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Thermal power business performance eye-catching eye-catching period how long?
With the release of this year’s interim performance forecast, the power industry is being described as "in full bloom." In contrast to the challenging conditions in the coal sector, thermal power companies appear to be experiencing a period of growth. How should we interpret this recent upswing in the power industry’s performance?
First, it's important to reflect on past struggles before celebrating current success.
Looking back, the power sector—especially the thermal power segment—went through one of its most difficult periods following the subprime mortgage crisis. For example, in 2008, 32 listed power companies in Shanghai and Shenzhen released interim performance forecasts that revealed poor results, with even top-tier companies like Huaneng Power suffering losses for the first time. The root cause was rising coal prices, which weren’t matched by corresponding increases in electricity tariffs. This led to declining profitability and a sluggish market, with the power sector among the worst performers. For several years, the industry remained in a downturn, with stock prices staying low until late 2011. That improvement came after a decade-long rise in coal prices ended, leading to lower generation costs and improved margins. However, the prolonged decline in coal prices also raised concerns about potential future reductions in electricity tariffs. Since coal is a finite resource, prices won’t stay low forever. With coal demand expected to rise in the fourth quarter, a return to previous price levels is highly likely. At that point, the golden era for thermal power companies may be coming to an end.
Second, while electricity demand is increasing, the recovery remains fragile.
Although the power sector is currently showing signs of improvement, the overall growth is still in a recovery phase, and the industry continues to face significant challenges. From January to June this year, national electricity consumption maintained a slow growth trend from the previous quarter, with a 0.9 percentage point drop compared to the same period last year. Even now, thermal power remains the dominant source of energy, accounting for around 70% of the country’s power supply. Given the limited growth in thermal power output and expected increases in grid-connected tariffs, it’s unlikely that the power industry will outperform the broader market in the second half of the year. Instead, the recent improvement has largely been driven by falling coal prices rather than better operational performance or stronger demand. Thermal coal prices are expected to remain weak, keeping cost pressures under control. However, lower utilization hours in 2012 suggest there is little risk of further declines. If coal prices continue to fall, a reduction in electricity tariffs is only a matter of time. The expectation of tariff cuts has become a major threat to the industry’s profitability. Additionally, with growing emphasis on energy conservation and environmental protection, the expansion of thermal power faces increasing restrictions. The lack of scale-driven growth also limits the performance of major thermal power companies.
Third, the coal-electricity linkage mechanism is either rescuing or hindering the marketization of power generation.
The pricing mechanism for electricity, which should reflect market supply and demand, resource scarcity, and environmental costs, is still not fully developed. As a result, the “coal and electricity mutual protection†policy continues to suppress the profitability of listed power companies. Under government intervention, China’s coal and power markets have long been closely linked. During the coal boom, local governments prioritized using coal for local power plants. Now, as coal prices fall, some local governments are taking administrative measures to protect their own coal companies from collapse. This policy undermines the market-based pricing of electricity and limits the future profit potential of listed power companies.
Finally, the outlook remains uncertain.
Thanks to falling coal prices, power companies that once struggled with losses are now seeing significant profits. However, this upturn comes amid economic slowdown, and many uncertainties lie ahead. Even if profits rise sharply, it’s largely due to the low base from previous years. Power companies still don’t feel particularly strong financially. Whether coal prices rebound in winter or spring could significantly impact the performance of thermal power firms, especially since their business models are relatively narrow. Unlike past cycles, China’s economy is now entering a new phase of development, focusing more on quality than just growth. Slower economic growth could reduce electricity demand, and the environmental impact of thermal power makes it less attractive compared to renewable energy sources. Therefore, after benefiting from the early drop in coal prices, the future prospects for thermal power earnings may be constrained by a potential rebound in coal prices or increased competition from renewables.