Chinese boiler contracts: persistence pays off

20 August 1998

Manufacture of the boilers for Heze II and Liaocheng in China is expected to start in spring next year. This will be over four years since the contracts were awarded but nonetheless welcome work for Mitsui Babcock Energy's Renfrew works, the UK's last remaining large-scale boilermaking plant. It is also a valuable strengthening of the company's foothold in what is still seen as the world's largest potential power market – present slowdown notwithstanding. The Heze II and Liaocheng plants will burn low volatile anthracite – an abundant but difficult fuel for power generation.

The complexities of the financial engineering that can be entailed in an IPP (independent power producer) projects, particularly in the Far East, are well illustrated by the drawn-out saga of the boiler contracts for China's Heze II and Liaocheng power plants, which will constitute 60 per cent of the 3000 MWe Shandong power project – China's largest IPP facility.

The boiler contract and letter of award for Heze II (comprising two 300 MWe units) and Liaocheng (two 600 MWe units) was won back in January 1995 by Mitsui Babcock Energy Ltd (MBEL), then in consortium with Westinghouse. But ratification of the deal, with formal signing of finance and project documents, including the boiler supply contracts, did not happen until 1 May, 1998. More than three years of negotiation and financial planning were needed to get to this point, exceeding the average planned construction time for the units.

The Shandong project

Shandong Province in eastern China, overlooking the Korean peninsula and Japanese archipelago, has a population of about 87 million, but an installed capacity of only about 16 000 MWe. This means that on a per capita basis, it has around one-sixth the generating capacity of an industrialised country such as the UK (165 MWe/capita compared with 1000 MWe/capita). The projected economic growth rate of Shandong, however, which is at the forefront of the China's socio-economic transformation and to some extent spearheading China's emergence onto the world trade platform, is put at over 11 per cent per annum (the present level of GDP/capita is around $360 compared with $19 650 for the UK). It remains to be seen how these growth projections are affected by the current economic downturn being experienced in China as a whole.

The $2.2 billion Shandong IPP project, of which Heze II and Liaocheng will form a key part, is being developed by Shandong Zhonghua Power Company Ltd, the customer for the boilers and other plant components. The other stations of the Shandong project are Shiheng I (2x300 MWe), which is in operation, and Shiheng II (2x300 MWe), already in trial operation, awaiting handover.

The Shandong Zhonghua Power Company Ltd is a special purpose Sino-foreign joint venture company set up to address the problems of extensive power shortages in the province. Its members are

  • Shandong Electric Power Group Corporation 36.6%

  • Shandong International Trust and Investment Co 14.4%

  • China Energy Investment Co Ltd

    (wholly owned subsidiary of Hong Kong based China Light and Power Co Ltd) 29.4%

  • EDF International SA (owned by Electricit√© de France) 19.6%

    Overall, Chinese ownership amounts to 51 per cent and foreign interests to 49 per cent. Shandong Electric Power Group Corporation is the provincial power bureau, which has responsibility for power generation, transmission and distribution of electricity in Shandong Province. Its owner is the State Power Corporation of China. Shandong International Trust and Investment Co is the provincial investment company.

    The joint venture company assigned and delegated the rights for the boiler supply contracts to an unincorporated consortium formed of the same companies as the joint venture itself. This consortium is responsible for building the power stations at Heze and Liaocheng under an engineering, procurement and construction (EPC) contract from the joint venture.

    This complicated structure was required by the offshore financing arrangements to ensure satisfactory completion guarantees by a single EPC consortium.

    The lead role within the consortium is being taken by Shandong Electric Power Group Corporation, which is also responsible for the construction of the stations.

    Tender history

    The key events leading to the final signing of the boiler supply contracts can be summarised as follows:


  • 8 September - receipt of the enquiry from the sponsors (later becoming the joint venture company)

  • 24 October - submission of a bid by Mitsui Babcock in consortium with Westinghouse Electric Corporation for the power island on both stations.


  • 12 January - Mitsui Babcock/Westinghouse consortium wins against international competition and receives letters of award. Elation: MBEL "thought they would get much needed work into their factory by the end of the year"


  • 7 June - extension of the letter of award to 15 January 1997. This lengthy delay was due to the problems associated with putting in place the limited recourse project finance and devising a satisfactory security package


  • 20 February - Westinghouse (who were to have supplied the turbines and generators) dismissed, much to their chagrin, due to US EXIM bank's unwillingness to finance the projects

  • 22 May - ECGD (the official UK export credit agency) confirmed that they would hold a concessionary interest rate until 1 May 1998

  • 27 July - Mitsui Babcock Energy Ltd rebids for 300/600 MWe boiler islands (the turbines to be supplied this time by Shanghai Turbine Works and the generators by Shanghai Turbine Generator Works, both working in joint venture with Westinghouse). Bid accepted by Shandong Zhonghua Power Company


  • 1 May - formal signing of the finance and project documents including the boiler supply contract, which is worth $300 million (excluding finance charges, etc).

