Executive Shakeups of China’s National Electricity, Oil & Gas Firms Suggest Market Reform Awaits

The energy industry went through an “earthquake” last week, as Beijing reshuffled six top executive positions in five state-owned energy utilities. The headman of State Grid Company of China (SGCC) is changed, again.

This reshuffle is highly usual, although Beijing often announced a bundle of senior position changes at the same time. The details of SGCC’s top leadership shakeup provide enough hints of Beijing’s unsatisfactory of the firm’s current role in an ongoing power market reform. 

Storming measure to tackle the “bottlenecks” in the energy market reform may be on the way, as the leadership shakeup heralds.  If so, a series of chain effects may be set off upon renewable power, battery, hydrogen, and smart grid sectors. 

[Before the breakdown, you could read our previous analysis on SGCC’s new corporate strategy that emphasized on smart grid investment: SGCC’s CapEX Cap Reasons and Effects on Battery Storage; SGCC’s Smart Grid Purchase Grand Plan ]

State Grid, CNPC, Sinopec Executive Shifts

Many in the industry are shocked by the reshuffle last week, which include six position changes: 

  • State Grid’s President: the vice governor of Jiangxi province, Mao Weiming, is appointed to lead the world’s largest grid company; the former head Kou Wei was removed after just 14 months in the post 
  • China Datang Chief Executive: Kou Wei was appointed to become the chief executive of China Datang. 
  • China National Petroleum Corp (CNPC’s) President: Dai Houliang, formerly president of Sinopec, will move to lead the largest Chinese national oil company
  • Sinopec’s President: Zhang Yuzhuo, best known for his previous rule in coal mining company China Shenhua, now succeeded Dai to steer Sinopec
  • Sinopec’s Chief Executive: former deputy chief of National Energy Administration, Li Fanrong, will take the role of Sinopec’s second head 
  • Separately, this week, Beijing promoted the former vice chief executive of China National Nuclear Corp (CNNC) Yang Changli to become the chief executive of China General Nuclear(CGN). The appointment marks the first time since 1994 a senior CNNC executive appointed to CGN. The two nuclear firms are known for competing head-to-head for the past decade.  

Maverick Moves upon State Grid 

The reshuffle smells like before a storm. 

Leadership reshuffling is nothing new to China’s state-owned enterprise. It is a routine for Beijing to relocate the senior officials among government departments and state-owned enterprise positions every two to three years, and a practice claimed to boost synergies and prevent corruptions.  

The top executive positions are appointed by the Chinese Communist Party’s Organization Department, together with State-Owned Asset Supervisory and Administration (Sasac), since the “state” is the ultimate shareholder of the state-run companies. The department most often decides on a series of position changes in a bundle and announce on the same time.  

However, a collective head changing of the three most influential energy companies—SGCC, CNPC, and Sinopec— is extraordinary. Setting multiple precedents, the re-organization of SGCC’s leadership is especially telling of Beijing’s reform intention behind the reshuffle:  

  • —Kou Wei has become the SGCC leader with the shortest venture (14 months, compared to Liu Zhenya’s 12 years and Shu Yinbiao’s 2.5 years)
  • —From the top chair position in SGCC to the second-place executive role in China Datang is a demotion, which is unheard of for most SOE leaders 
  • — Due to their dominant position in the power market, the electricity grid companies are of higher “status” compared to the power generation companies in China. And China Datang is often regarded as a smaller player among the five largest power generation utilities. A move from the top of SGCC to a lower position in China Datang is telling. (READ MORE on China Datang and other Power Utilities, Who Are They? )
  • — The new SGCC head is without any working experience in the electricity industry, which is unprecedented in SGCC and most Chinese electricity companies.

In retrospect of China’s previous industry reforms, collective leadership shakeups were the first signs of fundamental policy changes. It is understandable, as new leaderships are more capable of carrying out reformative measures that would harm existing interests. 

This round of shakeups, Energy Iceberg believes, is no exception.  

