In the initial stages of the electricity market reform, privately-owned SHPs indeed earned a lot of profits in developing hydropower, the return being estimated to reach as much as 20 per cent in the late 1990s and early 2000s (Cao, 2008: 92). This was due to the fact that the government at that time was not so serious about the environmental impact, neither did it have to follow formal procedures when making
an application to construct an SHP. As long as the applicant found the water resource, the firm could then draw up the construction plan and received approval in a very short period of time. However, after 2006, the central state announced a new measure referred to as the ‘Notification Regarding the Orderly Development of Small
Hydropower Plants to Protect the Ecological Environment’. From then on, all the necessary procedures were set up in the application, including an environmental impact assessment. From then on, the state began to check those ‘Four No-s’
regarding the SHPs– no registration, no construction plan, no acceptance certification, and no suitable management – and as a consequence forced most of them to close down. Subsequently, a serious problem began to emerge, particularly in relation to the plants’ profit margins. As a result, the average annual profit rate of an SHP is
currently about 8-10 per cent (Interview data EO1101-0804).13
One of the reasons for the shrinking profit margins of the SHPs was the forced connection policy of the SHPs to the national grid. In the case of Yunnan province, it is the South Power Grid that has the dominant position in the market (which decides whether or not a SHP can be connected to the national grid), whereas the SHP has to comply with it in order to survive in the market. Although the state requires national grid companies to purchase electricity generated by the SHPs, the real situation is that these grid companies are reluctant to fulfill the obligation. One of the main reasons why the national grid does not like to buy the electric power generated by the SHP is its unstable nature. One of our interviewees referred to it as garbage electricity.14 In the rainy season, SHPs can generate more power in a similar way to the big dams;
nonetheless, the electricity provided by the latter is already sufficient for the grid to supply the market demand. As a result, the electricity that a SHP has generated has to be sold at a much lower price or be given up. On the other hand, in the dry season, the
flow of the river is not abundant enough to be used for power generation, and therefore the SHP is not able to supply electric power to the grid. In addition, the quality of the electricity is low and the operation cannot be optimized. Therefore, the grid company lacks interest in the SHPs and even adopts certain measures to prevent them from being connected to the grid (Zhou, et al., 2009: 1079). In general, the grid company is very supportive of building big dams along major rivers in Yunnan.15
As a result of the forced connection policy, according to a report (Cao, 2008:
43-44), there were as many as 12 provinces in which the cost of power generation was higher than what could be recouped by selling the electricity to the grid company, which thus led to the companies in these areas recording a deficit. For example, in Guizhou province, the grid company paid the SHPs only $0.15 RMB per KW/hour, and sometimes this rate was even lowered to $0.12 RMB per KW/hour. By contrast, the grid sold the electricity to rural enterprises at $0.318 RMB per KW/hour, and thus the grid company earned a large amount of profit from this transaction. As one
hydropower developer pointed out: ‘Hydropower has seven advantages, including the raw material (no need to worry about the sources), the market, the transportation, the quality, the inventory and the state’s support. However, these seven advantages are less important than one disadvantage; that is, it is a highly monopolized industry that in practice is manipulated by the state by a lower price. Whether or not the price should be raised is not what we can say’ (Guan, 2012). In fact, our field trip in Yunnan confirmed this observation, for the developers are now complaining that the lowering of the purchase price by the grid company may cause them to suffer a deficit.
Some firms are even expecting to use the CDM mechanism to compensate for their currently very low profit margins.16
Even worse has been that the rural electricity companies have gradually been
merged and acquired by the powerful grid companies and have become their affiliates.
As a result, the local rural electricity companies have totally lost their initial function of benefiting poor rural areas, as the low-efficiency and high cost state-owned power generating companies now run the whole of the power generation market in China, or in Yunnan in particular.
Why are so many private companies still interested in investing in this SHP sector, given the fact that many have suffered from heavy financial losses? We found based on our field trips that local governments would compensate those companies by means of other administrative methods, such as real estate development projects whose profits are much larger than those from the SHPs in order to maintain the alliance. According to our interviews, the owners of the SHPs usually had more than just one station each. Thus, while the profit margins of the SHPs have been shrinking over the years, they still continue to invest in more stations due to the fact that, on the one hand, there is still some amount of shrunken profits and the stations can run for a long period of time and, on the other hand, they help the local officials fulfill the political missions assigned to them by the upper levels of government, which will later lead to other returns from the local officials.17 As one of our interviewees said:
The SHP project has been one of the most important items that the local government has had to implement according to the national evaluation criteria.
