A new mechanism for construction management systems of wind power development to reduce cost and improve economy Zhou

Shangjie , Vice-chief Engineer of China Hydropower Engineering Consulting Group Corporation CHECC Li Donghuiii,Senior Engineer, China Hydropower Engineering Consulting Group Corporation CHECC Abstract: During the process of construction and management, by bidding for concession has impelled the item owners to reduce the project cost and improve economic benefit within the license period, so as to achieve the maximum profits. This article tries to discuss the impact and effect of this model to Chinas construction system of electric power by demonstrating this models contents and its requirements to the project cost management. Keywords: wind power, license, bidding, cost
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1. Introduction The National Development and Reform Commission of the Peoples Republic of China invited the international bidders to bid for the two concession projects located at Rudong County, Jiangsu province and Huilai County, Guangdong province in April ,2003. Out of 9 firms two famous firms won the bids in September 2003. The concession in wind power development is a new mechanism after reform of power system in China. This mechanism introduces new financing system and attracts potential investors and reduce cost and improve economy. 2. Overview of wind power development in China In the past few years, the call for sustainable development has been increasing. Special attention has been given to clean and renewable energy resources by the governments of all the countries in the world after the requirement of mitigating green house gas stipulated in Kyoto Protocol. Various incentive polices supporting the development of wind power have been formulated by governments of different countries. Wind power has become a rapidly developed clean energy resources. The potential of wind energy resource in China is abundant. The wind energy potential available in the main land of China is 253GW (at 10m height). Annual potential production of wind power might be 506 Billion kWh to 632.5 Billion kWh, if the annual full load hours of wind power were estimated at 2000h to 2500h. The area of shallow sea along the east coast line of China is very huge, and offshore wind energy potential even more abundant. Preliminary estimation shows that offshore wind energy potential maybe three times that of onshore, i.e. 750GW. Offshore wind speed is higher and more stable than onshore, and wind sites are close to main load center of eastern China. However, the distribution of conventional energy recourses is uneven, so the wind energy is a complement to the conventional energy resources. The construction of electrically interconnected wind farms started in the beginning of 1980s. It developed rapidly at the initial period, though it started late. By the end of 2000, the installed

capacity of the wind farms amounts to 3440mw.The period of 1995-1997 sees a great increase with an installed capacity of 300mw in three year. By the end of 2003, the wind farms have a total installed capacity of 500mw.Despite of introduction of politics favored for wind energy development by the government, such as loans with discounted interest, the growth of wind energy was very slow. The major cause of the slow development is that the inherently monopoly of the electric power sector, which results in the concern of the potential investors in other sectors, while the middle- and small-scale investors are short of the resources to finance the power energy projects. The owners of the projects show little interest in reducing the project cost with an inadequate sense of save in cost, due to the pricing system of repaying capital with interest. The sustained high price of electricity makes the market hardly stand it. The advance of the structural reform in power sector, and the increase of wind energy development in China, the deeply hidden problems in wind power development have been gradually exposed. Before the reform, the production, transmission and distribution of power are fully handled by the government. The power departments regard the development of wind power, one of the renewable energy resources as their own responsibility, while they have to guarantee the normal balance between power supply and power demand. After the reform, the power utilities turned into independent power producers, and are separated from power grid companies, which are responsible for power transmission and distribution. The development of wind power will be no longer a responsibility of the power producing companies who aim at the profit making. So the driving force for the investment decreased. It is particularly true when the cost of wind power is higher than any other conventional power resources. Meanwhile the financing of wind power projects is lack of channels .The short terms of loan and lack of favorable conditions for interest of the loans provided by domestic banks, as a result only small-scale projects are executed. Without the involvement of financially potential developers in wind power development, it is difficult to commercialize the wind power industry. 3. Proposal for Concession The most demanding issue in Chinas wind power development at present is the expansion of wind power market by introduction of competitive mechanism to realize a commercialized development. This will help lower the cost and price of wind power energy and finally make the wind power an economically sound and clean energy. The concession was proposed against this background. By bidding for the concession for wind power development, the competitive mechanism will be introduced into building of large-scale wind power projects in China. The signing of concession agreement will make the investors give up their short-term interest for a long-term interest. In bidding for concession for wind power projects, the investors have to lower as much as possible their price of electricity. After winning the concession, the investors have to lower the cost of construction and operation during investment, construction and operation so as to obtain their maximum profit. The large-scale development projects will encourage the domestic manufacturers to increase the quality of their products and collaboration with overseas manufacturers. This will contribute to the cost reduction of wind power machines by expanding their productivities. The bidding for concession for wind power projects will also encourage the local investors to establish joint ventures with the alien firms in wind power development. This

