2014-03-24 12:27:39 - Fast Market Research recommends "China Power Report Q2 2014" from Business Monitor International, now available
While China's power sector continues to be 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 slow down further over the coming months. Although newfound reform momentum holds the potential to help the economy grow out from under its credit excesses, we continue to believe that the hangover effects of China's economic stimulus are yet to be felt, and cooling credit growth is likely to reveal these effects over the coming quarters. This considered, 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 over the coming years, as many projects under construction or planned will use coal or gas and as Chinese efforts in prospecting and exploiting conventional oil and gas resources are set to increase. While other sources of power will play increasingly important roles, China will remain reliant on coal for its power generation over the next decade. Energy poverty is a key concern in the country and coal will remain the only realistic option for providing cheap and abundant energy for the local population over the medium term. 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:
* 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. The action plan also aims to cut coal's share of the country's total primary energy use to below 65% by 2017 and increase the share of nuclear power, natural gas and renewable energy. 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.
* After launching a trading carbon scheme in Shenzhen in June 2013, China announced its intentions to expand this scheme to include Shanghai and Beijing (on November 26 and 28 respectively). While we highlight that China's carbon emissions trading scheme is only a pilot programme and is likely to have a minimal impact in the short term, the perceived success of the recent roll-outs in larger urban centres like Shanghai and Beijing will be a considerable indication of its long-term potential to reduce China's greenhouse gas emissions.
* China's National Development and Reform Commission said it would reform the price that power-grid operators pay to hydropower plants for electricity to encourage investment in the sector and help the country to achieve its clean-energy targets. According to the new proposal, energy prices for hydroelectricity will be based on the average price of electricity that power-grid operators purchase wholesale and they will also include hydropower development costs. Currently, hydroelectricity prices are regulated by local governments. Prices are based on a formula that also weighs development costs against other factors, however these are generally lower than the wholesale price of conventional electricity.
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