China's Three Gorges Giant Hydro Project Becomes a Profit Driven Investment Prospect

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). The massive $22 billion Three Gorges hydro project in China was conceived and initiated at a time when the sheer size of the project and national priorities overrode any talk of market forces or profitability. It was power for the People's Republic. The project, first mooted by Sun Yatsen, founder of the Chinese Nationalist party, in 1919, was finally launched after years of disputes and studies in 1992 by the Chinese government.

In February 2003, the profitability of the project's core hydro plant assets has been boosted by the approval of a 48 percent rise in tariffs. This will open the door for China Yangtze Three Gorges Project Development Corporation's fund-raising for the construction of the 18,200 MW scheme.

The 21 year old Gezhou Dam (2,175 MW) received approval from the state council to raise its tariff from $12.4 (102 yuan) per megawatt hour (MWh) to $18.4 (151 yuan) per MWh according to the Sate Development Planning Commission. The Gezhou plant will be the core asset of the proposed listing vehicle China Yangtze Electric Power (CYPC) which aims to raise $483 million through its IPO and a total of just under $ 5 billion over ten years by means of additional stock offers and sales to institutional investors.

The listing, which will represent 18% of the projects power assets, will be made in Shanghai by the end of 2003. It will be the first Chinese firm to promise dividends with at least 50% cash in its prospectus at the listing. The fund raising will offset the impact on power users by a reduction in their contribution to the Three Gorges project Construction Fund. It is planned to sell a further 32% of the power assets within a few years said the vice president of CYPC, Kou Riming. The privatization could move beyond 50% as China's power market reform evolves, he said.

The tariff rise took effect at the start of this year and an HSBC regional utilities analyst, David Yip, estimated the tariff rise would double the Gezhou Dam hydro plant's return on equity to 9 percent, which would enhance its attractiveness to investors. He said that previous hydro projects were not for profit and tariffs were cost based. Other analysts said that older power plants tended to have lower tariffs, as their depreciation costs were much lower than those of new plants. Kou Riming says that when working to capacity post 2009 the project will generate over $3 billion per annum cash flow.

The Three Gorges project is scheduled for completion in 2009 and will have an on grid tariff of $30.4 per MWh with an additional charge of $8.53 for transmission. These rates will undercut most thermal plants using carbon fuels and could replace the burning of 50 million tons of pollutant emitting coal per annum. In full operation, the hydro project will produce 84.7 million MWh of electricity power per annum from its generators on the 185 meter high dam with a span of 2,039 meters across the Yangtze River.

Three Gorges power will provide about 6 percent of China's total power capacity of 338,000 MW and will boost the total of 20% of hydropower currently going into the country's grids.

China has spent around $11 billion on moving over a million people to make way for the dam. The first four generators are due to be commissioned before the end of 2003 and will begin to supply 5.5 million MWh to Chinese grid users.