MEETINGS WITH A-POWER ON WIND FARM DEAL

UNCLAS SECTION 01 OF 02 SHENYANG 000204 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD WEET PGOV PREL CH SUBJECT: MEETINGS WITH A-POWER ON WIND FARM DEAL (U) This cable is Sensitive But Unclassified. Please protect accordingly. ¶1. (SBU) Summary. A-Power, a Shenyang-based NASDAQ-listed firm, explained its plans for a 600-megawatt (MW) wind farm in Midland, Texas, including production facilities and its relationship to GE and other suppliers. According to company executives, the project will not rely on U.S. stimulus bill financing. Rather, the project will most likely rely on Chinese financing and support from the Shenyang Municipal government. The lack of large-scale financing in Europe and North America is the major obstacle to wind power projects outside of China. A-Power plans to expand their operations worldwide. End Summary. ¶2. (U) To learn more about the Shenyang operations of A-Power (Nasdaq: APWR) and its new joint venture with Cielo Wind Power and U.S. Renewable Energy Group (USREG) to construct a 600 megawatt (MW) wind farm in Midland, Texas, ConGen Staff met recently with A-Power Chairman/CEO Gene Lv and Managing Director Wang Yunbo. Lv and Wang said they welcomed the opportunity to clear up any misunderstandings about the project. ¶3. (SBU) Mr. Lv said he understood why some U.S. politicians were against the use of government funds for the project, saying this is a normal reaction to a project located in someone else's district that may be poorly understood. Lv said he understands that as a democratic country, the United States allows for different voices to be heard, adding: "If the Senator had enough information regarding A-Power's cooperation with Cielo and Renewable Energy, he would understand that the project is in full compliance with USG policies in carbon emission reduction and new energy development." Lv also noted that former Vice President Al Gore has shown interest in wind energy and believes it is time for the U.S. to develop new and renewable energy instead of relying on fossil fuels. Financing -------------- ¶4. (SBU) Lv expects to receive all the financing for the USD 1.5-billion total cost of the project from China, not the United States, and he said the project would not use any "stimulus" funds. In fact, said Lv, several Chinese Banks have shown interest, including the Dalian Branch of the China Import/Export Bank, the Liaoning Branch of SINOSURE (China Export Credit Insurance Company), and the China Development Bank (CDB). The Import-Export Bank and SINOSURE have issued letters of interest to A-Power (Pol/Econ Chief obtained the letters from the banks expressing their interest to extend credit to the project; they were not actual letters of credit. End Note.) CDB Deputy President Zhao Jianping traveled to the United States on November 15 to attend a conference with all three partners: A-Power, Cielo Wind, and USREG with the hopes of inking another deal to establish a manufacturing plant in the U.S. Lv believes that it is only a matter of time before the CDB agrees to offer credit to the project. Lv added that although A-Power may enjoy preferential tax policies in the Shenyang Export Processing Zone (EPZ) where the majority of the turbines are being built, the vast majority of the benefits from the project would accrue to the United States and result in the future development of more wind farms. A-Power -------------- ¶5. (SBU) A-Power is a wind-power equipment manufacturer with operations located in the Hunan and Tiexi districts of Shenyang, including a joint-venture with GE to produce gear boxes. A-Power has 170 employees, including one PhD, 28 Master's and over 40 bachelor's degree holders. According Wang Yunbo, all of his managerial staff hold college degrees or have worked in the wind-energy industry for at least five years. By the end of 2009, A-Power's plant in the Hunnan District, which was just built in early 2008, will produce 32 sets of 2.5 MW wind turbines, each valued at RMB 25 million. By the end of 2010, the plant should be able to manufacture 400 sets of 2.5 MW turbines. Even though the turbines are labeled as 2.5 MW they are, as a matter of fact, 2.7 MW so as to ensure efficiency. With GE supplying the gearbox, A-Power will manufacture three of the other components-the shell, the blades, and the control system. The plant will not operate at full capacity because its production lines will be customized according to orders. Why GE? -------------- ¶6. (SBU) Wang Yunbo said that with over 60 GE 2.5 MW wind turbines around the world, all running smoothly, the GE gearbox was a natural choice. A-Power does not use Chinese technology for 2.5 MW turbines because the technology has thus far proven too unstable. In early 2009, A-Power negotiated a deal with GE Transportation to purchase 900 2.7 MW gearboxes, which they will use for the project. GE and SHENYANG 00000204 002 OF 002 A-Power also established a joint venture gearbox plant to be called GE Transmission Technology Shenyang Co., Ltd., in Shenyang's most successful EPZ, the Hunnan District. GE will hold a 25 percent share while A-Power will hold 75 percent. According to Lv, negotiations for the two deals were concluded in just two months, a relatively short period. Why Texas? Why Cielo? -------------- ¶7. (SBU) According to Lv, wind-power energy resources in China and the United States comprise a third of the world total and it would be a waste if the wind energy resources in Texas could not be fully developed. The United States has a large potential market and while 1.5 MW turbines are currently the most popular, the 2.5 MW are actually a better fit for integration with electrical grids. During his visit to Austin, Dallas, and Midland, Lv found the 20-to-30-meter-high flat-top hills in Texas to be the perfect environment for wind turbines and the chosen site in Midland, Texas has convenient access to three grids. The farm will have 3,000-4,000 hours of wind resources each year for generating electric power, and A-Power gains the over 10 years of experience Cielo has in wind farm operations in Texas. According to Lv, Cielo has just won approval from the Texas legislature to complete a smaller scale wind farm project. Lack of funding, however, has played a role in making wind energy a vastly untapped resource. Three experts from Cielo (the CFO and two technical officers) and one from USREG recently finished a site visit and field inspection of A-Power's Hunnan plant and were satisfied with the inspection, according to Lv. The Pressure to Succeed -------------- ¶8. (SBU) Liaoning Province and Shenyang Municipal government have shown great interest in the success of the project. According to Lv, the governments are holding A-Power accountable for any technical problem, be it in the GE gearbox or any other portion of the end product. The Shenyang municipal government has held four meetings on the funding, labor force, and technology for the project, and on November 8, Mayor Li Yingjie presided at a government Standing Committee Meeting on the project. The Shenyang Government even sent officers to monitor and supervise production at the site. Also according to Lv, House Speaker Nancy Pelosi expressed her appreciation for the project, and Senator Kay Bailey Hutchinson (R-TX) met with the joint venture team upon her return from a planning trip for the Copenhagen Climate Change Conference. Lv and Wang said other luminaries from the State Department, the House Energy Committee, and business leaders met with them during their visit to ink the deal. "We are working hard for a positive result for China and the United States," Lv said. Wind, Sun, Here, There -------------- ¶9. (SBU) In addition to a planned manufacturing JV manufacturing plant in the United States, the company has signed a framework agreement with Russia's Energy Ministry to develop its wind energy market. A-Power is currently negotiating with Canada to do the same and is in negotiations with Westinghouse (no details given). A-Power has also purchased a solar energy company in Japan for USD 50 million, planning to maintain the existing portion of the company, particularly its development center, but moving future operations to their Hunnan District facility to save on labor costs. To retain talent and a high level of productivity, A-Power decided to award the Japanese R&D staff, mostly 50-60-year old professors at Kyoto University and Osaka University, some 40 percent of the shares of the company. Finally, A-Power is cooperating with Yuanda Company in Shenyang to develop a new coating material for curtain walls that can generate electric power. WICKMAN