Cogeneration in China - Opportunities for International Suppliers
As the world's leading energy consumer, and facing deteriorating environmental conditions, China plans a massive promotion of alternative energy over fossil fuel dependence in its newest five-year plan. At the end of 2015, alternative energy, including solar, wind, biofuel, and hydro energy, is expected to account for 30% of total generation capacity. But while attention has been focused towards new energy sources, cogeneration, a traditional yet more technically mature way of energy saving, is being neglected. In contrast with new energy, where efficiency and scalability are major obstacles to profit, significant efficiency gains at existing fossil fuel power plants can be obtained through cogeneration.
China needs to find a way of meeting its emission targets and avoiding electricity shortages that inhibit growth. Over the next five years of economic development, could cogeneration provide an answer?
CHINA CHP OVERVIEW
Ever since Pearl Street Station, the world's first commercial cogeneration, or combined heat and power (CHP), plant was built by Thomas Edison in 1882, the world has enjoyed potential efficiency increases by utilizing waste heat from conventional power production. China began to use cogeneration in the 1980s, when a central government policy that encouraged cogeneration in North China's district heating plants was pronounced. The commercial development of CHP, starting in the late 1980s, quickly spread through China.
In the last decade, China has experienced colossal investment in its power generation sector. Installed capacity of thermal power stations (including coal, petroleum and gas sources) has grown from 210 GW in 2001 to 710 GW by the end of 2010. It will overtake the USA's 875 GW of thermal power generation capacity in the near future.
In the meantime, CHP installation capacity reached 167 GW in 2010, accounting for 23% of total thermal power capacity. This has presented significant opportunities to large Chinese equipment suppliers such as Harbin, Dongfang, Shanghai Electric as well as their foreign partners, GE, Mitsubishi and Siemens.
China Total Electricity Generation Installed Capacity (GW)
Source: China Electricity Council, GCiS
China's CHP equipment market is worth about RMB 28.1 billion ($4.5 billion) as of year-end 2011 (or RMB 30 billion when including exports). The domestic market, which is the focus of the report, grew by more than 20% in 2011, faster than GDP growth of 9.2%. Imported products by foreign companies play a significant role in the market, valued at about RMB 3.6 billion, most of which are gas turbines and reciprocating engines.
Around 75 companies currently provide CHP equipment to the Chinese market. Most local manufacturers supply large, coal-fired cogeneration equipment and enjoy significant market share. Foreign suppliers, such as GE and Caterpillar, focus on gas turbines and internal combustion engines, where technological requirements are high and customers are willing to pay a premium. The GCiS report estimates that there are fifteen notable foreign players in this market, with high market share in gas turbine and reciprocating engine segments. Foreign suppliers generally recognized as providers of superior technology and higher quality products, control around a quarter of this market.
CHP is a nebulous market. Each system is configured in a unique way that optimizes the existing equipment.
COGENERATION IN COAL-FIRED PLANTS
China's thermal power plant investment totaled RMB 105 billion in 2011, including coal-fired and gas-fired power stations. While this is a large-sounding number, it is less than half of 2005's investment. The shrinking investment mostly is due to a slowing of construction of coal-fired power plants.
As of year-end 2011, thermal power plant capacity accounted for around three-quarters of total electricity generation capacity. China's government plans to lower this ratio to 65% by 2015 when total generation capacity will reach over 1400 GW. It is implicitly clear that new coal-fired power plant construction and related equipment sales are expected to increase at a reduced pace in the following years.
Coal-fired CHP plants use back pressure and extraction steam turbines, power station boilers and generators. According to GCiS, 2011 orders on coal-fired cogeneration equipment have been constantly growing as a percentage of total coal-fired power generation addition. By 2015 it is expected that nearly 30% of total coal-fired installed capacity will be cogeneration power plants.
Although utility power plants will remain the major application for coal-fired cogeneration equipment market, the majority of equipment supplier revenues will come from industrial end-users. Industrial end-users, such as metallurgy, cement, paper and pulp, see cogeneration as a desirable solution for large-scale power and heat, as they are facing raised coal prices. In addition to cost savings, the technology and skills required for setting up a cogeneration project are commercially available. However, higher equipment costs and grid and heat pipeline connection issues must be overcome before industrial end-users fully adopt CHP.
