Chinese Wind Farms, A profitable option to coal?

Abstract: Global heating is a topic that is debated in every part of the world. The weather has become more extreme. While scientists debate over the reason for those extremes it is no doubt that emission of greenhouse gases are constantly increasing globally. China has in the past years substantially increased their investment in energy to cope with the demands of their booming economy. Much of the increased capacity comes from burning coal in large power plants that generates electricity. At the same time China’s steel industry have seen a rapid increase in terms of annual output. Steel production is another major user of coal. However in this thesis I have focused on the electricity problem and left the steel business outside of the equation. The idea behind the thesis is to find out what it will take to reduce China’s demand for coal and electricity generated from unhealthy coal power stations. How can the coal demand be replaced with renewable energy like wind power? To be able to come to any conclusion it is essential to take a look at the structure of these sectors in China, all the way from governmental policies, laws and available resources down to the pure financial side of an investment. As part of the investigation I also came to realize that China’s own resources of coal are rapidly diminishing. With an increased pace of coal demand, it may only take 22-35 years more before its resources of coal for electricity are consumed. My conclusions in this thesis are that there are several ways to justify a swap from coal to wind. An increase in price of “electric” coal from today’s level of 450 RMB/ton up to the range 1000-1200 RMB/ton will make all subsidies of wind power redundant. There are also two ways to make investment and usage of wind farms more lucrative than coal power plants, those appear through the Clean Development Mechanism scheme. If today’s long-term price of CER at the climate exchange in London increases from €8/ton up to €12/ton, majority of the wind farms in China will reach an IRR above 10%. The 10% level is the industry benchmark in China for coal power plants. A wind farm owner that is less risk-averse can also play the market, hoping that the spot price in April 2008 of ca. €18/ton is there to stay. If the Chinese government decides to take away the subsidies to Wind Power, the CER price would need to increase up to €30/ton to reach an IRR of 10%. Looking at the current situation in China where 43% of coal plants made a loss during the first two months of 2008, wind power is already more profitable than coal. Somehow it is logic, producing energy out of something that is free to use and renewable, should in the long-term be essentially cheaper to use as well.