Local officials require you to accomplish the already bidded for project within a specific time duration, and they can help you to shorten the administrative procedures to a week as compared to the normal two months….Whenever you help local officials to accomplish political assignments, even though those items’
profit-margins are very thin, local officials will compensate you in return on other construction items …We evaluate our project not based on a single item,
but rather in a holistic manner. (Interview data EW1102-0806)18
This statement clearly shows the close alliance between local officials and private capital, and the interest bundling approach through which private capital may suffer from short-term financial loss in return for much larger and long-term benefits. This may explain the paradox of the deficit-investment phenomenon in the small
hydropower sector.
The close alliance between local officials and the privately-owned SHPs has given rise to a phenomenon referred to as ‘demarcating the river territories’ (paoma
quanshui), indicating that the rivers have been cut into pieces by different parties for
building large and smaller dams as well as hydropower stations. The phenomenon has generated widespread criticisms and reports from the media, and has finally received responses from the state in reformulating the application procedures for SHPs by adding the environmental assessment item as we mentioned above. 19
Ironically, most of the environmental non-governmental organizations (NGOs) have paid less attention to this environmental disaster, and have instead devoted much of their limited resources to watching big dam construction, such as the 13 cascade dams along the Nu River (Mertha, 2008; also interview data ENG1101-0802).20 It is also because big dams create a much larger scale of environmental impact than the SHPs, and therefore NGOs have devoted much energy to big environmental events compared to the smaller scale SHPs. However, NGOs were indeed aware of these impacts of SHPs on the environment in Yunnan Province and provided in-depth reports to the media. One renowned environmentalist lamented:
The main problem with SHPs now is their blind development which results in not only electricity not being able to be sold, but also a shortage of clean drinking water because all the river water is used for generating electricity.
(Interview data ENG1101-0802)21
VI. Conclusion
This paper asks: how the Chinese local state officials respond to the demands for social and environmental protection from the central state, while simultaneously promoting economic development? This paper has shown that the local governments in Yunnan have responded to the political demands (rural electrification and poverty alleviation) by allying with private capital to build more SHPs to fulfill the political mission while at the same time granting other benefits to the privately-owned firms to compensate for the profit-losing SHP projects. This finding conforms to the findings of recent studies on the behavior of local governments in China that find that a new cadre evaluation system has emerged (Heberer & Senz, 2011) and that there are
‘bundled interests’ between local government officials and privately-owned firms on environmental issues (Kostka & Hobbs, 2012). We argue that, although the Chinese central state has begun to impose new social and environmental missions on local governments, the local governments have tended to interpret the political mission in a way that can be integrated with local economic development and to collaborate closely with private interests. Through this collaboration, local state bureaucrats simultaneously fulfill the central state’s political mission and local economic development demand. Specifically, we show that due to the market reform of the electricity industry in 2002, which has resulted in the major electric power-related SOEs pursuing profit maximization, SHPs’ profit margins have been radically squeezed. Nonetheless, the shrinking of profits has only further enhanced the local government officials’ alliances with the SHPs by allowing these SHPs to develop other profitable projects, in order to fulfill the political mission. The result of this
collaboration has been that the hydropower stations in the upper, middle and lower streams of the rivers may belong to different companies that have conflicts of interest in terms of utilizing the rivers for generating electric power (Zhou, 2010: 163).
Although we have found that the building of a large number of SHPs in rural areas has brought about an environmental disaster, we still regard the Chinese
government’s promotion of SHPs as being a positive part of its climate change policy and rural poverty alleviation. What the Chinese state has not yet recognized or finds difficult to deal with is the fact that its marketization of the electricity industry has merely resulted in its policy goals in relation to SHP being doomed to failure. As a policy tool to support rural development and poverty alleviation, the state needs to subsidize the SHPs and to enable them to receive an adequate level of profit in order not to be undermined by the SOEs.
