The power environment in China is ripe for a bright combined heat and power (CHP) market, which will open doors for foreign gas turbine manufacturers and private investors, writes Dr. Suqing Wang.

Despite China's relative slowdown in economic growth and foreign investment, the country still remains among the world's brightest investment prospects. Its sheer size and rate of growth mean that new power generation is being built and commissioned on an ongoing basis.

China remains the second largest economy in the world, according to the United Nations, and is also the top emitter of carbon dioxide. It is also the world's largest user of coal, says the US Department of Commerce. The country, however, is taking positive steps to cut its emphasis on coal-fired power generation, and the government has taken an active role in shaping new energy infrastructure.

The strategy of new applications for fossil fuels and development of alternative energy sources is the key to China's future. With electricity demand soaring, the country recognizes the need for greener solutions; therefore, China's government has reinforced the need for efficiency at all stages of the energy value chain.

What is more, the scale of its economy gives China the greatest opportunity to drive through and develop many new solutions that could benefit the world's infrastructure needs as a whole. China, therefore, has a major role to play in shaping the future of energy and its global impact.

A large and rapidly growing population, coupled with aging infrastructure and a shift toward more efficient, cleaner generation sources, will ensure that China remains particularly attractive for those seeking to deploy natural gas-fired power generation. This includes cogeneration, or also known as CHP, projects.

Gas-fired CHP generation is ideal as a self-contained energy source for a region or an industrial park. In addition to other facilities management services, ready-made CHP, and cooling services in some cases, could be provided at lower costs with reduced emissions.

China's 12th Five-Year Plan has placed special emphasis on cutting carbon emissions by reducing the use of coal and oil. The plan calls for an energy infrastructure designed to increase the nation's alternative energy capabilities, improve electrical power capacity and expand access to oil and natural gas in an effort to meet demand from a fast-growing economy.

This means a slowing down in the construction of coal-fired power plants; decommissioning of older, outdated and inefficient coal plants; demand side management practices; and adding more renewable energy and natural gas-fired plants.

The latest Five-Year Plan and ongoing policy-making depict the following cleaner and more efficient energy goals:

Renewable energy investment, including solar, wind, biomass and hydropower;

Efficiency improvements through the use of improved natural gas-fired CHP plants, including distributed energy (DE);

Smart grid infrastructure development;

Energy conservation;

Enhanced upstream energy production, including coal and gas;

Possible legislation revision to promote DE–CHP generation.

Achieving these energy-efficiency goals is far from straightforward, however, given the country's current regulations, policy and market structures.

Current structure

In China, power generation, transmission and distribution are dominated and regulated by the central government. Most of the power is produced by the large state-owned generation enterprises, as well as five major independent power producers (IPPs). There are dozens of IPPs at the provincial level or in the private sector that are operated by domestic and foreign developers as well.

The National Development and Reform Commission (NDRC) is the top government agency that governs goods and services pricing in China. The NDRC, along with the National Energy Administration (NEA), provides electricity regulatory oversight and project approval.

All electricity generated by power producers is sold via power purchase agreements (PPAs) to the State Grid Corporation of China and the China Southern Power Grid Company, which dominate the transmission and distribution in northern China and southern China, respectively.

The NDRC sets the wholesale and retail base electricity rates, which vary by province and are established through national and provincial governments. However, in a given province, power generators with similar technologies will typically have the same tariff with local adjustment for flue gas desulfurization and fuel costs.

In contract, the heat market is less regulated and is primarily managed at the local level. Steam sales agreements are signed with local steam customers directly, and the steam price is market-driven with oversight by local governments.

The NDRC has established a favourable on-grid tariff for renewable energy projects as an incentive to promote the clean energy policy. The wind power tariff is in the range of approximately 0.51–0.61 RMB ($0.08–0.09) per kWh; the solar photovoltaic power tariff is around 1.15 RMB/kWh and has been declining over the years; and the biomass plant tariff is approximately 0.75 RMB/kWh. All of these renewable energy tariffs are higher than the conventional power producer tariff.

