AES taps into China's rush to wind power
Va. firm selling some fossil-fuel plants

By Steven Mufson
Washington Post Staff Writer
Monday, October 26, 2009

HUANGHUA, CHINA -- Along the flat shoreline of the Bohai Sea, 33 new Chinese-made wind turbines jut up into the hazy sky, forming a line more than six miles long amid the shrimp farms here.

In the light breeze, the turbines turn lazily, but the pace of China's wind business is anything but sluggish. China aims to boost wind-generating capacity to more than 120 gigawatts by 2020, about four times the capacity that currently exists in the United States.

In Huanghua, about a three-hour drive southeast from Beijing, the concrete foundations for 30 more turbines have been laid and the project partners are eyeing possible expansion into the shallow waters offshore, where an oil-drilling rig now stands a short distance away.

"They are putting policies in place encouraging this on a grand scale," said Paul Hanrahan, chief executive of AES, an Arlington company that is a partner in this and three other Chinese wind projects.

Like many wind projects in China, this wind farm -- which started generating power last month -- is the product of U.S. and Chinese investment, featuring Chinese-made wind turbines and tapping Chinese subsidies for the electricity sold. Europe will play a role, too. If all goes according to plan, the venture will qualify to sell carbon offsets to traders or directly to European companies that are exceeding their emission quotas under Europe's cap-and-trade system.

China's push into wind energy is part of a broader effort to change its energy mix in an effort to reduce carbon emissions that contribute to climate change. It has set a goal of getting 15 percent of its power from renewable sources by 2020.

The experience of AES -- which generates electricity in 29 countries -- reflects the changing trends in China's energy sector. In the 1990s, AES focused on coal plants in China and it still operates three big ones, whose 2,400 megawatts of output dwarfs the company's Chinese wind farms.

Last year AES sold two inefficient fossil fuel power plants. One, an oil-fired plant, was bought and dismantled by the Chinese government. The other, coal-fired, was bought and may be refurbished by an aluminum maker; for now the plant is operating at only partial capacity.

"The Chinese are very much focused on things we would regard as environmentally sound practices," says Hanrahan, who was based in China for AES during the 1990s. "They are shutting down old [coal] plants and building new plants that are incredibly more efficient."

Joining the crowd

AES has joined the rush to build wind turbines in China, mostly in Inner Mongolia, where the wind blows stronger than it does near the Bohai Sea. The other AES wind projects are in Hulunbeier in northeast China.

The work could reshape AES. Sources say China Investment Corp., China's sovereign wealth fund, has been considering an investment in AES in return for a substantial equity stake. The deal would give AES more capital and greater access in China. The sources commented on the condition of anonymity because the talks have been private.

There are hurdles to overcome. The explosion in the number of wind turbines has created transmission bottlenecks; many turbines stand idle in Inner Mongolia and northeast China awaiting connections to State Grid Corp. of China, the company that owns 80 percent of the country's power grids.

State Grid's economic institute blames a lack of coordination among provincial governments, which can approve any project smaller than 50 megawatts. (Each phase of the AES project, which received provincial approval, is 49.5 megawatts.)

The rapid rise of wind power in China has also set off a scramble among turbine manufacturers. AES chose turbines made by Sinovel, a leading Chinese manufacturer along with Gold Wind and Dong Fang. Foreign manufacturers -- including General Electric and Vestas -- are trying to get their share.

"There is a lot of state influence, so there's a sizable piece of the market that is available to only Chinese-owned companies," said John Krenicki Jr., vice chairman of General Electric and head of its energy infrastructure division. "We're allowed to play in about half the market."

The payoff

As in the United States, wind power still relies heavily on government subsidies. The Chinese government has required utility companies to pay subsidized prices. The AES project in Huanghua gets 8.9 cents a kilowatt hour for wind energy, compared with 5.25 cents for coal-fired electricity in the region.

An additional 3 cents or so -- depending on the carbon-trading market -- could come courtesy of Europe's cap-and-trade system. Under that system, European companies can buy offsets from greenhouse-gas-reducing projects in developing countries instead of reducing their own emissions. Often this is cheaper, though it means that Europe is effectively subsidizing China's climate program. Last year, 84 percent of Europe's offsets came from projects in China.

AES is also developing an offset project in Chongqing, where it is burning methane sucked from coal mines to heat homes. Methane is a potent greenhouse gas, and burning it -- despite the carbon dioxide produced -- is better for the environment than letting it directly into the atmosphere.

One irony of China's improving environmental habits is that the bar is higher for offset projects.

Tim Clissold runs Peony Capital, a British developer of projects in China that generate offsets he can sell in Europe. Peony sells offsets linked to the conversion of two Huaneng coal plants to natural gas, which saved 2.6 million tons a year of carbon dioxide emissions.

Those projects are measured against business as usual, but because China has become more energy efficient, this year the baseline became harder to beat, Clissold said.

"It was bad news for investors, but in a sense quite encouraging," Clissold said. "Investors will get fewer carbon credits, but at least we won't fry quite as vigorously."

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