China State Grid Corporation heading down under

It didn’t take long for Liu Zhenya, general manager of State Grid Corp., to make good on a pledge to grow the Chinese power giant’s overseas assets.

Two weeks ago, Mr. Liu was telling reporters attending the Communist Party Congress in Beijing that State Grid’s ambition is to nearly quadruple its overseas assets by 2020 to as much as US$50 billion. Healthy returns from past deals are emboldening management of the state-owned company to kick the tires on more acquisitions, he said.

If there’s a surprise in Thursday’s announcement that State Grid is to buy Powerlink’s interest in ElectraNet, which operates South Australia state’s power transmission grid, it is that State Grid has chosen Australia for its next bet.

Past acquisitions have mostly been in fast-growing centers for energy demand like Venezuela, economies like the Philippines where infrastructure needs updating or vast countries like Brazil where State Grid can leverage its expertise in operating ultra-high voltage power lines. On the surface at least, the only comparable acquisition was State Grid’s purchase of a 25% stake in Portugal’s national grid company Redes Energeticas Nacionais RENE.LB -0.35%, earlier this year.

But a look at ElectraNet’s strategy document released in April signals why State Grid would be interested.

The power grid in South Australia already covers a service area of around 200,000 square kilometers, comprising transmission lines spanning 5,600 kilometers. That’s set to grow in future as mining investments create demand for power in remote parts of the state lacking a grid connection.

Also, State Grid has been investing heavily in smart grid technology in China that aims to match supply more closely with demand. ElectraNet said a key challenge would be planning for the uncertain impact of new technologies on its network in South Australia, citing the potential for motorists to switch to electric cars in future that will force up power use at night when batteries are re-charged.

“On present trends, South Australia’s underlying electricity energy consumption in 2035 may be around 50% higher than today and the State’s 2035/36 peak power demand may be 60% higher, excluding the potential for major new transmission loads,” ElectraNet said in the report.

“Even without major development projects, significant transmission investment will, therefore, be required over the next 25 years simply to supply South Australia’s growing demand for electricity. This typically includes local works such as additional transformers, additional capacitors (for voltage support at times of peak power demand) new lines and upgrades to existing power lines.”

State Grid didn’t disclose financial terms of its deal for the ElectraNet stake, but a person familiar with the matter told Deal Journal Australia that the deal is worth around 500 million Australian dollars (US$523 million).

State Grid undoubtedly needs to look overseas for growth. China’s power market is tightly regulated by Beijing, which fears that liberalization could force up inflation and stoke social unrest.

When prices of coal—which accounts for more than two-thirds of China’s energy mix—have surged in recent years, China has often reacted slowly in allowing government-set power tariffs to rise. That’s forced generating companies like Huaneng and Huadian, along with transmission companies State Grid and China Southern Power Grid Corp., to shoulder some of the losses from high fuel costs rather than pass them on in full to the consumer.

“Net asset returns on overseas projects are over a double-digit rate,” Mr. Liu said Nov. 11, adding that the return rate is three to five times higher than the company’s domestic investments.

State Grid also needs to grow overseas because it has reached its limits geographically in China. When the company was created in 2002 when China was breaking up its energy monopolies, State Grid was handed a monopoly position in power transmission in all but five provinces in the country’s south.

South Australia is a growing market—the state government predicts that the population could reach 2.28 million by 2036 from around 1.67 million last year. But that’s tiny compared to State Grid’s position in China where it serves a market containing a billion people, or 88% of the country’s citizens.

Perhaps mindful that China Inc. is still struggling to shed its reputation as being low-tech and low-cost, State Grid stressed what it can bring to Australia when announcing its deal with Powerlink. The company’s expertise extends from reducing losses when power is transmitted over long distances at high voltages, integrating wind energy output and solar power generation, and advanced smart grid technologies, it said.

For consumers, it could mean lower prices if State Grid follows through on an aim to reduce ElectraNet’s long-term transmission cost.

State Grid also appears keen to allay fears about another Australian asset falling into Chinese hands, following the political rumpus around the purchase of cotton farm Cubbie Station by a consortium led by Shandong RuYi Scientific & Technological Group., by stating that it won’t operate the South Australia power grid.