Higher power prices, profits seen
An industry body representing the mainland's power-generation industry is predicting that growth in demand will outstrip supply for a second year.
While this is good news for an industry suffering from widespread losses, how much profits improve hinges on when the central government will raise long-frozen power tariffs, and on the size of coal price rises this year.
The China Electricity Council projected in a statement released yesterday that national power consumption would grow 12 per cent this year to 4.7 trillion kilowatt hours, down from growth of 15 per cent last year.
It forecast that the industry's total installed generation capacity would grow 8.1 per cent to 104 gigawatts this year, compared to last year's 10.1 per cent growth. China has the world's second largest power-generating capacity after the United States.
The figures imply that the industry's demand-supply balance remains weighted in favour of profits.
The industry saw generating capacity grow faster than demand between 2005 and 2009, which led to falling plant utilisation. Lower utilisation is bad for profits, since higher fixed costs such as depreciation are borne by each unit of power sales. Beijing has not raised power tariffs on a nationwide basis since August 2008, while coal prices have surged, squeezing the power sector and reportedly leaving half the subsidiaries of the five state-owned power-producing groups in the red.
According to the council, the price of coal with a heating value of 5,500 kilocalories at the nation's largest coal port, Qinhuangdao, has soared 150 per cent since 2003, but the average power price has only risen 32 per cent over the same period.
Although the real coal price increase experienced by power producers is less than the 150 per cent quoted by the council, since Beijing often forces coal producers to accept lower prices on long-term contracts, power producers' profit margins have fallen markedly in recent years.
Rising inflation has prompted policymakers to hold back from raising power prices for fear of stoking inflation and social unrest. Inflation is widely expected to exceed 5.1 per cent for last month, the highest level in 30 months.
'The profit margin for coal-fired independent power producers is likely to stay low in the coming months,' wrote Samsung Securities researcher Gary Chiu. 'If consumer price inflation starts to trend down, we believe a 5 per cent tariff hike will come by around mid-2011.'
He said Beijing was caught in a quandary: it needed to ensure profits for power producers so they had an incentive to keep building plants to meet demand, while containing inflation at the same time.
The power generation industry last year reduced new plant investment by 4.3 per cent to 364 billion yuan (HK$431.5 billion), although the council expects this to rise to 400 billion yuan this year.
Power grid investment also fell 12.5 per cent last year to 341 billion yuan and is forecast to rebound to 350 billion yuan this year.
Demand surge
Mainland power consumption is expected to rise by 12 per cent this year
Generating capacity is only set to grow by: 8.1%
