Talking Point

Power grab?

State Grid is about to make the single biggest investment ever

New dawn for China’s power industry: will State Grid be the biggest beneficiary?

Uncover a major political controversy, and the English-speaking media will often try to add a ‘gate’ to it.
The original ‘gate’ – Watergate in 1972 – was named after the office complex in Washington bugged by Richard Nixon.
But there have been plenty more. Reagan had Iran-gate, Clinton got Monica-gate and Italy’s Silvio Berlusconi is currently experiencing a Ruby-gate of his own.
But did you know the word ‘pylon’ is derived from the Greek term for ‘gate’?
WiC mentions this linguistic coincidence because a plan to spend billions erecting new pylons across China is proving controversial too.
Welcome to Grid-gate…
Who is behind the plan?
State Grid is one of the most powerful companies in China today. In the current five-year plan the government has given it the go-ahead to invest Rmb500 billion ($76.8 billion) in a new ultra high-voltage (UHV) power grid.
That’s the largest amount ever invested by a single Chinese company. To put the scale of the spending in perspective, CBN compares it with China’s last mega-spend in the power sector: the world-famous Three Gorges Dam. But that project  cost Rmb203 billion, meaning that the UHV grid will cost two and half times as much. Or perhaps even more: China Securities Journal reports that by 2020 State Grid will  have spent Rmb600 billion on UHV.
The new grid and the Three Gorges Dam have more in common than their massive outlay. Experts are divided on their benefits, hence the controversy.
This is not the first time we’ve written about UHV. We first mentioned the plans back in WiC3 and again in WiC45 in a discussion of ‘smart grids’.
The cheerleaders at State Grid portray UHV as the ultimate win-win, saying it’s a new technology based on 139 Chinese patents, which means most of the manufacturing will be done at home, stimulating the economy.
They also claim it’s a vital solution to China’s energy needs. The cables are designed to shift electricity over far greater distances, meaning that power generated in the west of the country (from abundant coal resources and hydroelectric dams) can be moved to cities in the east where the demand is greatest.
State Grid argues that this is a greener solution than moving coal around the country on trains – and will help avoid costly power cuts in winter when transport gets disrupted by heavy snowfall.
But according to an article in New Century Weekly, some power industry veterans disagree.
In fact 23 such experts felt so strongly that they signed a joint letter to Premier Wen Jiabao in December raising questions about UHV’s likely success. According to New Century, the experts called the project too expensive and said it would never reach promised voltage levels.
They saw a further danger, predicting that State Grid’s plans to interlink (what are currently regional) distribution systems “could raise the risk of nationwide blackouts” should the UHV technology prove to have problems operationally.
They also criticised a UHV pilot project State Grid had built between Shanxi and Hubei, saying the 653km transmission line had underperformed. When State Grid completed the trial line – to demonstrate high-voltage transmission to the government – it was supposed to carry a capacity of 5 million kilowatts. But since it began operating in 2009, it has never handled more than 2.83 million kilowatts.
A flawed technology?
The 23 experts said there was a reason that UHV power lines had not been built in other countries. Japan, Italy and the US have all carried out extensive tests on similar technology – which uses million kilovolt alternate current (AC) rather than a standard 500,000 kilowatt direct current (DC). And all three opted not to use it.
What’s more, the critics complained that State Grid’s own test project was delivering less power than the standard DC line delivering electricity to Guangdong from the Three Gorges Dam.
Bottom line: any dream of criss-crossing the country with UHV lines will turn out to be a costly white elephant, they said. It is cheaper to ship coal across the country than build such a power network.
However, when State Grid got wind of the letter to the prime minister, it sent all 23 critics a missive of its own. In a letter dated January 30 it rebuked their negative assessment, insisting that the UHV pilot had been a “complete success.” It also refuted the cost argument, saying UHV was 27% cheaper to install than comparable DC transmission.
WiC doesn’t pretend to be an expert on power transmission technologies, and thus cannot offer a definitive view on the merits and stability of UHV.
But what is clear is that some of UHV’s critics within the power industry are concerned that they’ll be marginalised if the plans go ahead.  Once it has built nationwide UHV, State Grid will effectively have a distribution stranglehold over China’s power supply. Rivals fear it will want to start generating power too, starting a process of vertical integration that will challenge other industry players.
To put the debate in context, you have to go back to 2002 when market-friendly Chinese officials pushed through changes to power sector rules designed to make the sector less monopolistic.
The reform created five major power generation groups; it divided the grid between State Grid and the smaller China Southern Power Grid; and it decreed that there would be four auxiliary businesses responsible for building power plants.
The reformers only got so far, with both grid firms managing to retain control of the auxiliary businesses. When the reform camp pushed for these to be spun off into independent entities, State Grid resisted.
Caijing magazine points out that State Grid won the argument after a series of crushing power shortages during the heavy snows of early 2008. It then made the case to the State Council that such emergencies showed the merits of keeping the grid and the auxiliary firms together for network repair and maintenance purposes. Combining roles was the best way to  guarantee a continuous power supply, it argued.
Who is winning the debate now?
Right now, State Grid looks to be very much in the ascendant, and not just in the UHV battle. It was also announced last week that the government had given it permission to merge its two auxiliary busineses (China Gezhouba and CPECC). This follows State Grid’s acquisition of two power equipment makers last year (Pinggao Electric and XJ Electric). Caijing reports that State Grid’s shareholder Sasac (see WiC45) wants to create powerful national champions – using a philosophy that state firms should be ‘bigger and better’. The current consolidations are thus designed to nurture firms big enough to win lucrative contracts abroad (on the flipside: they may lead to less competition in the local market).
To its rivals and those who have championed power sector reform, this latest exercise in integration speaks volumes. And it fuels suspicions that UHV is State Grid’s latest powerplay for turning the clock back to pre-2002,  nullifying the reforms and cementing its future dominance. After all, with UHV it will be the gatekeeper for moving electricity around the entire nation.
Nor is this a company with modest ambitions. You may be surprised to hear it owns a bank. You’ll be less surprised to hear it’s building a network of charging stations around the country to ‘fuel’ China’s future shift to electric cars (see WiC49) – a move that may see petrol stations begin to close down.
So by 2020 State Grid could be all-pervasive: generating electricity from its own power stations, moving it through its distribution network to every city, and then charging drivers to refill their cars with it. All billed via a credit card issued by State Grid’s own bank too (bonus points for drivers if they do so, perhaps…)
If that scenario plays out, State Grid will almost certainly be the most powerful company in China.
Power shortages ahead…
Proponents of UHV – which will be financed by bonds bought by state-owned insurers, as well as from loans from state banks – have likely gained a boost from news that China will have its worst-ever power shortages this summer.
The power cuts will be severe in the coastal areas: Jiangsu, Zhejiang, Anhui and Fujian provinces are predicted to be the hardest hit, along with the city of Shanghai. State Grid told Xinhua that shortages of up to 30 gigawatts are possible (about 3% of China’s generating capacity). Shanghai officials says it could be so bad that Pudong’s department stores may be deprived of electricity and thus shut to shoppers.
Paradoxically, these shortages should strengthen State Grid’s hand. Headlines about outages will make it easier for the government to justify why so much needs to be spent on the new power network.
Of course, this will not address concerns about potential corruption. The grid will require huge procurement contracts, meaning lucrative opportunities for bureaucratic graft. After the kickbacks scandal that’s engulfed high-speed rail spending (see WiC95), government officials will be keen to prove to the public that ‘Grid-gate’ won’t follow ‘Rail-gate’.
But the cynics are already pointing out you don’t have to skim very much from $76.8 billion to amass a fantastic fortune.

