfield power investment and privatization opportunities outside Hong Kong and Guangdong province. The Exxon subsidiary has been in the power generation business in Hong Kong for more than 30 years in a joint venture with China Light & Power. Duke Energy, with 2,000 MW of independent power in the United States, Argentina, and Indonesia, also has plenty of experience. Duke Energy opened a Hong Kong office in early 1994 to concentrate on electric power opportunities in Asia and is developing several projects in China.

Opportunities in China have attracted other international alliances as well. Electricite de France, China Light & Power, and Shandong International Trust and Investment Corporation, for example, are developing a project to finance, build, and operate three coal-fired power plants with a total capacity of 2,400 MW.

Small Can Be Beautiful
As many large projects plod through the approval process, Enron has been quietly building a $130-million, 150-MW, oil- or gas-fired plant on Hainan Island. It's an example of a strategy advocated by several developers who say that smaller projects in China may be more profitable and less risky because they have less onerous approval requirements, are less costly, and can come on-line sooner.

Last September Enron signed an agreement to build, own, operate, and transfer the project. With all necessary approvals, construction began last October, even though financing for the project was reportedly still in the works as of this spring. The project is scheduled for on-line operation by year end.

AES and its subsidiary, AES-China Generating Company, reported this spring that their Xiangci plant, a 5-MW hydro facility, is operating well, and that the remaining 21 MW under construction should be completed by the end of the summer. The company also added the 9-MW Yangchun Fuyany diesel project, which is to expand to a total capacity of 15 MW by early 1996.

Large-Scale Financing Blueprint
To facilitate financing of large power projects, Asian Development Bank has financed a contract awarded to Price Waterhouse in partnership with Morrison and Foerster (a U.S. law firm) and PowerGen plc, Britain's second-largest power company. The group will advise on technical specifications, legal ownership structure, and a competitive bidding process for the Waigaoqiao II 1,800-MW power project in the Shanghai area. The resulting financing package for the coal-fired plant could lead to a blue-print for many future projects in China, raising the promise that China will shift toward Western-style financing and away from limiting foreign stakes and capping profits.

 

ABOUT -----CLIENTS ----- SERVICES ----- HOME ----- BARUCH ----- NYU ----- CONTACT