Datang International Power

Datang urges Beijing to further lift power prices to relieve coal cost squeeze

The company says authorities have not done enough to properly execute the mechanism to link power and coal prices introduced in 2004

PUBLISHED : Thursday, 17 August, 2017, 3:33pm
UPDATED : Thursday, 17 August, 2017, 3:33pm

Beijing has not gone far enough in adjusting power price last month to relieve power producers from financial difficulties, according to Datang International Power Generation.

The company, the listed flagship of one of the big five state-owned power generation majors, China Datang Group, will also lobby regulators to properly implement Beijing’s long-established but poorly executed mechanism to link power and coal prices that would subject power producers to less volatility in their earnings.

“The power price adjustment last month was not a real implementation of the coal cost pass-through mechanism,” the firm’s director of finance department, Sun Yanwen told reporters on Thursday.

“We will reflect the industry’s plight to the government and call for its proper implementation.”

The mechanism, launched in late 2004, allows power producers to pass on to customers 70 per cent of cost increases or declines if coal prices jumped or fell more than 5 per cent year-on-year over a six-month period.

The power price adjustment last month was not a real implementation of the coal cost pass-through mechanism
Sun Yanwen, Datang

But increases of state stipulated wholesale power prices had failed to match those of coal prices in some subsequent years, most notably between 2008 and 2011, resulting in industry-wide losses.

Power producers did enjoy a few years of good profits in a few of the following years, however, as power prices fell slower than coal prices.

Coal prices have been largely determined by market forces except for periodic intervention from Beijing after sharp spikes.

Impending energy price rise boosts shares of Chinese power producers

The latest upward spiral that saw coal price surge by over half from a year ago, has dampened Datang’s first-half power generation profit, which dived 77 per cent year-on-year to 1.41 billion yuan (US$182 million) this year. Similarly, the China profit of its bigger rival Huaneng Power International sank 85 per cent due to a lack of power price rise.

To help power producers and simultaneously maintain retail power prices, Beijing had announced that it would cut or cancel various government levies borne by power distributors and end users, to make room for a rise in producers’ wholesale prices from July 1.

Datang’s vice general manager Ying Xuejun said the move would result in an average 0.8 fen per kilo-watt-hour lift in its average power tariff and subsequently, a 0.3 fen per kWh of profit rise.

It could translate into an additional profit of 228 million yuan on the 76 billion kWh of coal-fired power it produced in the year’s first half, according to a calculation by the Post.

Datang’s complaint comes as Beijing is gradually raising the proportion of power sales that is subject to market prices through negotiations.

Over 20 per cent of its sales had already been priced by direct talks with large customers, and the portion would rise further as price reform deepens, Ying said.

Datang International Power posts 36pc first-half profit drop on higher coal costs and lower power prices

In contrast, the “direct sales” ratio of rival China Resources Power already reached 33 per cent in the year’s first half, it said on Wednesday, and such sales were conducted at an average 7.6 per cent discount to state stipulated benchmark prices amid the industry oversupply.

Ying said Datang would face pressure from relatively high coal cost and severe competition on sales volume subjected to market trading. This is despite the projection by his colleague, Bai Fugui, director of fuel management department, who expects average coal price to fall 5.3 per cent to 535 yuan a tonne in the second half from the current level after Beijing ordered miners to lift output.