China’s Datang International sees competition heating up amid power sector reform
Datang International Power Generation, a unit of one of the nation’s big five state-owned power producers, China Datang Group, will see more pressure on power selling prices and plant utilisation this year amid weak power demand and ongoing reforms to allow a greater role of market forces in setting prices.
The company will seek to cut operating and management costs to offset the impact, and expects falling coal cost to help as well, according to the management.
“We will strengthen our cost control efforts and cut management costs,” director of finance department Sun Yanwen said on Thursday.
The average 3 fen per kilo-watt-hour (kWh) on-grid wholesale price cut for coal-fired power from January 1 is expected to result in 3 billion yuan of revenue reduction this year, he said.
But this will be mitigated by the management’s projection of a 10 per cent fall in coal cost per unit of power produced, after a 20 per cent decline last year amid oversupply of the fossil fuel, Sun said.
Fuel cost took up 45 per cent of its total operating cost last year.
Datang International last week announced a 57.7 per cent rise in net profit to 2.79 billion yuan as lower coal costs saw power generation operating profit rise 5.8 per cent to 13.15 billion yuan (HK$15.8 billion).
It recorded a 1.52 billion yuan loss at its coal mining operation, almost the same as in 2014, and a 4.3 billion yuan loss of its coal-to-chemical business due to low utilisation of its plants, narrowing from a loss of 5.16 billion yuan in 2014.
Competition from renewable power against coal-fired power is heating up after Beijing said it will soon order regional governments to guarantee minimum plant utilisation hours for wind and ground-mounted solar farms, to ease chronic wastage due to grid bottlenecks.
Coal-fired plants will be pressured to lower their production to make room for renewable power, though with compensation for lost profit, and the pace of government approvals and construction of new coal-fired plants will be delayed.
Beijing has also said more pilots will be launched this year to allow direct trading between power generators and large industrial and commercial users on negotiated prices and volumes.
Complemented with expected tepid power demand growth, the raft of measures are expected to intensify competition among power producers and between coal-fired and renewable power.
“Due to the downward adjustment of on-grid tariffs for coal-fired power generation and the
relatively huge decrease in the price during the process of direct transactions conducted by large users in certain provinces, the overall profit of the company for 2016 is expected to be affected,” Datang International company secretary Ying Xuejun said last week in the firm’s results filing.
Vice-president Hong Shaobin on Thursday said direct sales accounted for 5 per cent of Datang International’s power sales last year, which is expected to rise to 10 per cent this year.
Such sales are less profitable since they are traded at price discounts of at least 4.2 per cent.
Despite having obtained approval to build 9.5 gigawatt (GW) of new plants, only 2 GW of all fuel types are expected to be commissioned this year, after 2.2 GW were put into operation last year. It manages a total of 42.3 GW.
Ying said management is projecting a 9 per cent fall in its average plant utilisation to around 3,850 hours this year, after it dropped 9.8 per cent last year.
Coal-fired plants accounted for 81 per cent of its total generating capacity last year.
Meanwhile, although a preliminary agreement to sell its loss-making coal-to-chemicals assets to central government-owned China Reform was scrapped last week due to a difference in opinion on deal terms after two years of talks, Datang International chairman Wang Xin said parent China Datang Group will lead efforts on the assets’ “reorganisation”.
No timetable is available as talks are ongoing, he said, adding the reorganisation is “highly related” to the parent’s plan to inject coal-fired power plants into Datang International.