Legal regulatory framework of investment in China's hydropower projects

Grandall Legal Group
Weidong Wang
[email protected]

Background of hydropower in China

Hydropower is an important energy resource in China. There are two classifications of hydropower projects: the large and medium-sized (over 50MW), and the small-sized (below 50MW).

In China, the main investment fund resources for hydropower include government funds and state-owned enterprises (SOEs). The government funds are channeled through state-owned assets supervision and management entities. As for SOEs, the major players are Huaneng Group, Datang Co., Huadian Power International Co. Ltd., Guodian Co. and Power Investment Co. Apart from that, private companies and foreign investments are beginning to show intense interest in funding for hydropower projects.

Foreign investment in PRC hydropower projects

In recent years, hydropower projects have remained in the spotlight of foreign investment due to its nature of stable returns, low maintenance cost, and may benefit from numerous preferential governmental policies. Additionally, hydropower plants have alternate means of income such as the sale of certified emission reductions (CERs). Usually, an investment into a large or medium-sized hydropower project would cost between Rmb 400 million (US$58.6 million) and Rmb 800 million.

At present, active foreign investors in this sector include Hong Kong CLP Holdings (HKCLP) and the AES Corporation. HKCLP's core business is in Asia's power industry, where as AES Corporation, which holds a hydropower station in Hunan province, is a US-based independent power producer (IPP) that entered into China's power industry since the early 1990s.

Regulation of investment in hydropower projects

Construction of a hydropower project in China involves a complicated process. Basically, the investment procedure of a hydropower project can be divided into the following phases:

i. Pre-investment verification phase;

ii. Investment verification phase; and

iii. Post-investment verification phase

1. Pre-investment verification phase

In the pre-investment phase, a series of approvals need to be made. After obtaining all the related approvals, an investor can legally submit its application of a hydropower project for project verification.

Over the past few years, the following approvals have become increasingly important for the construction of a hydropower project:

• Review comments on environmental impact statement – the Ministry of Environmental Protection has issued a stop order for the construction of the hydropower project on Jinsha river because it lacked this statement approval. This would set as a cautionary tale of the necessity of acquiring this approval;

• Seismic hazard assessment; and

• Cultural relics investigation of the project

2. Examination and approval of the projects investment phase

Pursuant to the Decision of the State Council on Reforming the Investment System, the projects constructed on major rivers and projects with the total installed capacity of 250MW or more shall be subject to the approval of the National Development and Reform Committee (NDRC), and other projects shall be subject to the approval of the competent local development and reform committee.

A hydropower project is within the range of encouraging classification of the Catalogue of Industries for Guiding Foreign Investment, a project where its total investment is over US$100 million shall be approved by the NDRC. Those below this investment threshold shall be subject to approval and verification upon the local development and reform committee's examination provided that the project has an installed capacity below 250MW and is not constructed on the major rivers.

3. Post-projects investment examination phase

After the formal verification of the project, several approvals are additionally required for the hydropower station. Below is an approval that tends to be neglected in practice.

• Permit on conversion of agricultural land into land for construction (if applicable)

Pursuant to the PRC Land Administration Law , if an agricultural land is proposed to be occupied for construction purpose, the examination and approval procedures regarding the conversion of agricultural land into land for construction purposes shall be required.

The forecast on China's hydropower projects

Upon the Notification to Improve the Small-sized Hydropower and Hydropower for Rural Electrical Progress, the Chinese government is encouraging small-sized hydropower projects in order to improve construction in the rural area and meet power requirements. Certain subsidies have been granted for small-sized hydropower projects with the possibility of further policy support in the future. These actions reflect the government's determination to improve small-sized hydropower projects. Foreign capital may supplement the needs for such small-sized hydropower projects and the government is encouraging investment in this sector by easing the approval and verification processes. The main deterrent for potential investors is the poor profit margins from these projects. However, if the government and interested investors collaborate, they may be able to find a solution that benefits all.