Friday, October 5, 2012

Two articles on dam-building plans in China

[Two articles below discuss new plans for dams in China. The first
examines plans for investing in solar and hydro in Tibet by Huaneng. The
second is extracted from an HSBC report on climate change risks in
China, and the implications of reduced water availability on hydro and
thermal plans.]

Company taps clean energy in Tibet
Xinhua News
October 4, 2012

A national energy company is planning to invest 100 billion yuan (15.87
billion U.S. dollars) within 10 years to tap into abundant solar and
hydroelectric power resources in Tibet.

Huaneng Tibet Power Generation Co., Ltd. (HTPG), a subsidiary of the
state-owned China Huaneng Group, has signed multiple agreements with the
Tibetan autonomous regional government regarding development of clean
energy, company sources said.

"The investment is aimed at putting an end to the energy shortage in
Tibet and sending power out of the region as well," said Liu Xingguo,
general manager of HTPG.

Tibet has abundant solar and hydroelectric power resources, with the
amount of annual sunlight clocking in at 2,000 hours and hydropower
resources that are believed to account for 29 percent of the national total.

However, Tibet still suffers from power shortage due to underdeveloped
infrastructure, which has in turn hindered the region's economic and
social development.

In July 2010, Huaneng kicked off construction on the Zangmu Hydropower
Station, the largest hydropower project in the region.

The 8.5 billion-yuan project, with an installed capacity of 510,000
kilowatts, is expected to go operational in 2014 and reach its full
capacity in 2016 after its six power-generating units are put into use,
generating 2.5 billion kilowatts of electricity annually.

By 2015, Huaneng's installed capacity in Tibet will reach 800,000
kilowatts and rise further to 10 million kilowatts by 2020, according to
the agreements between the company and the regional government.


Does China have enough water to keep building three power stations a week?
By Wai-Shin Chan
October 5, 2012

Cities like Beijing and farming heartlands are at risk of water
shortages from China's surging demand for power, says HSBC.

China builds an average of three new power stations a week; by 2030 it
plans to add more power capacity than exists in the US, the UK and
Australia today. This will require huge amounts of water for cooling and
driving steam turbine generators. The country's water resources are
already stretched and climate change is making conditions even tougher.

So what does this mean for investors and companies?

We believe that water and power risks must be a top priority when
planning capital expenditure. It is vital that the availability of water
and the potential effect on supply chains is taken into account for the
life of the investment.

Forty percent of China's total agricultural output is produced in
water-scarce regions. We believe five provinces - Hebei, Shanxi,
Shandong, Henan and Jiangsu - and three municipalities, Beijing,
Shanghai and Tianjin, are most at risk of water shortages. The
industrial sector is doubly exposed because it consumes well over 80% of
all electricity.

Given the investment implications, it's important to look at how China
is attempting to deal with the twin challenges of generating sufficient
power to drive its giant economy and protecting its precious water supplies.

In 2010, thermal power represented 74% of China's total installed
capacity and hydropower 22%. This means that almost all power generation
relies on water. The nation's industrialisation, urbanisation and rising
affluence will increase demand for electric power and with that comes
the further depletion of limited water resources.

China's annual renewable-water resource per capita averaged slightly
over 2,000 cubic metres in 2003-2010, just above the water stress level
of 1,700 cubic metres. On closer examination, this water is not evenly
distributed throughout the country's 31 provinces and municipalities.
Eleven provinces are already water scarce (meaning they have less than
1,000 cubic metres per capita per year) and climate change, caused
mostly by carbon-dioxide emissions from burning fossil fuels,
exacerbates existing water stresses. The Chinese government recognises
this and has responded by setting tough new water quotas as well as
pollution reduction targets.

Coal and hydro expansion

We estimate China's power sector uses approximately 10% of the nation's
water, relatively low compared to the UK's 34% and 49% in the US.
However, China plans to add 1,212 gigawatts of water-reliant power
capacity by 2030, equivalent to almost six times India's current
installed generation capacity. Coal-fired power will continue to
dominate: in the decade to 2020, China plans to add 453 gigawatts of
coal-fired power capacity, equivalent to double Russia's entire 2009
power generation capacity.