Market Reform and Energy Price: Two Reasons Behind the Reshuffle

In 2015 Beijing set off a grand vision to advance “energy revolution” in the nation, which has become the top priority of the energy industry ever since. 

Companies involved in this round of leadership restructuring are the most dominant players in the two most critical energy sectors—electricity and oil&gas. They are both the major forces to carry out Beijing’s revolution plans and, more and more, the bottleneck of the ongoing reforms.  

The electricity market reform has made some serious milestones. Most provinces have built up regional electricity trading markets, with half of China’s electriciy production traded in the market. China finally took the first step to set up the transmission & distribution pricing formula, replacing a former model where grid profits from being a power trader. 

However, the reform is stagnating in the past years with mounting issues. The result of a five-year “revolution” five-year spam is far from satisfactory for Beijing, who aims to develop a liberated wholesale electricity market and retail market—the model adopted in Europe more than a decade ago. 

Grids are not the only culprit of all the issues. But its dominant role in the market hinders the reform to moving forward, more and more industry experts believe. While Beijing intends to advance its energy revolution, it seems a must to reshape the electricity industry structure where grids currently play an essential role.   

SGCC’s leadership shakeup echoes that argument.  

Another issue behind the reshuffle is China’s energy price. 

In the past two years, to”reducing electricity price” has become one of Beijing’s top political priorities in the hope of reviving a slowing economy against the backdrop of a US-China trade war. [READ MORE on Beijing’s Pressure to Revive State-owned Economy by Deleverage and other Measures ]

While local governments pressured power generation companies to lower generation prices, Beijing has made an effort to reduce transmission and distribution cost of the two grids, first lowering 10% of the T&D prices in 2018 and another 20% in 2019. 

(It is a telling scene to see the communist party’s discipline department, a watchdog of officials’ performance, become the investigator of the grid companies’ prices. The political pressure is on. )

As the price cap orders unleashed, the profitability of the two grids saw steep declines in the past two years. And soon, the tension between the grids and the (local) governments are on the raising. Not long ago, an article quoted China Southern Power Grid company’s report appeared in China’s prestigious Caijing (Finance) magazine. The report of the second-largest grid company openly criticized the southwestern Yunnan government for “administratively capping electricity prices,” to attract some high energy-consuming chemical industries to the region.  

The article offers a sneak peek at the mounting tension between the power utilities and the government over price caps. However, Beijing appears to be siding with the regional governors, showing clear determination to further reduce electricity price.

Notably, days before Kou Wei’s removal, SGCC held its 2020 internal strategy meeting, which mentioned one critical conclusion: 

“Electricity price reduction is an essential matter for the nation. It relates to China’s manufacturing cost and competitiveness. It is a matter that tolerates no questions or criticism.”  

The grids are feeling the pain from the price caps. But Beijing seems to be determined to carry out its reform vision, as the choice of the utility’s new leader suggests. 

Chain Effects on Energy Storage, on Renewable 

What to expect from all management drama?

  • — reform measures on Chinese electricity and oil&gas market are ahead and perhaps tougher: on the electricity market, the grid companies are the reform “targets”. 
  • — Beijing may further limit grids’ existing operation, starting with the distributive grids’ construction. Regional distributive grid market would be further opened up for new investor and grid operators. (Currently, foreign investment into Chinese grid system is already allowed.) 
  • — Battery energy storage market faces some setbacks in near-term, as the largest investor the grids companies are under pressure to cap expenditure
  • — Smart grid construction of the two grids, in the coming two years, will continue. In the longer run, the grids must transform its role to become a service provider for the electricity system. Software, hardware, and know-how to improve the flexibility and responsiveness of the system are critical in the transition 
  • — Renewable prices are expected to continue to drop; moreover, it is unlikely to see immediate resolve on the subsidy deficit issue. As a result, renewable companies under financial pressure are likely to see asset sales (READ MORE on China’s Potential Renewable Asset Sales )