China faces growing gap between demand and ability to deliver

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Edgare Kerkwijk: “money is being ploughed into the economy and tariffs might remain in place"

Edgare Kerkwijk: “money is being ploughed into the economy and tariffs might remain in place”

Chinese turbine manufacturers and installation contractors cannot meet ambitious targets for offshore wind capacity

Later in 2020 or in early 2021, China is expected to become the world’s leading operator of offshore wind in terms of installed capacity. But it is far from plain sailing in the country’s offshore wind market and the strain of a fast pace of growth has begun to show.

Originally driven by state government goals – but beefed up significantly as numerous provinces around the country have committed to renewable energy – China’s ambitions for offshore wind have grown tremendously, from around 5 GW of grid connected capability by 2020, and another 10 GW under construction, to around 9 GW connected to the grid and 30 GW under construction.

By the end of 2018, the total of permitted offshore projects in the country stood at 43 GW, with around 30 developers involved in the market led by state-owned companies who have a 65% market share. But as Goldwind Offshore corporate chief engineer and general manager Endi Zhai told a November 2019 conference, there is now a big gap between demand and the industry’s ability to fulfil those targets.

Goldwind Offshore’s general manager told the conference that turbine OEMs in the country had the ability to delivery around 5.8 GW of capacity in 2020 and another 5.25 GW in 2021, a total of 11.05 GW. There are 22 installation vessels at work in the Chinese market, he said, and another seven under construction and due to be delivered by the end of 2020, but taken together OEM’s ability to build turbines and constructors’ ability to install them would mean there is a huge gap between the targets and actual delivery capacity.

There is, he says, “a resulting panic” and immense competition for delivery. Some estimates put the ‘gap’ between targets and the ability of Chinese turbine manufacturers to deliver in the required timeframe at more than 20 GW.

Dr Zhai’s analysis is one that Asia Wind Energy Association board member Edgare Kerkwijk says he wholeheartedly agrees with. “China is trying to make a quantum leap in offshore wind,” he tells OWJ.

“The state government identified offshore wind as a way to develop large amounts of power in a co-ordinated way, but the provinces are also playing an important part now, responding to direction from the government.

“The government told all of the state-owned companies in the energy sector they needed to do this. They have quickly got involved in the market. The five leading developers of offshore wind in China are all state-owned enterprises.

“But there is a huge supply chain issue,” says Mr Kerkwijk. “Chinese OEMs cannot produce enough turbines quickly enough. And bear in mind that although there are a lot of installation vessels and more under construction, none of them is designed to install turbines larger than 10 MW, despite the fact that companies like GE Renewable Energy are already testing 12-MW units and plan to build them in China.”

Concerns about the ability of the supply chain to meet ambitious targets have been expressed by several large Chinese wind turbine suppliers. Manufacturing of components such as blades, main bearings and related products such as offshore cables are all said to be becoming bottlenecks that will limit the rate at which new volume is connected to the grid.

And, as the industry struggles to build enough turbines, another challenge needs to be factored into the ‘supply chain crunch’ and the bottlenecks that will almost certainly mean targets for offshore wind will not be met. That challenge is the Chinese Government’s avowed desire to reduce tariffs for offshore wind or eliminate them altogether.

State media has reported the Chinese Government is planning to significantly reduce or end subsidies for new offshore windfarms from 2022 onwards, although it is suggested that local governments would still be encouraged to offer subsidies to incentivise new capacity.

“There is a lot of lobbying at the moment for the government to extend the deadline for eliminating tariffs,” Mr Kerkwijk tells OWJ. “A lot of money is being ploughed into the economy right now and I could imagine that the changes might be delayed as part of the government’s plan to keep the economy in good shape. Providing liquidity could extend to infrastructure, which might mean that incentives and tariffs remain in place longer.”

And according to Dr Zhai, there are other challenges too. The first technical challenge is that annual energy production from Chinese turbines needs to increase significantly. The second is that capex needs to come down, primarily via design optimisation and by reducing the time it takes to install turbines. And the third is that operation and maintenance costs are too high.

Looking further ahead, Dr Zhai suggests that as costs come down and feed-in tariffs are reduced, price bidding of the type widely used in Europe will come to play a more important role and facilitate “industry alliances” and build what he described as “a community of interests.” What he describes as “contiguous and concentrated offshore wind development” would also play a role driving down costs.

Heightened demand for turbines and for larger, more efficient models is being addressed by Chinese turbine manufacturers, but development lags behind that in Europe. Global Wind Energy Council strategy director Feng Zhao says Chinese manufacturers are “playing catch up.” He says the average size of an offshore wind turbine in China was less than 4 MW just two years ago, but this is expected to change, driven by the same pressure to reduce the levelised cost of energy experienced by developers in Europe.

A 10-MW wind turbine generator rolled off the production line at Dongfang Electric in August 2019. Shanghai Electric recently installed its first 8-MW wind turbine at its manufacturing base in Guangdong province, a design based on a licence from Siemens Gamesa Renewable Energy. According to GWEC, six Chinese turbine OEMs introduced new models in 2019, and manufacturers are introducing new medium speed and direct drive solutions.

Once the average capacity of Chinese offshore wind turbines has risen to levels more like those in Europe, capacity additions will accelerate, Mr Kerkwijk suggests, but Chinese turbines are unlikely to enter the European market or other export markets in the near-term, such is the level of unfulfilled demand in the Chinese market currently.

Mr Kerkwijk says he also expects the Chinese market to remain a difficult one for European developers and construction companies. “EDF has had some success as a developer, and DEME has an agreement with COSCO, but China is a difficult market for western companies,” he explains.

As Mr Kerkwijk notes, all of the turbines at the 300-MW Dongtai IV offshore windfarm, the first offshore wind project in China built in collaboration with an overseas company, EDF, are now operational. In 2019, EDF Group signed a breakthrough deal to jointly construct and operate two offshore windfarms in China. The agreement with Chinese power utility China Energy Investment Corporation was to jointly deliver the Dongtai IV and V projects offshore Jiangsu Province. They will have a combined capacity of 500 MW.

DEME and COSCO Shipping – the largest shipping company in the world – signed an umbrella agreement to “work closely” on the development of offshore wind energy in China, but in the short-term Mr Kerkwijk does not anticipate many other such agreements between Chinese developers and installation contractors.

In the medium term, says Mr Kerkwijk, more changes will be required if China is to set and reach hugely ambitious targets. He agrees that in addition to rapidly introducing new, larger turbines, adding new installation vessel capacity and reducing the time it takes to build projects and the cost of operating and maintaining them, Chinese companies would do well to follow their European counterparts and create dedicated offshore wind businesses.

He agrees that framework agreements and alliances like the one between turbine manufacturer Ming Yang Smart Energy Group and utility China Three Gorges Corporation could also be a step in the right direction, as could Shanghai Electric Power’s plan to go public. The plan would see Shanghai Electric separate from its parent company and undertake an IPO, joining three other wind turbine manufacturers in the country that are already listed.