Guozheng International released a research report stating that the publication of the 'Blue Book' clarifies the development path and key tasks for building a nationally unified electrical utilities market. It aims to discover value through the market, allowing electrical utilities to return to commodity attributes, which is beneficial for ensuring reasonable returns for electrical utilities companies. The entry of new energy into the market is accelerating compared to previous expectations, and there are reasonable policy expectations for improved returns for new energy electrical utilities operating companies. Currently, the overall valuation of the electrical utilities operator sector in the Hong Kong stock market remains relatively low, with multiple stocks having dividend yields exceeding 6%. The firm suggests investors focus on CHINA RES POWER (00836), CHINA LONGYUAN (00916), and CHINA SUNTIEN (00956).

Event: Recently, under the overall organization of the National Energy Administration, the China Electricity Council and more than 20 units, including State Grid, Southern Grid, and large power generation groups, jointly compiled the 'Blue Book'. It systematically summarizes the achievements of China's electrical utilities market construction, analyzes the current situation and challenges in depth, and proposes the development path and key tasks for further promoting the construction of a nationally unified electrical utilities market. The 'Blue Book' clearly defines the 'roadmap' and 'timetable' for the development of a nationally unified electrical utilities market for the healthy, orderly, and efficient development of China's electrical utilities market.

Guozheng International's main points are as follows:

The development plan for a nationally unified electrical utilities market is divided into three stages.

The 'Blue Book' specifies that the development plan for a nationally unified electrical utilities market is divided into three phases: the preliminary establishment period (2024-2025), the comprehensive establishment period (2026-2029), and the improvement and enhancement period (2030-2035). By 2025, a nationally unified electrical utilities market will be preliminarily established, with the overall design of the electrical utilities market basically improved, effective linking of cross-province and regional markets to provincial/regional markets, significant enhancement of market scale, and preliminary formation of trading mechanisms for new energy storage, etc. By 2029, a nationally unified electrical utilities market will be fully established, promoting the unification of basic institutional rules and supervision of the market, connectivity of market facilities, and achieving full coverage of provincial spot markets, with new energy fully participating in market trading, forming a collaborative and functionally complete multi-level electrical utilities market. By 2035, the nationally unified electrical utilities market will be perfected, with unified national rules and standards, comprehensive integration of multi-level markets, electricity prices reflecting the value of various resources, and nationwide optimization of electricity resource allocation.

Build a multi-level electrical utilities market and establish a diversified electrical trading market to achieve resource allocation and the commodity attributes of electricity.

Clarify the collaborative operation of provincial electrical utilities markets, regional electrical utilities markets, and inter-provincial and inter-regional electrical utilities markets, aiming to achieve nationwide electricity resource allocation. Deepen the electric energy market and auxiliary services market, and explore markets for electric capacity, transmission rights, electrical utilities futures, and more. Deepen the operation of the electric energy market, realizing longer-term and shorter-term bilateral extensions for medium and long-term electricity trading, with continuous starts on working days to promote the construction of the electrical utilities spot market. The market price will reflect the price of electric energy, returning electricity to its commodity attributes. The auxiliary services market will reflect the value of auxiliary services. The return of electricity commodity attributes is beneficial for ensuring the profit levels of power generation companies.

The trading mechanism for the new energy generation market is expected to gradually improve.

The "Blue Book" suggests accelerating the rhythm of New Energy entering the market, with full participation in market trading by 2029. In 2023, the nationwide market-oriented trading volume of New Energy reached 684.5 billion kilowatt hours, accounting for 47.3% of all New Energy generation. Some large power generation enterprises have seen their proportion of New Energy participation in the market exceed 50%. The trading mechanism for green electricity and green certificates continues to be improved, and the scale is constantly expanding. In the first half of 2024, the nationwide green electricity trading volume reached 151.93 billion kilowatt hours, with 0.16 billion green certificates traded. Currently, the pressure to absorb New Energy generation is increasing, and the market entry of New Energy can better solve the problem of absorbing New Energy power. However, New Energy has significant output volatility and is difficult to predict, requiring a comprehensive design of a market system and trading mechanism that adapts to the characteristics of New Energy to support high proportions of New Energy participation in the market. On the other hand, the green value of New Energy has not been fully reflected, and supporting policy measures need to be improved.

The bank believes that in the future, policy levels will clarify the methods and paths for New Energy to participate in the market, improving the absorption model that combines guaranteed procurement of New Energy with market-oriented trading, and exploring reasonable return guarantee mechanisms for New Energy entering the electricity market. The mechanisms for the Shagao Desert Base and distributed generation sources to participate in the market are expected to accelerate their introduction, and the trading mechanisms for green electricity and green certificates will be further improved.

Risk warning: Policies may not be implemented as expected; the growth rate of social electricity consumption may slow down.