2013-12-13 12:22:38 - Recently published research from Business Monitor International, "China Power Report Q1 2014", is now available at Fast Market Research
While China power sector is set to remain in a league of its own, storm clouds are gathering on the horizon. According to BMI's Country Risk analysts the Chinese economy is likely to enter recession over the coming months. Despite record new credit issuance in recent months, the manufacturing sector has once again entered contraction, and high household savings rates by no means suggest that consumer demand will remain unscathed. That said, a slowdown in power demand appears to be on the cards. Meanwhile, the country is trying to ease its reliance on coal, focusing on cleaner forms of power generation. However, we still expect coal-fired capacity to grow in real terms and dominate the energy mix to the end
of our forecast period.
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In terms of fuel mix, conventional thermal sources play a key role and are expected to continue to dominate electricity generation in the coming years, as many projects under construction or planned will use coal or gas and China intensifies its efforts in prospecting and exploitation of conventional oil and gas resources. In particular, while other sources of power will play increasingly important roles, coal-fired sources of electricity dominate, and will continue to dominate, the electricity mix in China over the course of our 10-year forecast period. Yet, rising coal prices are once again a key threat to the profitability of power generation companies operating in the domestic segment, and Chinese utilities have placed collective pressure on the government to moderate proposed restrictions on imported coal, highlighting the difficulties China has in balancing the interests of its mining and power sectors as growth slows.
Aside from short-term considerations, and while it should be kept in mind that China will remain in a league of its own, macroeconomic and sector-specific factors also point to an equally moderate long-term outlook. In particular, we highlight that while the energy white paper published in October 2012 should not be taken at face value, the substantial emphasis the document puts on conservation, energy efficiency and emissions reduction is certainly significant and could influence the electricity markets.
That said, some more positive recent developments in the market include:
* Although the details need to be confirmed, China's State Council has announced it will ban the construction of new coal-fired power plants in the regions around Beijing, Shanghai and Guangzhou - a move designed to cut harmful emissions and negate growing concern about air pollution in the country's northern and eastern population centres. Yet, while this move will be welcomed from an environmental perspective and creates upside to our forecasts for non-coal-fired sources of power generation in China, we remain cautious with regard to the implementation of the policy; with China reliant on burning coal for around three quarters of all electricity generation, we question whether the country will be able to realise ambitious targets to cut total fossil fuel consumption in primary energy use by 2017.
* China's Ministry of Land and Resources expects to see about CNY80bn in total investment into domestic oil and gas exploration efforts, according to a report in state-owned Xinhua News Agency. This is an 18.9% year-on-year increase from 2011 levels, and more than quadruple the investment made in 2002. This forms part of the state's efforts to boost domestic production of oil and gas so as to reduce China's reliance on imported energy sources.
* China has announced that it is set to raise on-grid prices paid to power producers that utilise natural gas while also cutting the prices paid to coal-fired generators on a region-by-region basis - in what can be seen as the latest in a raft of measures designed to ease the country's reliance on coal and focus on cleaner forms of power generation. The National Reform and Development Commission, the country's top economic planning organisation, has also indicated that the move will help to address the threat of possible gas supply shortages at peak times, stating that on-grid prices need to be adjusted to take into account increased generation costs following recent government-mandated natural gas price hikes.
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