China already ranks second in the world in terms of installed power generation capacity and is the world’s largest market for power generation equipment.

And the Chinese market is far from mature. The country’s economy continues to grow at a robust rate, while the power-hungry processes of industrialization and urbanization are still in the early stages; the nation’s demand for electricity will only increase, heightening the need for additional power generation capacity. Building sufficient capacity to meet demand will take time.

China’s installed capacity grew by a cumulative average of 10 percent over last 12 years. According to industry estimates, power generation capacity will grow 6 percent per year between now and 2020. Meanwhile, the US Energy Information Administration (EIA) expects China to expand its power capacity at the fastest rate in the world until 2030.


Source: EIA

Thermal energy, much of which comes from coal, accounts for 76 percent of China’s installed capacity. The remainder comes from hydroelectric power (21.6 percent), nuclear power (1.1 percent) and wind power (1.1 percent).

The future will bring substantial changes, but coal-fired power generation equipment will likely maintain its dominant position–even if its share declines in the future.

That being said, industry projections forecast that the coal and hydroelectric power will account for 85 percent of China’s installed capacity by 2020. Nuclear power will increase to 5 percent of installed capacity, wind power will account for 7.5 percent and other sources (solar, biomass, etc.) will be 2.5 percent.

Source: China Electric Council, Industry Estimates

Renewable energy currently represents 3 percent of total energy consumption. But China’s Renewable Energy Law, announced in February 2005, calls for renewable energy sources to account for 10 percent of the country’s installed capacity. Nuclear power should post strong growth, in line with the country’s “Nuclear Power Mid- to Long-Term Development Plan,” issued in October 2007.

According to the plan, China should have 40 gigawatts of nuclear capacity in operation and 18 gigawatts of additional capacity under construction by 2020. More recent announcements from the National Energy Administration indicate that China expects nuclear power to constitute over 5 percent of its total installed capacity by 2020.

Wind power, on the other hand, remains a big question mark. Analysts and policymakers recognize that wind power’s unreliability means that it will make only a marginal contribution to total power generation. At the same time, however, the capital expenditures associated with wind power are relatively low compared to other options. In China, a wind project usually costs USD1,200 to USD1,600 per kilowatt of generation capacity. By contrast, a solar project typically costs around USD4,000 per kilowatt.

Given those economics, it’s not surprising that power companies invested heavily in wind projects after the National Development and Reform Commission (NDRC) determined that non-hydroelectric, renewable energy would have to contribute at least 5 percent of total generation capacity by 2020.

Recent studies indicate that wind power could be a feasible solution. The United Nations Environment Programme (UNEP) found that at 50 meters above ground level, the technically exploitable wind resource could reach 1,400 gigawatts.

For now, independent power producers will continue to invest in wind projects for another reason: Only three companies in China can invest in nuclear–China National Nuclear Corp, China Guangdong Nuclear Power Corp, and China Power Investment Group.

The Pick

Dongfang Electric (Hong Kong: 1072; OTC: DNGFF) manufactures equipment for large thermal-power, hydro-power and nuclear-power stations. It’s one of the three major power-generation equipment makers in China. The company currently has a production capacity of 30 gigawatts per year and controls 30 percent of the domestic market for large-scale steam/hydro power equipment.

Although thermal-related orders still dominate its books, the growth will come from cleaner forms of energy–especially nuclear and wind power.

The company’s thermal business should also experience a modicum of growth, as the government has been pushing for bigger and more efficient coal-fired units. This plan calls for the closure of smaller, inefficient units that produce more pollutants in favor of modern power generation facilities.

If the state’s projections and plans materialize, China will need to add around 60 to 70 gigawatts of new nuclear capacity over the next decade–and many analysts believe this estimate is on the low end of the range. With nuclear power accounting for little over 9 megawatts of total capacity, there’s plenty of growth opportunity.

Dongfang Electric should also benefit handsomely from its exposure to nuclear energy sector. Nuclear power equipment represents the company’s second-largest business line, and these orders could generate more than 20 percent of the firm’s revenues in the next two to three years.

Recently the company announced that it expects its 2009 net profit under Chinese generally accepted accounting principles (GAAP) to increase more than 650 percent from a year ago. Net profit under Chinese GAAP in 2008 was Rmb176million (USD26 million); if the company’s estimates are correct, net profit for 2009 should be around USD200 million. Note that in 2008 the company’s net profit under Hong Kong GAAP (the stock has a dual listing in Hong Kong and mainland China) was higher. This should be the case this time around; I expect net profits to touch USD220 million under Hong Kong GAAP.

Dongfang Electric is a buy up to HKD45 for the local shares (the best way to trade this stock) and up to USD6 in the over-the-counter market.

Yiannis Mostrous is editor of The Silk Road Investor. He and Benjamin Shepherd, editor of Louis Rukeyser’s Mutual Funds, will host an exclusive conference call on investing in eachange-traded funds on March 17. Registration is limited. Additional details are available here.