Energy & Resources

Plenty of puff

Chinese wind power revives as investor favourite


A sudden surge in wind power

China’s windpower sector had a surge in the final quarter of 2020, notching up more new additions in December (47 gigawatts) than in 2018 and 2019 combined, according to Wood Mackenzie, the global energy consultancy.

A record 72GW of new wind capacity was reported last year in total, with renewable energy back at the top of the domestic policy agenda, following two major speeches by President Xi Jinping.

Last September Xi said that China would be carbon neutral by 2060 and in December he told the UN Climate Ambition Summit that China plans to triple its renewables capacity to 1,200GW by 2030.

The Chinese also added about 48GW of solar, the most since 2017, and about 13GW of hydropower.

In WiC526 we reported on how similar momentum has been propelling solar power stocks back to new highs. Shares of wind power firms are in full sail after a long period stuck at lower valuations too. Industry leaders like wind farm operator Longyuan Power averaged just 0.7 times price-to-book for about three years. This prompted a swathe of state-backed players to delist from the Hong Kong Stock Exchange, including China Power New Energy Development, Huaneng Renewables and Huadian Fuxin.

Longyuan’s shares have more than tripled since May 2020 and it is trading at 1.8 times price-to-book, according to S&P Global Market Intelligence data (although still some distance back on Danish competitor Ørsted’s 5.4 times).

Longyuan is in the process of buying sister company Inner Mongolia Pinzhuang Energy and executing a dual listing in Shenzhen. It is also acquiring 2GW of wind capacity from its parent China Energy Investment Corp. The parent firm has about 15GW of unlisted wind assets, and Longuan has committed to ramping up its capacity by 80GW over the next four years.

So why did wind stocks perform poorly until recently? The shortcomings of the government’s subsidy scheme was a factor: companies had invested billions in new capacity but the Renewable Energy Fund hasn’t been paying out subsidies on time after running up a massive deficit, estimated at Rmb200 billion ($30.96 billion).

Longyuan’s financials show that its accounts receivables shot up from Rmb7.15 billion ($1.1 billion) in 2017 to Rmb21.5 billion in June 2020, according to S&P data.

However, the irony is that the state subsidies were also a major factor in the rush of installations – or more specifically, the announcement that the subsidies would be phased out for onshore wind farms built after the end of 2020.

Such was the flood of new onshore projects that some commentators have claimed that the figures must include capacity installed in earlier years but not previously connected to the grid.

Feed-in tariffs for offshore projects will largely come to an end this year as well, which is likely to encourage another burst of construction over the next few months, analysts have predicted.

Going forward the government is prioritising non-subsidised projects that get close to grid-parity with fossil-fuelled power. The costs of building new wind power projects has been falling rapidly. But the focus then turns to other milestones, such as when renewable power is costing less to construct than the operating expense of existing coal-fired generation.

The focus on more cost-effective installations shouldn’t detract from other challenges in the industry.

An obvious one is a shortage of energy storage capacity (wind power isn’t as predictable, particularly onshore), while the national grid is optimised for coal-fired power.

Another challenge is transmission. The government is building ultra-high voltage lines from northern and western regions of China – where much of the renewable energy is generated – to major urban centres in the south and east (see WiC523 for an update on the UHV grid). But utilisation of existing capacity is nowhere near what it could be.

Smartkarma’s Mio Kato has estimated that China’s onshore wind farms were operating at 2.6% of their technical capacity in 2019.

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