The current reform is actually an extension of the 2015 round of electricity reform, but in the face of multiple complex new backgrounds of “double carbon” and “lack of electricity,” there have been more profound and innovative changes in implementation, which further highlights the “market-based” core under the “new power system.”
The Zhitong Finance App learned that Guosheng Securities released a research report saying that the current reform is actually an extension of the 2015 round of electricity reform, but in the face of multiple complex new backgrounds of “double carbon” and “lack of electricity,” there have been more profound and innovative changes in implementation, which further highlights the “market-based” core under the “new power system.” As a flexible power source, thermal power is in the policy dividend period. Currently, coal prices are declining, the profit flexibility of thermal power is increasing. Attention is being paid to the choice of flexible standards, and later it has achieved the advantage of high dividends and high dividends after returning to the public sector. It is recommended to focus on the green power sector. As the reform focuses on new energy, accelerates the promotion of green electricity/green license transactions and the resolution of consumption issues, the bottom space has reached an inflection point. Continue to be optimistic about the hydropower/nuclear power sector, showing potential dividend assets, seizing long-term investment value, and also optimistic that improvements in water fundamentals this year will bring improvements in hydropower profitability.
Guosheng Securities's main views are as follows:
First round of electricity reform (2002 to 2015): separation of factory networks, exploration of electricity sales
In 2002, the central government issued the “Electricity System Reform Plan”, which established the sixteen-character policy of “separate factory networks, separate main and auxiliary networks, separate transmission and distribution, and online bidding”, marking the beginning of the first round of power system reform in China. The main goal of this round of reform is to “break down monopolies, introduce competition, improve efficiency, and reduce costs”. The State Electric Power Company split the two major businesses of “power generation” and “power grid” and split them into two major power grid companies and five major power generation groups to achieve “separation of plant networks”, reducing the degree of monopoly on China's power system. This round of reform has broken down the system restrictions on exclusive access to electricity, fundamentally changed the command-based planning system and problems such as the lack of separation between government and enterprise, and factory networks, and formed a diversified competitive pattern for many central power generation enterprises, as well as many local, foreign-funded, and private power generation enterprises to run electricity. The reforms have greatly enhanced the vitality of power enterprises, improved the power supply capacity, and alleviated the electricity shortage problem that has plagued China's development for a long time.
Second round of electricity reform (2015): control the middle and liberalize both ends
In 2015, “Certain Opinions of the CPC Central Committee and the State Council on Further Deepening the Reform of the Electric Power System” was issued, kicking off a new round of power system reform. This round of reforms further deepens and promotes the marketization of electricity, with the core idea of “controlling the middle and liberalizing the two ends”, that is, controlling transmission and distribution grids with natural monopoly properties, liberalizing restrictions on the power generation side and electricity sales side markets, and promoting market-based reforms. The main goal is to highlight the market attributes of the electricity market that “determines electricity prices and further guides market demand through the relationship between supply and demand”.
Insist on comprehensively promoting the marketization of electricity
The complete electricity market includes the electric energy market, ancillary services market, and capacity market. The focus of electricity reform in 2023 is the determination of the capacity market, and electricity prices for coal-to-electricity capacity were officially introduced. Guosheng Securities believes that the main line of the 2024 reform will adhere to “marketization”. The spot market and auxiliary service market will be placed in the electric energy market. The implementation of the spot market and timeshare electricity prices will be the highlights worth paying attention to in this year's electricity reform. Furthermore, the auxiliary services market will be further improved.
It is necessary to balance the “dual carbon” goal, build a new power system, and deepen electricity reform
The “Document No. 9” issued in 2015 is still reforming the power system with traditional energy as the main body, and has not taken into account the subsequent trend and impact of the rapid development of new energy sources in China. In March 2021, the central government first proposed a discussion on “building a new power system”; in July 2023, the “Guiding Opinions on Deepening the Reform of the Electric Power System and Accelerating the Construction of a New Electric Power System” was issued. Under the new power system, different power supplies face different transformation paths, and it is necessary to guarantee the rational benefits of various power sources on the basis of giving full play to market competition. New energy will be developed as the main energy source, and environmental value will be realized through green electricity/green license transactions; thermal power will be transformed into flexible resource regulation, and its capacity and adjustment value will be realized through capacity electricity prices and ancillary services/spot transactions. Guosheng Securities anticipates that after the official determination of capacity electricity prices in 2023, the focus of the 2024 reform will focus on new energy, and green electricity/green license transactions are expected to accelerate.
Streamlining the cost transmission mechanism
China's power system reform has Chinese characteristics. On the one hand, the transmission of the cost mechanism is reflected in the transmission of some power system costs from the power generation side to the user side, and on the other hand, it is reflected in the rationalization of the relationship between industry, commerce, and residential electricity prices. Document No. 9 of 2015, “Certain Opinions of the CPC Central Committee and the State Council on Further Deepening the Reform of the Electricity System”, mentions “properly handling cross-subsidies, improving the tiered price mechanism, and ensuring that electricity prices for residents, agriculture, important utilities and public welfare services are relatively stable to effectively safeguard people's livelihood”. Electricity prices for residents, industry, and commerce in our country are seriously inverted. Cross-subsidies distort the electricity price structure and electricity price level, making it difficult to implement a “reasonable cost compensation” electricity commodity pricing mechanism.
Guosheng Securities believes that by adhering to the market-based reform of electricity, the cost transmission mechanism should also be speeded up and straightened out. It is possible to further resolve the cross-subsidy issue on the premise of safeguarding people's livelihood through stepped adjustments, etc. In the long run, the power generation side costs are expected to be reduced.
Investment advice
The focus is on the thermal power sector. We recommend focusing on coal-power integration targets: Xinji Energy (601918.SH) and Guodian (600795.SH); focus on the elastic targets in the Yangtze River Delta region: Zhejiang Electric Power (600023.SH), Shenneng Co., Ltd. (), Wanneng Electric Power (000543.SZ), Huaneng International (Dubai), and Huadian International (), which are the leading thermal power targets in the country. 600642.SH 600011.SH 600027.SH We continue to recommend leading targets for thermal power flexibility transformation: Qingda Environmental Protection (688501.SH) and Huaguang Huaneng (600475.SH).
In addition, in the green power sector, it is recommended to focus on China's leading green power operators: Three Gorges Energy (600905.SH), Longyuan Electric Power (001289.SZ), and Funeng Co., Ltd. (600483.SH). For the hydropower sector, we recommend focusing on Changjiang Electric Power (600900.SH), Huaneng Hydropower (600025.SH), SDIC Power (600886.SH), and Sichuan Investment Energy (); for the nuclear power sector, we recommend focusing on China Nuclear Power (USD) and China General Nuclear Power (003816.SZ). 600674.SH 601985.SH
Risk warning: Prices of raw materials rose above expectations; project construction progress fell short of expectations; policies such as the electricity auxiliary service market and green license transactions fell short of expectations.