CHINA'S first public tender for concession offshore wind farms, which ended early this month, is showing a cut-throat price war among project developers, mainly state companies eager to tap the business.
The tender, initiated in May, comprises four projects off the coast of east Jiangsu Province, with a combined capacity of 1 gigawatt.?It has drawn 70 bids from local companies or consortiums, some of which offered to deliver power at tariffs as low as 0.61 yuan (9 US cents) per kilowatt, a rate far below market expectations and a rate at which projects may be unprofitable.
"The offerings are patently too low," said Changjiang Securities analyst Liu Yuanrui, who said 0.8 yuan per kWh should be the appropriate rate, based on the tariff at Donghai Bridge Wind Farm, China's only major existing offshore wind mill. The Shanghai-based wind farm, a pilot project, was developed at a rate of 0.98 yuan per kWh.
Early foothold
China Power Investment Corp, parent of Hong Kong-listed China Power International Development Ltd, appeared to be the most competitive bidder in the Jiangsu tender, offering the lowest tariff for three of the four projects, followed by Datang International Power Generation Co and its parent's new energy unit.
The intention of the state utilities is simple: by winning contracts, backed by solid financing, they can fulfil the government's clean-energy objectives and grab an early foothold in the nascent sector.
Wind power capacity accounted for only 1.5 percent of China Power's total installed capacity in 2009, the lowest rate among China's top five state power generators. The situation has prompted the company to tap more renewable energy sources or face obstacles in winning state approval to build more coal-fired stations in future, Liu said.
The government has yet to announce the winning bids, but industry sources said it may not award the projects to the lowest bidders. The sources said that other factors, such as technology levels and operational management, are also likely to be taken into account, though price still dominates any evaluation. The government is keen to avoid replicating mistakes made when onshore wind projects were tendered.
In the mid-2000s, the National Development and Reform Commission held similar bid tenders for onshore wind farm concession projects, awarding projects to lowest bidders to encourage a cut in wind power prices.
However, some of the winning concessions offered tariffs that proved to be too low to be viable, forcing the NDRC to modify the rules in 2008 by reducing the role price played in the overall evaluation. In July last year, the top planning body scrapped the case-by-case tendering mechanism and standardized tariffs for onshore projects after finding many plants were suffering from low margins, or even losses, due to low utilization rates.
The planning commission set the standardized tariffs charged by wind farms to grid companies at 0.51 yuan, 0.54 yuan, 0.58 yuan and 0.61 yuan per kWh, varying by regions according to different levels of wind resources. The high end is already on par with the lowest offer in the latest offshore tender.
At present, onshore wind is more economical than development offshore, where wind farm construction takes place in a more hostile environment.
Still, Huatai United Securities analyst Ye Tao said the government's intention to drive down costs as rapidly as possible could help companies with low tariff offers in the latest tendering.
"It's not all bad for such low offers to occur in the first round of tender," Ye said. "Should the projects be developed smoothly, the government could accelerate and expand the bidding process, pushing forward the offshore wind sector beyond planning."