Dams and Landslides

Special analysis on Three Gorges: Flagship of centralized electricity

Patricia Adams and Gráinne Ryder

December 28, 1998

Three Gorges is the flagship of the large-scale, centralized electricity expansion programme. As long as the Three Gorges dam proceeds, desperately needed market and policy reforms will be stymied, say authors.

Proponents of the Three Gorges Project claim that the megadam is the best way to reduce China’s reliance on coal. Energy specialists argue, however, that switching from coal to gas, and using new technology of combined cycle gas turbines or cogeneration, would be able to reap greater environmental benefits than the Yangtze dam by a prospective 60 per cent reduction of carbon dioxide emissions. The Three Gorges dam would reduce carbon dioxide emissions by 5 per cent.

Patricia Adams and Gráinne Ryder of Probe International maintain in their article, “China’s Great Leap Backward,” (International Journal [53/4, autumn 1998]), that the most economical way to reduce coal consumption is through cogeneration. China has about 450,000 industrial, commercial, and residential-use boilers burning 400 million tons of coal per year, about eight times the amount of coal that Three Gorges might potentially displace. If one-quarter of the boilers were retrofitted for cogeneration with the same amount of fuel, they could expand electricity supply by 80-90 billion kilowatt-hours annually, roughly equivalent to Three Gorges’ expected output but at a fraction of its cost. Below is the third excerpt of the article.- Editors

Three Gorges is the flagship of the large-scale, centralized electricity expansion programme. As long as the Three Gorges dam proceeds, desperately needed market and policy reforms will be stymied. The vast majority of the growth in electricity is to come from large-scale coal, hydro, and nuclear suppliers – investments that the command and control apparatus knows best.

Because of their large scale, megaprojects are technically and organizationally complex, experimental, and take a long time to build. Therefore, politicians must insulate them from changing economic conditions (by taxing competitors and subsidizing them) and from technical innovation (by granting various forms of monopoly control). Unforeseen construction and operation complications make them unreliable and costly providers of power. Three Gorges is no exception.

Because the private sector is shy about investing in Three Gorges, the state’s full economic arsenal has been assembled to do the job. The dam is being financed by direct allocations of state funds, by transfers of revenues from the Gezhouba dam downstream of Three Gorges, and by increases in national electricity rates. The Chinese government currently imposes a .12 cent per kilowatt-hour tax on power consumers in the country to help defray the costs of building the Three Gorges dam. Nor is it uncommon for China’s utilities to apply a number of additional charges, including Three Gorges construction fees, in determining the price of cogenerated power. When the government hasn’t made support for Three Gorges obligatory, it has “recommended” that some profitable large enterprises ‘assist their counterparts’ by making donations to the Three Gorges project.

Another crucial source of funds for Three Gorges is the government-owned State Development Bank (SDB), which provides long-term financing for policy-oriented projects in accordance with the State’s development plan. The SDB made its first commitment to Three Gorges in 1996 when a ten-year $3.6 billion loan made the dam the SDB’s number one debtor. According to the China Daily of 7 April 1998, “Huge amounts of loan money from the [SDB] have propped up the development of the country’s key electric power projects.” Since its establishment in 1994, the bank has injected about $14.92 billion into the construction of hydroelectric, thermonuclear, and thermoelectric stations, including the Three Gorges project. It will continue to favour large electric power plants, making it one of the most important sources of funds for construction of China’s power industry. The SDB receives its capital and funding from the government. It also issues debentures to domestic financial institutions, construction bonds in China, and bonds in international capital markets; and it borrows money from foreign governments, international financial institutions, and foreign commercial banks. Sovereign guarantees make these debt instruments relatively risk free.

The promise of sovereign guarantees was the inducement the private sector in the industrialized countries needed to invest in Three Gorges. In 1996, the SDB launched its first international bond offering, ¥30 billion underwritten by Nomura Securities and IBJ Securities of Japan. When a Japanese critic of Three Gorges discovered that the bond issue violated Japanese security laws because it failed to provide clear information on the use and risks of the bonds, Nomura cancelled a second ¥30 billion bond issue. The SDB launched its second bond issue in January 1997; this time $330 million in bonds was underwritten by Lehman Brothers, Credit Suisse First Boston, Smith Barney Inc, J.P. Morgan & Co, Morgan Stanley & Co Incorporated, and BancAmerica Securities, Inc.

Taxpayer-backed agencies have also been enlisted to fill the breach left by the private sector: although in the United States the Export-Import Bank and the Bureau of Reclamation have refused to support Three Gorges for environmental and economic reasons, the Canadian, Swiss, British, German, French, Brazilian, and Japanese state-financed export credit agencies have had no such misgivings; together they have contributed $1.2 billion. Canada’s Export Development Corporation, for example, has subsidized loans of approximately $120 million to finance the sale of Canadian computers and turbines for the Three Gorges project.

State protection can keep market pressures at bay for a limited time. Even under the best circumstances, Three Gorges power will cost more than power from cogeneration, and some renewables. Under more likely circumstances, it will become increasingly expensive as technical problems cause shortages and greater costs, which will encourage power consumers to leave the deteriorating state-run system for independent or self-generated power.

The signs are menacing. In October 1997, a visiting American engineering team discovered that the temporary cofferdam holding back the Yangtze while dam construction is under way is at risk of collapsing. Boulders are falling off the diversion channel walls, and it now seems that project authorities overestimated the rock strength under the dam. The rock could fracture, causing water to seep beneath and around the dam wall, threatening its foundation and triggering landslides. Chinese authorities have called in a team of Norwegian geotechnical engineers to stabilize the situation, but remediation may take decades and will be costly. Meanwhile, rock failures may damage ship traffic and the ship locks themselves. Sediment build-up, about which Chinese experts have been warning for decades, is forcing project authorities to dredge the diversion channel around the clock, leading the American engineers to predict that sedimentation will likely compromise the dam’s operation sooner and more severely than was originally thought.

Technical complications and social upheaval may turn Three Gorges into a bottomless pit that will invite the wrath of a burgeoning economy anxious for reliable, cheap power. According to an American executive whose company operates competing power plants in China, Three Gorges “is like the U.S. nuclear program; it will take forever, it will cost all the money in China, and it won’t make any power for 30 years.” The final cost could well be at least $2,000 per kilowatt and hence total more than $36 billion, making it “very uncompetitive if you charge any capital costs for the power.”

Three Gorges Probe welcomes submissions. However, it is not a forum for political debate. Rather, Three Gorges Probe is dedicated to covering the scientific, technical, economic, social, and environmental ramifications of completing the Three Gorges Project, as well as the alternatives to the dam.

Publisher: Patricia Adams Executive Editor: Mu Lan

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