How China’s power companies invest overseas

China’s power infrastructure investment comes in multiple forms, all of which entail different risks

By Wang Yan and Li Danqing

Over the past twenty years, China’s ‘going-out’ strategy has built Chinese companies an international role as the major suppliers of infrastructure around the world. Within the growing stock of infrastructure that China is building up, power infrastructure, especially coal power plants outside China’s borders, is attracting increasing attention both for their contribution to energy accessibility in developing countries, particularly South Asia and South East Asia, and for their climate impacts for decades to come (“carbon lock in”).

Articles, reports and academic papers have been written about this phenomenon as the world seeks a way to engage China in a dialogue about its coal build-up overseas. But before any serious conversation can happen, understanding the true nature of Chinese power companies’ operations overseas is key. Chinese companies’ role in supporting the development of coal power plants overseas comes in multiple forms, ranging from design and construction to part-ownership. Since 2013 Chinese companies have had an increasing preference for equity investments, a form of investment that entails both increased potential profit and increased risks. This blog tries to illuminate the landscape that the multiple forms Chinese coal power investments are made in.

Types of investment

A commonly overlooked aspect of Chinese – or for that matter any country’s – overseas infrastructure investments is that there are a range of investment model options available for companies and banks. Each option entails different types of contracts, partnerships, responsibilities, potential profit margins, and, inevitably, risk. To get a true understanding of how Chinese coal plant construction companies operate overseas operate, it is important for us to understand these different models.

Engineering, Procurement, Construction (EPC) was the dominant form of overseas investment for Chinese companies until 2018. An EPC contractor will carry out the detailed engineering design of the project, procure all the equipment and materials necessary, and then construct a functioning facility or asset as specified in the EPC contract. EPC+Finance (EPC+F) is one common derivative form of EPC, in which the project owner also wants the contractor to solve project financing.

Build-Operate-Transfer (BOT) and Build-Own-Operate-Transfer (BOOT) are typical types of public-private partnerships (PPP). In a BOT or BOOT project, normally large-scale, greenfield infrastructure projects, a government will grant a company the right to finance, build, own and operate the project with the goal of recouping its investment. Once investment has been recouped, the control of the project will then be transferred to the government after a specified time, normally 20 to 30 years.

Equity investment refers to companies’ investing in other projects or companies in the form of cash, tangible or intangible assets, in order to obtain an intended return in the future.

In the power sector, EPC revenues come from project payment as the plant function fulfills the contract, while BOT/BOOT rely on power purchaser’s continuous buying electricity from the plant during the project period, which is ensured by a Power Purchaser Agreement (PPA). Thus, long-term and steady project revenue is a determining factor in securing project financing.

In many cases, Chinese companies will set up a special purpose vehicle (SPV) via equity investment, registering it in the host country. The SPV becomes the project operator and engages with local and day-to-day businesses.

Chinese companies, therefore, play multiple roles in overseas power plant development – as investors, owners, designers, contractors, and operators.

From EPC to equity

Since 2013 Chinese companies have significantly increased equity investment in overseas coal power. In 2018 equity investment for the first-time outpaced EPC, the traditional investment avenue, in terms of newly-installed capacity. In the past decade, a total 10.8 GW of coal capacity had gone online with the backing of Chinese equity investment, 96% of which came after 2013 (Fig. 1). This shift from EPC contractors to equity investors with strong financing capacity appears to be the trend for future overseas coal power investments.

PPDC-coal-1
Fig. 1. Coal power projects (capacity) with Chinese equity investment and EPC over the past decade.

Why the shift?

The transition from EPC to equity investment fits into the broader arc of China’s ‘going-out’ strategy, which began in 1999 and increasingly encouraged outbound investment, besides merely product and service export. The Belt and Road Initiative (BRI) has spearheaded China’s ‘going out’ since 2013, and in that time China’s outbound direct investment (ODI) in BRI countries has occupied a growing share of China’s total ODI, with 12.5% of China’s direct investment going to BRI countries in 2017. Despite a 19.3% year-on-year decrease in China’s total ODI in 2017, direct investment in BRI countries witnessed a 3% growth.

