The offshore wind sector in China is often surrounded by a sense of mystery. Very little news about its expansion
has reached us in the past few years, but this could be about to change as it embraces competitive auctions.

Developers in China installed 1.16GW of offshore wind farms in 2017, which brought the cumulative total to 2.8GW. These figures represent only a tiny part of its huge potential, which amounts to over 500GW for projects with both fixed and floating foundations, according to organisation Carbon Trust.

The country also has a target of 5GW of installed offshore wind capacity by 2020. To help China to reach this and unleash its potential, in late May the National Energy Administration announced a shift from its feed-in tariff scheme to competitive auctions for utility-scale renewables projects.

This means that, from next year, onshore and offshore wind farms in China will go through competitive bidding based on the cost of construction and power prices. To promote cost reduction, the NEA would also require project prices to be lower than the average wind FIT guaranteed by the government, which is currently CNY850/MWh ($124/MWh). This is part of the government’s plan to reduce the subsidies it is paying, and ensure that its wind sector achieves “grid price parity” with traditional energy sources including coal.

In our view, these competitive auctions should help international investors to finally enter the Chinese offshore wind market.

International players often find China a tough market to break into. The country has invested heavily to develop its in-house technologies and domestic supply chain in every sector in the past decade to boost its economic growth. Wind is no exception.

This has worked particularly well in the onshore wind sector, where the country is the largest globally with 186GW of installed capacity, but not for offshore wind.

This is mainly because offshore wind farms off the Chinese coast require a high level of investment and expertise, due to challenging conditions including the weather and seabed. Building onshore wind farms has been an easier and cheaper solution for Chinese firms for expanding the country’s renewable energy sector. In contrast, the offshore wind supply chain has lagged behind.

However, in the last couple of years, China has loosened its restrictions on foreign investors, and this has given international firms the possibility to form partnerships with local businesses to enter the market. If China wants to build a large offshore wind market, commercial partnerships will be important – but won’t be enough to support the growth of the sector on their own.

We think one solution could be to allow foreign companies to bid in competitive auctions.

The launch of competitive auctions is set to put local developers and turbine makers under pressure to bring down the costs of building offshore projects. However, their relatively limited experience could make this difficult, and make it attractive to team up with European firms. After all, we see no shortage of European investors and manufacturers who would be keen to enter the market. For example, in March 2017 GE entered the Chinese market by securing an order for three of its 6MW Haliade offshore wind turbine.

In fact, one example of how China could benefit from the European expertise is on the manufacturing side. Turbine makers including MHI Vestas and Siemens Gamesa are adapting their turbines to the harsh conditions of the Taiwanese market, which include typhoons and earthquakes. Chinese offshore wind farms would be located in similar areas with similar risks. It would make sense to take advantage of a technology that European manufacturers are already developing, which would also bring positive effects on cost reduction over time.

Above all, the country’s commitment to lower its barriers is key to attract foreign investors. According to the China Investment Report published by the International Energy Charter last year, the government is taking measures to increase its ease of doing business and the transparency of its investment framework. This is good and those in the offshore sector may see the results in next year’s auctions.