After a massive retreat of foreign investment from China's power industry, the resulting predicament of the country's power plants within three to five years will trigger a re-surgence in foreign investment, said industry insiders.

The investment spree in power plant construction over the past two years is forecast to create problems within the country's power industry, when China's tight power supply is greatly alleviated in a couple of years.

A number of power plants will see declining profit margins or be shut down by the government due to an inability to comply with the country's environmental protection statutes.

Foreign investors consequently will have sizable opportunities to merge with and acquire the local power plants confronted by the operation difficulties at that time, Shi Weiming, chief executive officer of Hong Kong-based Senergy International (HK) Ltd told the Coaltrans China 2005 in Beijing earlier this week.

The foreign companies might acquire a stake in these plants at a lower price, and enhance the power plants' management and technologies to gain profits, he predicted.

The projected difficult position of China's power plants in a couple of years comes from a number of factors, said experts.

Soaring coal prices, which account for half of the cost of the country's power generation, have passed on great pressure to the power plants, although the government is making sustained efforts to ease the dispute between the coal suppliers and the power companies.

Besides, as the central government tightens control over power plant construction in order to cool down over investment, under-construction power plants- especially small and medium-sized ones -will be facing great risks in meeting the government's operation standard in a couple of years when they complete the construction.

"The power generators that run into trouble will have to look for international partners to better the situation," said Shi.

The prediction, however, is challenged by other industry analysts.

Tony Sun, vice-president of Corporate Finance & Business Development at Singapore-based Asia Power Corp Ltd said it will not be that easy for the foreign investor to make a big foray into the country's power industry within such a short period.

"Unlike other sectors such as manufacturing, foreign investment has been a marginalized presence in China's power generation industry," Sun told China Daily in a telephone interview.

Due to an inability to understand the rules of the game in China's power industry and rising fuel costs in power generation, foreign investors have failed to gain a strong footing in the domestic market, said insiders.

The power industry is more than an economic issue in China, with the political implications of issues such as lower tariffs to residents and electricity price stability of significant concern.

"Rooted in tradition, the country's power industry has been a government-controlled sector, which gives little say to foreign investors," said Sun.

In addition, most foreign players remain cautious in investing in China's power industry because they are unassured by what they may perceive as inconsistent policies coupled with a frail administrative and legal system, analysts said.

Many investors complain that the long-term power purchase agreements, which set the generating hours and electricity tariffs to attract foreign investment in the 1980s, had not been honored.

Wei Bin, a senior analyst with Beijing-based State Power Economic Research Center said some foreign investors will be likely to cash in on the expected merger and acquisition opportunities in a couple of years, but there will not be a large flow of foreign investment.

(China Daily April 14, 2005)