Rating: OUTPERFORM (maintain)
Electricity prices have increased across many cities in China. This week, we present our insights into electricity price increases, based on supply and demand factors. We also share our trend forecasts.
Upside potential: China electricity prices are lower than in other countries
In 2019, the average electricity sales price in China was RMB0.611/kWh, 59/80/83% of OECD countries/newly industrialized countries/the US. China’s power market transactions continue to grow. From January to July 2021, electricity trading volume in power trading centers across the country increased 35.3% yoy. Breaking this down, the medium to long-term direct trading in China’s power market increased 38% yoy, accounting for 34.8% of total power consumption, up 5.4ppt yoy. In the future, market-oriented reforms would realign power resources toward commodity factors, and the impact of supply and demand on electricity prices would increase.
Supply factors: stability hurt by slowing investment and rise of wind and solar
Investment yoy growth rates for China's power industry fluctuated downward from 2004 to 2019, particularly during the 13FYP period. We saw significantly curtailed overall power investment. Meanwhile, the country's installed power capacity continued to grow, while the proportion of wind and solar installed capacity increased to 24% by the end of 2020. We predict that by the end of 2030E, China's wind and solar installed capacity will reach 1.65bn kW, accounting for 45% of the total power market. Instability in wind and solar power generation would affect the stability of total supply to an extent.
Demand factors: economic growth, carbon-neutral demand and extreme weather
With the reduction of the Covid-19 impact, economic growth, high-temperature weather and electricity consumption have continued to increase this year. Electricity consumption increased 22.4% yoy in 1Q21 and increased 8.2% yoy rose in 2Q21. Driven by carbon neutral demand, electrification of the terminal energy market would increase. With the rise of markets such as data centers, we see a lot of growth potential for electricity consumption in China. We expect a 2020-25E CAGR of 5.5% in electricity consumption and ~3.4% for 2020-35E.
Tight electricity supply would lead to price increases
We believe that electricity supply will tighten in the future on higher demand as the median electricity price rises. Currently, electricity prices in many areas have increased. In August 2021, the average transaction price of power plants in Yunnan Province rose 9.38% yoy and that in Inner Mongolia rose 30.50% yoy. The bid spread in August in Guangdong Province was -RMB0.0025/kWh, significantly narrower than in previous years. In response to the tight supply, multiple notices have been issued to allow prices to rise. Ningxia notified that monthly trading prices of coal and electricity could rise no more than 10% against benchmark prices. Inner Mongolia notified that starting August 2021, transaction prices of coal-fired power generation in the power trading market in the western Mongolian region could rise no more than 10% against the benchmark prices. In addition, the Shanghai Economic and Information Commission removed a temporary ceiling on electrification market prices.
Valuation and risks
Under electricity market reforms, power supply is tightening, so we see a basis for power prices to rise. China has issued a number of coal supply guarantee policies. With incremental coal production capacity increases in the future, the supply and demand balance would improve and coal prices would gradually decline. With lower costs and rising electricity prices, the performance of thermal power companies could improve. With carbon neutrality and cost reductions, we estimate cumulative installed capacity CAGRs of 9%/15% for the wind/solar generation markets over 2020-30E. Currently, the new energy business for power operators continues to strengthen. Compared with pure new energy operators, revaluations of new energy assets of traditional thermal power companies have large growth potential, so we expect valuations to improve. We recommend Huaneng Power InternationalInc (600011 CH, BUY), China Resources Power Holdings (0836 HK, BUY), Jilin Electric Power (000875 CH, BUY), Fujian Funeng (600483 CH, BUY), SDIC Power Holdings (600886 CH, BUY), China Longyuan Power Group Corporation (0916 HK, BUY)
Other stocks (not rated): Jinko Power Technology, CECEP Solar Energy, CECEP Wind-Power Corporation.
Risks include: policy implementations falling below expectations; industry technological progress slowing down; electricity demand falling below expectations; and coal price fluctuations.
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