China is building public-work projects at a frenzy, what is attracting Morgan Stanley to the hydropower industry?
China has the world’s largest available hydropower resources and is currently the biggest producer of hydroelectric power in the world with more than 200 gigawatts of existing installed generation capacity. In the small hydropower sector [defined as less than 30 megawatts], China has over 30,000 existing hydropower plants. China’s government has passed favourable policies and regulation such as the Renewable Energy Law to promote hydropower sector growth. This is further emphasised in the 12th five-year plan in which China plans to grow hydropower capacity to over 450GW by 2030. The additional capacity of more than 200GW is enough to power the whole of France.
How are you taking advantage of the opportunity?
Morgan Stanley has led a private equity consortium in investing a total of $300 million in hydropower operator Zhaoheng Hydropower, China’s largest small hydropower-focused operator. We first committed $150 million in 2010 and the company has been doing very well, its revenue has gone up by 50%, so we have invested another $150 million in August. It is the largest foreign investment in China’s renewable energy sector to date and the first China investment of Morgan Stanley’s global infrastructure fund.
Zhaoheng’s hydropower plants are situated in southern and western parts of China, such as Yunnan, Sichuan, Guangxi and Guizhou, where income per capita is lower than in the coastal cities, and where there is acute demand for energy. The company plans to use the investment proceeds to continue acquiring high-quality hydropower plants to exceed 1GW of operating capacity over the next two years.
Will the slowdown in China’s economic growth affect returns from the investment in Zhaoheng?
As big SOEs [state-owned enterprises] don’t go after smaller power generators, there is not much competition. Zhaoheng has projects in big provinces with large populations. Many big power plants have been built along the coastal areas, such as Guangdong and Zhejiang, whereas there are only a few of them in the western part, and it’s difficult to transport electricity across a big country. So Zhaoheng serves the supply-and-demand gap well. China’s giant power grids are not energy efficient and tend to generate pollution, so it’s ideal to generate and consumer power locally.
What is your investment style?
We not only bring in capital but also much needed know-how and international expertise. We have a global asset management team in New York with engineers with 20 to 30 years experience in managing clean energy projects such as power plants and wind farms, they know how to look at these businesses and improve efficiency, they can predict future problems before they are taking place. Because of the extra value we can offer, there’s a lot of interest from the local governments and companies to form a partnership with us.
What are the benefits of hydropower and what challenges does it face?
Hydropower is the cleanest form of energy, it has no emissions or carbon dioxide pollution, it comes from water which is readily available, so it is very cost efficient. It facilitates urban development and at the same time protects the environment.
Historically, rainfall can be very volatile. There was drought last year, but so much rainfall this year that it has provided operating challenges that companies need to cope with by diversifying their portfolios across different provinces.
Are there other companies you are looking at?
We go for companies with high quality management teams and big growth potential.