Foreign Developers in Chinese Offshore Wind—The Missing Player and the Risk Concern

In two separate pieces coming, we will be talking about international developers’ current activities in the Chinese offshore wind market and the reasons behind some’s hesitation–the different risk profile.

Shell & Eolfi’s Joining Force (Update)

In case you didn’t know yet, one of the important players–Shell–has acquired French floating developer Eolfi on 4 Nov. The purchase may have a critical impact on the technology direction of the European offshore wind market. But as both companies have been searching for opportunities in the Chinese offshore wind market, too. It would be interesting to see if the synergy may bring any changes to their chances in China.

Eolfi has entered into China since last year, and Shell is adding new resources to its Chinese offshore wind team. But neither has taken any stake in Chinese offshore wind projects.

The limited news of Shell, especially, is very telling of the risks facing the foreign developers, which we will try to dive in below:

It is no news that foreign developers have been growingly interested in the Chinese offshore wind market, as the nation speeded up its offshore wind moves since 2017 and poised to be the second-largest offshore wind market in just a few years.

The pursuit has become more active, following the breakthrough deal inked between EDF and China Guohua that allows the French firm to take minority stakes in Dongtai IV and Dongtai V projects and thus become the first foreign player chipping into Chinese offshore wind sector.

Who are Looking into Chinese Offshore

It is no secret of which companies are seeking opportunities in the Chinese sea, as the list of attendees in various Chinese wind conferences well documented. They can be categorized into three groups:

  • The “major” energy firm: beside EDF, the two European offshore wind developers coming from oil&gas background—Equinor and Shell —are the “usual suspect” in those conferences. They all are of experience in European offshore wind, existing energy business footprints in China (not Equinor), and of long-standing  relationship or connections with the Chinese government and Chinese state-owned companies
  • Foreign IPPs with existing Chinese renewable experience: usually these are Asian power developers with easier access and understanding of the Chinese market. Hong Kong energy firm CLP is a typical case as a “foreign company” in status but have already established great government connections and a sizable portfolio of onshore wind projects in China. [There are other potential players—Sempcorp fit these criteria but do not appear to show a lot of interest; Thailand power utility Ratch also fits into this group]
  • Foreign IPPs with OW experience: Orsted and other European companies (CIP, Ideol, e.g.) with offshore wind development experience are also looking, but they generally have limited human capacity based in China and have limited cooperation with Chinese utilities, which is a key challenge

Among the trio, the first group of companies seems easier to make inroads into China. It is therefore not surprising to see, in September, Equinor strikes an MoU with State Power Investment Corp (SPIC) to collaborate in offshore wind. The MoU is deemed as a breakthrough by the industry, but it certainly requires further effort to become materialized business cooperation.

It is Possible to Team with Chinese Companies

The Chinese energy market has long been a hard nut to crack for foreign companies, with the market, legal, language, and information barriers for international players. The success of EDF and the MoU of Equinor—despite only some early-stage success and the result remained to be seen—show the possibility to make inroads into this market of great potentials.

Both EDF and Equinor have opted to team with Chinese power companies for offshore wind projects. This is in part due to most (>40GW) potential offshore wind projects in the pipeline that have been more or less signed up by domestic developers (not officially determined and may be subject to changes in future allocation). This left little option for newcomers. But a more important reason is the market reality, where foreign developers lack the in-depth government and industry connections and local human capacity to establish a project by itself and building up such business infrastructure is very costly and risky.

As a result, teaming with Chinese utilities is a logical direction.

Chinese power companies have been always open for foreign investment under the condition of minority share. Even in the highly sensitive nuclear power sector, foreign investors are allowed (limited to minority). Successful cases include:

  • EDF in Taishan NPP, in this case, EDF brought critical reactor design and fuel technology
  • CLP in Daya Bay NPP, in this case, CLP represent the interest of the “power user” of the project
  • Ratch in Fangchenggang NPP, the Thailand firm appears more as a financial investor who looks into access to other renewable projects

READ MORE about China’s further opening up energy market for foreign investment

It also makes financial sense for Chinese offshore wind companies to work with foreigner forces. Most of the Chinese energy companies are under massive political pressure to lower their debt ratios in their business and selling off part of the project equity is a reasonable option. Moreover, many of them hope to cooperate with European energy players to open up opportunities overseas, as SPIC’s deal with Equinor suggests.