Equity investment brings more return for investors. As owners of a project, equity investors can potentially get higher returns in the long term. Equity investment also brings flexible options to investors. They can invest not just with cash, but also with current assets like materials and fixed asset. This offers both flexibility and lower cash flow risks.

In addition, equity investment, especially from state-owned companies, plays a credit checking role. It tends to enhance borrowers’ credit and lenders’ confidence and willingness, as well as attracting other types of lenders for project financing, such as seed banks and foreign capital banks. This means that equity investment can help a project to raise more money in less time, potentially lowering the overall cost. Lastly, with ownership of the project, equity investors take initiative for project management and risk control, and receive more rights to local resources, which also serves to lower the cost of the project.

In terms of coal plants, there are three key drivers underpinning the transition: global market trends, the company’s transition needs, and China’s top-down support.

1) The long-term benefits of exploring new markets, integrated industry chain and decision making power brought by equity investment. Equity investment allows companies to lock in long-term partnerships, acquire local resources in a lower-cost way, and ensure quick or steady growth in a foreign market.

Many Chinese companies are currently transitioning from EPC contractor to whole industry chain service providers. China Machinery Engineering Corporation (CMEC), one of China’s oldest and largest coal plant constructors, noted in its 2018 yearbook that the company has tried to diversify and widen its industry chain in recent years, with more projects conducted via ‘EPC+Investment+Corporation’ model. As part of this transition, the company has also formed partnerships with GE in multiple overseas equity investment projects.

2) A more competitive environment for the EPC-driven model meets the rising need for private investment in public projects. Driven by a desperate need to ease power shortages, while worried about tighter public funding and debt burdens, host countries are embracing private investment into public projects, or EPC contractors with its own financial support.

For example, in 2015 Pakistan updated its 13 year old electricity investment policy to allow for 100% foreign capital ownership of project companies, increased allowed return of investment, and “take or pay mechanisms”, an electricity payment mechanism which will ensure investors’ returns. The updates were all intended to increase potential profit margins for foreign companies, attract foreign capital, and reduce electricity generation cost.

3) Top-down financial support and policy signaling for equity investment overseas. Boosting overseas equity investment in power sector markets has been highlighted in a number of China’s diplomatic agreement and official BRI documents.

For example, in China’s new cooperation with Africa on infrastructure development, the integration of investment, construction and operation has been underlined in developing power, transport and communications projects. These investments are supported either by loans from China’s policy banks, or from commercial banks. China’s concessional loans require Chinese companies’ holding shares in overseas projects.

More equity investment, more risks?

But higher returns come with a higher risk profile. Along with the responsibilities of designers, constructors, or equipment-providers that normally come from the EPC model, the equity model also brings Chinese investors in on feasibility study, business negotiation, financing plan, construction, to long-term operation and management with a variety of foreign and domestic stakeholders. Chinese companies, along with banks and insurers who give financial support, are more attached to long-term steady returns and interlocked in multiple project stages, exposing them to complex risk patterns. Fig. 2 illustrates the risks exposed at each stage of an equity power project.

 

PPDC-coal-2
Fig. 2. Stages and risks in project development (see Feb 2018 article in Infrastructure Economics 《建筑经济》

Most of China’s overseas coal power investment is in developing country markets (Fig. 3), which frequently present higher investment risks due to financial insecurity, political unrest, sovereign debt or uncertain business environment, causing uncertainties for China’s overseas investment.

PPDC-coal-3
Fig. 3. Total capacity of coal plants with Chinese equity investment in different regions. South and Southeast Asia are hotspots for China’s overseas coal investment, and together host 94% of Chinese equity-invested coal plants.

One of the most pressing challenges is changing or stricter electricity investment policies, which are already leading to project delays or cancellation. In Indonesia, for example, a gap between forecast electricity growth rate (8.3% for the period 2017-26) and actual growth rate (3.6% in 2017) has resulted in the postponement of 22GW of planned electricity generation projects.