In conclusion, accounting for more sluggish investment in coal-fuelled power plants, market participants have a moderate outlook on coal-fired cogeneration equipment with less than 10% compound annual growth rate after 2011.
COGENERATION IN GAS-FIRED PLANTS
Gas-fired power plants were traditionally used in offshore oil drilling platforms, or as peak load power plants. In recent years, a strong trend towards gas-fired power plants as a main electricity and heat resource has been recorded. Going forward, given rising coal prices versus the increasing availability of natural gas, equipment such as gas turbines and heat recovery steam generators (HRSG) are expected to grow at a much faster rate.
In 2011, gas-fired power plant capacity reached 33 GW: a growth of 24% compared with 2010. By 2015, the installed capacity of gas-fired power plants will reach at least 60 GW, implying a compound annual growth rate of around 20%. GCiS forecasts a total spend of over RMB 60 billion on gas turbine and HRSG equipment for cogeneration between 2011 and 2015.
By 2011, China has economically recoverable natural gas reserves of 3.8 trillion cubic tonnes (and an additional 25 trillion tonnes in recoverable shale gas), ranking third in the world. Several long distance pipelines were completed between 2010 and 2011. This was a high period for overall construction as plants, pipelines and supply stations are brought online at the same time.
Gas turbine orders have shown significant growth in 2011 and this trend is likely to accelerate over the forecast period. Apart from gas supplies from inland China, expanding offshore gas drilling and import LNG will also increase gas supply. Gas-fired power plant construction will continue in China's east and south coastal provinces where huge electricity demand exists.
District heating is also expected to drive considerable growth in gas-fired equipment demand. As of 2010, district heating with CHP supplies over a third of total construction areas in northern cities and towns, the rest being heat-only boiler stations fuelled by coal or natural gas. To reduce energy waste and pollution caused by coal-fired localized boilers and improve energy efficiency, cities including Beijing, Tianjin and Taiyuan have planned to restrict new heat plants to gas-fired only. As shown in currently released plans, new heating plants in these areas have all adopted gas-fired cogeneration.
DISTRIBUTED ENERGY RESOURCE
According to the US Department of Energy, distributed energy resources (DER) - also called distributed generation, distributed energy, and distributed power systems - are small, modular, grid-tied or off-grid energy systems located in or near the point where energy is used. Deploying DER creates a vast demand for medium to small sized gas turbines, microturbines and as internal combustion engines. These needs present an opportunity for international suppliers. DER does not account for a large proportion of cogeneration, but it maintains a fast growth rate.
Power company Huadian has announced several gas DER projects for a pipeline located in Guangdong and Jiangsu, most of which are for combined heat and power. Funding for these types of projects usually comes from power group equity investment and bank loans.
Currently, most of the DER projects in China are found in coal bed methane applications in mining, and in gas-fired uninterruptible power supplies for public buildings. However, this may well change if China realizes its target of 50 GW of gas-fired DER by 2020. Current installation capacity stands at 5 GW.
Ambitious as this may sound, multinationals and state-owned power groups are moving on it. GE and Huadian formed a joint venture company after President Hu Jintao's visit to the US in 2011, where he saw GE's aeroderivative gas turbines. The efficiency and durability of Chinese equipment is far behind foreign products.
Financially, the unit cost of small gas turbines and internal combustion engines remains an obstacle for DER deployment. Integration with the grid may not be an immediate problem but when installation capacity reaches a higher level, it could potentially inhibit further development of small-scale power generation. This has happened for China's wind and solar farms.
China CHP Equipment Market Segment
Emissions reduction and energy efficiency initiatives are the major drivers behind China's cogeneration equipment market. In addition to adopting alternative energy, both local and central governments have the incentive to implement cogeneration when building new power plants or retrofit old ones.
With foreseeable economic growth rates as high as 8%, China is facing 30-40 GW of annual electricity shortages. Cogeneration will continue to contribute to overcoming this problem. It enables stable economic growth with a more efficient and balanced fuel consumption.
Even though Chinese companies are playing catch up with foreign suppliers' technology, the latter must build joint venture corporations with domestic partners to further penetrate the market. Achieving the right balance of technology transfer and commercialization spells big things for this market.
This was originally published in Cogeneration and On-site Power Production, May-June issue 2012.
About GCiS China Strategic Research
GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.