China’s coal-fired power producers face tougher times after record profits this year

The mainland’s coal-fired power generation industry faces a double whammy of over-capacity and rising competition as a result of gradual power price liberalisation, even though profitability has been propped up by sinking coal prices in the past few years.

Analysts say power producers will have to exercise restraint on new capacity expansion, or else risk seeing utilisation fall below last year’s 15-year low and eat into profit margins, especially if coal prices find a bottom after four years of precipitous falls.

“Power plants built this year were planned four to five years ago, so it will take some time for the large supply of new plants proposed and approved when demand was good to be digested,” the director of Xiamen University’s Centre for China Energy Economics Research, Lin Boqiang, said. “It will be up to the power firms to control the actual amount of plants to be built.”

Based on recent months’ growth figures on power demand and generating capacity, the trend of worsening over-supply has yet to turn the corner.

According to a joint research paper by environmental protection campaigners Greenpeace and North China Electric Power University, the mainland’s coal-fired power industry’s capacity utilisation is likely to fall 8 per cent year on year to 4,330 hours this year. In the first 10 months of the year it declined 7.9 per cent year on year to 3,563 hours.

The full-year estimate compares with last year’s 4,706 hours, which was 6.1 per cent lower than in 2013, and is much lower than the 4,719 hours recorded in 1999 in the depths of the previous industry down-cycle and the global financial crisis.