With $230 million equity share in projects worth $2.8 billion of power generation, it is not widely known that EDF, France's state-owned electricity company, is second only to Hong Kong's China Light And Power as a foreign investor in China's power sector. The company is also hoping to be closely involved in China's burgeoning nuclear development. The China division's CEO Jean-Christophe Delvallet talks about the company's plans to leverage its expertise in an area vital to China's soaring energy needs.

What has been the build-up to EDF's presence in China? And what do you intend to do?

JCD: We've been present in China for 20 years. The key to our approach is that we want to be an industrial operator and to operate as a Chinese player in the local market.

In the 1980s we focussed on getting to know the market. Avoiding direct investments, we provided consultative services to Chinese owners, including a nuclear power station in Guangdong. We also provide consulting in several hydropower projects in Guangdong and elsewhere.

However, in the 1990s, after having set up a good relationship with our future partners, we took a more direct route and invested in coal fired power generating ventures, both in Guangdong and Guanxi provinces. Currently, We own 60% of the Guangxi Laibin B project and 19.6% of the 3000MW Shandong JV. Laibin B was the first Build Operate and Transfer project in the Chinese power sector, and the Shandong JV is still the largest of its kind in China. Going forward, we aim to stay asset-light and highlight our operationally and industrial expertise.

The big advantage of the consulting approach, as opposed to the direct investments of other players, is that you don't get involved in pricing and regulatory issue.

Yes. There's a lot to be said for the consulting approaching, especially these days. Ten years ago, foreign investors were provided with favourable inducements to come to China. At that time, capital and technology in China was scarce. But now, banks are stuffed with cash, and are eager to provide loans, since the power sector is considered safe.

In addition, technology for 300MW boilers has already been fully localized, and the principal Chinese suppliers now all have licenses for 600MW technology. The sector has matured rapidly, and reliance on foreign input is now much less.

In fact, in a couple of years time, there will probably be no new wholly foreign owned ventures in the generation sector. There will be a place for foreigners for advisory and consulting work, however.

How important is the China market for you?

The market in which we will live or die is the rapidly deregulating energy market in the European Union. But Europe is a mature market. China on the other hand is seeing unprecedented demand. The important thing to remember is that China is so large that the power technology it eventually adopts, be it in nuclear, clean coal or hydro, will probably be adopted as the industry standard. China will be the main market, the standard setter. In that sense, it's a very important market for all power companies.

Consider this: In 2002, there were 350GW of installed capacity. The target for 2010 is between 450GW and 500GW. That's 20-25000MW of new capacity every year. That's the equivalent to installing the generating capacity of France every three to four years!

What's the situation with regard to nuclear power in China?

As regards, nuclear power, China is one of the few countries that has a true long-term programme. Before the end of this year, four more nuclear units are expected to be announced on the coast, to add to the existing four units.

It's likely that's the first step to a fully fledged nuclear option.

In relative terms, nuclear power is less than 2% of the mix in China. But in absolute terms that's quite large and with room for considerable further development. The Chinese want to build 30-40GW in the next thirty years, equivalent to 40 units of 1000MW each.

Here again, the sheer size of the programme will lead to new standards being adopted , localized and further developed by the Chinese nuclear industry, making it an important market for all players.

We run 58 units in France, so it's an area we regard as belonging to our core competence.

We don't supply equipment ourselves, but we know all the global suppliers and can help the owners set up their specifications.

How do you finance your projects?

We use limited recourse financing with equity participation by EDF International, EDF's holding company responsible for consolidating EDF's investments worldwide. The usual debt/equity ratio is in the order of 70/30 for this kind of investment. In EDF's two existing large investments, for instance, the security of the lenders is on the assets of the project company, with limited recourse to the sponsors. Debt is a mix of US dollars and Rmb loans. We are looking to increase the share of local debt, since they offer competitive rates and maturities.

How does your status as a state-owned company affect your financing?

We are not listed, although we are looking at taking on a strategic investor in the not too distant future, probably one of our customers.

EDF is a slightly hybrid creature, since it used to operate as a monopoly in France up until recently, but competitively abroad. That's why the foreign activities are kept ring fenced.

What is your debt policy?

The basic principle is that our debt policy must not impact EDF's home balance sheet.

Otherwise, it varies. The Shandong project was partly foreign financed, since the technology was cutting edge, foreign technology to drive the anthracite boilers. In Laibin B the debt is completely US dollar denominated, and we are currently considering with the Guangxi provincial authorities how to refinance at least part of the debt with local loans to reduce costs.

Are you profitable? What about your expensive technology?

Yes, our investments have been profitable from the first day. Of course, we put in a lot of investment, so the overall break even point is somewhere down the road. Tariffs are a problem, since there are being kept low in some provinces. Actually, tariffs aren't so important as long as we can preserve initially agreed dividend flows. That depends on the ability to diminish costs: lowering operation and fuel costs, and refinancing debt, in particular with longer maturities. As for technology and the higher cost of imported equipment, this is taken into account when the contractual tariff formulae are drawn up, which is usually on a cost plus basis.

Is downward pressure on tariffs sustainable? How can the blackouts the country has seen this year be prevented?

No, and this is understood by the government. On the one hand, provinces must uphold their past commitments to maintain their credits. On the other hand, trying to force tariffs down too far through administrative means may result in discouraging further investment at a time of accelerated demand growth. That's also an economic price that has to be considered.

What's s most likely power mix in the future?

China has abundant coal and hydro potential. Coal will be the number one by far - along with the challenge to introduce cleaner technology. Nuclear will stay quite small, although in absolute terms that will still be pretty large by international standards. Gas, despite the promise of the west east pipeline, is relatively precious and expensive. It will not be used for generating electricity, unless it's close to large cities, as it's clean. Otherwise it will be used by retail users. But as the situation changes, so will China's energy mix.