“有缘千里来相会. (fate brings people together from far apart). Unattributed
Decarbonising electricity is hard everywhere, and China is no exception.
No matter how cheap it is, forcing new supply into an already over supplied system runs into opposition, there is never enough transmission in the right places and when the economy softens environmental policies are relaxed.
China’s 2021-25 electricity plan won’t be published until 2021, but the policy decisions and underlying reasons are being developed now, and frankly the world’s children and their descendants should really be marching on Beijing if the news flow this year is a harbinger.
The environmental disaster that China’s short-sighted focus is bringing on them and the world is one thing, but the financial disaster is perhaps more likely to bring change.
Based on declines in share prices of listed companies in the sector we estimate there has been around $A33 billion of value destruction over the past five years and right now that value destruction continues.
That’s actually a relatively small decline compared to what happened to the European sector some years ago, but it’s still a lot of money for a “developing country”.
A summary of China’s IPP (independent power producer) sector enterprise value is shown below.
It’s probably most instructive to start with an equally weighted share price index chart.
The key message of the chart is reinforced by the table of returns below. It’s the persistency of negative returns across the sector and across the time frames that should be sending a message. And no doubt it is.
The question is, however, what that message is. Is it more of the same? Or is a new direction needed?
I’m sure this question is debated in China, but in the end no sector will indefinitely keep on destroying value at the rate electricity companies in China have destroyed the value in the past five years.
Two problems, obvious to all except management
There are two main financial problems for the sector, both of which are obvious, but nothing is ever done.
First is over capacity and the second is the cost of coal. The only hope for sector profits is a lower coal price, but that can only come about if either there is a lot more coal supply either in China or globally, or if demand falls.
So long as China remains a coal importer it’s exposed to the global price, and this will make its electricity expensive relative to countries that either don’t’ have to import or, like the Middle East and the US, can for a while rely on cheap gas.
It may seem obvious but it’s hard to see how building more coal-fired capacity is going to help with either over supply or lower requirement for imported coal.
The new plants being built are of good standard for a coal plant: China Resources talks about “ultra super critical” so one strategy may be to make less efficient plants close. But it’s still an ultra dumb strategy and we are ultra super critical of it.
13% sales growth, 10% asset growth, but decline in profit over six years
Below we show a table from Factset of selected aggregate financial stats. 2019 is Factset consensus forecast.
Sales are up 13% and total assets 10% over the six years but ebitda is flat. Capex intensity (capex:assets) has declined from 9% to 6% but is still chewing up more than half ebitda.
Bad for the economy, bad for carbon reduction
In many respects China is the dominating influence in the world. And yet the coverage and analysis of China’s electricity sector, the single biggest source of marginal carbon emissions in the world and an important driver of global coal prices is modest.
There are some good analysts out there, ITK has respect for the work of Laurie Mylliverta. Laurie wrote a good summary of the causes of the estimated 4% growth in China’s emissions in the June half of 2019 here.
We reprint one image from Laurie’s post here, that shows the first half growth in coal consumption excluding electricity. The coking coal very largely goes to steel and we argue much of the steel is related to construction one way or another.
Laurie also wrote up in August plans by China’s power industry to aim for 1300 GW of coal fired capacity in China by 2030, 290 GW higher than the 2018 total. Laurie’s piece can be found here.
The requested increase in capacity from the China Electricity Council [CEC] is despite the fact the sector has way too much capacity today and that the CEC is not that optimistic about electricity volume growth. They just want more coal at the expense of nuclear, renewables and hydro.
China’s solar installations have halved – bad news for most
A further write up of the very sharp halving of China solar installations from 2107’s 53 GW was by put together by Michael Standaert for Yale360 and can be found here.
The reduced installations in China, which, as in so many things was half the world total, and will likely mean a decline in global installations and therefore the impact that the learning rate has on costs will be at best zero. Michael notes that many of the approved zero subsidy solar plants totalling 21 GW have not yet started.
China looks likely to abandon absolute carbon caps.
“Energy Insiders” will be talking with Stian Reklev from Carbon Pulse this week about developments in China. Stan’s latest china carbon newsflash is behind a paywall but ITK is informed the message is:
“China is likely to avoid setting an absolute cap on CO2 when it launches its emissions trading scheme next year, and instead opt for an intensity-based approach, according to a Tsinghua University professor advising the government on designing the market.
The move would be a major U-turn for the government, which has touted the introduction of what will be the world’s biggest carbon market next year as over time becoming a major tool in curbing its emissions.
“The national carbon market is an intensity-based carbon market in the early stages, not a carbon market based on totals,” He Jiankun, director of the Low Carbon Economy Lab at Tsinghua, wrote in an op-ed in the China Environment News magazine Friday”
For much of China, electricity is as expensive as in Australia (at the generator level). There are also countless exceptions.
The aluminium sector for instance has a large “captive power” segment that seems, from this distance, to often write its own rules about cost and environmental compliance.
Why is the sector expanding?
Why would you build more coal capacity when the existing sector is not making money, you are the world’s largest carbon emitter by a long, long way and the electricity you produce requires imported coal which will puts you at a global disadvantage?
Still ,that is what the industry seems to be doing. The half yearly reports we read all talked in vague terms of talking to the Government.
One lesson ITK will take away is that however bad the planning for decarbonisation in electricity is in Australia, it is orders of magnitude less bad than in China.
June half numbers, coal cost A$46/MWh, price received $87 MWh
In any event there are some English language June half reportings by the IPPs. Huaeng, the largest of the Group, puts together a very informative interim. Some quotes:
“Total electricity sold by the Company amounted to 185.032 billion kWh, representing a decrease of 5.78% over the same period last year. The utilisation hours reached 1,900 hours, representing a decrease of 151 hours over the same period last year.”
ITK notes that 1900 hours is capacity utilization of 43% which is not too wonderful. It’s a bit seasonal and will pick up in the December half. Huaeng’s output for the six months is about equal to Australia’s electricity consumption over a full year.
Huaeng reported separately its “on grid price” was 419 RMB/MWh or A$87 MWh. Again this is a price comparable to Australian prices.
The good news for the sector is coal prices. Huaneng said:
“The unit fuel cost of our domestic power plants throughout the year occurred for sales of power was RMB223.81/MWh, representing a year-on-year decrease of 5.57%.”
223 RMB translates to A$46 so we would argue that the coal cost for Huaeng is higher than or at least comparable to any coal generator in Australia.
China Resources Power, headquartered in HK is the second largest company in the sector based on market cap. It has over 83 GW of power and is moving as fast into renewables as it can, building over 900 MW last year. It aims to have 28% “clean energy” capacity by 2020. Coal is 77% of capacity.
Revenue has been flat for five years and the market is treating it no more kindly than other companies in the sector. Fuel cost was 206.5 RMB or just A$ $39/MWh
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.