Wind Power: The Era of Consumption as King

Today I have something a little different for everyone - a translated op-ed/analysis piece about the challenge the Chinese wind power industry currently faces, published on the BJX energy news platform. The original author is Ran Xiaoran (冉小冉), staff writer at BJX.

Wind Power: The Era of Consumption as King

In recent years, advancements in new energy technology and increased production capacity have spurred rapid market expansion. However, as policies evolve, changes in the market environment such as reduced prices, grid integration challenges, and the transition to a market-driven electricity pricing system have altered the underlying dynamics of new energy development.

1) Consumption is King

There was a time when the primary focus of the industry was on "expanding territory" and "trading resources for market share," placing resources at the heart of industry growth. [Translation note: basically, you had to buy market share, so whomever had the most resources to do this would get ahead].

Over the 14th Five-Year Plan period, companies have heavily invested in wind power projects to meet their energy transformation targets, not just major energy corporations but also local and private entities too. Wind power OEMs have also played a significant role in this development, attracted by the stable cash flows and advantageous electricity pricing at the time.

By October 2024, China's total installed wind power capacity reached 486.17 gigawatts, with solar and wind combined at 1,279 gigawatts. With this massive capacity, the trend of the commidification of renewable energy power stations has become more obvious, and the transaction market for wind and solar assets has become more active.

However, the core of the market's dynamics is still the balance between supply and demand. As wind power projects serve dual purposes—to increase the share of clean energy and to be traded as assets—investors are increasingly focusing on their environmental value and financial returns. The current investment landscape shows standalone renewable energy plants are now at risk due to falling electricity prices and increased curtailment rates, contributing to reports of asset "devaluation."

The notion of "devaluation" isn't baseless. For instance, the first domestic onshore wind power REIT approved in June this year saw its valuation adjusted down by 7% by the Shanghai Stock Exchange, reflecting policy shifts and anticipated market conditions.

Another thing worth noting: Since the second half of 2024, State Power Investment Corporation, known for its vast clean energy installations globally, has been selling off shares in more than 10 of its solar PV project companies, clearly as a strategy to enhance asset quality. One example includes its sale of the Shandong Narentai Company, which saw a net return on assets in 2023 of just 1.8% and was categorized as a ineffecient asset.

In just the last five years, renewable power plants have transitioned from subsidized pricing to grid parity and now into the electricity spot markets, showing a clear decline in electricity prices along the way. According to BJX research, there's been a drop in transaction volumes for wind farms in 2024, primarily in the "Three North" regions.

The wind power utilization rate from January to September 2024 was 96.4%, down from 97.1% in 2023, with provinces like Hebei, Shandong, Liaoning, Jilin, Hubei, Shaanxi, Qinghai, Xinjiang, and Tibet experiencing declines to different degrees, indicating increased curtailment.

The Third Plenary Session of the 20th CPC Central Committee in August underscored the urgency of improving renewable uptake by issuing decisions to accelerate the "Development of a New Energy System." This highlights the critical role of consumption in ensuring the sustainability and attractiveness of investments in new energy.

No matter whether considering from the angle of stable industry development or attracting investment, consumption has once again become the lifetime renewable energy.

2) Diversified Development

Each phase of industry development brings its challenges. While asset "devaluation" due to declines in captured power price impacts investment decisions, two notable cases illustrate the robust growth of renewable energy in green finance:

In March 2023, two new energy infrastructure REITs, focusing on offshore wind and photovoltaic projects, were listed and performed exceptionally well on their first trading day, signaling strong market approval for renewable energy assets. Their continued growth into 2024 further alleviates concerns about asset value depreciation.

In the author's view, the decline in renewable energys costs is the result of competition among various power sources and a positive trend for the industry. Wind power, for example, now costs significantly less to install than five years ago, which, combined with long operational periods and digital enhancements, promises stable returns.

Looking ahead, in the "Consumption is King" era, renewable energy construction will spawn new investment models. The industry is exploring scenarios like distributed energy, integrated wind-solar-storage systems, and hydrogen production from wind power to address future uncertainties.

Since this year, the "Three North" regions have been emphasizing power offtake as a key criterion for approving new projects. Xinjiang's policy in March 2024 encourages investment in projects that can increase energy consumption, demonstrating a shift towards integrating power consumption with renewable energy production.

Furthermore, innovative electricity pricing strategies are emerging, particularly with the integration of storage solutions together with renewable energy projects. This not only boosts consumption capacity but also enhances market trading flexibility.

To navigate the uncertainties of electricity supply and pricing, wind power must diversify and ensure load offtake to secure a stable future.

-End

This article plays nicely with my post last week, where I criticized a Bloomberg article for mischaracterizing power markets as a "lifeline" for Chinese renewable projects, when it's actually a threat. This piece only underlines that reality.

It's not that the renewables projects have fundamentally bad business cases; it's just that they were developed under certain assumptions for the shape of the market and the state of the policy market, and those conditions are all changing now. New projects going forward will be built according to those new realities, and probably do just fine. Meanwhile, some projects built in the "in between" years (like right now) may find themselves with some headaches.

But of course, if you work with some savvy and well-informed local advisors (cough cough) you'll be able to take all available steps to minimize downside risk while maximizing your upside. After all, the alternative is choosing not to participate at all in the largest power market in the world. Can you afford that?

That's all for this time. If you enjoyed this content, please give me a follow, and also check out The Lantau Group, a specialist consultancy focused on the Asia-Pacific energy sector. I'm based in The Lantau Group's Shanghai office, where I helps companies make crucial decisions about their energy strategy in China, including power tariff forecasts, budget forecasts, and sustainability planning for power customers, as well as transaction/commercial support for power infrastructure developers, lenders and investors.