July 24, 2018 Read More →

S&P: China market reforms will benefit cleaner energy at the expense of coal

S&P Global Ratings:

China’s latest push to accelerate market-based electricity trading should  boost the consumption of clean energy. Coal-fired power could face further market-share losses, however producers in this segment may get some relief from governmental backing of coal-linked market pricing to reduce input-price volatility.

“Our base case assumes all Chinese power companies will be exposed to higher competition and price risks due to increasing market-based trading volumes,” said S&P Global Ratings credit analyst Gloria Lu. “Coal-fired power generators (gencos) could face the most pressure unless they improve their competitiveness.”

On July 16, 2018 China’s energy planners, the National Development and Reform Commission (NDRC) and National Energy Administration (NEA), jointly issued a policy note (Notice 1027) with guidelines to advance the country’s market-based electricity trading mechanism.

In recent years, an increasing portion of electricity sales have been transacted in direct sales or regional power-trading centers, rather than under the government set tariffs and planned dispatch volumes. The ratio of market-traded volume in national power consumption reached 25.9% in 2017, up from 19.0% in 2016 and just 5.4% in 2015. Exchange-traded electricity tends to be sold at discounts to official tariffs.

“We estimate market-based sales could increase to 35%-40% of national power consumption in 2018 and more in years ahead,” said Ms. Lu.

The July 16 policy note also recommended linking power prices to a coal index in bilateral pricing negotiations. This could reduce input-price volatility. It also showed policymakers are aware of,  and looking for means to help stabilize the performance of coal-fired gencos over the next two to three years.

Under the guideline recommendations, China will lower the threshold for participation in electricity markets. On the demand side, lower requirements on volume and voltage levels will allow more industrial and commercial users to purchase electricity on the market. Participation will also extend to more power retailers and end users from high-tech, emerging, and policy-supported industries.  

The notice said that four energy-intensive industries, including coal, steel, non-ferrous metals, and construction, are open to market trade of all power volume from 2018. In fact, these four industries are already major users of the direct power-purchase mechanism. In 2017, they accounted for about 25% of national power consumption, and over 50% of national market-trade volume.

For some gencos which have been engaged in market trade for years, such as China Resources Power Holdings Co. Ltd., the ratio of market-trade volume to total power sales could be as high as 50% by the end of 2018.

In China, a common bottleneck to the development of clean energy is the insufficient intake of generation by grids due to power oversupply and under-developed transmission infrastructure. We believe this leads to higher curtailment rates of clean energy in certain regions and sectors in the nation. Clean energy covers hydro, wind, solar, and nuclear power.

In our view, the new policy will help increase the consumption and efficient use of clean energy. This is because it promotes more clean energy sales through market exchanges and also facilitates cross-regional transmission. At the same time, clean energy still benefits from its higher pecking order in power dispatches and the China’s recently proposed consumption quota system on renewables. The government plans to bring down the renewables curtailments to be less than 5% by 2020, compared to 11.8% for wind and 6% for solar in 2017.

More: China’s Move To Accelerate Market Pricing Of Electricity Will Be Harder On Coal Than Clean Energy

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