China Three Gorges: Offshore Wind Giant Targeted by the Pentagon

[First published on 2020/09/01, this article is updated on 2020/09/08]

China Three Gorges (CTG) has been through a critical energy transition in the past decade. It is poised to become the most significant offshore wind developer and a renewable heavyweight in China, while formerly only known for its world-class hydropower assets.

Though most of its business is domestic-focused, the 100% state-owned power conglomerate has shown a rising appetite in the international energy market as well. It has already built up a sizable renewable portfolio in SEA, Europe and South America. 

But the international ambition now faces uncertainty, as the US and China confrontations show no sign of ending and continues to ramp up in many fronts.

The most recent development of the conflicts involved the renewable firm. In Aug, the US Department of Defense has determined that CTG, among other Chinese energy giants, are owned or controlled by the Chinese military (PLA).

The Pentagon piled up “PLA-Controlled Chinese Companies” list since Apr. and, since then, expanding the enlisted Chinese companies. While the list is meant to open doors for future sanctions, the exact measures remain unclear. 

Who is China Three Gorges? And what does the looming sanction threat mean to the firm and its international partners?

New Energy IPO Marks Three Gorges’s New Phase

Prior to the tensing geopolitical episode, CTG is on track to build up a renewable power empire featured with a world-leading size of offshore wind capacity.

A critical milestone has been achieved in early 2020, as CTG New Energy (三峡新能源)—the renewable energy affiliate of the firm—kicks off off a ¥25bn initial public offering (IPO) in Shanghai stock exchange.

Most of the capital raised will be allocated for offshore wind project development in China.

The IPO marks the raising importance of renewable in CTG’s strategy. The firm already has several publicly-trading subsidiaries, but all of which are hydroelectricity companies—including China Yangtze Power Co (CYPC 长江电力), Hubei Energy Group (湖北电力), and Chongqing Three Gorges (重庆三峡).

The IPO case, thus, also highlights CTG’s march towards a leading renewable player in the world. 

China Three Gorges: Hydro Remains the Cornerstone

Hydro still is the group’s main thing.

• By the end of 2019, the cumulative installed power capacity of CTG has passed 74.96 GW, in which hydro represents 66% (49.5GW). 
• The firm has an overseas power portfolio of 9.4GW, of which 95% or 8.9GW is hydro assets. 
• Meanwhile, CTG is building 56GW projects. More than half of the constructing capacity, roughly 30GW, is from hydropower dams. 

With such a power portfolio, CTG is only a 2nd tier electricity developer in China, next to peers like China General Nuclear, China Resources, and SDIC Power. [READ MORE: our explanation on China’s power generation market structure and the 1st, 2nd, and 3rd tier players]

But it is absolutely the leader in hydroelectricity. Right now, the CTG group contributed 14% of China’s total hydro capacity. But that share will rise to 20% next year and continue to climb, as several juggernaut dams to be launched soon. 

Critical Hydropower Assets of CTG

CTG’s position was due mostly to two flagship projects: the Three Gorges (22.5GW) and the Gezhouba dam. And in the past few years, its position in hydro continues to cement by the following constructions:

• Xiluodu (13.86 GW): COD in 2014, the world’s 3rd largest operating hydropower plant
• Xiangjia Ba (6.4 GW): COD in 2014
• Wudongde (10.2 GW): trial run completed in Jun 2020 and COD in 2021
• Baihetan(16 GW): COD in 2022. Upon completion, the project could be the world’s 2nd largest operating hydropower plant. second world largest hydroelectric power plant in China, in terms of generating capacity. 

However, the high percentage of hydro in the total asset has been identified as a risk factor. The firm thus adapted a strategic shift to ramp up renewable investment. By the end of last year, the firm’s renewable power capacity reached 11.5GW, including 5.3GW onshore, 0.8 offshore wind units, and 4.4GW solar power.

Offshore Wind: The Anchor of CTG’s Renewable Strategy

The strategy shift, however, means that CTG now faces strong competitors, many of which took part in the renewable playground at least ten years earlier than the hydro company. To compare, the country’s pioneer wind developer CEIC has built up some 38GW wind capacity by the end of last year.

Given the limited space left in the “conventional” market, CTG chose to focus on its offshore wind—then a nascent industry in China. 

In 2010, CTG tipped its toe in the water by launching the 125MW Xiangshui project, in Jiangsu. Shortly after, it adopted an aggressive approach in grabbing project approvals from the local governments who had been slowly realized the opportunity in offshore wind. 

The methodology CTG brought forth was “centralized and cluster development”(集中连片开发), which emphasized on building large wind complex (>1GW). The concept was then embraced by the Fujian government, which granted half of the province’s project development right to CTG. 

Fujian is the second coastal province in China that adopt ambitious offshore wind targets. By the success in the province, CTG quickly stands out as a dominant player in the field. 

