Chinese Power Gencos’ Tariffs Likely to Rise in 2H21

Chinese power generation companies’ (gencos) realizable coal-fired tariffs are likely to rise in the second half of 2021, as many local governments have lifted the restrictions on tariff increases for market-traded power, Fitch Ratings says.

The increase in tariffs on coal-fired power will be driven by tight power supply and high coal prices, and will provide a small amount of relief from the pressure on the power segment’s margin from surging coal prices.

On 26 August 2021, the Shanghai government issued a supplementary notice on the 2021 direct power sales plan in the city, in which it removed the temporary suspension on upward revision of coal-fired tariffs. West Inner Mongolia also allowed the spot market-trading price of coal-fired power to be raised by up to 10% of the benchmark on-grid tariff, and long-term contract prices can also be renegotiated from 1 August 2021. Ningxia province also allowed the market-trading price for coal-fired power to be raised by up to 10% in August-December, 2021, including both monthly and annual traded electricity.

Surging coal prices in 2021 threaten power gencos’ profit margins. Procurement costs for listed subsidiaries of our rated issuers rose by 20%-30% in 1H21, and EBITDA for pure power gencos declined despite revenue growth of over 20%. There is no fuel cost pass-through mechanism for benchmark coal-fired power tariff in China, although the discount on spot-traded power declined. Guangdong’s monthly traded electricity prices with discount decreased to zero in September 2021 from CNY2.5MWh in August 2021 and CNY18/MWh in July 2021.

China introduced the market-trading mechanism in 2015. However, market-traded power was selling at a discount due to fierce market competition and relatively low coal prices, until 1H21, when the situation reversed, with surging power demand and coal prices. This has put upward pressure on the coal-fired power tariff.

Fitch expects more provinces to take actions similar to that of Shanghai, Inner Mongolia and Ningxia. We expect Chinese power gencos to record higher on-grid tariff, which may slightly offset the impact of rising coal prices on their profit as the rise in tariff will be far short of the rise in fuel cost.

The Qinghuangdao spot price is already over 60% higher than in the same period of last year, but tariff increases will likely be capped at 10% of benchmark prices in most regions, implying growth of up to 18% compared with an average 7% discount previously. Although rated power gencos will see a lower cost increase, we still expect a sharp decline in dark spread, the spread between tariff and unit cost, in 2021. We also expect the market price for 2022’s annual contracted power sales to increase whereas we expect coal price to moderate in 2022, which could lead to a recovery of the dark spread, although the spread is likely to remain lower than that in 2020.
Source: Fitch Ratings