Furthermore, on the administration side, China also has to have a more coherent bureaucracy to coordinate the development of hydropower. At the present time, the application and approval of SHPs belongs to the local development and reform commission. Although the Bureau of Environmental Protection is responsible for reviewing the environmental impact, the final decision is always based on economic interests. This creates a less coherent view of the environmental impact. China needs to have more coherent bureaucratic procedures to review the applications of SHPs and to pay more attention to the functions that SHPs can perform to rescue the rural economy from bankruptcy and save the environment.
Notes
1. There are four grades below the 50MW installed capacity of small hydropower: 0.5–5MW, 5–10MW,10–25MW, and 25–50MW (Zhou et al., 2009).
hydropower plants which it regards as a clean energy; so does the Chinese state. As regards its mission in China and the Asia-Pacific Region, please see http://www.hrcshp.org/en/about.html.
3. Building large dams in the world and in China now creates colossal disputes not only within domestic politics but also in the international arena, especially when the river is transnational, for example the Lancang River flows into Myanmar, Cambodia, Thailand, and Vietnam. Building large dams may cut the water flow of the rivers and trigger international disputes (Mosert, 2000;
Liebman, 2005; Onishi, 2007; Hensengerth, 2009).
4. The ‘Three Rural Issues’ (sannong wenti) refers to three issues highly relating to rural development in mainland China. Specifically, these issues are rural areas, agriculture, and peasants.
5. This means that by building more SHPs, rural peasants would have electricity for cooking and other domestic energy utilities. This would then reduce the peasants’ incentive to cut wood from the forests.
6. The new companies include two power grid operators, namely, the State Power Grid (covering mainly the northern, northeastern, northwestern, eastern, and central China areas) and China South Power Grid (covering the Yunnan, Guizhou, Guangxi and Guangdong areas; and five state-owned electricity operators such as Huaneng, Datang, Guodian, Huadian, and the Electricity Investment Corporation. Accordingly, the existing regional and rural agricultural grids have been incorporated into the two newly-established national grid systems.
7. T city is the anonymous name we use for the city in which we did our field study in Yunnan.
8. Please see Larson, C. (2010, January 18) for the impact of Karst landscape on water supply.
9. Interview data EO1102-0804, data obtained from local informant in T city during our field study.
10. Interview data EO1102-0804, an officer from the City’s Development and Reform Commission, Kunming City, 04 August 2011.
11. The value-added tax was 17 per cent in one of the cities that the authors had visited in Yunnan. Of this 17 per cent, 75 per cent went to the central state and the remaining 25 per cent was local tax.
The local government would return this 25 per cent to the investor over a five-year period.
12. Interview data EO1101-0804, with an officer from the Agricultural Bureau, Kunming City, 04 August 2011.
13. Interview data EO1101-0804, with an officer from the Agricultural Bureau, Kunming City, 04
August 2011.
14. Interview data EE1101-0711, with engineers of South Grid Corp., 11 July 2011.
15. Interview data EE1101-0711, data based on interview with engineers of South Grid Corp., 11 July 2011.; also interview data EOE01-0710, data based on an interview with engineers from the Bureau of Water Resources, T City, Yunnan, 10 July 2011.
16. Interview data EW1202-0708, owner of a small hydropower plant, 8 July 2012, in T City, Yunnan.
In addition, CDM (the Clean Development Mechanism) is a type of flexibility mechanism that provides trading schemes for emissions reduction projects that generate Certified Emission Reduction (CERS) units. The CDM allows industrialized countries to buy CERS and to invest in emission reductions where it is cheapest globally. Of course, China is one of the largest countries to benefit from the CDM mechanism.
17. Interview data EW1201-0707, owner of a small hydropower station, 7 July 2012, T City, Yunnan.
The returns may consist of different types, and one of them may be a real estate development project which has much larger monetary profits.
18. Interview data EW1102-0806, owner of a small hydropower station, 6 August 2011, T City, Yunnan.
19. There are a lot of reports on the environmental impacts of SHPs. These documents are also one of the main sources of this research.
20. Interview data ENG1101-0802, with a local environmentalist of green NGO, Kunming City, 02 August 2011.
21. Interview data ENG1101-0802, with a local environmentalist of green NGO, Kunming City, 02 August 2011.
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