HONG KONG (S&P Global Ratings) Sept. 13, 2023--The profit recovery of China's coal-fired independent power producers (IPP) will likely last into the second half of 2023. The continued moderation of coal prices coupled with upward adjusted coal-fired power tariffs since last year underpin the earnings improvement.
"Longer-term, we expect the thermal coal price to return to the government-guided range and the market-based on-grid tariffs to better reflect power supply and demand dynamics," said S&P Global Ratings credit analyst Scott Chui.
From Jan. 1, 2023 to Aug. 30, 2023, spot thermal coal prices have fallen by about 20% compared with the average in 2022. The moderating trend mainly stems from the expansion of domestic coal production as well as cheaper coal imports.
On the demand side, national power consumption grew by 5.2% in the first seven months compared with the same period of last year. Full-year power consumption will grow at about 6% this year, according to forecasts by the China Electricity Council (CEC), indicating a growth rate for the second half of about 6%-7%.
"IPPs' coal power tariffs will hold up for the remainder of 2023. A chief source of support for this is their high proportion of power tariffs already locked in annual sales contracts," Mr. Chui said.
In the first half of 2023, rated issuers reported an average of 2% coal power tariff hike from last year, corresponding to about a 20% premium to the coal-fired benchmark rates. Nonetheless, with the softening of coal prices, potential risk of tariff cut may pile up for 2024 and onward.
Ancillary services market may also create more opportunities for the IPPs, as coal-fired power plants assume the responsibility of maintaining power grid stability. In the first half of 2023, China Resources Power Holdings Co. Ltd. (CRP; BBB+/Stable/--) and Huaneng Power International Inc. (HPI; A-/Stable/--) earned HK$0.8 billion and Chinese renminbi (RMB) 1.5 billion from ancillary services such as peak shaving--leveling out peaks in electricity use by industrial and commercial power consumers. We expect secular growth in the ancillary services in China, and this should compensate the coal-power units for the likely lower utilization in the future.
LOWER TARIFFS, MORE VOLATILITY FOR RENEWABLE OPERATORS
Higher marketization increases earnings volatility for renewable energy operators. Cross-provincial or regional market-based trading tariffs are usually lower than the local coal-fired base-tariffs, adding volatility to the earnings of renewable operators. In the first half of 2023, CRP and China Longyuan Power Group Corp. Ltd.'s (A-/Stable/--) sold about 31% and 49%, respectively, in renewable power via market-based trading. As a result, their average tariffs fell by 4% and EBITDA margin from the segment dropped by 2 percentage points.
Green electricity trading, as a form of market-based trading, could partly compensate the loss of tariff subsidies because it usually trades at a premium over the local base-tariff--despite the current small scale. More policy incentives may be necessary to further develop the market. This could include a tightening of carbon emission standards or the inclusion of more industry sectors into carbon trading.
Revamping old wind projects may also bolster the profits of renewable energy operators. The National Energy Administration in June 2023 announced plans to replace wind turbines that are more than 15 years old or that have less than 1.5 megawatts (MW) in capacity compared with newer models. Longyuan could be the key beneficiary of this new initiative because about 70% of the company's wind turbines are at or below 1.5MW. Longyuan expects these old projects--once upgraded--could double its existing capacities.
Renewable energy subsidy collections, on the other hand, remained subdued. This is despite the fact most of our rated IPPs have indicated that more than 70% of their projects are within the tariff subsidy verification list published by the National Development Reform Commission. In the first half, CRP and Longyuan only received RMB0.1 billion and RMB500 million in tariff subsidies, respectively; whereas last year they received RMB0.02 billion and RMB11 billion. Some companies have started provisioning the ageing receivables for impairment, despite the risk of non-payment remaining remote for now.
HEADROOM DESPITE CAPEX BOOST
Capital expenditure (capex) will accelerate and constrain financial profiles. Despite a slow first half of 2023, we believe our rated IPPs should be able to catch up on their renewable construction plan for the full-year 2023. In the first half of 2023, HPI, CRP, and Longyuan added 0.5GW-2.9GW of new capacities, accounting for only 8%-36% of their full-year targets. We estimate their capex level will rise to RMB32 billion-RMB93 billion over 2023-2024, compared with RMB18 billion-RMB57 billion in 2021-2022.
"We believe our rated peers still have sufficient headroom to withstand the capex pressure," said Mr. Chui. Most of the IPPs had a funds-from-operations interest coverage ratio of above 2.0x for 2022, which will improve to above 3.0x over 2023-2024 given the turnaround of operating cash flow from their coal-power segment. We also believe state-owned IPPs will maintain sufficient liquidity and diversified funding channels for their investment plans. Low interest rates in China will also help. We expect most state-owned IPPs' average funding costs to stay at about 3%.
Table 1
| Rated issuer (listed) | Rating | Tariff change (%) | Coal unit fuel cost change (%) | Renewables market trading proportion (%) | Renewables capacity additions (GW) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Coal-fired | Wind | 1H2023 | 2023 guidance | 2025 target | ||||||||||||||
|
Huaneng Power International Inc. |
A-/Stable/-- | 1.90 | N.A. | -11.30 | N.A. | 2.90 | 8.10 | 44GW of renewables | ||||||||||
|
China Resources Power Holdings Co. Ltd. |
BBB+/Stable/-- | 1.80 | -3.10 | -8.10 | 31.00 | 2.00 | 7.00 | 50% of total capacity | ||||||||||
|
China Longyuan Power Group Corp. Ltd. |
A-/Stable/-- | -1.90 | -3.50 | N.A. | 48.70 | 0.50 | 6.00 | At least doubling capacity by end-2020 | ||||||||||
| GW--Gigawatt. N.A.--Not available. | ||||||||||||||||||
Editor: Lex Hall
Related Research
- Deepening Market Reform Increases Industry Risk For China's Power Producers, June 30, 2023
- Credit FAQ: The Renewables Race: How Quickly Can Asia-Pacific Shake Off Coal?, May 10, 2023
- China's Renewable Developers Can Tackle Spiraling Debt And Capex, April 17, 2023
- China Power Sector: Regulatory Support To Stay As Subsidies Fade, Oct. 16, 2022
- China's Independent Power Producers Are Set To Break Their Losing Streak, Oct. 13, 2022
This report does not constitute a rating action.
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