By now, CTG has some 1.78GW turbine put up in the sea. That number is like to raise to 6GW, and the firm still has 8GW pipeline in reserved. 

These figures mean that CTG is soon to be the most dominant offshore wind developer in China. 

Three Gorges Flagship Offshore Wind Projects: 

• Fujian Xinghua Bay Wind Farm—Test Ground of China’s Large Wind Turbines. In the 77.4MW Xnghua Bay Project (Phase I) in Fujian, CTG has chosen eight OEMs to supply then-largest turbines (5-6.7MW) in China. The Phase II project has put up so-far the largest offshore wind turbines in China: the 8MW and 10MW machine of Goldwind and Dongfang Electric. [READ More: our analysis of Chinese OEMs’ 10MW Turbine R&D]
• Shandong Laizhou Bay Wind Farm—China’s First Wind-and-Aquaculture Hybrid Project The 300MW Laizhou Bay Phase I has begun construction in Shandong Province in 2020, which plans to use turbine foundations as artificial reefs for aqua-farming. It is the first-of-this-kind project in China.  
• CTG Yangxi Shapa Floating Wind Pilot—Marching toward Floating Wind The project aims to install a 5.5MW (Ming Yang) floating turbine in 2021. If succeeded, it will be China’s first floating unit. [READ MORE: our analysis on China’s floating offshore wind outlook and CTG’s involvement. ]

Three Gorges’s Offshore Wind Value China Existence

CTG is more than just a developer. It has several critical investments in the offshore wind value chain: 

• Turbine Making: it owns 10.52% shares of Goldwind, the largest wind turbine OEM in China and a leading player in manufacturing offshore wind turbine. Meanwhile, CTG also has a solid cooperation relationship with Dongfang Electric, the country’s critical hydro equipment producer who is active in the offshore wind market with the first double-digit turbine. CTG has chipped into an investment fund led by Dongfang Electric.
• Wind Farm Design: CTG owns a power plant design firm Shanghai Investigation, Design, and Research Institute (SIDRI). The institute is currently one of three dominant offshore wind engineers in China. 
• Offshore Construction: CTG has chopped into CREC-Fuchuan Marine Engineering Co, a three-party joint venture and the key offshore wind contractor in Fujian province. The affiliate owns Fuchuan Sanxia (Fuchuan CTG), the first self-elevating and self-propelling OW installer in China.

Impacts of Being Targeted by the Pentagon

As the Pentagon added China Three Gorges into the “People’s Liberation Army (PLA) Controlled List”, the firm is now facing potential sanction measures from the US. 

Being in the PLA-Controlled list does not entail sanction measures. But it is a threat from Washington of sanction, which would also have impacts. 

“Aggressive Sanctions Unlikely” 

As of now, whether the US government would impose sanctions and what would be the sanction measures are both unclear. Answers to the two essential questions heavily depend on the next moves of the US president and the administrations on which trade/finance sanction measures to adopt. (e.g. involving decisions from the Treasury Department) 

International law experts right now tend to think that aggressive trade or finance sanction approaches toward these Chinese companies are unlikely, as this commentary points out.    

But the downward spiral of the US-China relationship seems to open new areas of confrontation every week. That means uncertainties and risks for international parties working with CTG and other companies enlisted. 

Trade Sanctions on Chinese Energy Firms: CGN the Example

To understand the potential sanction threat, Three Gorges and other Chinese companies targeted by the Pentagon could take their peer China General Nuclear (CGN) as an example—in the worst scenario. 

Last year, the Bureau of Industry and Security of the US Department of Commerce (BIS) included CGN into the “entity list.” The move effectively bars US entities from selling nuclear products, technology and materials to the Chinese firm freely. 

CGN’s import from US companies will require case-by-case approval from the US regulator. Also, the trade bar also opens the door for the US to use “long-arm jurisdictions” against other non-US entities to sell technology to the Chinese firm. 

The Guangdong-based firm claimed the impact of the sanction is limited. However, as a result, one of the firm’s nuclear construction based on AP1000 reactor design—a US technology—did not move forward as planned.

CTG Has Limited US Technology Exposure 

The example of CGN indicates, if trade sanction is in place, CTG’s projects or investment involving US technology could be stranded. 

But such impacts would be limited for CTG in renewable and power sector, as the firm has little limited exposure to the US technology.

In terms of wind power development, CTG did install GE’s offshore wind turbine in its Xinghua Bay Phase 1 project which serves as a testing ground for different turbines— turbines of 5 Chinese wind OEMs are also deployed in the project. 

CTG did not seem to prefer GE’s product. Instead, it is largely in favour of Goldwind, Dongfang Electric, and Ming Yang, as its recent orders show. That means the constraints of potential sanctions on CTG’s wind development would be limited. 

