The curtain falls on photovoltaics, and ultra-high voltage takes over | Insights from Jianzhi Research

When it comes to the hot topic of the new energy sector, the market's first thoughts are usually solar power, wind power, and the booming charging pile industry this year. However, the ultra-high voltage (UHV) sector has been overlooked by the market.

In the past two years, due to factors such as the pandemic, the UHV sector did not accelerate as expected, and projects were stagnant. It was only this year that it officially entered the implementation phase. As we approach the end of the 14th Five-Year Plan, the next two years will be a golden period for UHV construction. Moreover, the demand for the 15th Five-Year Plan and deep-sea construction will ensure the sustainability of UHV's future growth.

Companies that enter the core supply chain of UHV will benefit greatly during the next wave of UHV construction, which will serve as a booster for their performance.

Key points of this article:

1. How big is the demand for UHV?

2. Which sectors will benefit the most?

The trillion-dollar UHV sector is about to explode

In the past two years, the wind power, solar power, and other new energy generation sectors have attracted great attention from the market. While the market is focused on the scale and growth rate of wind power and solar power installations, the issue of new energy consumption has been overlooked. However, China's power resources and load distribution are uneven. Clean energy such as wind and solar power is mainly located in the western regions, while the concentrated power consumption areas are in the eastern and central regions. This imbalance between power generation and consumption results in the inability to fully absorb local power generation, and the storage of power resources becomes difficult. Without strong transmission capabilities, a large amount of power resources will be wasted. Especially in the past two years, with the continuous increase in the scale and penetration rate of solar power and wind power installations, the demand for consumption and transmission has become increasingly urgent, and only UHV can solve this pain point. In the next two years, UHV will enter a golden period of construction.

UHV can be divided into UHV DC (direct current) and UHV AC (alternating current). To efficiently implement the "west-to-east power transmission" and achieve long-distance, high-capacity power transmission, only UHV DC transmission can meet the requirements. This is because UHV AC transmission results in significant energy loss over long distances, leading to poor efficiency and economic viability.

Although the importance of UHV construction is well known, in reality, due to the pandemic and other factors in 2021-2022, the progress of UHV projects in China has been slow. The overall construction progress of UHV projects has been delayed. It was not until this year that State Grid Corporation of China planned to approve "5 DC and 2 AC" projects and start construction on "6 DC and 2 AC" projects, marking the true start of UHV project implementation. Currently, China has put into operation "22 DC and 17 AC" UHV projects, but only 5 of them are primarily for transmitting new energy, which is far from sufficient to meet the future demand for transmitting power from large wind and solar power bases.

However, the progress of large wind and solar power base projects has made UHV construction imminent. The first batch of 97.05 GW of large wind and solar power bases is planned to be fully operational by the end of this year. The future growth of UHV construction will mainly come from the second and third batches of large wind and solar power bases.

The second batch of large wind and solar power bases is planned to have a total installed capacity of 455 GW, with 200 GW planned for installation during the 14th Five-Year Plan period, including 150 GW for transmission and 50 GW for local consumption. During the 15th Five-Year Plan period, 255 GW is planned for installation, including 165 GW for transmission and 90 GW for local consumption. As for the third batch of announced 190 GW projects, the proportion of transmission has not been specified yet. Assuming a 50% transmission rate, it would still be 95 GW, and there may be additional UHV demand in the future. Assuming that a single ultra-high voltage (UHV) line corresponds to a transmission scale of 8-12 GW for large wind and solar power bases, it is estimated that the second batch of large bases during the 14th and 15th Five-Year Plan periods will require 33 UHV transmission channels, and the third batch will require 8.

According to publicly available information, it is estimated that there will be 10 remaining UHV projects (9 direct and 1 alternating) that have not yet started construction during the 14th and 15th Five-Year Plan periods. In addition, 4 direct projects have been approved to start construction in 2023. Therefore, it is estimated that there will be a total of 13 UHV DC lines and 1 AC line from 2023 to 2025.

The investment amount for a single UHV DC line is usually around CNY 20-30 billion. Assuming that the investment amount for a single UHV DC line is CNY 25 billion and the investment amount for an AC line is CNY 5 billion, the total scale of UHV by the end of the 14th Five-Year Plan period will reach CNY 330 billion. The second and third batches of UHV DC lines required for the second and third batches of large wind and solar power bases during the 15th Five-Year Plan period will be approximately 22, with a market size of approximately CNY 550 billion.

