Energy Iceberg: CA Weekly News Intake and Analysis
- China’s power industry is now in agony. Bankruptcy, stranded assets, and high debt ratio now haunt the power utilities, but these are the predictable outcome following years of over-investment on coal assets.
- The key takeaway is that this push-out effect will continue, as renewable would continue to increase and wind/solar prices now are close to grid parity.
- Beijing will soon look into 14th Five-year plan making for the power sector. A theory circles lately in the industry that the new plan would incorporate a 2050 coal-fired capacity target. The target will require a significant capacity phase-out.
Coal Power Bankruptcies in China
Two weeks ago, China Datang—one of China’s “Big Five” power utilities—announced to file for bankruptcy for a subsidiary coal-fired power plant in Liancheng, Gansu province. This is, in fact, the second case, following another coal-fired plant in Hebei filing for bankruptcy in Dec 2018.
The bankruptcy is just a fraction of the “misery” looming over the whole industry. In recent two years, power developers generally struggled, and coal-fired business is buried deep in a financial swamp, fighting with high leverage, low return, and massive loss-making.
Another coal power plant in Gansu is reportedly running on 269% debt-to-equity (D/E) ratio, label by Beijing state-asset regulator as a “zombie company”, those who made years of losses in a row, and deemed impossible to be saved even by China’s old trick—asset restructuring (M&As among different assets).
In most other countries, bankruptcy is a natural choice from the business’ poor performance or wrong financial decisions. But that used to be a “no-no” for Chinese energy companies, majority of which are state-owned enterprises (SOEs) who could borrow from, also, state-owned banks continuously, and who are bound to “social obligations” like keep people’s job intact, etc. Filling for bankruptcy of a major power company’s mainstream asset thus raise some eyebrows. On the one hand, that reflects Beijing indeed kept a tighter leash on bank behaviors; and it shows how serious the finance issue facing many of these power assets.
Recommend to read the two following media reports for more details of the bankruptcy (in Chinese):
Energy Observer Magazine: “Datang Power Plant Bankruptcy: Coal-fired’s Life or Death under Power Trading”
But today’s situation was well predicted back to 2015 when utilities and local governments were eager to ramp up coal units against a bottom coal commodity pricing. Growth of coal power capacity that year was 55%, out-of-sync with just 1.3% power demand growth.
See this old article by a former journalist of China Electricity News: “China Has 170GW Stranded Power Asset”
Chinese Power Market Paradigm Changes
Multiple factors contribute to the current situation, to sum up:
- Market fundamentals—the “oversupply” in recent years’ Chinese power market. Although power demand growth bounced back a little in 2017, overall, the demand increase is tepid. Supply is abundant due to over-investment in coal-fired power plants (see the 2015 peak in the chart), the ramp-up of centralized wind/solar power production bases.
- Market competition—renewable is ramping up, with grid parity deadline set at 2020; the power trading pilots—albeit progressing slowly— so far become a vehicle of the government to push generators to lower prices. More and more wind/solar projects have offered lower-than-coal prices. e.g., Golmud solar project by China Three Gorges is at ¥0.31/KWh, already lower than regional coal-fired power benchmark.
- Multiple Policy Paradigm Changes—the “game” of the Chinese power market is in slow transition now. These include:
- China has long established the principle in Renewable Energy Law to “ prioritize renewable” (全额保障性收购) in the merit curve order, which did not see proper execution in practice. But now the situation is changing amidst Beijing’s emphasis on renewable.
- Regional governments used to be able to protect coal units’ interest, but their hands are tied now as required to fulfill a soon-to-be legally binding “renewable portfolio standard” (RPS, 配额制).
- The power trading pilots, albeit progressing slowly, has introduced impose competition elements on the thermal units.
- Pricing mechanism—the problematic decoupling of coal commodity pricing and power pricing in China: Energy pricing set up remains a persistent issue in the Chinese market, in fact, a rooted factor for many problems. In this case, the coal commodity price is market-based, while the coal-fired power pricing is government-set, determined by a team in the central government organization (NDRC) every once a while (often too late and subject to political considerations).
- Historical burden, typical SOE obligations are driving up cost, etc.
China’s 14th Five Year Plan for Power
“Unfortunately,” the struggle and the life-or-death fights of coal power will continue as Beijing intends to further cap coal units in the new power industry five-year planing for 2021-2025. Lately, a rumor circles in the industry that, in that 14th FYP for the power sector, a target of only leaving 0.6TW thermal installed capacity for 2050 will be mentioned. This would mark the start of China phasing out coal (so far only limiting growth) units, as the current size is 1.1TW.
This advisory piece of Chinese power sector experts Zeng Ming and Du Xiangwan for the 14th FYP may be worth a read:
If so, the bankruptcy is just the beginning.