CHINA'S first public tender for concession offshore wind farms, which ended early this month, is showing a cut-throat price war among project developers, mainly state companies eager to tap the business.

The tender, initiated in May, comprises four projects off the coast of east Jiangsu Province, with a combined capacity of 1 gigawatt.?It has drawn 70 bids from local companies or consortiums, some of which offered to deliver power at tariffs as low as 0.61 yuan (9 US cents) per kilowatt, a rate far below market expectations and a rate at which projects may be unprofitable.

"The offerings are patently too low," said Changjiang Securities analyst Liu Yuanrui, who said 0.8 yuan per kWh should be the appropriate rate, based on the tariff at Donghai Bridge Wind Farm, China's only major existing offshore wind mill. The Shanghai-based wind farm, a pilot project, was developed at a rate of 0.98 yuan per kWh.

Early foothold

China Power Investment Corp, parent of Hong Kong-listed China Power International Development Ltd, appeared to be the most competitive bidder in the Jiangsu tender, offering the lowest tariff for three of the four projects, followed by Datang International Power Generation Co and its parent's new energy unit.

The intention of the state utilities is simple: by winning contracts, backed by solid financing, they can fulfil the government's clean-energy objectives and grab an early foothold in the nascent sector.

Wind power capacity accounted for only 1.5 percent of China Power's total installed capacity in 2009, the lowest rate among China's top five state power generators. The situation has prompted the company to tap more renewable energy sources or face obstacles in winning state approval to build more coal-fired stations in future, Liu said.

The government has yet to announce the winning bids, but industry sources said it may not award the projects to the lowest bidders. The sources said that other factors, such as technology levels and operational management, are also likely to be taken into account, though price still dominates any evaluation. The government is keen to avoid replicating mistakes made when onshore wind projects were tendered.

In the mid-2000s, the National Development and Reform Commission held similar bid tenders for onshore wind farm concession projects, awarding projects to lowest bidders to encourage a cut in wind power prices.

However, some of the winning concessions offered tariffs that proved to be too low to be viable, forcing the NDRC to modify the rules in 2008 by reducing the role price played in the overall evaluation. In July last year, the top planning body scrapped the case-by-case tendering mechanism and standardized tariffs for onshore projects after finding many plants were suffering from low margins, or even losses, due to low utilization rates.

The planning commission set the standardized tariffs charged by wind farms to grid companies at 0.51 yuan, 0.54 yuan, 0.58 yuan and 0.61 yuan per kWh, varying by regions according to different levels of wind resources. The high end is already on par with the lowest offer in the latest offshore tender.

At present, onshore wind is more economical than development offshore, where wind farm construction takes place in a more hostile environment.

Still, Huatai United Securities analyst Ye Tao said the government's intention to drive down costs as rapidly as possible could help companies with low tariff offers in the latest tendering.

"It's not all bad for such low offers to occur in the first round of tender," Ye said. "Should the projects be developed smoothly, the government could accelerate and expand the bidding process, pushing forward the offshore wind sector beyond planning."

China's total installed offshore wind capacity is expected to reach 5GW by 2015 and 30GW by 2020, industry officials have said, as offshore sites become increasingly attractive, despite the technological challenges. The limitation of space available, especially in the densely populated east of the country, puts pressure on the government to look offshore for future wind power development.

The United Kingdom, which opened the world's largest offshore wind farm last week, has 1.341GW of installed offshore wind capacity, more than the rest of the world combined. China's total installed wind capacity - both onshore and offshore - is the world's largest.

Analyst Ye said it's likely the tariffs for offshore wind farms in China will more or less be set "at one go," rather than by rounds of tenders as seen in onshore projects.

The government has also signaled that the first round offshore bidding will serve as a benchmark.

Shi Lishan, vice director of the renewable energy department under the National Energy Administration, reportedly said some of the bids were a bit low but prices at that level will be a "milestone" in the development of China's offshore wind sector.

China Power, the lowest bidder in three out of the four Jiangsu wind projects, also this month became the biggest winner in China's second round of solar power project tenders, securing seven projects in all 13 solar farms put out to tender.

Repeat strategy

The company's winning bids, which range from 0.73 yuan per kWh to 0.99 yuan per kWh, were the lowest among competitors and below the widely considered 1 yuan break-even point in the domestic solar industry.

Ye said China Power is hoping to repeat the strategy of "lowest price wins" in the offshore wind project tender.

China's offshore wind sector will be a cornerstone for major wind-turbine manufacturers to grab market share, with domestic leaders like Sinovel Wind, Xinjiang Goldwind Science & Technology Co, and global firms like Vestas of Denmark and Germany's Siemens expected to be big winners, according to a UBS report.

China's new entry threshold for the wind-equipment sector aims to raise standards for production scale and research, and will give priority to the industrialization of offshore wind farm equipment. That may result in major domestic companies and leading foreign firms squeezing out smaller domestic competitors, the Swiss bank said.

The development of offshore farms will also increase market share for turbines of 2MW or above in China, causing prices for 1.5MW turbines to fall between 5 percent and 10 percent this year, UBS estimates. Offshore wind farms typically need turbines of 2 megawatts or more.

Sinovel, the domestic company that built 34 turbines of 3MW capacity each for the Donghai Bridge wind project, said it has completed the development of 5MW turbines with test products to be delivered in the fourth quarter of this year. ?

Foreign firms have lost contracts in China to local competitors rapidly in recent years. The combined market share of Vestas, Gamesa of Spain, India's Suzlon and United States-based GE for newly installed wind capacity in China was only 11 percent last year, according to the Chinese Wind Energy Association. That compares with more than 50 percent in 2006.

Foreign companies began setting up assembly plants in China after the government in 2005 required 70 percent of wind-turbine content to be domestically manufactured. The requirement was abolished early this year as Chinese companies become increasingly competitive.