Many of you already know that eastern Chinese provinces have unleashed ambitious plans to build offshore wind along the eastern coastline.
Specifically, Guangdong, Fujian, Zhejiang, Shanghai, and Jiangsu are the key area with the expected rapid growth of offshore installation. Meanwhile, Shandong, Tianjin, and Hebei are following the footsteps.
By 2019H1, China has grid-connected over 4GW offshore wind turbines. But the units under construction around 10GW is more than double the operational amount, while the total approved (inclusive of constructing and preparation-stage) projects exceeds 41GW—tenfold the installed capacity.
[A side note: CWEA registered 4.445GW installed offshore wind capacity by 2018—that is the installed capacity inclusive of units not yet grid-connected and commercialized; National Energy Administration had the “installed capacity”—grid-connected capacity—at 3.63GW by 2018. Here we use the NEA data, which is grid-connected capacity. ]
Most of the approved/planned projects are looking to hook to the grid by 2021, to secure the premium feed-in tariffs and avoid competitive pricing. Apparently everything completing on time would be a mission impossible, but still, in two years, China would see offshore wind capacity to spike.
Unexpected Increase of Supply?
The development has been exceeding expectations. Previously Beijing set just 5GW installed capacity target by 2020 in the 13th Five-Year Plan—clearly a low hanging fruit now.
Some of the 41GW planned projects would connect in two years, and most others may come online later. But overall, the amount of new offshore projects may be out of Beijing’s plan for the regional power mix balance.
But then it leads to an obvious question: does offshore wind power in China face curtailment problem in the not-distant future?
Double Whammy in the Coastal Provinces
Other factors to take into account are nuclear and external power supplies in the region.
Nuclear is destined to fail its 13th FYP target, of GW by 2020, no question about that. The failure, however, does not mean Beijing’s fundamental shifting its plan for nuclear power. Quite the contrary, Beijing is eager to move ahead but was delayed owning to:
- Unexpected supply chain issues occurred the inaugural AP1000 reactor due to difficulties of the US suppliers to provide equipment
- While the inaugural project’s success is the prerequisite condition for Beijing to approve more projects, the delay of the demonstrative project thus result in almost all new builds which were planned only to adopt AP/CAP technology
- The alternative option—the HPR1000 design with China’s own IP— still takes 1-2 years to complete the first demonstration project
- The trade war escalation between the US and China led to Beijing’s concern over using the US-origin AP1000 technology.
But some of those factors have changed, and the other will change soon. HPR-1000 first unit is likely to complete the latter half this year, allowing Beijing to green-light a few projects. From then on, China would speed up nuclear construction to catch up on what it planned to achieve.
If construction resumed or speeded up, it is likely to see a major spike of nuclear capacity coming online around 2025-2027. This spike could threat the market space of offshore wind.
On top of that, there is the binding obligation of the eastern provinces to accept power transmission from the west. Notably, the eastern provinces—as the region with the highest density of population and economic activities—are China’s power demand centers and were the popular destinations for power sales. One of the advantages of nuclear and offshore wind projects—both high in capital expenditure and require relatively long payback period—in the regions is its proximity to the load center.
However, historically, these provinces have committed to accept power (fossil, renewable, and hydro) from western power production centers. Such commitment has already resulted in long-distance transmission investment by the two grid companies.
In existing dispatch order, the long-distance power sales are (also) prioritized. Certainly, the regional government would push back if there is too much external supply, but the grids are also powerful to influence the choice.
By then, offshore wind, nuclear power, and long-distance transmitted power will provide a decent energy supply mix. But the question is: whether the growth of supply and of demand would be in sync.
The answer is, likely, a no, looking into the demand growth rates in the past years.
In 2019H1, as an example, NEA reported 5% power demand growth in 2019H1, again registering lower YOY growth. The lowering demand growth has been a while now. And official clearly said that the slow-down would continue, as the Chinese economy is moving from manufacturing-industry-oriented to services-industry-heavy.
Moreover, as the manufacturing industry is moving away from the higher-human-capital eastern region to the west, the eastern region may face a sharper decline in their power demand growth.
But as demand growth becomes out-of-sync with the sharp increase of supply, what would happen?
Offshore Wind Disadvantageous in Future Market Competition
In any situation where nuclear, offshore wind and other supplies compete head to head in the eastern market, offshore wind may be in a disadvantaged position. Specifically:
- Nuclear plants in China tend NOT to serve as peakers due to security concerns, though Beijing and regional planners would push them to become more flexible. Still curtailing offshore wind is easier for the grid operator. Shall a situation of regional/seasonal capacity/output surplus occur, nuclear reactors are more “rigid” than offshore wind units to accept curtailment.
- Long-Distance supplies would compete with offshore wind—maybe in equal footing. While the provincial government may support its own offshore wind, grids need to protect its own interest, too
- The Chinese power market is moving from government-regulated model to a more liberalized market model. One of the key change is on the way to determine power generation sequence (merit curve order): right now regional governments have very strong power to determine regional merit curve (determined in meetings); but as power trading reform kick in, a growing portion of power will be required to compete in the power market to get online. How would China design the future trading competition is not 100% certain, but LCOE will eventually be a key competition focus. In that sense, offshore wind is also in clear disadvantageous position.
Energy Storage plus Offshore Wind is the Salvation
These competition issues may be a chilling message to the ambitious offshore developer. Already they should take into account the scenario of offshore wind curtailment.
In that scenario, energy storage offshore or near-shore may be necessary.
In the western regions where renewable curtailment is a profound struggle, renewable power units are required to equip with comparable auxiliary (调峰) capacity, with grid dispatch operator inspecting their capabilities. It is maybe the future for offshore wind units, too. Offshore wind operators would need to either purchase auxiliary services or built such facilities themselves.
Notably, Chinese nuclear developers have been building pump-hydro storage nearby its planned reactors for its auxiliary option. They have been always thinking ahead.
Given the European industry’s experience in combing offshore wind and energy storage, this is an area where hydrogen companies, batteries, and other floating technology firms should look for opportunities.