Uncover a major political controversy, and the English-speaking media will often try to add a ‘gate’ to it.

The original ‘gate’ – Watergate in 1972 – was named after the office complex in Washington bugged by Richard Nixon.

But there have been plenty more. Reagan had Iran-gate, Clinton got Monica-gate and Italy’s Silvio Berlusconi is currently experiencing a Ruby-gate of his own.

But did you know the word ‘pylon’ is derived from the Greek term for ‘gate’?

WiC mentions this linguistic coincidence because a plan to spend billions erecting new pylons across China is proving controversial too.

Welcome to Grid-gate…

Who is behind the plan?

State Grid is one of the most powerful companies in China today. In the current five-year plan the government has given it the go-ahead to invest Rmb500 billion ($76.8 billion) in a new ultra high-voltage (UHV) power grid.

That’s the largest amount ever invested by a single Chinese company. To put the scale of the spending in perspective, CBN compares it with China’s last mega-spend in the power sector: the world-famous Three Gorges Dam. But that project cost Rmb203 billion, meaning that the UHV grid will cost two and half times as much. Or perhaps even more: China Securities Journal reports that by 2020 State Grid will have spent Rmb600 billion on UHV.

The new grid and the Three Gorges Dam have more in common than their massive outlay. Experts are divided on their benefits, hence the controversy.

This is not the first time we’ve written about UHV. We first mentioned the plans back in WiC3 and again in WiC45 in a discussion of ‘smart grids’.

The cheerleaders at State Grid portray UHV as the ultimate win-win, saying it’s a new technology based on 139 Chinese patents, which means most of the manufacturing will be done at home, stimulating the economy.

They also claim it’s a vital solution to China’s energy needs. The cables are designed to shift electricity over far greater distances, meaning that power generated in the west of the country (from abundant coal resources and hydroelectric dams) can be moved to cities in the east where the demand is greatest.

State Grid argues that this is a greener solution than moving coal around the country on trains – and will help avoid costly power cuts in winter when transport gets disrupted by heavy snowfall.

But according to an article in New Century Weekly, some power industry veterans disagree.

In fact 23 such experts felt so strongly that they signed a joint letter to Premier Wen Jiabao in December raising questions about UHV’s likely success. According to New Century, the experts called the project too expensive and said it would never reach promised voltage levels.

They saw a further danger, predicting that State Grid’s plans to interlink (what are currently regional) distribution systems “could raise the risk of nationwide blackouts” should the UHV technology prove to have problems operationally.

