China’s power monopoly dilemma

Consolidation of China’s coal and electricity industries may not resolve long-standing price tensions and power shortages argues Liu Chengkun

In late June, China’s biggest coal company, Shenhua Group, overtook China Power Investment (CPI) to become the country’s fifth largest electricity generator. That month, it acquired Datang Corporation’s 40% stake in east China power firm Anhui Ma’anshan Wannengda Electricity, taking Shenhua’s total electricity-generation capacity above 5.7 gigawatts.

CPI, meanwhile, appears to be expanding in the other direction: its coal businesses now produce more than 72 million tonnes of the fuel a year, making it China’s third biggest coal company. China’s power industry is restructuring. But why?

Around the same time as Shenhua’s June acquisition, the State Electricity Regulatory Council (SERC) published its annual report for 2011. It said that the electricity businesses of China’s five big power companies – Huaneng, Datang, Huadian, Guodian and CPI – suffered combined losses of more than 15.1 billion yuan (US$2.4 billion) last year; four times as much as in 2010. Huaneng was the only one of the “big five” that managed to turn a profit: 192 million yuan (US$30.2 million). The worst hit was Datang, which lost more than 5.8 billion yuan (US$912 million).

In the four months before its deal with Datang, Shenhua also took a controlling stake in west China firm Sichuan Bashu Electricity Development. And it has acquired electricity-generation interests in Henan and Jiangxi provinces too. This expansion drive is part of a wider consolidation trend in China’s power sector: small power plants making losses or unable to source sufficient coal are actively seeking buyers.

For some, this consolidation is to be celebrated. “Shenhua’s acquisition of so many power plants will help integrate the resources of the electricity and coal companies, reduce generating costs and increase power-plant profits,” said Wan Xuezhi, an electricity expert at research outfit CIConsulting. “That is great news for the security of China’s electricity supply and will help coordinate supply and demand.”

Particularly significant was Shenhua’s acquisition of State Grid Energy Development, said Zhao Yuwei, of coal and electricity portal The government wants the national grid company to divest itself of non-core assets, he said. “This will help the grid concentrate its energy and finances on its main business. That’s good for electricity-sector reform. Meanwhile, Shenhua’s increased generating capacity will give the firms a greater say in how the grid is run.”

But Ren Haoning, another researcher at CIConsulting, raised concerns. With big firms snapping up smaller companies, the sector looks set for a greater degree of monopolisation. The entire industry faces a shakeup, and many are worried about the implications for smaller businesses.

China’s ongoing reform of the electricity sector, which dates back to 2002 (when the State Power Corporation was dismantled), is meant to be about breaking monopolies and driving competitiveness and productivity in both coal and electricity firms. But integration of the coal and electricity sectors will bolster monopolies and benefit the big state-owned firms, say critics: when certain firms possess the lion’s share of advantageous resources and price-setting rights, a monopoly will effectively be created.

Raising prices, making losses

China’s five major power firms account for a huge proportion of the country’s electricity output. But since 2008 their coal businesses have been losing money, and in the last two years a lot of it. Of their 436 coal power subsidiaries, 236 were in the red in 2010.

In the first half of 2011, the “big five” lost a total of 6.65 billion yuan (US$1 billion), according to a China Electricity Council report. This means they must have lost 8.5 billion yuan (US$1.3 billion) in the second half of the year– an increase of more then 27% on the previous six months.

In a bid to stem the losses, the government hiked electricity prices three times in 2011, more than any other year in history. On April 10, the National Development and Reform Commission – China’s top economic planner – raised the cost of electricity for business and agriculture by an average of 0.02 yuan per kilowatt hour in 12 provinces, including Shanxi, Qinghai, Gansu and Hainan. On June 1, it increased prices in Anhui, Hunan and Jiangxi, by a little under 0.02 yuan per kilowatt hour. And on November 30, prices were bumped up again, by an average of 0.026 yuan per kilowatt hour for power supplied to the grid by coal-burning plants nationwide.