will help improve the management of wind power industry and in the long run the cost of wind power production will be reduced. The process of the concession program is as follows: based on the results of preliminary investigation of the wind resources conducted by the local governments or the concerned authorities at the sites, an area with potential wind power resources for commercial development with wind power facilities of considerable size will be selected and granted to the successful bidders for the projects. The winner of the bid will be selected as the owner of the projects and he will take all risks concerning the investment, construction and operation of the projects. During the validity of concession, the successful bidder will have the right to own and operate the projects. The government undertakes to buy all the energy produced by wind projects there. This will be implemented through power procurement contracts signed between the local power grid authorities and the developers. The contract must be valid for the entire life of the project operation. The pricing of electricity shall be determined through bidding. The projects must be transferred free of change to the local government or its representative assigned by the local government when the concession expires. The operation life of the projects in the concession is set for 25 years (including 2-3 years of construction) as its predicted economic life. 4. Bidding for concessions By the end of 2002, two 100MW-wind farms (the Shibeishan wind power project in Guangdong and the Rulai wind power project in Jiangsu) were approved by the former State Planning Commission as the first demonstration wind farm concession. On April 1,2003, the international competitive bidding for the concession of these two projects was conducted and in September of 2003, the investors for these two projects were selected based on the result of bidding. The operation period for the projects was 25 years (including construction period). During the operation period, a two-stage price of electricity will be adopted. The first stage when accumulated power delivered to the power grid is less than 30,000h equivalent to the full-load operation hours; during which the price of electricity specified in the tender document of the successful bidder will apply. At the second stage when the power supply has accumulated to the amount equivalent to 30000h of operation, the average price of the power market shall apply. In order to promote the large-scale development and commercialization of wind power industry, and to attract the potential investors, the following specifications have been made in the tender documents. (1) Each of the wind farms will be 100mw in terms of installed capacity, with unit installed capacity over 600kW. (2) The procurement of local turbo-generating units shall be greater than 50%. (3) The selection of investors shall be made through competitive bidding. The lowest bidder will be granted the contract, provided his price is rational. The available power produced by the wind farms after the local power grid at the price specified in the above will procure its completion. The impact of the wind power price on the selling price of the electricity shall be considered in the provincial power price system. The Provincial Planning Commission shall be the tenderer. The successful bidders shall sign the agreement for concession with the Planning Commissions of the two provinces, and power procurement contracts with the power grid companies of the two provinces.

By the closing date September, 2003, 9 potential investors from both China and overseas submitted their bids. The bids were opened at the project sites on September 1 (Refer to Tables 1 and 2). The companies F and I won the concessions for the Rudong wind power project in Jiangsu province and the Huilai Shibeishan wind power project in Guangdong province with the lowest bid prices respectively. Table 1 Bids Opened at the site of Rudong wind farm, Jiangsu province Name of bidder Firm A Firm B Firm C Firm D Firm E Firm F Power tariff with an Income Tax Rate of 33% yuan /kWh 0.7191 0.6070 0.715 0.6087 0.6190* 0.4365 Power tariff with an Income Tax Rate of 15% yuan /kWh 0.6469 0.5850 0.682 0.5978 0.6716 0.3979 percentage of local turbines % 53.86 68.30 65.34 51.50 >50 68.4 RMBYuan0.4365/kWh and RMBYuan 0.5013/kWh (including taxes )

Table 2 Bids Opened at the site of Huilai wind farm, Guangdong province Name of bidder Firm G Firm H Firm I Firm J Firm K Power tariff with an Income Tax Rate of 33% yuan /kWh 0.6753 0.5414 0.5013 0.7179 0.5053* Power tariff with an Income Tax Rate of 15% yuan /kWh 0.6043 0.5306 0.4763 0.6796 0.4721* percentage of local turbines % 53.60 51.50 >60 68.40 68.30

Notes: The AVTs are included in the tariff listed in the tables. For the convenience of comparison, the original tariffs which did not include the AVTs have been readjusted. The figures ear-marked with * are the latest offer after considering the preferential terms at the bid opening site Based on the present price level in China, the per kilowatt cost of the wind power electricity is around 8,000 yuan, if it is produced by a 100 MW wind farm. If the assumed counting conditions are as follows: full load hours per year are 2,300 hours, the fixed number of year is 7 years, and all the investments internal rate of return is 8%, the average price of the grid electricity is 0.65 to 0.70 yuan per kWh during the ordinary management period, including the value-added tax. Comparatively, the bidding price is reduced 35% and 25% respectively (the price of the grid electricity is counted as 0.67 yuan per kWh, and the following calculation also takes this value as benchmark), so the purposes of reducing the cost of construction and reducing the price of electricity have been achieved preliminarily. If it is counted by the present measure method of repaying principle and paying interest on loans, the electricity price during this period is much higher, close to 1.00 yuan per kWh, because of the short grace period (7