Oversea Expansion Likely to Embrace Impacts 

That being said, being targeted by the Pentagon would have negative connotations on Three Gorges’ oversea strategy. 

The hydro and clean power developer and builder have been actively expanding abroad, under Beijing’s Belt & Road Initiative Strategy in the past decade.  

Two affiliates of CTG is the main players to carry out the group’s international strategy:

1. CTG International (CTGI): a power developer and investor. By the end of 2018, CTGI has built up an oversea power portfolio totalling 17GW. Majority of these power assets are hydro. There is also a sizable portfolio of wind and solar power plants. 
2. China International Water & Electric Corp (CWE): a power engineering and construction contractor. Hydropower is the main focus.   

The potential sanctions, if any, are unlikely to harm CTG’s existing international projects, where CTG mostly serve as an investor. 

• International Reputation: But being targeted by the US government, without a doubt, would damage the firm’s international reputation. 
• Sanction Uncertainty A Risk Factor: Moreover, the uncertainty of potential sanction measures mean the increased risk factors for its international partners. That put both CTGI and CWE in disadvantageous positions—either for future investment plans or for competing for contracts. 
• Disadvantageous in RE: Sector In wind power and solar market where competition is abundant, the impacts could be more pronounced.  
• Disadvantageous in Europe: the negative impacts could be more obvious for CTG’s development in the European market, where the firm already faces a higher competition and higher trust barrier.

China Three Gorges’ International Portfolio   

The clean power group has established footprints in Asia, South America, Africa and Europe, with hydropower and wind power the main asset. 

• Asia (Pakistan, Myanmar, Malaysia and Nepal): CTG has built up a South Asia branch, which attracted investment from IFC and China’s Silk Road Fund. In Pakistan, it is carrying out the development of 7 clean energy (mostly wind) projects totalling 2.78GW. In Myanmar, it is developing the Salween River hydropower plant together with a Thai investor, and studying the possibility of building 27 wind farms (one has signed investment aggressive). In Malaysia, it has built up a hydropower plant as an EPC contractor. It also looks to develop a hydro plant in Nepal. 
• S. America (Brazil & Peru): CTG Brazil is the affiliate promoting development in South America. The firm has controlling or minorities stakes in 7 hydropower plants, 11 wind farms and a power trading company in Brazil. It is looking into Peru now with Portuguese partner EDP.    
• Africa (Congo, Nigeria ): it is actively looking into hydropower investment opportunities in Africa. 
• Europe (Portugal, Germany, UK, Greece, Italy, Poland): CTG Europe branch has involved in renewable development in at least six European countries. A key milestone is achieved in 2011 when the firm acquired 21.35% of Portuguese power company EDP. The cooperation opened the door for CTG to invest in the Moray offshore wind farm in the UK and an onshore wind project in Italy. Separately, CTGI has secured 80% stake in Meerwind project in Germany and is developing a flagship 4-stage solar project in Greece.   

China Three Gorges’s Renewable Activities in Europe 

•  In May 2012, CTG bought 21.35% equity in Energias de Portugal (EDP), becoming its single largest shareholder. 
• In 2015, CTG and EDP set up a joint venture Hydro Global to jointly develop middle and small hydro projects around the world. 
• In 2016, CTG broke ground in the developed market and made a €650 mn deal to buy 80% of German offshore wind park Meerwind and therefore becomes the first Chinese enterprise to enter the global offshore wind power market.
• In 2018, CTG launched a bid for EDP’s remaining capital with the offer valued at €9bn. However, the bid was collapsed and had little progress afterwards.
• In 2019, EDP Renováveis concluded the sale of a 10% stake in the 950MW Moray East offshore wind project for £35 mn. 
• Currently, CTG is in talks to acquire 13 photovoltaic power stations valued at €500-600 mn, from X-Elio, a Spanish photovoltaic power generation company.

China Three Gorges’ Renewable Activities in South America

•  CTG Brazil was founded in October 2013 and entered the Brazilian power market by acquiring from EDP 50% of the equity of Jari, Cachaoeira Caldeiráo hydropower plants.  
• In May of 2015, CTG Brazil acquired 49% of 11 wind farms (operating, under construction and development) across the country. The wind farms, together, will have an installed capacity of 328.6 MW. 
• In 2015, CTG acquired 100% stake of a hydro asset operator and two hydropower plants from Brazil’s Triunfo Participações e Investimentos (TPI) at around $538 mn.
• In 2016, CTG purchased Duke Energy Brazil which brought the company a total installed capacity of 8.1 GW. 
• In 2020, CTG acquired 83.6% stake of Luz Del Sur (LDS) with $3.59 bn. LDS is the largest power company in Peru and owns 100 MW of hydro generation assets.
• Renewables has another core business of the company with a focus on the offshore wind sector. The IPO of the affiliate may bring more strengths to CGT’s renewable strategy disposition.