May 17, 2015 / 9:31 PM / 3 years ago

Chinese wind earnings under pressure with fifth of farms idle

SHANGHAI/HONG KONG (Reuters) - China’s wind farm firms are feeling the heat as state grid operators deliberately delay hooking them up and cut back on purchases, wasting about a fifth of the total wind power output or enough electricity to run Beijing for 40 days.

China is now the world’s top wind power producer thanks to policies designed to boost renewable energy use, with an installed capacity of over 100 gigawatts - more than a quarter of the world’s total and almost enough to light up Spain.

But capacity has raced far ahead of grid construction, with state grid operators reluctant to connect wind farms in remote areas as long as their profit margins on renewables lag that of coal-generated electricity.

Instead, they are resorting to a practice known as curtailment, or slowing the connection of wind turbines to their grids and limiting the use of wind power. This in turn is leading to wasted capacity and lower returns on wind power investments.

“Considering the huge growth in wind instalment we saw last year, curtailment is going to be a big problem (for wind power producers) ... China is one of the worst countries affected,” said Shanghai-based Shane Sun with international renewable energy consultancy MAKE.

In the first three months, curtailment almost doubled from a year ago to 10.7 billion kilowatt-hours, nearly a fifth of total wind power generated in China, official data showed. That’s equivalent to output generated with about 3.5 million tonnes of coal, or 7 percent of China’s first-quarter coal imports.

BREAKNECK EXPANSION

Meanwhile, generating capacity expansion continues at breakneck speed. While China still relies on coal for most of its power generation, it has more than doubled its installed wind power capacity in the past five years, and Beijing wants to double it again to 200 GW by 2020 with annual investments of $27 billion (£17.17 billion).

As if that wasn’t incentive enough, state-run power producers are also racing to build capacity to lock in current prices ahead of an official cut next year.

But this expansion coincides with China’s economic slowdown and a sharp decline in the pace of growth in overall power demand, which rose an anaemic 0.8 percent in the first quarter, its slowest rate in more than five years, industry data showed.

INFLATED PRICES

While listed wind firms have seen their shares surge 18-38 percent this year, compared with a 17 percent rise on the broader Hang Seng index .HSI, some industry insiders are urging investors to rein in their enthusiasm.

    “I‘m not entirely sure where the optimism came from,” said an executive at top power producer Datang Power (0991.HK), a sister company of wind farm operator Datang Renewable (1798.HK) and a wind farm owner.

    “Overall electricity demand is very weak. It is unlikely wind power will outshine others.”

    Analysts said wind-related stocks like Datang Renewable have risen partly on expectations of higher wind speeds in China this year after they were down 8-12 percent in 2014.

    Even so, all those unused turbines probably won’t be switched on until ultra-high voltage lines, designed to enable long-distance transmission of renewable power from the windy, remote north to population and industry hubs in the south and east, are completed in 2017.

    In the meantime, some companies like Huaneng Renewables (0958.HK) are building wind farms in the east and south where better grid infrastructure offsets low wind speeds and land shortages.

    Some analysts say investors may be in for an earnings disappointment this year unless wind speeds improve and the government enforces a long-delayed rule requiring grid operators to buy certain amounts of power from renewable sources.

    Wind farm operators are mostly owned by state-run power groups like China Guodian and their listed units such as Huaneng and Longyuan (0916.HK).

    Editing by Stephen Coates

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