Sunday, December 2, 2012

[China] State Grid's Surprise Australian Power Play

[China] State Grid's Surprise Australian Power Play

29 November 2012
By David Winning
Wall Street Journal, Blog

It didn't take long for Liu Zhenya, general manager of State Grid Corp.,
to make good on a pledge to grow the Chinese power giant's overseas assets.

Two weeks ago, Mr. Liu was telling reporters attending the Communist
Party Congress in Beijing that State Grid's ambition is to nearly
quadruple its overseas assets by 2020 to as much as US$50 billion.
Healthy returns from past deals are emboldening management of the
state-owned company to kick the tires on more acquisitions, he said.

If there's a surprise in Thursday's announcement that State Grid is to
buy Powerlink's interest in ElectraNet, which operates South Australia
state's power transmission grid, it is that State Grid has chosen
Australia for its next bet.

Past acquisitions have mostly been in fast-growing centers for energy
demand like Venezuela, economies like the Philippines where
infrastructure needs updating or vast countries like Brazil where State
Grid can leverage its expertise in operating ultra-high voltage power
lines. On the surface at least, the only comparable acquisition was
State Grid's purchase of a 25% stake in Portugal's national grid company
Redes Energeticas Nacionais RENE.LB +0.91%, earlier this year.

But a look at ElectraNet's strategy document released in April signals
why State Grid would be interested.

The power grid in South Australia already covers a service area of
around 200,000 square kilometers, comprising transmission lines spanning
5,600 kilometers. That's set to grow in future as mining investments
create demand for power in remote parts of the state lacking a grid

Also, State Grid has been investing heavily in smart grid technology in
China that aims to match supply more closely with demand. ElectraNet
said a key challenge would be planning for the uncertain impact of new
technologies on its network in South Australia, citing the potential for
motorists to switch to electric cars in future that will force up power
use at night when batteries are re-charged.

"On present trends, South Australia's underlying electricity energy
consumption in 2035 may be around 50% higher than today and the State's
2035/36 peak power demand may be 60% higher, excluding the potential for
major new transmission loads,� ElectraNet said in the report.

"Even without major development projects, significant transmission
investment will, therefore, be required over the next 25 years simply to
supply South Australia's growing demand for electricity. This typically
includes local works such as additional transformers, additional
capacitors (for voltage support at times of peak power demand) new lines
and upgrades to existing power lines.�

State Grid didn't disclose financial terms of its deal for the
ElectraNet stake, but a person familiar with the matter told Deal
Journal Australia that the deal is worth around 500 million Australian
dollars (US$523 million).

State Grid undoubtedly needs to look overseas for growth. China's power
market is tightly regulated by Beijing, which fears that liberalization
could force up inflation and stoke social unrest.

When prices of coal - which accounts for more than two-thirds of China's
energy mix - have surged in recent years, China has often reacted slowly
in allowing government-set power tariffs to rise. That's forced
generating companies like Huaneng and Huadian, along with transmission
companies State Grid and China Southern Power Grid Corp., to shoulder
some of the losses from high fuel costs rather than pass them on in full
to the consumer.

"Net asset returns on overseas projects are over a double-digit rate,"
Mr. Liu said Nov. 11, adding that the return rate is three to five times
higher than the company's domestic investments.

State Grid also needs to grow overseas because it has reached its limits
geographically in China. When the company was created in 2002 when China
was breaking up its energy monopolies, State Grid was handed a monopoly
position in power transmission in all but five provinces in the
country's south.

South Australia is a growing market�the state government predicts that
the population could reach 2.28 million by 2036 from around 1.67 million
last year. But that's tiny compared to State Grid's position in China
where it serves a market containing a billion people, or 88% of the
country's citizens.

Perhaps mindful that China Inc. is still struggling to shed its
reputation as being low-tech and low-cost, State Grid stressed what it
can bring to Australia when announcing its deal with Powerlink. The
company's expertise extends from reducing losses when power is
transmitted over long distances at high voltages, integrating wind
energy output and solar power generation, and advanced smart grid
technologies, it said.

For consumers, it could mean lower prices if State Grid follows through
on an aim to reduce ElectraNet's long-term transmission cost.

State Grid also appears keen to allay fears about another Australian
asset falling into Chinese hands, following the political rumpus around
the purchase of cotton farm Cubbie Station by a consortium led by
Shandong RuYi Scientific & Technological Group., by stating that it
won't operate the South Australia power grid.

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