It's always good to have a back-up plan.

The country's second largest Hong Kong-listed power company foresees challenges ahead in China's electric power generation industry, and plans to adjust its business focus accordingly, both structurally and geographically.

Datang International Power Generation Co Ltd has announced it will diversify its fuel resources and extend its regional reach beyond its northern turf to the east and west.

"Although we see vast opportunities in China's power business in the coming years, we should also be aware of possible setbacks," says Yang Hongming, senior vice-president of Datang International.

"The coal supply is not stable, even though it supplies between 70 and 80 per cent of China's power."

Despite a recent modest drop, market-oriented coal prices have remained high for the past three years. This has hurt profits for China's power producers, a situation exacerbated by an unchanged electricity tariff that the central government has levied to stem inflation and protect economically disadvantaged groups. Datang International's coal prices were up 28 per cent in the first half of this year, with net profits increasing 0.55 per cent to 1.119 billion yuan (US$138 million). "Rising coal prices have squeezed our profit margins," reads a company statement.

Government agencies including the National Development and Reform Commission (NDRC) have asked existing power plants to upgrade their facilities and ordered the closure of several small coal-fired generation units across the nation, as a means of protecting the environment and boosting energy efficiency.

Yang says Datang International has to invest 1 per cent more on improving facilities such as desulphurization equipment. Plants are expected to meet the environment protection standards laid out in the Kyoto Protocol, which China ratified at the beginning of this year.

"One per cent is not a small figure for big companies like us," Yang says.

Datang's annual operating costs stand at 6.4 billion yuan (US$789 million).

The country's power industry plans show that competition will increase over the next few years when power producers begin bidding for low tariffs to get their electricity on a regional grid.

Northeast and Central China have already started preparing for the price competition system, which will extend across the country when the time is right, NDRC sources say.

"We have to get ready because if we don't, we risk compromising both costs and overall management efficiency," Yang says. "It is only a matter of time." Datang International has devised new measures to face these challenges. "We will focus on diversity in both our business portfolio and geographical layout, which will reduce risks and keep us competitive," Yang says.

The company has combated problems in the coal supply by diverting some of its attention to the development of other fuels and renewable sources.

Its ambitious growth plan for 2008 calls for hydro to account for 20 to 25 per cent of its total capacity. The percentage currently stands at a mere 2 per cent.

Datang International currently has 11,360 megawatts (MW) of installed capacity in operation. It plans to build five 350 MW hydro generation units at a location near Chongqing, Southwest China, a statement on its website says.

The government's first renewable energy law will come into effect early next year, and Datang has shown interest in developing the nuclear sector and renewable energy sources.

Only China National Nuclear Corp and Guangdong Nuclear Power Group were permitted to develop nuclear projects, and the five national independent power producers (IPPs) are theoretically only allowed to be minority investors, Zhang Yi, Datang International's president and vice-chairman, said at a press conference in Hong Kong in late August.

"Nuclear industry investments are still a grey area. There is no clear regulation saying whether we can invest, but project developers need to have the technical capabilities. We are looking into it."

The power company is also planning to invest 700 million yuan (US$86 million) to 800 million yuan (US$98.6 million) to build a 100 MW wind power project in Inner Mongolia.

The project's feasibility is currently under consideration and has yet to be approved by the government, company sources say.

NDRC vice-minister Zhang Guobao earlier told journalists at an energy forum in Beijing that wind and biomass resources are the two key renewable energy sources for China to develop in the near future. "Although solar energy resources are abundant, it is still only practical in small-range generation in remote western areas."

The company plans to build more plants on both the eastern seaboard and in isolated western regions to counteract a lack of balanced regional distribution. This will extend the company's presence beyond North China, where most of its facilities are located.

"We cannot remain concentrated in one small area," says the vice-president.

Datang announced on August 25 that the NDRC approved its plans to build three coal-fired power plants in the coastal provinces of Zhejiang, Fujian and Guangdong.

Combined investment in the facilities hit 21 billion yuan (US$2.6 billion), with a total installed capacity of 4,800 MW.

The three plants will be completed over the next few years, and the company has also invested 250 million yuan (US$30.8 million) for a 28 per cent stake in a coal mine owned by Shanxi-based Datong Coal Group, one of China's largest coal producers.

The mine, which is still under development, will be able to supply 10 million tons of coal to the power plants.

"We can see the huge demand in economically developed coastal areas," Yang says.

The company also hopes to carve its niche in western regions where preferential policies have been announced to facilitate major investment.

(China Daily 09/12/2005 page3)