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China could yet swing to power over-supply as generation continues apace
14/09/2005. Source:KPMG.
 Despite constant reminders of China’s insatiable appetite for all forms of energy, private equity investors should be aware that fears still remain that the country could actually swing rapidly from shortage to over-supply, according to an energy sector report from KPMG in China.
The report also highlights the urgent need for further investment in China’s national grid. Despite accounting for 40 percent of all investment in the electric power sector between 1995 and 2003, the grid remains unfinished and - as such - is proving a major obstacle for overcoming China’s power supply issues.
Commenting on the report, Stephen Machin, Head of Power & Utilities at KPMG in the UK, said: “The Chinese government’s increasingly cohesive energy strategy is beginning to pay dividends as the country steps up energy production in an effort to meet surging demand. What may surprise outsiders however is that there is still a fear that the incredible efforts to extend capacity could dramatically overshoot the mark, creating excess supply within a few years if all projects currently underway reach completion.”
“Several years ago, in the wake of the Asian financial crisis, China slowed power plant construction, anticipating reduced power consumption growth. This did happen but a sharp rebound in power demand in 1999 then caught the government unaware, resulting in widespread power shortages. This in turn sparked a further round of power generating projects but the government is keen to make sure that supply is balanced against demand this time. What is not helping the situation is the government’s estimate that nearly 120,000 megawatts of unauthorized capacity – normally coal-fired power plant projects being pushed through by local administrations - is now being built.”
Irrespective of how much power can be generated however, the issue of transmission still remains critical. The Chinese government started joining up the country’s north and central electricity networks in 2003 but there is still much work to be done. Many power cables tend to be old and poorly maintained, making electricity transmission highly inefficient.
The KPMG report points out that while coal continues to supply the lion’s share of China’s power needs, there is an expectation that nuclear power will be a major growth area for the Chinese authorities. Between them, China’s nine nuclear reactors provided seven gigawatts (gw) of power in 2003 – or two percent of China’s power supply. According to the Chinese Atomic Energy Authority, China aims to have 36gw of installed nuclear generating capacity by 2020, necessitating the building of 27 further nuclear plants. Construction of the first two was sanctioned by the government in 2004.
Meanwhile, the coal industry is expected to undergo a period of radical modernization and rationalization. Stephen Machin explained: “The increasing pressure to raise coal output is stretching mining capacity and contributing to higher casualties in a sector which already had a poor safety record. The government is now working to streamline the industry by nurturing the development of a handful of home-grown state enterprises. Rationalization across the sector will then most likely see the emergence of several major domestic players, as thousands of smaller mining operators are forced out of business. However, the introduction of modern technology and safer mining techniques will help improve safety standards across the board and establish more secure supply.”
Investment is not just being stepped up in the traditional generating sectors. Hydropower is touted as the next big thing in China, with official sources reckoning that the country’s hydro-electric capacity is potentially as high as 300gw – with less than a third of that exploited to date. The levels of investment needed to realize that potential are enormous. Recent press reports suggested that the current Three Gorges Dam plan is expected to ultimately cost US$22 billion but will supply 18.2gw of power, making it the single largest generating facility in the world. Despite the enormous cost, the Chinese appetite for hydropower is not expected to diminish.
Stephen Machin concluded: “China is already ranked second in the world in terms of power generation capacity. Foreign investment and technology is playing an increasingly large role in the development of further capacity with a number of foreign power companies gaining access to major projects in the mainland market. The issues and challenges of matching efficient energy supplies to meet China’s burgeoning demand will be an underlying component of international political relationships and the world’s capital markets for years to come. The energy needs of the Chinese people are now a major factor in the complex global energy supply and demand equation.”
KPMG is the global network of professional services firms who provide audit, tax and advisory services. KPMG LLP operates from 22 offices across the UK with 9,000 partners and staff. KPMG recorded a UK fee income of £1,066 million in the year ended September 2004. KPMG LLP, a UK limited liability partnership, is the UK member firm of KPMG International, a Swiss cooperative. For further information visit www.kpmg.co.uk
© 2005 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative.
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