In addition to electricity sector regulation changes, investors should not underestimate the risk posed by strengthening environmental regulations. As the principal culprit for air pollution and climate change, coal plants are in a particularly vulnerable position as governments race to strengthen their environmental regulations as they develop. This is also likely to cause project delay or cancelation, resulting in companies’ breach of agreement, economic loss or reputation loss. Meanwhile, many countries are aggressively making strides to speed up their energy transition and incubate renewables markets with ambitious policy goals, as in Vietnam for example. Public opposition, including protests and court cases, are also a major risk that can lead to project postponement or even cancellation, as happened to the Lamu coal plant in Kenya, for example.

Chinese companies’ investment in coal power plants overseas comes in multiple formats and is evolving as both domestic and international dynamics change. To become forward-looking investors, Chinese companies must raise their awareness of regional energy transitions and ongoing climate change action, and incorporate such aspects into their investment decisions. Beyond that, Chinese banks, insurers and supervisory bodies should also pay closer attention to the risks their overseas projects tie them to.

For anyone working on the issue of Chinese overseas energy investment – a “make or break” issue for global climate efforts – these types of investment arrangements and the opportunities and risks they entail are essential details. Policy makers, researchers, students and journalists should all take note.

Wang Yan and Li Danqing are both climate campaigners with extensive experience in Chinese overseas energy investment

 

Unpacking Chinese financing of Pakistan’s “dream” power plant

Chinese companies are not just pouring concrete along the Belt and Road. Financing is a big part of China’s overseas involvement.

By Liu Shuang

There has been much discussion about China’s involvement in coal projects overseas. Critics point to the tremendous carbon footprint it may create, and call for a change in the practice. Analyses have highlighted the complicated dynamics that enable the continued build-up of coal fired power capacities around the developing world, against the stern warning of climate scientists.

Within that complex dynamics, financing is one central piece of the puzzle that is often poorly understood. Due to intrinsic difficulties in gaining access to information about how financial actors (especially Chinese ones) operate, presenting an accurate picture of key financial components at project level proves to be challenging.

This blog tries to shed some light on Chinese financed coal-fired power plant, by using a “strawman case” built out of publicly available information.

The case in point is the Engro Thar Block II (ETBII) project in Pakistan’s Sindh province, one of the key coal power projects listed under the China Pakistan Economic Corridor (CPEC). As a major destination of Chinese coal investments globally, Pakistan provides a good observatory point to understand why coal projects along the Belt and Road continue to get funded by Chinese lenders.

engrothatblockII
Engro Thar Block II 2×330MW Coal fired Power Plant TEL 1×330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh, Pakistan. Source: CPEC Website

“The Thar dream”

Ever since the discovery of the massive coal reserve in Thar in 1991, a desert area 500 kilometers to the east of Karachi, the anticipation of developing Pakistan’s indigenous source of energy has captured the imagination of the nation. The reserve is estimated to comprise 175 billion tons of lignite coal. Unlocking a fraction of it would be sufficient to power the entire country, which, to this date, still heavily relies on imported fuel oil for its electricity demand. But technological barriers had thwarted attempts to tap the resource in the past. And due to concern with climate change impacts, the World Bank withdrew its support for the endeavor in 2009, leaving the project in financial uncertainties for a few years.

The entry of Engro, one of Pakistan’s largest private energy conglomerates, breathed life into the project. But the prospect of developing the Thar minefield really improved after China got on board. In 2014, Engro Thar Coal-fired Power Plant (660 MW) was listed under the China Pakistan Economic Corridor (CPEC). And the year after, a consortium of Chinese finance institutions committed to fund the project, enabling the project to achieve financial closure in April, 2016. According to CPEC’s official project registry, the Engro Thar Block II project is a combination of coal mining and mine-mouth power generation, with the first phase of the coal-fired power plant consisting of two 330MW units.

Engro’s official website celebrated the project as a “significant feat”, marking “a new era for energy security in Pakistan and brings with it the realization of the Thar dream.”

Chinese actors

The project illustrates a typical financing structure that is increasingly common along the Belt and Road.