The future market demand for UHV, which is close to trillions of yuan, represents a great opportunity for China's power industry and deserves attention.

The entire cycle from approval to operation of a UHV project takes about 2 years. However, the construction progress of the "14th Five-Year Plan" period has been slow, and it is expected to start normally this year. It is expected that UHV will gradually enter a peak period of revenue confirmation in the second half of next year. In addition, the scale of UHV construction projects during the "15th Five-Year Plan" period is large and the duration is long, so the demand for UHV will continue to increase.

In addition to land-based projects, the development of deep-sea offshore wind power has also increased the structural demand for flexible DC transmission of UHV. This is because offshore wind farms are weak AC systems composed of wind turbines and cannot meet the demand for conventional DC power transmission intensity. Flexible DC transmission has low requirements for grid strength, making it the only solution for transmitting deep-sea offshore wind power. Although it is difficult to estimate the specific scale, deep-sea offshore wind power is the main direction for future offshore wind development, and it has great potential to drive the demand for UHV.

In summary, whether it is onshore or deep-sea demand, it will drive a construction boom for UHV in the next few years.

With the outbreak of the industry, core equipment will benefit first

The UHV industry is entering a period of explosive growth, which will inevitably benefit every link in the industrial chain. In the cost structure of UHV DC, core equipment accounts for 25%. The core equipment of UHV DC includes converter transformers, converter valves, GIS, DC protection systems, and DC bushings. Among them, the highest value is converter transformers and converter valves, accounting for 43% and 22% of the core equipment, respectively.

(Source: Zhi Research)

(Source: Zhi Research)

In terms of competition, UHV belongs to a critical power transmission link, with strict requirements for safety and quality. The entry barrier for core equipment is high, so most of the market is highly concentrated in the core equipment sector of UHV DC. Only a few companies meet the production standards for UHV DC core equipment. CR3, the DC control and protection system, accounts for 100% of the market share, with State Grid Nanrui providing 76% and the remaining 24% provided by Xuji Electric. According to the research, CR3 accounts for 83% of the converter valve market, with China Southern Power Grid providing 50%, China XD Group providing 21%, and Xuji Electric providing 13%. As for the converter transformer market, CR3 accounts for 77%, with XD Group accounting for 34%, China XD Group accounting for 31%, and Baobian Electric accounting for 12%.

Therefore, overall, the top three players in each link of the core equipment for UHVDC (Ultra High Voltage Direct Current) monopolize the majority of the market share.

Based on the construction scale of UHVDC from 2023 to 2025 and the 14th Five-Year Plan period, the market space for core equipment will also be significantly expanded.

If there are a total of 13 UHVDC projects from 2023 to 2025, assuming an investment of 25 billion yuan per project, the total incremental investment in UHVDC in the next two years will be approximately 325 billion yuan. From 2026 to 2030 (during the 14th Five-Year Plan period), it is estimated that there will be a demand for approximately 22 UHVDC projects, with a market size of approximately 550 billion yuan. Assuming that the core equipment accounts for 25% of the total investment, and the converter transformers and converter valves account for 43% and 22% of the core equipment respectively, the market increment for converter transformers and converter valves in the next two years is estimated to be approximately 34.9 billion yuan and 17.8 billion yuan, and during the 14th Five-Year Plan period, the market increment for converter transformers and converter valves is estimated to be approximately 59.1 billion yuan and 30.2 billion yuan. By the end of the 14th Five-Year Plan period, the total market size for converter transformers and converter valves is expected to be approximately 94 billion yuan and 48 billion yuan.

Currently, the top three players in the converter transformer market are XD Group, China XD Group, and Baobian Electric, while the top three players in the converter valve market are China Southern Power Grid, China XD Group, and Xuji Electric. In the future, the majority of the nearly 100 billion yuan market increment for core equipment will be divided among these leading companies.

Summary

Overall, compared to fully marketized sectors such as charging piles, photovoltaics, and wind power, UHVDC is a national strategic project related to the construction of power infrastructure, and its degree of marketization is naturally lower than the aforementioned sectors. The supply of core equipment is also highly concentrated. However, the future growth potential of UHVDC is not lower than that of the aforementioned sectors.

With the continuous increase in wind power and photovoltaic installations, as well as the laying of future deep-sea projects, the demand for UHVDC will inevitably surge. Moreover, as the pandemic is under control, projects have started to be launched this year, and the completion of the 14th Five-Year Plan is imminent. It is expected that the next two years will usher in a peak period of UHVDC construction. Therefore, it is worth continuous tracking and attention.