The Zhitong Finance App learned that GF Securities released a research report saying that on February 7, the Development and Reform Commission and the Energy Administration issued the “Notice on Establishing and Improving the Market Price Mechanism for Electricity Auxiliary Services”. The bank believes that auxiliary services are an important puzzle for improving the new business model of thermal power and reshaping the value system. Based on the present, improving thermal power profits will drive the restoration of net assets (high ROE). Looking forward to the future, profits will increase steadily, and dividends will increase, and the utility of thermal power will accelerate. For Green Power, ancillary services will further clarify the business model, and are optimistic about the acceleration of installed capacity and the increase in the market share of power groups.

The views of GF Securities are as follows:

The launch of ancillary services is a matter of “breaking the wall of the system” and moving forward after the beginning.

On February 7, the Development and Reform Commission and the Energy Administration issued the “Notice on Establishing and Improving the Market Price Mechanism for Electricity Auxiliary Services”. Following the implementation of capacity electricity prices in November last year, the bank's electricity reform framework “System Breakdown” was once again verified: the bank believes that green electricity consumption is the core challenge of the power system. The core idea of breaking the wall is, on the one hand, reducing power generation side costs through methods such as increasing the proportion of coal in Changxie, and fixing the electricity side price through time-sharing electricity prices and long-term environmental premiums. On the other hand, “redistribution of the cake” is achieved through methods such as capacity electricity prices, ancillary service electricity prices, and coal-to-electricity linkages. The bank also proposed a pyramid structure for the pace of electricity reform, that is, changing the electricity price plan first, then promoting market transactions, and finally forming a constant electricity price equation. Based on this, the bank once again reaffirms the rhythm. 2023 looks at capacity electricity prices, 2024 looks at coal-electricity linkage+auxiliary services+timeshare prices, and 2025 looks at environmental premiums and market-based trading reforms. Currently, the breakdown of the system is being encouraged and moved forward again.

From airing to promoting high frequency, look forward to the “Basic Rules of the Auxiliary Service Market” and “Practical Guide”.

(1) In terms of transaction activity, ancillary services aim to solve large-scale grid problems, focusing on peak shifting, frequency modulation, backup, etc.; (2) judging from the solution, the spot market is the most inclusive but also the most difficult to advance, and is the ultimate solution, but most provinces will still use the auxiliary service market as a transition method; (3) from the perspective of revenue and expenditure entities, following “who benefits and who bears”, the bank expects new energy to be the main revenue carrier in the short term; (4) Looking at it, from last year's Q3 and this year's Q1 blows Due to the high frequency of implementation of this notice, the overall progress has exceeded expectations. This notice can be understood as a program, but the electricity price rules will still require 6 months of consideration and practice as a practical guide, reflecting the complexity and urgency, and looking forward to the implementation of market rules. The bank estimates that the market space for comprehensive ancillary services will be 388 billion yuan (including capacity) in 2030. As the main provider of auxiliary services, thermal power is bound to benefit significantly.

The auxiliary service is an important puzzle for improving the new business model of thermal power, and the reshaping of the value system.

The bank reaffirms the composition of electricity prices for thermal power, fixed cost of energy recovery (depreciation), variable cost of electricity price recovery (coal price), and recovery adjustment costs for ancillary services. On the one hand, the electricity price mechanism described above continues to prove the independent operation mechanism of capacity electricity prices, electricity prices, and auxiliary service electricity prices, breaking the traditional price cap; more importantly, through the construction of coal-electricity linkage, capacity, and ancillary service markets, thermal power profit stability will gradually increase, and cyclical fluctuations will be significantly mitigated while profits increase. Based on the present, improving thermal power profits will drive the restoration of net assets (high ROE). Looking forward to the future, profits will increase steadily, and dividends will increase, and the utility of thermal power will accelerate. For Green Power, ancillary services will further clarify the business model, and are optimistic about the acceleration of installed capacity and the increase in the market share of power groups.

Investment advice: After the system breaks down, thermal power business model innovation and green power construction are expected to accelerate.

Auxiliary services accelerate the trilogy of thermal power, focusing on the high-ROE Zhejiang Electric Power (600023.SH), Huadian International (600027.SH), Huarun Electric Power (00836), and Huaneng International (600011.SH); high-dividend Shenneng shares (), Inner Mongolia Huadian (Dubai); high-growth Guodian Electric Power (Chengdu) and Wanneng Electric Power (000543.SZ). 600642.SH 600863.SH 600795.SH Focus on flexibility to transform Qingda Environmental Protection (688501.SH); Three Gorges Energy (600905.SH), Longyuan Electric Power (001289.SZ), etc.

Risk warning: reforms fall short of expectations; coal prices have risen more than expected; Green Electric's installation progress is low.