They also criticised a UHV pilot project State Grid had built between Shanxi and Hubei, saying the 653km transmission line had underperformed. When State Grid completed the trial line – to demonstrate high-voltage transmission to the government – it was supposed to carry a capacity of 5 million kilowatts. But since it began operating in 2009, it has never handled more than 2.83 million kilowatts.

A flawed technology?

The 23 experts said there was a reason that UHV power lines had not been built in other countries. Japan, Italy and the US have all carried out extensive tests on similar technology – which uses million kilovolt alternate current (AC) rather than a standard 500,000 kilowatt direct current (DC). And all three opted not to use it.

What’s more, the critics complained that State Grid’s own test project was delivering less power than the standard DC line delivering electricity to Guangdong from the Three Gorges Dam.

Bottom line: any dream of criss-crossing the country with UHV lines will turn out to be a costly white elephant, they said. It is cheaper to ship coal across the country than build such a power network.

However, when State Grid got wind of the letter to the prime minister, it sent all 23 critics a missive of its own. In a letter dated January 30 it rebuked their negative assessment, insisting that the UHV pilot had been a “complete success.” It also refuted the cost argument, saying UHV was 27% cheaper to install than comparable DC transmission.

WiC doesn’t pretend to be an expert on power transmission technologies, and thus cannot offer a definitive view on the merits and stability of UHV.

But what is clear is that some of UHV’s critics within the power industry are concerned that they’ll be marginalised if the plans go ahead. Once it has built nationwide UHV, State Grid will effectively have a distribution stranglehold over China’s power supply. Rivals fear it will want to start generating power too, starting a process of vertical integration that will challenge other industry players.

To put the debate in context, you have to go back to 2002 when market-friendly Chinese officials pushed through changes to power sector rules designed to make the sector less monopolistic.

The reform created five major power generation groups; it divided the grid between State Grid and the smaller China Southern Power Grid; and it decreed that there would be four auxiliary businesses responsible for building power plants.

The reformers only got so far, with both grid firms managing to retain control of the auxiliary businesses. When the reform camp pushed for these to be spun off into independent entities, State Grid resisted.

Caijing magazine points out that State Grid won the argument after a series of crushing power shortages during the heavy snows of early 2008. It then made the case to the State Council that such emergencies showed the merits of keeping the grid and the auxiliary firms together for network repair and maintenance purposes. Combining roles was the best way to guarantee a continuous power supply, it argued.

Who is winning the debate now?

Right now, State Grid looks to be very much in the ascendant, and not just in the UHV battle. It was also announced last week that the government had given it permission to merge its two auxiliary busineses (China Gezhouba and CPECC). This follows State Grid’s acquisition of two power equipment makers last year (Pinggao Electric and XJ Electric). Caijing reports that State Grid’s shareholder Sasac (see WiC45) wants to create powerful national champions – using a philosophy that state firms should be ‘bigger and better’. The current consolidations are thus designed to nurture firms big enough to win lucrative contracts abroad (on the flipside: they may lead to less competition in the local market).

To its rivals and those who have championed power sector reform, this latest exercise in integration speaks volumes. And it fuels suspicions that UHV is State Grid’s latest powerplay for turning the clock back to pre-2002, nullifying the reforms and cementing its future dominance. After all, with UHV it will be the gatekeeper for moving electricity around the entire nation.

Nor is this a company with modest ambitions. You may be surprised to hear it owns a bank. You’ll be less surprised to hear it’s building a network of charging stations around the country to ‘fuel’ China’s future shift to electric cars (see WiC49) – a move that may see petrol stations begin to close down.

So by 2020 State Grid could be all-pervasive: generating electricity from its own power stations, moving it through its distribution network to every city, and then charging drivers to refill their cars with it. All billed via a credit card issued by State Grid’s own bank too (bonus points for drivers if they do so, perhaps…)

If that scenario plays out, State Grid will almost certainly be the most powerful company in China.

Power shortages ahead…

Proponents of UHV – which will be financed by bonds bought by state-owned insurers, as well as from loans from state banks – have likely gained a boost from news that China will have its worst-ever power shortages this summer.

The power cuts will be severe in the coastal areas: Jiangsu, Zhejiang, Anhui and Fujian provinces are predicted to be the hardest hit, along with the city of Shanghai. State Grid told Xinhua that shortages of up to 30 gigawatts are possible (about 3% of China’s generating capacity). Shanghai officials says it could be so bad that Pudong’s department stores may be deprived of electricity and thus shut to shoppers.

Paradoxically, these shortages should strengthen State Grid’s hand. Headlines about outages will make it easier for the government to justify why so much needs to be spent on the new power network.

Of course, this will not address concerns about potential corruption. The grid will require huge procurement contracts, meaning lucrative opportunities for bureaucratic graft. After the kickbacks scandal that’s engulfed high-speed rail spending (see WiC95), government officials will be keen to prove to the public that ‘Grid-gate’ won’t follow ‘Rail-gate’.

But the cynics are already pointing out you don’t have to skim very much from $76.8 billion to amass a fantastic fortune.


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