Turning to wind for rescue
By Shahid Javed Burki
Monday, 27 Dec, 2010
BY now it has become conventional wisdom to attribute the persistent energy crisis in the country – the growing gap between demand and supply in electricity and natural gas – to the lack of political will to tap the large resources available.
Pakistan has resources it could use for increasing power generation and with more emphasis on exploration it could bring more gas to the surface.
Wind is one of the sources of supply that can be tapped without creating too much political fuss. There is enough of it available in several parts of the country. What is needed is a strategy that would do three things: create partnership between the public and private sectors so that investments can be made by the latter within a regulatory framework developed by the former; undertake investment in transmission lines from the areas that are rich in wind to the points of consumption; and provide incentives to the Chinese to invest in the sector. In this context, it is interesting to note how the wind-power sector has developed in China over the last few years.
In developing their wind-power industry, the Chinese used the strategy with which I had become familiar when I was looking after the World Bank`s programme in that country in the period 1987 to 1994. One of the first projects I was responsible for developing in China for funding by the bank was a massive power plant at a place called Beilongjiang near Shanghai. The Chinese wanted the bank to finance the building of four 300 MW coal-fired plants. They accepted the bank`s requirements that financing will only be available by selecting the supplier through international competitive bidding. But they insisted that the winner of the contract would be allowed to bring in only one plant; the remaining three would be made in China by a subsidiary that would be established with Chinese participation. America`s Westinghouse was the bid winner.
The company went on to create a production facility in China which increased the capacity of the plants it produced first to 600 MW, then to 900 MW and now to over 1,000 MW. China is now one of the biggest manufacturers of coal-fired plants in the world. During Prime Minister Wen Jiabao`s recent visit to India, Beijing offered to build a number of plants with financing to be provided by China`s public sector banks.
The Chinese have followed the same strategy in developing their wind-power industry. In the case of this sector, the Chinese forced the Spanish company Gamesa to help create a domestic industry in the sector. According to one account, “nearly all the components that Gemesa assembled into million-dollar turbines here are made by local suppliers – companies Gamesa trained to meet onerous local content requirements.
And these suppliers undermine Gamesa by selling parts to its Chinese competitors –wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.” On 4 July 2005, the Chinese National and Reforms Commission, the country`s planning authority, issued “Notice 1204” directing that domestic wind farms had to buy equipment in which 70 per cent of the value was domestically manufactured.
This local content requirement was in clear violation of the rules of the World Trade Organisation (WTO). The Chinese had joined WTO in 1991. Its rules don`t allow the use of the incentives the Chinese have employed to create competition by developing their own industries. But companies such as Gamesa could have persuaded their home governments to go to the WTO. They decided not to take that route in spite of the fast development of the domestic industry in China.
Gamesa sells more than twice as many turbines in the country as it did when it was the market leader five years ago. In other words, even if domestic competition was developed by state support the sheer size of the economy has enough potential demand to accommodate several suppliers, both foreign and domestic.
Now the Chinese manufacturers control more than 85 per cent of the wind turbine business. Sinovel, the country`s largest company, has said it wants to become the world`s largest wind-turbine company by 2015, a goal it is well on its way to winning. In order to ease this path, the Chinese authorities withdrew “Notice 1204”. By then it was not needed.
For instance, Gamesa was now selling turbines in China that had 95 per cent local content. Their development was aided by the state that provided the companies with land and cheap credit to set up their plants and quickly expand their capacity. Gamesa`s market share has declined from about 35 per cent to only three per cent.
“With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.”
What is the relevance of the rapid development of the Chinese wind-power industry for easing Pakistan`s energy shortage? The answer to the question is obvious: China could become a major supplier of both equipment and finance to develop Pakistan`s potential in this neglected area. What China is doing in developing nuclear energy in Pakistan, it could also do for wind. I am told that during the time President Pervez Musharraf was in charge, the Chinese proposed a wind project that would have produced 1,000 MW of energy.
His prime minister, however, asked the Chinese to scale back the project to 250 MW which Beijing declined to do, arguing that a smaller wind-farm did not make much economic sense. If this story is correct, it obviously set back the country by years and discouraged the Chinese from investing in Pakistan to develop wind power.
The situation may be changing now. While in office, President Asif Ali Zardari has developed strong relations with China. His government has allowed a Chinese bank to set up operations in Pakistan which Beijing undoubtedly will use to finance the projects China is interested in building in the country.
The Chinese signed a number of agreements during Prime Minister Wen Jiabao`s three-day visit to Pakistan. These included support for the development of wind power. It is interesting that Wen`s visit and display of his country`s interest in aiding the development of wind-power came a few weeks after the late Richard Holbrooke signed an agreement to build three wind power plants in Sindh that will produce a total of 450 MW at a cost of $375 million.
This amount will be paid out of the $7.5 billion Pakistan is set to receive from the United States under the terms of the Kerry-Lugar bill.
Pakistan, in other words, may see the United States and China compete with one another to gain a foothold in its energy sector in the country.
China is already involved in developing nuclear power with the promise that it would build a large 1,000 MW plant to augment the supply of power already coming from the plants built or nearing completion. If China enters the field of wind-power, it will do so on a large scale, establishing large wind farms that will generate hundreds if not thousands of megawatts of power.