China's power producers recoup past losses on economic shifts
Beijing's efforts to rebalance the economy by boosting consumption and slowing the expansion of energy-intensive sectors have improved the financial health of power generators and made it easier for them to finance clean energy projects.
This was made possible by an earlier coal mine building boom and slower power demand growth from the economic rebalancing, which together brought down coal prices, said ratings agency Moody's.
Coal prices were expected to stay low in the next 18 months, it said.
"As China's economy rebalances and as the government strives to improve the country's air quality, capital expenditure for the country's power generating sector will shift from capacity additions to fuel mix optimisation," Moody's said in a report.
It noted that the nation's installed generating capacity growth had fallen to 10 per cent or less since 2008, compared with 10 to 20 per cent in the previous five years.
Coal-fired power capacity made up 39 per cent of new plant additions last year, down from 71 per cent in 2008, it added. Much of the decline took place last year largely due to growth in hydro and solar capacity.
This was made possible by a tougher environmental protection regime for polluting coal-fired plants, support policies for clean energy projects in the form of subsidies and tax exemptions, and a sharp drop in solar and wind power equipment prices.
As coal-fired plant additions slowed and coal supply soared after years of consolidation of existing mines, new mine construction and railway extensions, the price of the benchmark 5,500 kilocalories power-station coal in the nation's largest Qinhuangdao coal port fell to 490 yuan (HK$616) a tonne from 850 yuan in 2011.
This allowed power generators to recoup much of their lost profitability during 2008 to 2011 when Beijing failed to implement a coal cost pass-through mechanism for setting tariffs to protect consumers against inflation, resulting in major losses for generators amid soaring coal prices.
Generators' profitability has since been restored as Beijing has not cut power prices to reflect lower coal prices since late 2012.
The China Times yesterday quoted a government source as saying Beijing planned to cut generators' on-grid prices by one fen per kW-hour, less than the 1.5 to 2 fen expected by analysts.
Improved profits also brought down power producers' debt load and interest costs, boosting their capacity to finance clean energy projects to help achieve pollution-cutting goals.
Still, the big five state-owned power producers' exposure to coal-fired generation would not change for years, while their profits had been under pressure from higher interest rates since last year, Moody's said.