China's coal-fired power capacity expansion will also involve an
increase in coal mining, which consumes an abundance of water for
extraction and processing. We estimate that 47% of coal reserves are
located in water-scarce regions. Water scarcity could also lead to a
greater reliance on coal imports; for example, 30% of China's ensured
coal reserves are in Shanxi, a province suffering from extreme water

Changes in water availability also threaten hydropower. Although
hydro-capacity is usually built in water-rich areas, the effects of
shortages can be felt more quickly in the event of drought. Some
hydropower stations have operated at below capacity in recent summers
due to droughts in southern China.

The government plans to expand hydropower from 216 gigawatts in 2010 to
568 gigawatts by 2030. Unfortunately, the damming of rivers upstream has
the potential to generate tensions with countries further downstream, so
hydropower in China comes with geopolitical risk.

We believe the expansion of China's installed thermal and hydro capacity
will further stress water resources. Even with a change in fuel mix, we
expect that 87% of power capacity will still require water. That means
efficiency needs to be greatly improved.

Capping water use

Energy efficiency is as important as water efficiency. Using less energy
would reduce demand for power, alleviating some of the water stress.
China has improved both water and energy efficiency in recent years,
although much more must be done to achieve national targets.

Stricter energy-efficiency targets have already been imposed on the
industrial sector after they missed 2011 targets. We think industrial
water targets could follow suit, though more efficient expansion may
also require more upfront capital expenditure.

Water scarcity puts the metals and mining, utilities production and
supply, and manufacturing segments at risk. No water means no
electricity, and no raw materials such as iron and steel. As mentioned
earlier, some 40% of agricultural output is produced in water-scarce
regions, mainly in the country's north. Climate change will also affect
agricultural productivity through increased temperatures and altered
water availability. Moreover, since agriculture is of prime importance
to China in terms of food security, competition for water could become

The central government set national water quotas in 2011. In response,
provincial administrations have set and released 2015 water caps. Since
the total of the 31 provincial caps actually exceeds the national total
for 2015, some inter-provincial planning or collaboration will have to
take place. We believe this further highlights the problem of
enforcement in China. Moreover, some of the most water-scarce provinces
have been given the toughest water pollution-reduction targets, making
it extra hard to balance growth with water quantity and quality.

Since 45% of China's GDP originates in water-scarce provinces, we think
provincial water caps could force a change in the economic mix.
Facilities may have to relocate, and water quotas and
pollution-reduction targets could be enforced more strictly than in the
past. In addition to the five provinces and three municipalities that
are most at risk of water shortages, three borderline stressed provinces
- Guangdong, Zhejiang and Inner Mongolia - are also vulnerable as they
fluctuate in and out of water stress.

China's planned economy is taking water and other resource stresses into
account, however, the growth profiles of power and water in certain
provinces seem to reveal a planning mismatch. Although water tariff
hikes are also a concern, we believe the greater risk lies with water
shortages. Improving both the water and energy efficiency of operations
is crucial.

Water and power risks need to be considered as a core feature of capital
expenditure plans. Project financiers should consider these resource
shortages before funding assets, ensuring that water availability has
been taken into account, and somewhat assured, for the life of the
asset. Investors should examine the effects of potential water shortages
on facilities located in water-scarce provinces and whether direct
operations or supply chains could be affected. Companies should be more
conscious of water quotas and pollution targets as they strive to make
operations more efficient, as water targets may be more strictly
enforced than in the past.

Finally, we believe that water constraints will provide an additional
driver for industrial energy efficiency, already a priority of the 12th
Five-Year Plan. Without upfront action now, we believe the risk remains
and future assets could be left stranded high and dry.

Wai-Shin Chan is climate change strategist at HSBC. This article is
drawn from HSBC's report "No water, no power: is there enough water to
fuel China's power expansion?"

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1 comment:

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