ETBII Finance

At least four categories of Chinese actors are involved in this case:

Lender : China Development Bank (CDB), Industrial and Commercial Bank of China (ICBC), Construction Bank of China (CBC)

Credit insurance: Sinosure

Construction company (EPC contractor): China Machinery Engineering (CMEC)

Project developer: Sindh Engro Coal Mining Company (SECMC, with China Power International Holding and CMEC as shareholders)

As in many other similar China-financed projects, the structure features one Chinese policy bank (either CDB or the Export-Import Bank of China), two Chinese commercial banks and Sinosure. The arrangement helps spread financial risks across multiple Chinese players. While players such as CDB has attracted wide attention as one of China’s financial engines powering the Belt and Road Initiative, other key players have managed to stay out of the spotlight. One of them is China Export & Credit Insurance Corporation (Sinosure), whose involvement in such deals can often tip the balance between go and no-go.

Sinosure engages in a business known as “policy insurance”, non-profit oriented insurance bankrolled by China’s treasury, with the aim of promoting the country’s export and overseas investments. In a project like ETBII, Sinosure provides an Export Buyer’s Credit Insurance to the Chinese financial consortium against the risk of repayment delay or failure due to political or commercial reasons. For a range of risks from war to contract breach, the company offers a maximal 95% insured percentage. The safety net is critical in markets with high uncertainty and gives Chinese companies a considerable edge. Despite the seemingly bottomless “pockets” of Chinese policy banks and state-owned commercial banks, whether Sinosure is on board usually accounts for “50-60% of the weight” in their decision making, according to those familiar with the matter. And Chinese actors don’t even have much choice. Alternatives to Sinosure, commercial insurance companies or foreign insurers, are much less desirable for their high charges. Sinosure’s influence in deciding China’s overseas energy footprint cannot be underappreciated.

Even though on paper Sinosure may maintain an “agnostic” approach to the types of energy projects it insures, be they coal-fired or renewable, other project features can tilt it more toward coal. Guarantee from a project’s host country government matters to an insurer. Large fossil fuel projects, in this regard, usually have better access to state support than renewable energy projects much smaller in scale. Smaller project size also means a lower “financial threshold” of entry, attracting developers that, to insurers, are intrinsically riskier. Large fossil fuel projects may also leave behind more valuable fixed assets than renewable projects in occasion of a default, an important consideration for insurers. All those non-climate related factors may make Sinosure more inclined toward projects like ETBII.

A bankable PPA

In any major power project that involves financing from international lenders, the Power Purchase Agreement (PPA) often ranks as the most important contractual component of the deal. On the surface, a PPA is merely an instrument that facilitates the sale and purchase of electricity. But more importantly, for most power projects, payment from the buyer under the PPA constitutes the only revenue stream for the project company to repay its loans. The negotiation and set-up of a PPA would often decide if a project is considered “bankable” to potential lenders.

The Pakistani authority has more or less standardized the PPAs of coal power projects, making them acceptable for international financiers. In a 2016 presentation by Pakistan’s Private Power and Infrastructure Board (PPIB), a government body that facilitates investments into the country’s power sector, it boasts government guarantee of power purchaser obligations, attractive Return on Equity (ROE), tariff indexation against inflation and government assurance of foreign currency conversion as terms that would sweeten a power deal for foreign investors. Most, if not all, of those elements will end up in a project PPA.

Based on the information published by Pakistan’s National Electric Power Regulatory Authority (NEPRA), we could get a glimpse of the key components of the PPA for ETBII.  The following chart lists those components and juxtaposes them with equivalent PPAs of wind power projects in Pakistan for reference.

PPA
* A selection of multiple wind energy PPAs from the NEPRA website is used here for reference purpose

Beyond the fact that a coal power PPA usually features a relatively low electricity tariff, which is highly valued by Pakistan’s policy makers and regulators that put “affordability” of electricity at the center, the PPA also caters to the needs of other key stakeholders in the deal. From a lender’s point of view, the PPA’s tariff formula incorporates debt service considerations of the project, based on a standard interest rate (London Inter Bank Offer Rate plus 450 basis points) for foreign currency loans. In addition, it also promises an over 30% Return on Equity for the project’s sponsors (i.e. shareholders), which is higher than what’s typically factored in in PPAs of other similar projects (15%-20%).

