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Natural Gas for Power Generation

The business development

The Industry

Other Questions

 

Natural Gas for Power Generation

What are the differences between gas-fired power generation and coal-fired generation?
Our gas-fired power plants emit almost no fine particles and sulphur dioxide, and only produce a small amount of nitrogen oxide as compared to coal-fired power plants. Our power plants also generate less noise. For the same amount of heat, burning natural gas produces about 50% less carbon dioxide than burning coal. In addition, for the same level of installed capacity, the thermal efficiency ratio of combined cycle gas-fired plants is on average approximately 8-10% higher than that of traditional coal-fired power plants. In other words, to produce the same amount of electricity, our power plants use less fuel. As such, it would reduce production cost effectively.

Besides, different from the traditional coal-fired power plant, we can heat up the power generation efficiently and increase the electricity power so as to provide peaking power to meet the huge electricity demand.

How is renewable energy business in line with the policies of the central government?
Power plants, which are fuelled by natural gas, directly benefit from the policies on clean energy source being promoted by the PRC government. According to the Eleventh Five Year Plan, the NDRC has set the target to decrease the proportion of consumption of coal to total fuel consumption by 3% to 66% in year 2010 as compared to year 2005 in order to help reduce damages to the environment caused by coal-fired power generation. The government also implements policies relating to energy saving and reduction of discharge of pollutants and formulate plans for these issues. The PRC government promotes the use of environmentally friendly energy by specifying that all aged and inefficient small-sized coal-fired power plants should be shut down by 2010. This policy is beneficial to the development of clean energy source, thus creating a favorable operational environment for the Group.

 

The business development

Which company is the Group's natural gas supplier? Has the Group entered into any long-term supply contracts with it?
Zhejiang Gas Company is the gas supplier of the Group. We have entered into long-term supply contracts with them with a contract term of 20 years. Zhejiang Gas Company is responsible for the distribution of natural gas in Zhejiang province through West-East Gas Pipeline. Our power plants are directly connected to the gas off take stations operated by Zhejiang Gas Company.

What is the price of natural gas as a percentage of the Group's cost used for power generation? Is there any measure to mitigate the impact of fluctuation in the price of natural gas on profit?
For three years ended 2006, 2007 and 2008, natural gas accounted for 73.3%, 66% and 68.4% of total turnover. The percentages of operating cost were relatively stable. The on-grid tariffs are determined by pricing bureaus, so the price fluctuation is relatively low. Mechanism linking gas and electricity prices is implemented in mainland China, under which on-grid tariffs will be adjusted by the pricing bureaus in line with the price of natural gas. Therefore, the risk of cost fluctuation can be effectively transferred to customers. Meanwhile, the Group will actively increase operational efficiency in order to reduce consumption of natural gas.

The on-grid tariffs are set by the Provincial Pricing Bureau. What are the procedures?
Mechanism linking gas and electricity prices is implemented in mainland China to ensure that power generation companies are able to achieve reasonable profitability. The Interim Measures for the Administration of On-grid Tariff set out the principles for which pricing bureaus should follow in determining on-grid tariffs for power generators. On-grid tariffs are set by pricing bureaus taking into consideration various factors including the economic lives of the respective power generation facilities, fuel and production costs, and applicable taxes, plus a reasonable margin and return. The Group filed its application of construction of power plants with expected profitability. The relevant authorities will also consider whether the power plants are able to achieve reasonable profitability in the future during the approval process.

The Group's power plants features include [peak powering plant], what is peak power plant? How does it affect the Group?
In fact, The Group's power plants can expand their capacity so as to address the needs for future development. Serving as a power plant for peak powering, the generating units can also generate more electricity on the basis of planned utilization hours. There are both peak hours and off-peak hours for power demand in mainland China every day. Generating units of gas-fired power plants can adjust the power output shortly with high flexibility and efficiency. Gas-fired power plants can generate more electricity based on on-grid demand during peak hours.

Who are the clients of the Group? How to ensure the level of power purchasing?
According to the Electric Power Law of the PRC, a power plant is required to sell its power to the provincial power grid company to which it is connected. A power plant's sole customer is its respective provincial power grid. The approving authorities has forecast and analyzed the market demand for electricity before approving the application of power plant construction in a move to ensure the reasonable and stable supply of electricity. The authority concerned would also take into account of the environmentally friendly and peak loading nature of the power plants and set the utilization hours at 3,500 in an attempt to ensure the stability of the income of power plants. Meanwhile, the Group and power grid companies constitute an integral whole that are in line with national policies on the industry and power demand, and we maintain a good relationship in respect of power generation and power sales. The Group has established a long-term business relationship with them by entering into a long-term contract. The power sale agreements will be renewed automatically every year, thus there is certain assurance of income.

For what reasons the Group is located in Zhejiang province?
The Group is strategically located in Zhejiang province, one of the fastest developing regions in China with strong demand for electricity. Zhejiang province is one of the major provinces among the first batch of PRC provinces that used West-East Gas Pipeline in large scale. GDP growth of Zhejiang province has been consistently higher than China's overall GDP growth. The electricity consumption has constantly been growing at a rate that was higher than national average level. Therefore, locating in Zhejiang allows us to benefit from the fast growing economy of the province.

