Power Asset Restructuring: Revamping Coal or Improving Renewable?

China has set off a brand-new scheme to revamp the country’s coal-fired power asset. The restructuring currently took place only in five provinces as a reform pilot. But it is likely to roll over to the whole nation.

It will have significant impacts not only on the country’s coal sector but also on the electricity market and renewables business. 

Coal Power Asset Ownership Reshuffle

Last month, the State Asset Supervisory & Administration Commission (Sasac) released a policy to restructure the ownership of coal-fired power assets in five northwestern provinces in China. 

The five are Gansu, Shaanxi, Xinjiang, Qinghai and Ningxia. 

The restructuring involved 48 coal-fired power companies, of which 40 companies totalling 32.6GW will undergo ownership reconstruction and eight companies temporary exempt from the reform. 

Right now, the 48 companies separately belong to China’s five largest power generation companies or the “Big-Five.” [Read More about China’s Five Largest Power Generation Utitlities]

One Coal Power Player in One Province” 

The state-owned asset regulator Sasac looks to consolidate these companies and forge 5 larger provincial coal-fired power entities. 

Each province would have only one coal-fired company, after the reform. Big-Five will own one of the five regional monopolies each. Specifically: 

  • China Huaneng >> 12.65 GW in Gansu Province,
  • China Datang >> 9.08 GW Shaanxi 
  • China Huadian >> 6.29 GW Xinjiang 
  • State Power Investment Corp (SPIC) >> 1.3 GW Qinghai
  • China Energy Investment Corp (CEIC) >> 3.34 GW Ningxia 

Purpose of the “Reform”: to Help the Over-Supplied Coal to Survive  

The ownership restructuring pilot has taken place now and is expected to complete by the end of next year. By the consolidation, Sasac hopes to achieve multiple targets: 

  • The total coal-fired capacity of these companies could shrink by 1/4-1/3
  • The average operational time of each power plants would increase “significantly,” due to the capacity reduction 
  • Financial losses of these companies would be reduced by 50% and their debt to asset ratio would improve substantially

Coal-fired Sector Facing Challenges: Renewables, Fuel Cost, Electricity Price

Clearly, the final target of the reform is to improve the financial performance of the coal-fired power assets, which has been facing severe overcapacity and increasingly sidelined in the power mix, due to the raising of renewable power and tightening policy. 

Moreover, in recent years coal power in Northwestern China also faces a rising cost, as a large amount of coal-to-chemical projects in the regions drive up the higher demand for fossil fuel. Adding insult to injure, China is on the path to cap coal-fired power and reduce electricity price, further squeezing the business cases of the coal power units.

The on-going electricity market trading reform created more pressure. Two of the regional power trading last year had led to “negative price” of coal units. While the market reform is still at an early stage to explore the pricing mechanism for coal units as “peaker” (or frequency control units), the value of coal power asset in providing system flexibility has yet to reflect in the market. 

As a result, a series of coal-fired plants announced bankruptcies last year. More have started to call for Beijing’s intervention to provide a surviving chance. [READ More about coal-fired power’s financial and business struggles in China. ]

In the case of the “Big-Five,” together the five owns 474 coal-fired power plants by the end of 2018, totalling 520 GW. It is estimated that more than 54% of these assets or 257 power plants registered financial losses in 2018, of total losses ¥37.96bn. 

The average leverage (debt-to-asset) ratio of the 474 power plants was at 73.1%, while that of the 257 power plants were at a dangerous 88.6%. [READ More about the Big-Five’s Financial Result in 2019]

Reform Pilot Could Expand to Wider Areas 

These assets spread across 30 provinces in China. Those in 15 provinces in Northeast, Southwest and Northwest of China—were renewable or hydropower is abundant—overall faces financial losses. 

Although the coal-fired capacity involved in the current reform only represent some 6% of Big-Five’s thermal units, the restructuring heralds a major shakeup in the country’s coal-fired power market. 

The industry widely expects that the testing pilot will eventually roll over to 15 provinces or the whole nation. The next stage reform will also include the coal-fired power assets of the tier-2 or even tier-2 power utilities. 

Wider Implications on Renewable and Power Market

Aiming at rescuing the coal-fired sector, the policy has significant implications and may reshape the dynamics of renewable and the power market.

So far, there are highly divergent opinions on the effect of the reform. 

Supporting Arguments

Supporting voices believe that the consolidation could improve synergy of these coal-fired power plants of the “Big-5.” The competition among them (for upstream fossil fuel resources, for generation dispatch quota and power market share) is the leading cause of their financial struggle. 

Meanwhile, consolidation may help to reduce the asset size and alleviate the overcapacity issue, some supporters believe. 

The Big-5 also major wind/solar developers in the region. With the consolidated coal-fired assets, some argue, the Big-5 utilities could utilize the coal power plants as “peaker” or reserved capacity more effectively, thus helping both the coal-fired and renewable assets in one region. 

Challenging Arguments

However, scepticism on the restructuring is also on solid ground.

Firstly, consolation does not always lead to efficiency. China had engaged in various industrial asset consolidation as a reform approach to spur productivity. But in multiple cases, these government-guided M&As only lead to the birth of larger but not-more-efficient entities. 

While over-capacity remains the root cause for coal-fired’s financial struggles, combining these assets may only postpone the necessary “pains” of bankruptcies.   

More importantly, the reform would create regional coal-fired monopolies. The increased market position of the regional coal power players could also mean competition against renewables and hydro. 

Whether the reform leads to a higher level of coordination between coal and renewable, or more conflicts, will be determined by each companies’ management strategies, Beijing’s policy and local execution of these policies.

Former Consolidation Case

In 2018, Sasac initiated the consolidation between former China Guodian and China Shenhua–a power utility and a coal miner, to address the similar challenges. The merger provides the new player, China Energy Investment Corp, in-house coal mining and transportation resources, which is a major advantage for its downstream coal power business.

However, it should be noted that the coal-power-oriented consolidate has yet to provide synergy for the renewable assets inherited from the two former energy groups. Some of the strategic renewable business units have even shown sliding performance. [READ More about the performance of the turbine making unit of CEIC, Guodian United Power]

Power Market Reform Sailing into Difficult Waters    

The reform also means a shakeup of China’s power market structure forged since 2002, when the five central government-owned generation utilities were formed and encouraged to compete with each other in all power sectors and without regional borders. 

In that sense, creating regional coal-fired generation monopolies suggests a reversed direction—although it is in a small step. 

If anything, the recent “restructuring” suggests the growing difficulties of China’s on-going electricity market reform, which has taken place since 2015. The market reform hopes to intensify competition among generators and retailers by introducing trading measures. 

But no reform is without pain. And when the change may jeopardize the survival of state-owned assets and the employment rate, choices become more complicated.

The next steps of this restructuring remain to be seen. Nevertheless, it is critical to take note of the future “reformative” track.