Updated energy policy

Further progress to greener solutions is being made. However, to support massive economic growth and reduce emissions impact, the government of China has been undertaking various energy policy changes and reforms.

Some recent energy policy changes and proposed changes are:

Local governments will be allowed to approve projects below 300 MW – all projects are currently approved by the NDRC;

Power and heat sales will be allowed from CHP projects directly to end users (industrial, municipalities, etc.);

The NDRC, NEA and Ministry of Finance are all promoting the use of CHP to improve energy efficiency. Detailed guidance is expected to be issued to local governments and municipalities for implementation soon;

More natural gas-fired power plants will be constructed to rebalance the coal-fired plant dominated power generation structure;

During the period of 2006 to 2020, the country plans to accelerate the development of its DE policy (primarily CHP plants), and establish pilot projects to formulate and compile technical standards, break major technical barriers and, therefore, create conditions for the large-scale application of DE;

Around 1000 natural gas-fueled DE projects will be constructed;

China's goal is to achieve DE integration with 60 per cent of its own technologies when the installed capacity reaches 10,000 MW and to achieve a 90 per cent equipment localization rate for small and medium main equipment and micro-gas turbine manufacturing. By 2020, through promoting the use of DE systems across the country, China will reach an installed DE capacity of 50,000 MW;

DE and CHP generation providers are classified as category one (priority) users of natural gas;

The government is proposing a natural gas price scheme to support the clean and more efficient energy strategy;

Strong smart grid infrastructure will be developed,

Energy conservation and new technologies such as electric cars will be adopted;

Upstream energy production (coal and gas) will be enhanced.

Foreign investment in the power sector in China has changed in recent years.

In the 1990s and early 2000s, its power market was very attractive to foreign investors with many encouraging benefits and investment guarantees, including reduced or waived taxes; cheap or free land for power plant investment by foreign developers; long-term PPAs; guaranteed power sales; guaranteed electricity sales price and guaranteed returns as high as 15 per cent to 20 per cent.

Since 2004, China has been working hard to overcome challenges related to guarantees, power plant utilization hours and higher fuel costs to ensure the country remains a bright prospect for foreign investment.

CHP in China

What are the implications of China's power market and regulatory framework for the development of CHP generation in the country?

First, CHP generators would be better positioned to offset or recover profits despite China's tariff structure and approach to fuel costs. Second, a more stabilized, developed and refined natural gas pricing and tariff adjustment system would encourage CHP investment.

Steam prices, especially in industrial parks, are typically high, which means the profit from heat (steam) generation of a CHP plant is the driving factor for overall profit.

This is why CHP remains an attractive application that could help drive greater adoption and investment in China's natural gas-fired power plants.

Recently outlined energy policy changes in China also remain very promising to those who will implement these critical human infrastructure projects.

They will continue to attract interest from many foreign developers and EPC (engineering, procurement and construction) companies looking to develop and construct CHP plants in new markets. With the right relationships in place, suitable project opportunities can be identified and supported.

Foreign investment and CHP technology will thrive in China as developers and EPC companies execute projects consistently and have positive experiences. Procurement success and the pathway to implementing reliable Chinese equipment can be achieved with the consistent use of manufacturing and qualifying processes.

Similarly, the EPC contract structure, for example, is not a common approach to project execution; therefore, project controls and quality assurance, as well as quality control procedures become much more important to ensure standard designs and the achievement of project cost and schedule metrics.

Bright future.

CHP generation has the potential for a bright future in China as the country continues to develop and build more natural gas-fired power plants. Steam prices remain relatively high, which offsets the current electricity tariff, making CHP a lucrative investment.

The new market will also open doors for foreign gas turbine manufacturers and private investors.

For developers, a strong relationship with local government is critical for project identification and approval. Projects with strong heat demand associated with industrial facilities will have better economics than power-only projects.

It is also recommended that all developers carefully select strong contractors and utilize local standards and equipment as much as possible to construct economically competitive facilities.