China’s coal-fired power producers set to play the ‘rebalancing’ game

China’s coal-fired power generation sector is set to enter an era of “significant rebalancing” in the years ahead amid slow demand growth, capacity oversupply, tightening environmental regulations and policies that promote competition among generators.

Winners are likely to be companies that operate newer, more efficient, environmentally friendlier and better located plants, since they are more likely to survive amid falling power prices and rising environmental compliance costs, analysts said.

“Slowing demand growth and a large and possibly growing generation capacity surplus will intensify competition among generators as China gradually reforms its power plant dispatch [and procurement] policies,” said Hu Xinmin, senior manager at Hong Kong-based power industry consultancy Lantau Group, in a report.

“If China is to achieve its emission reduction objectives, new efficient capacity will need to continue to displace older less efficient capacity. Shutting down facilities becomes imperative. China’s power sector needs to enter an era of significant rebalancing.”

A series of policies announced in the past year have dimmed the profit outlook of coal-fired power generation, including the roll out of more pilot schemes in different parts of the nation for direct power sale and purchase between generators and big industrial users.

This involves negotiations between buyers and sellers on volumes and prices and the entering into of contracts on power sales, which generally results in lower prices.