CITIC Securities released a research report stating that with the government relaxing its control over electricity prices, the overall net asset return on the "coal + electricity" sector has exceeded the market average return, and it is economically feasible to extend the coal-electricity integration model downstream of the power generation process through upstream resource endowment. There is still a need for moderate growth in coal-fired power generation to build a new power system, while the willingness of traditional power companies to participate has decreased. The effort of coal companies to participate in new coal-fired power projects or stock integration is significantly increasing, and coal-electricity integration has evolved from a risk prevention measure to a growth strategy for corporations. The shaping of the advantages of the coal-electricity integration model depends on the endowment of coal resources and the prospects for demand. The prospects for the long term depend on the continued advancement of power market reforms.

Coal-electricity integration in history: A means for coal-electricity corporations to avoid coal price fluctuations.

Coal-electricity integration is a specific form of vertical integration in the industry. In most cases, the coal production and power generation process of the coal-electricity integration model is concentrated in a single enterprise or placed under the same control of one group, and it is reflected in the form of coal-electricity cooperation. Government control over electricity prices has made it difficult to fully manage the resource pricing system in the coal and electricity sector, and in the process of the coal-electricity game, power generation companies are often in a relatively weak position, which motivated electricity companies in history to implement coal-electricity integration as a means to avoid the impact of extreme price fluctuations and enhance coal-electricity corporations' ability to withstand risks posed by fluctuations in coal prices.

"From having coal to being capable" - integration helps coal enterprises seize growth opportunities.

With the advancement of electricity price reforms, the overall rate of return for the 'coal + electricity' sector has begun to exceed the overall market rate of return since its merger in 2022. Corporations that have coal resources and have extended downstream into the power generation sector already have economic feasibility from the standpoint of investment returns. Coal-electricity integration has evolved from a risk prevention measure into a growth strategy for corporations that have coal resources and investment capability. Building a new power system still requires moderate growth in coal-fired power generation, while the market share of traditional state-owned power companies in coal-fired power generation has been decreasing in recent years. From 2018 to 2023, the total market share of coal-fired generation by the 11 central state-owned power companies decreased by about 4 percentage points (based on data from CEC and various state-owned enterprises' public announcements and official websites). The intensity and enthusiasm of corporations that have coal resources to participate in new coal-electricity projects or market integration have increased significantly in recent years. These corporations are moving from simply having coal to becoming "capable" enterprises in the power sector.

The shaping of the advantages of the integration model depends on costs, demand, and the advancement of power market reforms.

The essence of coal-electricity integration lies in that coal production costs are reflected on the cost side, while power generation revenue is reflected on the revenue side. If the production cost of coal is located below the bottom half of the industry's cost curve, implementing coal-electricity integration will have a higher central net asset return on investment and less net asset return volatility. Considering the complexity and long-term nature of electricity price reforms, as well as the overall trend of decreasing coal-fired generation hours, demand prospects related to electricity must be analyzed carefully for integration projects. In the long term, with the transformation of coal-fired power from base load to flexible power sources, the return on investment in coal-electricity integration projects will depend on the advancement of power market reforms, such as capacity electricity prices and auxiliary service markets.

Investment strategy:

Constraints on electricity demand in the entire society, a significant decline in marketization of electricity prices, construction projects being delayed, a significant increase in coal mining costs, and slower-than-expected progress in power market reforms.

Investment strategies.

With the economic feasibility of the integration model, coal-electricity integration no longer serves as a simple tool for power generation enterprises to cope with extreme fuel cost fluctuations, but has evolved into a means for corporations that have coal resources and investment capability to seek growth.