Financial Times
February 2, 2006

While China needs to attract outside investment, foreigners have stayed away from the market after several cases of the Chinese reneging on power puchasing deals.

While China needs to attract outside investment, foreigners have stayed away from the market after several cases of the Chinese reneging on power puchasing deals. The energy sector has always been a microcosm of China itself, encapsulating in miniature the ambition and stress inherent in the country’s wrenching economic transition. The size of projected demand is enormous. The current Five Year Plan foresees total installed generating capacity at 390m kilowatts (KW) by 2005, up from 319m kw at the end of 2000, according to the State Economic and Trade Commission. But reaching this target presents challenges of a similar magnitude. China must create an attractive environment for investors despite having alienated many foreign power companies by reneging on several power purchasing agreements over the past five years. It must seek to raise capital despite offering rates of return that are capped by the State Development Planning Commission (SDPC) at “slightly above” the cost of capital. Environmental concerns require a diversification away from cheap but polluting coal-fired power stations and the building of more gas thermal, hydro-electric and nuclear projects. Michael Komesaroff, managing director of Urandaline, a consultancy on capital intensive industries, is not sanguine on China’s ability to attract foreign investors in the medium term. “I think there are enough (foreign corporations) that have been burned. There will always be those who want to come in but overall it won’t be easy.” The latest in a series of cases in which Chinese authorities have reneged on their power purchasing promises to foreign-invested plants involve two large plants in Fujian, a relatively wealthy province in the south-east that has attracted much foreign investment from Taiwan. Meizhou Wan, a wholly foreign-owned 720MW clean coal plant that was scheduled to cost $755m, is currently renogiating its power purchase agreement after Fujian provincial authorities reneged on the old contract to pay Rmb0.56 per kwh (6.7 cents), Fujian officials said.