Utilities Unbundled issue 13

Go west

  • Share

The aftermath of the global financial crisis and tougher domestic conditions have sent Chinese power companies overseas in search of strategic power and utilities (P&U) acquisitions.

Recent overseas expansion by Chinese companies looks likely to continue and potentially accelerate.

Tough domestic market

China’s power market is highly competitive and conditions remain challenging, with reported losses in thermal generation of RMB2.8b (US$445m)9 reported in January 2012. This continues the sector’s heavy losses since 2008, largely due to:

  • Rising input prices
  • Strict government-imposed electricity price controls

In search of returns overseas

The trend towards foreign acquisitions is highlighted by China Huaneng Group, one of China’s top five state-owned electricity generators. In 2008, the Group acquired Singaporean power producer, Tuas Power, for US$3.1b, followed in 2011 by the US$1.2b purchase of a 50% stake in US-based InterGen NV. Other activity includes:

  • Two major acquisitions by the State Grid Corporation of China (SGCC) in Portugal, totalling US$1.5b10.
  • China Investment Corp’s (CIC) purchases of major utilities assets worth approximately US$2.5b11.

The renewables sector has also been active. Since 2011, GoldWind has acquired two US wind farms, Shady Oaks and Musselshell, for US$200m and US$100m respectively.

Tax breaks have been an influencing factor in the US deals. “We enjoy good cash flows and profit margins due to the substantial tax benefits available,” says Liang (Jeffrey) Sun, Executive Director at GoldWind International Holdings Ltd.

Profiting from renewables

The profitability of China’s biggest P&U companies is increasingly underpinned by non-power and clean energy operations.12

The first direct investment in overseas renewable energy by one of China’s top five power producers was in July 2011 by Longyuan Power, a subsidiary of China Guodian Corporation. Longyuan Power signed an agreement to buy a Canadian wind project from Farm Owned Power (Melancthon) Ltd. for US$247m. Sun says that Longyuan now plans to buy Shady Oaks from GoldWind this year.

“Developed countries are targeted because renewable energy policies are changing in China,” Sun explains. Consistency and stability from European and US regulators is valued.

Operating in a mature regulatory environment also gives turbine manufacturers access to more profitable downstream businesses. “In my experience, Chinese domestic turbine market prices are falling,” says Sun. “That’s why we began moving downstream in 2010. Selling turbines generates little profit while the return on our overseas wind power plants can exceed 20%.”

Overseas expansion to continue

Recent overseas expansion by Chinese companies looks likely to continue and potentially accelerate:

  • GoldWind is in talks to acquire five more wind farms before the end of 2012
  • SGCC is expected to purchase Enagas SA, a Madrid-based natural gas utilities company
  • China Guodian Group is widely tipped to buy Baglan Bay power plant in the UK from GE

Supported by their banks and investors, Chinese companies are reforming the landscape of the global utilities market. According to Sun, “Momentum will be maintained until China’s economy resumes normal growth.”

China's outbond investments

China's Outbound Investments

For more information, contact Ben van Gils.

  • 9 “Operational Performance of State-Owned Big Five Power Companies in 2011 and January 2012,” Ministry of Finance of the People’s Republic of China, April 2012, http://qys.mof.gov.cn/zhengwuxinxi/qiyeyunxingdongtai/201203/t20120319_635947.html accessed 12 September 2012.
  • 10 The acquisition of Redes Energ├ęticas Nacionais (25%), and seven Power Transmission Lines from Actividades de Construccion Servicios SA (ACS).
  • 11 Since January 2011, CIC has acquired the following stakes: Thames Water Utility (8.7%), GDF-Suez (10%), Cheniere Energy (50%), and AES-VCM Mong Duong Power (19%).
  • 12 Xuechen Zhu and Jianfeng Xu, “Becoming a Global Leader,” China Huaneng Magazine, December 2011.

<< Previous Next >>