Far East Wind Power Corp. has entered into a binding Letter of Intent with Beijing Tongchuang Hengyuan Technology Development Company (the “Owner”) in order to acquire certain rights to a wind farm located in Ningxia Hui Autonomous Region, People’s Republic of China.
Highlights of the LOI are as follows:
- Commitment by Far East to fund up to $20.0 million of development costs
- Commitment from local Chinese partner to execute business plan and work to obtain all necessary remaining permitting and authorizations for wind farm, and secure low interest rate bank debt financing of up to $70.0 million
- Far East’s ownership interest in the wind farm, to be structured as a sino-foreign joint venture (the JV), will be 49%, the local Chinese partner will own 51%
- Far East will consolidate all assets, liabilities and results operations under applicable accounting guidance as a result of holding the majority of the seats on the JV’s board of directors, and controlling all cash disbursements, cash dividends, cash receipts, and approval or disapproval of any equity or debt financing to be contemplated or executed by the JV
- Far East and the local Chinese partner have informally agreed on a monthly dividend distribution plan whereby Far East and the Chinese partner will receive monthly cash dividend distributions - subject only to Far East’s approval
- Initial plans are for development of a 50 megawatt wind farm with installed capacity to potentially generate $10.2 million in revenues on an annualized basis if fully utilized
- Far East’s right of first refusal on remaining preliminarily approved wind farm where potential developable assets at Ningxia total 1 gigawatt (inclusive of the initial 50 megawatt wind farm) and if fully developed, installed and utilized could represent approximately $204.0 million in revenue on an annualized basis.
Background
Far East’s portfolio and the business in general is extremely scalable and highly profitable due to unique market conditions in China and as a result of certain new Chinese laws and regulations. The Company is taking advantage of a niche marketplace in China. Chinese state-owned enterprises are developing wind farms but there is not enough development to meet China’s stated renewable energy goals and many entrepreneurs in China are attempting to enter the wind farm marketplace themselves. The issues these entrepreneurs face invariably revolve around start-up financing, of which these entrepreneurs generally do not have access to. Far East is working with these entrepreneurs to provide them with capital and refine their business plans so that as partners we can develop wind farms that will generate substantial cash flow for each partner for many years to come.
In December 2009, revisions to China’s original 2005 renewable energy law were adopted by the National People’s Congress and were effective on April 1, 2010. The revisions contained three main provisions:
- The renewable energy law was strengthened to guarantee that electric utilities purchase all renewable power generated, including wind farm-generated electricity. Previously, utilities were only obligated to purchase renewable energy if there was sufficient power demand on the electrical grid. Now, utilities must buy the power in any circumstance. The revisions to the law also add deadlines and economic penalties for utilities failing to comply with this guaranteed-purchase requirement.
The requirement for detailed planning and coordination, including coordination of renewable energy with overall electric power sector development and transmission planning, coordination of local, provincial and national level development plans. Additionally, the roles and responsibilities of the five main electric power companies are to be redefined in relation to electrical grid interconnection of renewable energy generators such that the five main electric power companies are responsible for assisting with the development of renewable energy. The law revisions also address topics such as energy storage and smart grids.
The grid-related provisions included in the December 2009 legislative revisions were as a result of the fact that the renewable sector has been growing so fast, especially wind power. In the past few years the growth of wind power in China has been so significant that transmission planning and interconnection of the Chinese electric grid was falling and electrical power generated through wind farms was being lost before being transmitted to the electrical grid.- The revisions to the renewable energy law also strengthened a renewable energy fund under the Ministry of Finance. Previously, this fund was collecting a$0.06/kilowatt hour surcharge on electric power sales on a nation-wide basis (some customers still remain exempt from the surcharge). The Ministry of Finance applies those funds to the costs of government-supported renewable energy projects and the costs of grid connections. However, thus farm the surcharge has not been enough, so the new revisions allow the Ministry of Finance to supplement the renewable energy fund from general revenues.
Many other energy policy changes have also occurred recently;
- China has instituted a target of 15% for renewable energy and non-fossil fuel sources of electricity share of all final energy consumption by 2020.
- In December 2009, China announced that it would reduce the carbon intensity of its Gross Domestic Product by 40%–45% by 2020, relative to 2005 intensity levels.
- China also recently instituted a three year tax holiday from local and provincial tax for renewable energy projects. Subsequent to the tax holiday, the tax rate will be 12.5% for three years, and 25% thereafter.