The Group positions itself as a clean energy enterprise. Does the Group stick to gas-fired power generation? Is there any plan to diversify into other new energy like wind power or hydro power?
The market potentials for gas-fired power generation is immense and the Group will continue to have the gas-fired power generation as our core business. The Group may engage in more sophisticated gas-based power provision businesses such as cogeneration and tri-generation or CCHP power generation which are efficient and environmentally friendly in time to come. Among many other clean energy sources, natural gas is an energy that is most sophisticated with highest effectiveness. But we still keep a close eye on any development or investment opportunities for other new clean energy sources. However, we focus on gas-fired power generation at this stage.

Will the Group consider expanding into upstream business including the exploration and exploitation of natural gas in a move to form an integrated natural gas power generating company?
The Group's mission is to become a clean leading clean energy enterprise in China and at the moment focuses on the effective and efficient management and operation of the power plants. In light of this, we do not consider the plan of expanding into upstream business.

What is the overall growth strategy for the Group?
The Group's growth driver clings on increasing use of natural gas as a fuel for power generation. According to Eleventh Five Year Plan, the National Development and Reform Commission ("NDRC") of the PRC has set the target to increase the proportion of consumption of natural gas to total fuel consumption by 2.5% to 5.3% in the year 2010, underscoring the escalating demand for gas-fired power generation. The Group's business strategies include continue to manage our power plants efficiently and effectively, expand or upgrade our power plants, engage in more sophisticated gas-based power and heat provision businesses such as cogeneration and tri-generation or CCHP power generation which are efficient and environmentally friendly, and increase our market share through investing in new projects and making acquisitions.

 

The Industry

What is the market share of gas-fired power generation in China? How large is the market potential?
The Group has strong confident that, bolstered by the national policies and fast economic growth, the market share of our gas-fired power generation market will be further enhanced. The Group views that the percentage of natural gas used for power generation purposes would increase to over 30% by 2010. According to EIA's estimation in its International Energy Outlook 2008, the installed gas-fired generating capacity in China is expecting to grow at an average annual percent change of 13% from 2005 to 2030.

Who are the main competitors? Is market competition very fierce?
We have no direct competitor in the market. The power industry involves careful planning. A power plant and a power grid company constitute an integral whole despite a separate entity. There is division of labor among each of power plants within the province and every power plant offers support to each others to maintain safety and meet the demand of end-users in the community. Therefore, direct competition does not exist in the operation.

Coal-fired power plants are mainstream power plants in mainland China. As compared to them, what are the edges of gas-fired power plants?
Our business is supported by government and is in line with their policies on clean energy sources and we are obtaining government grants. Our gas-fired power plants adopted the combined cycle combustion process, under which the burning of natural gas drives a gas turbine to generate electricity. For the same level of installed capacity, the thermal efficiency ratio of combined cycle gas-fired plants is on average higher than that of traditional coal-fired plants. In other words, to produce the same amount of electricity, our power plants use less fuel. The on-grid tariff of gas-fired power generation is higher than that of coal-fired power generation. We have relatively high efficiency in operation and profitability.

Are there enough natural gas reserves in China? What the Group does for ensure the stable supply for natural gas?
According to Statistical Review of World Energy issued by British Petroleum plc, it is estimated that China had a total 1.88 trillion m3 of proven natural gas reserves at the end of 2007. Natural gas will be distributed effectively to Zhejiang province through West-East Gas Pipeline and Sichuan-East Gas Pipeline which can provide a stable supply for the province.

What are the government's policies in supporting gas-fired power generation?
According to the Eleventh Five Year Plan, the NDRC has set the target to increase the proportion of consumption of natural gas to total fuel consumption by 2.5% to 5.3% in year 2010 as compared to year 2005, while to decrease the proportion of consumption of coal to total fuel consumption by 3.0% to 66.1% [in year 2010] as compared to year 2005. A total proven reserve of the natural gas fields was approximately 1.7 trillion m3. The West-East Gas Pipeline (Phase I) is only part of a nationwide natural gas supply infrastructure network as stated in the Eleventh Five Year Plan. The annual natural gas transport capacity is 17 billion m3 (already in operation). Sichuan-East Gas Pipeline, with the capacity of 12 billion m3 , will be expected to supply natural gas in the end of 2009 .The construction of West-East Gas Pipeline (Phase II) is in progress. The pipeline, which will be 8,000 km in length with annual transport capacity of 30 billion m3, is expected to reach and supply natural gas to Zhejiang in 2010.

 

Other Questions

How's the dividend policy in the future?
The Group intends to declare for each year dividends equivalent to 20% to 30% of our distributable profits. However, declaration of dividends is subject to the approval of the Directors after taking our profit, financial status, future development and other factors into consideration.

Would the Group invite any strategic investor?
The Group has no plan to invite strategic investor tentatively.

 

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