READ MORE about Chinese state-owned companies under massive pressure to “deleverage”

Such intent of “swap” cooperation is nothing new and was seen in the oil&gas sector. In the past, Shell, BP, and Eni have reached similar cooperation deals with the Chinese national oil companies.

Not All Chinese Companies are the Same

While I often hear European players complaining about how difficult to work with Chinese state-owned enterprises. Such statements, partially true,  conveniently ignore the fact that not all Chinese state-owned power companies are the same in their motives and strategy.

The progress made by EDF and Equinor suggests that some Chinese companies are more open and eager to work with foreign players. And picking out the right partners may be critical for success in the Chinese market.

For instance, Guohua is a power generation subsidiary of China Shenhua, who has joined forces with Guodian to form the largest power utility Energy Investment Corp (CEIC) in 2017. Shenhua is known for its background as one of China’s largest coal miner. But you may be surprised if the firm’s keen interest in energy transition by seeking investment opportunity in frontier area for the past 10 years—from early on investing a lot on coal-to-chemical (which related to their old business but “cleaner”), the fourth-generation nuclear technology, to now committed to offshore wind and hydrogen.

While this factor may have played into the deal with EDF, the mentality of regional branches of the state-owned companies is another factor to take into account. The local connection with these local branches and subsidiaries are ultra-critical. 

Another example is SPIC, which has set a new corporate strategy to develop itself to be a “world-leading renewable developer” under the new leadership of Qian Zhimin. Since Qian took the rein of SPIC, the firm has been in internal reform and has shown intentions of working with foreign suppliers, too.

The one who signed the MoU with Equinor was CPIH, the only Hong Kong-listed daughter firm of SPIC.

It is safe to assume that SPIC/CPIH did not just talk with Equinor, in my speculation. On the contrary, a typical move of Chinese firms would be approaching different candidate for cooperation opportunities.

It is highly possible that we will hear more from SPIC to work with other foreign players.

READ MORE about SPIC, Shenhua, and other Chinese power utilities

Where is Shell?

When the Equinor and SPIC MoU came out, a key question rise: where is Shell?

The question rise because Shell is clearly in a more advantageous position to step into the Chinese offshore wind sector, compared to others.

A comparison of foreign offshore wind developers’ strengths in the Chinese market

To start with, Shell is arguably a more connected and established player in the Chinese energy sector. It has long-standing cooperation relationships with the Chinese government at both the central and regional levels. It has participated in various energy policy advisory research and has supported Beijing’s several energy strategy shifts in the past, including (almost) taking a role in the west-to-east gas pipeline and becoming the first to invest in shale gas.

It has various local operations in unconventional gas and oil&gas retail sectors, providing them bargaining chips with local government, too.

Shell also has cooperation with Chinese oil&gas companies. It may lack experience working with the power sector, but its role in the north sea offshore wind operation also makes it an interesting partner candidate for the Chinese utilities.

Comparatively speaking, the Dutch supermajor is still in an advantageous position to chip into Chinese offshore wind.

So where is Shell during the recent development?

A positive sign is that the supermajor is, finally, developing a team in China dedicated to offshore wind business development. But the silence is also telling.

Risk vs Return Calculation

There are certainly various factors behind business decisions for market entry. The calculation and comparison of risk vs return among different markets would be one of the decisive factors.

In that direction, the Chinese offshore wind market—despite a boom and large market—may be conceived as of high risk vs return ratio.

The crux of the matter, however, is that the market has a  different risk profile which is highly unfamiliar to the foreign players.

Smaller-size foreign players may just lack local capability in assessing and controlling these unique risks. And larger and listed players, like Shell, is bound to the standard/stricter rules for assessing any investment decision.

For example, Shell has turned down the investment opportunity to chip into China’s first and major gas pipeline, WEPI, in the past, despite initial interest. A key concern at that point was the worry over a return, despite the top policymaker–NDRC –has vouched (verbally) for a solid return rate, according to the interview I had before with former top officials of NDRC, Zhang Guobao, who recently passed away.

READ More on that interview titled “Shell was Missing At the Day of Contract Signing”  

Anyway, old story aside, we will talk about some of the key bottlenecks in the Chinese offshore wind market—insurance, verification, and HSE— that lead to that higher risk profile and concerns in the next piece.

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