years); while the average price of the grid electricity is 0.32 yuan per kWh. Thus it can be seen that preliminary model effect has been obtained by the bidding for concession. 5. Analysis of the composition of the wind farm cost The natural resources and the system cost mainly account for the cost of the wind farms. The natural resources mainly embody the annual amount of electricity of the naturally-operated wind turbines. The system cost includes the cost of the turbines, the fee of installation and purchasing the affiliated equipments, and the cabling costs along the roads to the wind farms and of connecting to the power grid. The electricity price of the wind farm results from the financing conditions, such as the capital ratio, lending rate and the grace period, and is also influenced by the government policies, such as the import tariff and the value-added tax, and the income tax and value-added tax of selling the electricity. At last, the electricity price is also affected by the measure method of electricity. The costs account for the biggest share in the electricity price, nearly 48.4% of the whole price(0.32 yuan per kWh if converted into the electricity price). Next is the scot, the value-added tax of which is about 14.5%(0.10 yuan per kWh), the additional tax 1.2%(0.01 yuan per kWh), and the income tax 11.9%(0.08 yuan per kWh). As the cost is a national policy, the owner has little possibility to adjust it. So, how to reduce the cost of the project construction and operation is a question that all the bidders mainly concern about. The bidding enterprises have made a good exploration on how to reduce the construction cost. Firstly, make use of the existing roads, purchase the turbines in batches so as to reduce the cost of the equipments, and take advantage of the present special policy of the import duties. The construction cost of the two winners was 7868 yuan per kWh and 7021 yuan per kWh respectively, which is lower than the common wind farms to some extent. Secondly, the cost can also be reduced by the strength and credit, and by way of financing improvement. Simply prolonging the loan time from seven years to fifteen years, can reduce about 0.10 yuan per kWh of the electricity price. Many commercial banks and other financial organizations have also promised to carry out the special interest rate (10 percent is decreased on the basis of the real rate of interest). The reason that the banks are so interested in the investment in the wind power construction is that the government has already promised a lump-sum purchase of the wind power (by signing the long-term power purchase agreement between the grid corporation and wind power investing enterprises). 6. Questions and suggestions The model item of bidding for concession of wind power generation has achieved the expected effect, but its still at the stage of preliminary experiment. At the same time, the other countries dont have the comparatively matural experiences for us to use as references, so many problems must be solved during the final stage of our work (1) The related legislation should be strengthened at once. Several problems of law and administration have been involved in the activities of development, construction, production, operation, prosecution and management of the wind power projects. As a whole, the present laws, codes and policies relating to the development of the wind power are comparatively ambiguous, some of which are not manipulable. Some aspects of the operation, such as the cooperation of the local authorities, the signing of the power purchase agreement and the insurance of the wind energys connection to power grid, still lack the effective regulations and specifications. The previous ministry of the electric power

had released a regulation to insure that the wind energy could be connected into power grid, requiring that all the groups relating to the grid account for the price difference between the price of the wind electricity and the average price of the grid electricity. But after the reform of the electric power system, some related definitions have been ambiguous. Some related authorities have investigated and established Chinas Law of Renewable Energy Development. The research and experiment of carrying out the compulsive share of the renewable energy is going on. We believe that Chinas laws about the wind power will be further developed. (2) The adjustment of the policy was taken into consideration when altering the electricity price, but the potential risk to the bidder resulting from the rise in price of the materials and equipments was not, which at last led to the cost risk of the item. In the case of furious fluctuation of the material price, we must investigate its influence on the electricity price and release the corresponding compensatory policy. (3) After the reform of the electric power system, the speed of the power supply construction and high-end power grid construction is very fast. But the construction of the low-end distribution grid, which has a close relationship to the wind power, might be ignored. But if the developers of the wind power give attention to the construction of the low-end distribution grid, the cost must be increased, which will make the originally high price of the wind electricity much higher. Therefore, the distribution and the construction of the power grid must meet the requirements of the wind power development. (4) The phenomenon of inequality does exist in the bidding documents about the electricity price between the bidders of the domestic enterprises and foreign enterprises. The Sino-foreign joint ventures can not only enjoy the special policy of exemption from import duties, but also enjoy the reduction and remission of the income tax, while the local enterprises cant enjoy the same special policy. Because of the tremendous impact of the tax on the electricity price of the wind power, its unfair of the unequal competition between the domestic and foreign enterprises. This problem has already aroused the attention of the related sections during the public bidding of this time. (5) At present, the deepness of the early work seems to be deficient, either as a whole or for every aspect. Therefore, to strengthen the early work, is an important way to further decrease the cost of the wind power items. 7. Conclusion (1) The public bidding for concession is a successful practice to Chinas reform of the construction management system of wind power sector. It has been a good model, and has built up a sound foundation for the exploitation of the wind power resources and for future development of the wind power industry. (2) Some competitive investment groups (including the private capital) have been attracted by the competitive bidding, which has turned diversified investors into reality. It has also increased the competition, and fully aroused the enthusiasm of every group . This has helped break through the monopolization. (3) The competitive bidding for concession has encouraged the investors to reduce the project cost and strengthen the management of the construction and operation processes, which has reduced the electricity price in the end . Based on the experience of this competitive bidding, China plans to develop dozens of

wind farms in the range of 100 to 200 MW in the short term. After entering WTO, a reformed and open China will get more opportunities to communicate with the other countries, and the wind power industry will have a bright future. Representor Profile: Mr. Zhou Shangjie,Senior Engineer, Vice-chief Engineer of China Hydropower Engineering Consulting Group Corporation CHECC , the director of Hydropower Standardization Center, China Society for Hydropower Engineering and China Engineering Cost Association.