China's ambitious plan to increase wind power capacity could attract up to $150 billion in investment, but Beijing will have to get serious about revamping regulations and building much needed infrastructure.
China is set to raise its wind power capacity to 100 gigawatts (GW) by 2020, eight times its current level and more than Britain's entire current power capacity, as part of a stimulus package aimed at boosting renewable energy.
Shares of wind firms such as China High Speed Transmission (CHST), the country's biggest maker of wind turbine gearboxes, have risen over 60 percent this year on expectations China will soon unveil more incentives to develop wind energy.
China, the world's second biggest energy consumer, is also the top greenhouse gas polluter, and the threat of climate change is driving Beijing to take a series of initiatives to restrain the country's greenhouse gas emissions by power plants.
We see wind as the best investment option, as it is the world's most commercial green energy, said Nomura analyst Clarisse Pan, who expects China's wind industry growing at up to 24 percent a year through 2020.
While private funding for wind projects is expected to soar, new transmission lines will have to be constructed as more wind power farms are built.
And faced with tough regulatory hurdles, some firms might be discouraged and hold off investments, making it difficult for China to set its targets.
The market is too unstable (for us) to take the risk, said Suzlon Energy China chief executive Paulo Fernando Soares, referring to government's large-scale project tenders where foreign firms like Suzlon are struggling to compete with local companies.
India's Suzlon is the world's fifth-largest wind turbine maker.
Cash perks and tax breaks for wind projects spurred growth in China's wind sector, attracting over $2 billion in investment from the world's biggest wind firms including Denmark's Vestas, Spain's Gamesa and GE Energy over the past five years.
China's rise to become the world's fourth largest wind power producer benefited local wind firms like turbine makers Sinovel Wind, Goldwind Science and Technology, and Dongfang Electric. Together they now account for over 50 percent of a market once dominated by foreign firms.
For a graphic of China's wind market share, click
For a graphic on global wind power producers, click
Analysts believe China's long-term expansion target for wind power, along with more stimulus measures, will be a catalyst for outperformance for CHST and most domestic wind companies.
CHST, which makes gearboxes for GE and German wind farm builders like Nordex and REpower Systems, is seen as a clear winner from the stimulus, owing to its China market leadership.
The demand for wind power will remain strong in the next decade, leading to a robust business environment for CHST, said CIMB-GK analyst Keith Li, who forecast the company's revenues to rise 36 percent a year over the next three years.
Analysts also expect the small wind farm builders like China WindPower and China Power New Energy to benefit as wind turbine prices fall, electricity tariffs rise and tax rebates kick in.
China's wind power generation has doubled in the last year and is expected to surpass nuclear within a decade as China seeks to wean itself off cheap but dirty coal.
There are hurdles ahead, however.
Most investors want to see clarity in regulations for project biddings and the lack of investment in power grid infrastructure and transmission lines may hold up some projects.
Although provisions were laid out to regulate the wind-power grid price, there are mixed views about open tenders and whether they drive prices below a level sustainable for many projects.
We cannot say that we feel that every bidding process is fair. Sometimes the results are very surprising, said Goldwind chief financial officer Yu Danke.
Wind tariffs at 0.6 yuan a kilowatt-hour are 10-20 percent lower than those in major European countries like Germany, said Nomura's Pan, adding that Chinese projects generate returns of only 6-7 percent, compared to thermal power's 13 percent.
Energy from coal, which is the source for 80 percent of the nation's energy output, is sold at about 0.4 yuan a kwh.
Beijing also places more emphasis on companies meeting capacity than ensuring the actual flow of power, meaning productivity is lower than in other markets such as the United States.
Another challenge for China is that much of its wind energy capacity is located in Inner Mongolia, Gansu and the northwest province of Xinjiang, which are thousands of kilometers away from the east coast where most of the energy demand lies.
Despite the hurdles, few firms or investors are prepared to turn their backs on Chinese wind.
There are things we don't like but the market is too significant, said Soares.
(Editing by Lincoln Feast)