The PPA represents a different kind of product that is being promoted along the Belt and Road: the knowhow of setting up financial frameworks of projects fundable by Chinese financial institutions. As Chinese banks and companies take leading roles in overseas power projects, they share their expertise with host countries, showing them how to make projects work. This is something much less tangible than the infrastructure projects ended up being built, but no less important.

The enabling environment

Chinese financing can only be materialized into projects with the help of enabling investment and regulatory frameworks in Pakistan, co-created by a host of government agencies. The bonding of the two elements releases “energy” that propels Belt and Road power projects forward.

In the ETBII case, beyond PPIB support of the project, endorsement statements were provided by the Ministry of Petroleum and Natural Resources and the Government of Sindh in support of the project, quoting energy security and the use of “indigenous resources” as main reasons; the province’s Environmental Protection Agency issued a No Objection Certificate, with no climate considerations included.

For those with a view to contain and even reverse the “chemical reaction”, understanding both the financing element and the enabling element will better prepare them for engagement and intervention. The strawman case is not meant to depict a complete picture. Yet the snapshot it creates should contribute to the mapping of key players and their interactions that illuminate the way ahead.

Liu Shuang is the Director of Energy Foundation China’s Low-Carbon Economic Growth Program. At Energy Foundation China, she develops and implements program strategies, manages grants on carbon emission scenarios, market-based instruments, economic analysis of environmental and climate policies, and mainstreaming climate research into economic growth. She holds an MSc in Environmental Economics from University College London and a BA in Economics from Peking University.

Supply and demand: understanding Chinese involvement in coal projects overseas

China is shifting away from coal domestically but building many coal power plants overseas, why?

China’s involvement in building coal power projects in other countries has been the subject of much criticism. The increasing urgency to address climate change, as highlighted by the recent special report published by the Inter-governmental Panel on Climate Change (IPCC), casts such involvement under serious scrutiny. The IPCC report bluntly states that in order to keep global temperature rises close to the 1.5 degree threshold that scientists deem relatively safe, countries should basically cease using coal as energy for electricity by 2040. Global temperatures are already 1 degree higher than pre-industrialization levels, leaving humanity with very little remaining “carbon budget” to spend if it is serious about keeping climate change under control. As one of the most carbon intensive way to generate electricity, coal-fired power plants (CFPP) understandably rank high in the phase-out list.

To a large extent, Chinese actions in this area would determine the fate of the “black gold” and the global fight against climate change, due to the size of its economy which still relies primarily on coal for electricity. In comparison, coal only accounts for 17.8% of the US’s primary energy source. Alarmingly, as China shifts away from coal domestically, for air quality and economic structure considerations, it appears to be building coal power projects elsewhere in the world that will likely negate part of the decarbonization happening inside China while exporting pollution.

Elizabeth Economy, a China expert at the Council for Foreign Relations, encapsulates the criticism in her 2017 article on Politico, calling out China’s overseas CFPP involvement as “ugly” and “not in keeping with the spirit of (the Paris Climate) Agreement.”

At a recent workshop that I attended in Jakarta, co-organized by the Beijing-based Global Environmental Institute and Indonesian think thank IESR, a local CNN correspondent asked the panelists the same question: Does China’s building of CFPPs in Indonesia constitute a “double standard”?

This is a question that is likely going to be asked more in the future, as the urgency of climate change becomes ever more salient and China’s overseas involvement continues to deepen. The Jakarta workshop, which convened stakeholders from both Indonesia and China, provided an opportunity to do just that, taking a closer look at an issue ripe with contradictions. Discussions at the workshop suggest that there are at least three lenses through which the issue can be viewed: recipient country agency, multi-stakeholder playing field, and Chinese industrial policy.

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An IESR researcher presenting research findings at the workshop

The role (& responsibility) of recipient countries

Responding to the question from the CNN journalist, Professor Yuan Jiahai from the North China University of Electric Power, who was present at the event, argued that it was largely an outcome of recipient country demand and market competition: Indonesia’s power sector is in need of CFPPs and Chinese companies are coming in to capture the market.

