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Chinese offshore wind growth reflects improved returns

Publication Date: 17 Apr 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
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Investment Strategies Environmental, Social & Governance Equity Multi Asset China Energy

Growth in Chinese offshore wind power capacity has accelerated in recent years, reflecting lower costs and a relative improvement in tariffs compared with onshore wind power, according to a new report. 

In a note to its clients, Fitch Ratings said the Chinese government's target of increasing offshore wind capacity to 5 gigawatts (GW) by 2020 is likely to be achieved at the rate of construction.

Offshore wind turbine capacity of 1.2GW was installed in 2017, almost double the amount added in 2016, taking total offshore wind capacity to 2.8GW, up from less than 500MW in 2013. Total global installed offshore wind capacity was 18.8GW in 2017, of which 15.7GW was in Europe. 

Chinese offshore growth has been in contrast to its declining onshore installation, which fell by 19% to 18.5GW in 2017, due largely to low utilisation of existing capacity. Utilisation of onshore capacity has started to improve, and the government has lifted a ban on installation in some provinces previously affected by these curtailment issues.

The government is seeking industry feedback on a new renewable energy quota policy that would set provincial requirements for the proportion of electricity consumption coming from renewable sources, Fitch noted. The policy would help to reduce curtailment risks for wind-farm operators if implemented effectively. Accordingly, onshore installation is likely to rise in 2018, but we also expect strong growth in offshore installation to continue.

Offshore windfarms generally benefit from higher utilisation rates than onshore farms. Stronger offshore winds allow longer operational hours, while offshore farms can be located closer to load centres in more developed coastal provinces, offering more consistent demand. 

Most existing offshore wind projects are in inter-tidal zones along the coast of Jiangsu province, which was the second-largest consumer and largest net importer of power in 2017. Most of these projects are designed for 2500-2700 annual utilisation hours, compared with an average of under 2,000 hours for onshore turbines.

These benefits are balanced by higher capex for offshore wind projects, both in terms of overall scale and per unit of power. Construction, laying underwater transmission cables, and building transformer substations are more expensive at sea. 

A typical offshore wind project of 200MW-300MW requires capex of CNY3.5-5.5 billion, which is too large and risky for many companies. Unit capex of offshore wind projects commissioned in 2016 and 2017 was typically CNY16-19/watt, while it was around CNY20/watt for projects built in deeper sea. Onshore capex costs are around 7.5/watt on average.

Nevertheless, the economics of offshore wind farms have improved in recent years, both globally and in China, and are now more comparable with onshore projects, the ratings agency opined. "Capex costs, while still high, have fallen as offshore wind turbines have become larger and cheaper, and as the upward trend in offshore project construction has created economies of scale that have brought down construction and auxiliary equipment costs." 

Meanwhile, the standard on-grid tariff has been fixed since June 2014 at CNY0.85/kwh for offshore wind power and CNY0.75/kwh for farms in intertidal zones. In contrast, tariffs for onshore farms were adjusted down by 7%-18% from 2015 to 2018. We estimate that the extra annual revenue generated by offshore wind farms compared with onshore - taking into account higher tariffs and utilisation - is now comparable with the higher capex costs, suggesting similar returns.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma (Associate Editor ReachX)

 

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