The company responsible for linking hydro dams on the Lancang (Mekong)
River to Yunnan’s power grid has been operating at a loss in recent
years, the Asian Development Bank reports.

Dachaoshan dam on the Lancang River

With financing from the ADB, the Yunnan Electric Power Group Corporation
(YEPG) completed a US$207-million transmission link to the Dachaoshan
dam on the Lancang/Mekong River in early 2004.

In its project completion report, the Bank concluded that while the project met its
objectives of increasing the company’s power transmission capacity and enabling greater use of Yunnan’s hydropower capacity during the flood season, the company is not financially viable.

Instead of generating a 10-per-cent return on net fixed assets by 2003, the
company operated at a loss of US$35.5 million (285 million yuan RMB) in
2003 and continued to lose money in 2004 Ð although its losses were 40
per cent less than in 2003.

The Bank attributes YEPG’s losses to restructuring and transmission rates that are set too low.

Prior to restructuring, the company recorded an operating profit of US$28.7 million (230 million yuan). In 2003, the company’s highly profitable generating assets were transferred to other newly established generating companies. YEPG became a transmission company
keeping only a small amount of generation capacity to facilitate peak and frequency regulation of the grid.

To make the new company viable, the government was supposed to increase transmission rates to reflect the actual costs of the company’s new transmission investments, including debt servicing, operating costs, depreciation and at least 12-per-cent return on investment for shareholders.

The government did approve two tariff reform plans in 2002 and 2003, which led to a slight increase of retail tariffs by 0.15 US cents (0.012 yuan) per kilowatt-hour and the introduction of time-of-use charges for transmission. But these changes aren’t enough.

To become financially viable, the company has requested a doubling of transmission rates to 1.5 US cents (0.12 yuan) per kilowatt-hour, which the central government has not yet approved.

The ADB expects the company “to turn an operating profit in 2005 as anticipated electricity tariff increases kick in as part of the government’s temporary rules on management of tariffs in the power industry.”

Last May, the National Development and Reform Commission, China’s top planning agency, issued new guidelines which, if implemented, would allow grid companies “to recover their costs and earn reasonable returns from transmission and distribution charges.”

YEPG’s future financial performance will depend largely on whether the government approves these new charges, the ADB concludes. YEPG’s proposed doubling of transmission rates raises questions about the viability of further grid expansion to accommodate hydro exports, and the final cost to China’s power consumers.

The ADB report endorses the proposed rate increase without an analysis of its impact on power consumption and demand. Nor does the report mention whether the proposed rate increase will be subject to ratepayer hearings in affected jurisdictions or regulatory scrutiny from China’s industry regulator, the State Electricity Regulatory Commission.

YEPG is a subsidiary of China Southern Power Grid Company, which plans to invest US$29 billion in west-east transmission projects over the next five years.

In addition to the US$50-million loan for YEPG’s Dachaoshan transmission facilities, the ADB provided a US$500,000 technical assistance grant to advise YEPG on modern accounting and utility management practices. One of the objectives of the grant was to
“strengthen YEPG’s tariff-setting capabilities in order to ensure adequate revenues to carry out its system expansion plan while maintaining financial soundness.”

The lead consultant for the Yunnan-Dachaoshan project was Canadian engineering  consulting firm Dessau-Soprin.

The Dachaoshan transmission project includes 500 kV transmission lines and substations, as well as lower voltage distribution lines, and communication facilities to allow efficient dispatch of power from the Dachaoshan dam.

Dachaoshan is the second of eight giant dams slated for construction on the Lancang/Mekong River. The dam owner is Hydrolancang, the Yunnan subsidiary of Huaneng, one of China’s “big five” generating companies.

In March, China Power News Network reported that the 1350-MW Dachaoshan dam was barely operational due to lower than normal river flows.

Sources:

Asian Development Bank, Project Completion Report on the Yunnan
Dachaoshan Power Transmission Project (Loan 1644-PRC) in the People’s
Republic of China, Asian Development Bank, August 2005. www.adb.org

China Power News Network, “Southern Power Grid company allocated an additional 500 MW of power to Yunnan,” 31 March 2006.

Grainne Ryder is policy director at Probe International. She can be reached at grainneryder@nextcity.com