    Finance and project strategy

    The finance for the Heze II and Liaocheng projects, which is supported by ECGD and commercial loans, is structured on a "limited recourse" basis, under which loan repayments will be made from revenues generated by the sale of electricity from the completed power stations. There are no government guarantees and recourse is to the project itself not the government. This is the first time ECGD has supported a project in China on such a basis.

    ECGD has underwritten a $312 million loan facility to help finance MBEL's order. Finance was jointly arranged by Greenwich Natwest, IBJ Asia Ltd and Societe Generale Asia Ltd. Greenwich NatWest is also acting as the ECGD facility agent.

    The ECGD loan facility allows 85 per cent of the eligible amount to be financed at a concessionary interest rate. It also allows 15 per cent of the eligible amount to be procured locally in China, while the remainder has to be procured within the European Community, predominantly from the UK.

    In addition, there is a commercial loan facility of $37 million for local supply which permits a total of around $79 million of materials and equipment to be procured in China. It is this local supply that has allowed the present price level to be obtained, says Mitsui Babcock.

    To ensure efficient procurement of the $79 million of local supply, a wholly-owned subsidiary of MBEL has been registered in the Waigaoqiao Free Trade Zone of Shanghai. An office has been set up and will form the centre of MBEL project activities in China for procurement, and employment of local staff.

    A cornerstone of the Mitsui Babcock strategy is to perform a significant amount of engineering in China, with the work to be executed under an engineering services contract with a selected design institute.

    It is planned that ex-pat staff from the UK and local engineers employed by Babcock (Shanghai) Trading Ltd will reside in the design institute and manage the contract.

    A decisive factor in bringing the deal to a successful conclusion was the positive attitude of ECGD, its flexible approach to project financing and its determination to solve problems – in particular its ability to "progress and conclude issues on the security package" and willingness to extend the loan period and provide a concessionary rate of interest.

    Financing was greatly helped by the fact that two of the Shandong IPP plants, Shiheng I and II, are already up and running and generating good cash flows while the new plants are being built.

    The boiler technology

    The technical basis for the Shandong boilers is the Mitsui Babcock reference plant at Yue Yang, Hunan Province. The two 362 MWe units there are natural circulation, downshot fired units which fire the full range of anthracite and semi-anthracite fuels.

    Coming into service in 1991-2, the Yue Yang units are, according to Mitsui Babcock, the "latest downshot fired boilers operating in the world regularly firing true anthracites." They therefore represent state-of-the-art proven anthracite firing technology and form the basis for the selection of Mitsui Babcock as the boiler supplier.

    The boilers at Yue Yang have demonstrated great flexibility with these difficult fuels. Coals with volatile contents from 4 to 14 per cent dry mineral matter free have been fired, and the ash content has been as high as 45 per cent, more than twice that originally specified.

    The range of fuels for which was the Shandong boilers will similarly cover a wide range, including coals with volatile contents from 5 to 14 per cent dry mineral matter free and ash contents in the range 20-35 per cent. Turndown without oil support at Yue Yang has been demonstrated to be below 40 per cent BMCR, and similar capabilities are required for Shandong.

    Despite the wide range of relatively difficult fuels fired, the boilers at Yue Yang have enjoyed the best record of availability for units in China in recent years, says Mitsui Babcock. The Shandong units will therefore incorporate all the features which have proved so successful at Yue Yang. They are designed for an extended operational life, and the headers and interconnecting pipework are arranged to enhance the fatigue life of the boiler pressure parts.

    Gas velocities are selected to minimise erosion and a number of mechanical features are incorporated which will restrict furnace slag formation. These include the unique membraning of secondary and final superheaters which prevents distortion of the elements and inhibits slag build up, and a curtain of wall air injected down the front and rear walls to provide an oxidising environment local to the walls. Ribbed tubing is used in the furnace in order to significantly extend the range of conditions over which the tubes can operate with safety, and the through-life maintenance costs of the furnace refractory will be minimised by employing a unique tile design.

    To meet the high combustion efficiency demanded for the project, a downshot furnace arrangement is required. High levels of burnout are maintained while simultaneously controlling NOx formation to the specified levels. Further, the units are designed to run at a comparatively low excess air level and with a low exit gas temperature, which is compatible with the sulphur content of the fuel. The units will use the highly efficient plate-gilled economiser and an airheater design which will deliver the high combustion air temperatures required for anthracite firing.

    With downshot firing, it is imperative that the furnace and flame are wholly compatible so that the thermal performance of the furnace can be reliably predicted. Three dimensional CFD (Computational Fluid Dynamics) techniques have been used to develop the technology and ensure full furnace utilization.

    The firing system is readily scaled up to enable the larger sized units to be designed with confidence, says Mitsui Babcock.

    Moving into Vietnam

    MBEL's experience in China has recently helped it win orders for the supply of two anthracite-fired boilers for a 2x300 MWe power plant to be built at Pha Lai in north Vietnam.

    Linkedin Linkedin   
    Privacy Policy
    We have updated our privacy policy. In the latest update it explains what cookies are and how we use them on our site. To learn more about cookies and their benefits, please view our privacy policy. Please be aware that parts of this site will not function correctly if you disable cookies. By continuing to use this site, you consent to our use of cookies in accordance with our privacy policy unless you have disabled them.