At the same time, the government imposed price caps on coal for power generation, as well as a trial hike of 0.08 yuan per kilowatt hour in the subsidy for scrubbing nitrogen oxides. At 2011 output levels, these increases translate into extra takings of more than 100 billion yuan (US$15.7 billion) for the power firms.

Although it’s generally accepted that the sector’s losses are due to high coal prices – pushed up by China’s ever rising demand for power – there are also problems to be found within the power firms themselves.

Take the Datang group, where losses were heaviest, as an example. The company made a small profit on electricity generation. But it spent more than 20 billion yuan (US$3.1 billion) servicing its high level of debt. The other four big players have similar obligations. The SERC revealed that profits at the “big five” get eaten up by the financing costs – even the company with the lowest debt bill spent more than 15 billion yuan (US$2.4 billion).

The companies are heavily reliant on debt financing. Secretary of the China Electricity Council Wang Zhixuan said that asset-to-debt ratios at the big five are over 86%, and financing costs are rising.

And, despite the long-term trend, coal has actually been getting cheaper this year – prices have fallen by 20% so far. But the corporate losses continue. Of the 24 electricity firms listed on the Shanghai and Shenzhen stock exchanges, 17 said in half-yearly results that they expect to lose money or see a fall in profits. In spite of higher electricity prices and half a year of falling coal costs, the power companies have been unable to pull themselves out of the mire.

When coal prices increase, the state makes the power plants absorb 30% of the extra costs, explained Wang. Over time, this has forced power companies into the red. “Although coal prices have fallen this year, the power plants have been burning coal that they purchased earlier at higher prices. Only now are they starting to use the cheaper coal. But coal prices are still on the high side and the power plants are forced to rely on government help.”

Electricity reform

Shenhua’s aggressive acquisitions are part of a new wave of consolidation.

China operates a dual pricing system for coal: there’s market economy coal and then there’s planned economy coal, which only state-owned power plants have access to. Prices in the two brackets have become further out of step recently and power companies have suffered – this is one of the main reasons for electricity shortages.

In September 2011, deputy head of the National Energy Administration’s coal department indicated that “coal-electricity integration” would be a long-term policy goal.

Since 2008, the big five power generators have all snapped up coal businesses. In November last year, 120 billion tonnes of shallow coal seams were identified at Santanghu in Xinjiang, in China’s far west – and Datang, CPI and Guodian are all now working on coal power generation and coal chemical projects here.

On July 31, the government of Shanxi, a coal-mining province in north China, published a proposal for coordinating the development of coal and electricity companies. This year, the province plans to push ahead with joint operations.

But with electricity prices still set by the state, and coal increasingly marketised, tensions are bound to get worse. Companies already complain that state-set prices are too low, meaning they take the hit when fuel prices rise. While the various interest groups continue to drag their feet, it is unlikely real reform of the electricity sector will be seen in the near future.

Lin Boqiang, head of Xiamen University’s Centre for China Energy and Economic Research, said the government’s aim in promoting joint coal and power operations is to absorb the impact of higher coal prices and ensure electricity supply. But he pointed out a hidden danger: if coal prices continue to rise in the long term, the power plants will have reason to sell coal, rather than use it to generate electricity. Under the market economy, coal and electricity firms should be run separately – the finer the division of labour, the better, he said.

Similar trends were historically seen in the United States, but since the 1990s American electricity generators have divested themselves of coal interests and now tend to rely on long-term supply contracts. “That’s the trend worldwide, while China is going the other way,” said Lin.

“Proposals for reform of the electricity system were published in 2002, a decade ago. So far, that approach seems to have been a complete failure. The state needs to rethink electricity reform.”

Liu Chengkun is a reporter at Time Weekly, where this article was first published.

It is translated and published here as part of our Green Growth project, a collaboration between
chinadialogue and The Energy Foundation.

Homepage image from Time Weekly