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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 experiencing a "bloom" in profitability. In contrast to the struggles faced by the coal industry, thermal power companies are currently enjoying a period of growth. How should we interpret this recent upswing in the power sector?
First, it's important to reflect on past hardships before celebrating current success.
Looking back, the power sector—especially the thermal power segment—faced its most challenging period following the subprime mortgage crisis. For example, in 2008, many listed power companies in Shanghai and Shenzhen reported disappointing results, with even top-tier players like Huaneng Power suffering losses for the first time. This was driven by rising coal prices and stagnant electricity tariffs. The sector saw a prolonged downturn, with stock prices remaining low for years. It wasn’t until the second half of 2011 that things began to improve, thanks to a decline in coal prices over a decade, which reduced generation costs and boosted profitability. However, the long-term decline in coal prices also raised concerns about potential future reductions in electricity tariffs. Since coal is a finite resource, prices will eventually rise again. With coal demand peaking in the fourth quarter, a return to previous price levels is highly likely, signaling an end to the current favorable conditions for thermal power.
Second, while electricity demand is growing, the recovery remains fragile.
Although the power industry has seen some improvement, it is still in a phase of slow recovery. The overall growth rate has remained sluggish, with national electricity consumption increasing by just 0.9 percentage points compared to the same period last year. Thermal power still dominates the energy mix, accounting for around 70% of the total. Given the lack of growth in thermal power output and expected increases in grid tariffs, it's unlikely that the power sector will outperform the broader market in the second half of the year. Instead, the recent gains are more attributable to falling coal prices than improved operational efficiency or stronger demand. While coal prices remain weak, cost pressures are limited. However, if coal prices continue to drop, a corresponding reduction in electricity tariffs is inevitable. The expectation of tariff cuts has become a major threat to the industry’s profitability. Additionally, environmental regulations and energy conservation efforts are restricting the expansion of thermal power, limiting the growth potential of major power companies.
Third, the role of coal in electricity pricing continues to hinder market reforms.
The mechanism for setting electricity prices based on market supply and demand, resource scarcity, and environmental costs is still not fully established. As a result, the "coal and electricity mutual protection" policy has continued to suppress the profitability of listed power companies. Under government intervention, China’s coal and power sectors have remained closely linked. During the ten-year coal boom, local coal companies were required to prioritize their coal for local power plants. Now, as coal prices fall, some local governments are stepping in to protect coal companies from collapse, effectively maintaining the status quo. This policy undermines the market-driven pricing of electricity and limits future profit growth for power firms.
Finally, the outlook remains uncertain.
Thanks to lower coal prices, power companies that once struggled are now seeing significant profits. However, this recent boom comes amid an economic slowdown, and many uncertainties lie ahead. Even if profits surge, it’s largely due to the low base from previous years. Power companies still face challenges, especially if coal prices rebound in the coming seasons. With their business models relatively narrow, thermal power companies may struggle to maintain strong performance. Moreover, unlike past cycles, China’s economy is transitioning toward higher-quality growth, rather than rapid expansion. Slower economic growth could reduce electricity demand, and the environmental impact of thermal power is becoming a growing concern. Renewable energy is gaining traction globally, further reducing reliance on coal-based power. As a result, even if thermal power companies enjoy temporary gains from falling coal prices, their long-term prospects could be affected by rising coal prices or increased competition from cleaner energy sources.