According to the Indonesian officials, electrification remains a priority of Indonesia, the 4th most populous country in the world, of over 18,000 islands, where access to safe and affordable electricity in many areas is still all but unavailable. At the same time, on the supply side, the government is at pains to diversify its energy sources, ever since Indonesia became a net oil importer for the first time in 2004. Within a short span of 8 years (from 2009 to 2016), electricity generation from oil fell from 25% in the general mix to below 7%. while coal rose from 39% to 55%. These changes have been led by twosuccesstive administrations (President Susilo Bambang Yudhoyono and President Joko Widodo) who spearheaded the so called “Crash Programs” to accelerate installation of power capacities to ease the country’s chronic electricity crunch.

However, it has not been all smooth sailing. President Yudhoyono’s first Crash Program was known for its poor execution. Announced in 2004, it aimed to add 10,000MW of new capacity by 2009. Instead completion was severely delayed until 2014, and the resulting power plants that were built were of such low quality that they could not perform at their stated capacity.

President Joko Widodo’s new program, created in 2014, aims to add another 35,000MW to the grid by 2019, a goal that many consider unrealistic.

And it is here that China’s involvement dovetails, as Chinese companies pocketed the majority of projects under President Yudhoyono’s initial program. As opposed to outright ownership of the projects, the Chinese companies were mainly involved in design and construction through EPC contracts (Engineering, Procurement and Construct), which meant that they did not operate, maintain, nor own the power plants that they built. Apart from their engineering and construction prowess, favourable financing support for Chinese company involvement may have also played a key role for their winning of this job.

As a result of these developments in Indonesia’s Crash Program, Chinese companies, and by extension, China, came to occupy a primary role in Indonesia’s energy system. Indonesian media was rife with open speculation that favoritism toward China was part of why so many projects were granted to Chinese companies, pointing to the fact that project tender process had deadline submission requirements only China’s companies could meet. The speculations weren’t entirely groundless. Recently, Indonesia’s national power company (PLN) is embroiled in corruption scandals related to its coal power project.

More guests at the dinner party

It is worth noting, however, that China has not been the only outside player eyeing the Indonesian coal power cake. Japan is a key player and has been exerting its influence.

At the workshop that I attended, the below chart kept appearing in presentations from Indonesia officials. It illustrated Japan’s roadmap to assist Indonesia in building its “clean coal” power fleet through to 2025. Created by the Japan International Development Agency (JICA) as part of its development assistance to Indonesia, JICA stated that “the introduction of Japan’s CCT(Clean Coal Technology), which represents the highly efficient technology for coal-fired power plants, will help curb demand for coal and greenhouse gas emissions by making it possible to increase the output of power generation without increasing the use of the resource.” In the planning for the study, JICA also built in a step where the roadmap could be “incorporated into Indonesia’s national power source plan”.

CCT Roadmap
Roadmap of clean coal fired power plant deployment in Indonesia, created by JICA

Beyond the controversy of an external country’s involvement in domestic energy developments, Japan’s pushing of “clean coal” has raised the ire of many who believe it be a false solution to climate change. Ironically, JICA created the roadmap in close coordination with Japan’s Climate Change Program Loan to Indonesia, announced in 2008 as Japan’s first climate change-related Official Development Aid (ODA) loan to assist Indonesia in its effort to reduce emissions, strengthen adaptation to climate change and respond to cross-sectoral issues. This practice of marrying the promotion of Japanese coal technology and its climate finance has been controversial and subject to much criticism internationally.

But Japanese officials are unabashed when confronted with the question. As Japanese media reported, promoting Japan’s high efficiency coal power technology as a climate change solution is part of Japanese government’s efforts to “assist Japanese businesses against Chinese rivals for coveted overseas power plant contracts.”

To some extent, Japan’s efforts in Indonesia have paid off nicely. Of the  8 high-efficiency coal power plants  that are under construction,at least 3 projects, including the 2 largest (Jawa Tengah- Central Jawa and Jawa-4 – Central Jawa), are being financed by Japanese Bank for International Cooperation (JBIC) or built by Japanese companies such as J-Power and Itochu. And despite the controversy over the Jawa Tengah project for its land acquisition issues and environmental problems, Japan’s support for it continues, with one Japanese official telling the Nikkei Asian Review, that they wanted to make the Central Java project a showcase that will open the door to more projects.” Recent signs seem to suggest that there might be a rethinking of overseas coal financing from Japanese financial institutions.

