Hydropower in China: enormous opportunities but significant risks

Implications: This article suggested a rosy picture of China's hydropower market, but ignored the significant risks. It is true that there will be growing demand for hydroelectricity in China, from super-large, large projects to small- and micro-hydro, because of the rapidly growing electricity demand, especially for clean/green electricity. But investors, equipment providers, and engineering and consulting companies like MWH need to be aware of several major risks including the increasing difficulties in relocating local residents, more stringent land and environmental regulations, growing concern about ecological consequences, pending deregulations of the electricity market, and continuing inconsistency in government policies.

Analysis: China has nearly 700 GW of hydropower resource, of which about 400 GW is exploitable at reasonable costs. The total installed capacity reached 120 GW in 2005, and about 42 GW including MWH's project are under development. China's goal is to increase the hydropower capacity to 290 GW by 2020. This will include a significant amount of small hydro (50 MW or smaller). For example, China will develop about 15 GW of small hydro for rural households between 2006 and 2010. 

But these new hydropower projects including those under development will face significant risks.  The number one difficulty is to relocate the significant amount of local residents, who have rapidly growing awareness of--and availability of means in--protecting their rights.  They will demand more compensation to relocate and will have more help from both local and international NGOs.  Small hydro projects face more stringent environmental and land regulations.  Large hydros need to be prepared for a deregulated electricity market, where coal power can be a very tough competitor. 

Small hydros in China experienced a cold period in recent 1-2 years. Power grids purchased their electricity at very low price (only about 120-150 yuan/MWh in Guizhou), or purchase only part of electricity output (for example in Zhejiang due to infrastructure bottleneck and counterproductive tax policies). Small hydros also have increasing difficulty in getting commerical loans from the bank. A great number of small-hydro projects stopped or were cancelled. Some of these problems are relatively easier to solve. But many are not. For example, it will become more difficult for the developers to make a deal with the local residents.