Chinese industrial policy

Japan’s rather high-profile and coordinated activities in Indonesia to promote its coal interest provides a point of reference for Chinese efforts in the same arena.

If there is one component of the nebulous Belt and Road Initiative (BRI) that is relatively well defined, it is its function as an extension of Chinese industrial policy. The need for many Chinese industrial sectors to find new markets outside their home country is a powerful driver for China’s “Going Out” strategy which predates the BRI for more than a decade.

In the specific area of coal power, China, as its neighbor Japan, is keen to see its companies winning lucrative contracts overseas, a need accentuated by a slowing domestic market. According to Prof. Yuan Jiahai, China’s coal power sector is facing a severe overcapacity problem: “failure in power planning” (i.e. not foreseeing slowing electricity demand growth) makes many existing Chinese coal power plants badly under-utilized, spending a good part of the year idling. The situation prompted the Chinese government to apply the brake on new coal power plants, suspending new builds in 15 provinces.

Yuan-overcapacity
Prof. Yuan Jiahai’s presentation highlights the problem of overcapacity with China’s coal power sector by showing decreasing annual utilization hours of existing power plants

But the Chinese companies that over the years have excelled in building CFPPs need jobs. And the unique bond between Chinese state-owned enterprises (SOEs) and the state machinery (diplomatic, finance and industrial) makes China particularly well disposed to make concerted efforts to advance the interest of its industries. A 2015 State Council directive on “international industrial capacity sharing” lays out a blueprint for how the government would assist competitive Chinese industries to expand globally. Within its toolbox are instruments such as Chinese policy banks (China Development Bank and the China EXIM Bank) that tie their concessional loans with business deals for Chinese companies; and high-level bilateral government-to-government dialogues that secure “full package” deals for Chinese corporations. Premium Li Keqiang’s “industrial diplomacy” with Kazakhstan is celebrated as the origin of this model.

Power plant construction and operation is listed in the directive as one of the priorities for such state support, as it is a sector through which not just Chinese equipment, but also Chinese services and standards, can be exported. And the model plays out in Indonesia’s power market. Shenhua, one of China’s largest coal industry conglomerates, won the contract to build and run the Java-7 coal-fired power plant in Banten, another high efficiency CFPP listed in the CCT roadmap. The Shenhua-led Chinese consortium managed to beat 36 other competitors in the bid, and attributed the success to its premium clean coal technology and “low-cost, tailor-made financing” based on its strategic partner relation with China Development Bank.

This may give the impression of a formidable, highly efficient industry-policy complex geared up to take over any country’s power market. But in reality, Chinese efforts in promoting the export of its industrial capacities are far from seamlessly coordinated. Government red tapes and lack of service/support are among the many complaints Chinese entrepreneurs make. And in many emerging markets Chinese companies are still required to follow standards set by “Europeans, Japanese or South Koreans.” Chinese actors are barely catching up with experienced players in the arena (such as Japan) that have mastered the art of merging foreign aid, industrial policy and overseas investment into a strategically aligned whole. By and large, Chinese companies still predominantly compete for EPC deals, which is considered low-end and low-value in the global value chain.

GEI-China coal type
Majority of Chinese involvement in overseas coal power projects is through EPC contracts. Source: GEI

Shifting China’s overseas coal involvement

For anyone with an eye to engage and influence China’s overseas energy projects along the Belt and Road, the above should serve as a reminder of the intertwined forces that are collectively shaping the energy landscapes in those developing countries.

To shift the direction of such projects would require pulling multiple strings at the same time: without empowered and enabled host countries that are capable of envisioning their own energy future differently, investing countries alone would find it hard pressed to resist lucrative power deals that are being actively marketed; without a globally coordinated and aligned approach to public financing of fossil fuel projects, one country’s high-minded rejection of a project might simply become another country’s business opportunity; and without a conversation that could engage China’s industrial policy makers, the domestic economic agenda would continue producing strong momentums for Chinese companies to seek CFPP projects overseas, despite warnings from climate scientists.