POWER October 2012 - 65

POWER IN CHINA
ing rise of domestic coal demand and international
crude oil prices has sharply pushed
up China's coal prices (Figure 1). In 2008,
for example, average raw coal prices rose
by 112 yuan/ton ($17.63/ton), reaching a
peak price of 628 yuan/ton. About 1.32 billion
tons of coal were consumed for power
generation that year, which means that the
fuel portion of the cost of generating power
by all of China's thermal power corporations
increased by 147 billion yuan, leading
to an industry-wide loss of 70 billion
yuan. This was the power industry's worst
economic loss in history.
Since 2009, coal prices decreased somewhat,
although the price has been very
volatile (Figure 2). The price of coal began
another upward trend at the end of 2010,
reaching a peak of 860 yuan/ton on Oct. 23,
2011. The price of coal was in the range of
620 to 635 yuan/ton in mid-August 2012.
Stagnant Electricity Market Reforms.
The promise of the Power System
Reform Scheme that began the electric
power industry's market-oriented reforms
in 2002 was " breaking monopoly, introducing
competition. " A decade later, the
electricity generation sector has been unbundled
successfully, but the electricity
price reform portion of the Scheme, part
of the core market reforms, has stagnated.
The mechanism used to develop the price
of electricity is still unreasonable, particularly
in light of the other reforms that have
been successfully completed.
At present, the government, not the
electricity market, formulates all market
electricity prices in China, wholesale and
retail. On the generation side, all electricity
generators sell electricity to the power
grid corporations at a fixed " benchmark
price " determined by the government. Customer
prices (residential and industrial) are
likewise fixed by government tariffs. However,
the mechanism to allow competitive
bidding for electricity sales by generation
companies is still not in place.
The fixed generation price means that
the generation companies cannot pass on
cost increases, such as the rapidly rising
price of coal, to the power grid corporations
or consumers in a timely manner.
The result has been increasing costs for
electricity production but fixed retail rates.
Consequently, all of China's power generating
corporations have suffered serious
economic losses.
Unfavorable Economic Conditions.
2. Average raw coal price for Top 5 power generation corporations,
2004-2010. Since the Chinese government deregulated coal prices in 2002, the market price
of raw coal has increased considerably; it peaked at 628 yuan/ton in 2008. The last full year that
annual historical prices are available is 2010. Source: China Coal Industry
700
600
500
400
300
200
100
Coal price
19.0
516
483
382
406
6.8
6.3
0.0
-7.8
-10
2004
2005
2006
2007
2008
2009
2010
Table 2. Profit structure of China's Top 5 power generation corporations,
2008-2010, in 100 million yuan (CNY). As of Aug. 22, 1 CNY = $0.1574.
Sources: China Electricity Council, State Electricity Regulatory Commission
Corporation profit
category
Thermal power
Hydropower
Wind power
Other
Total profit
October 2012 | POWER
Hua-neng Da-tang Hua-dian Guo-dian
-85.45 -128.15
51.61
9.39
104.72
64.79
14.44
23.84
80.27 -25.09
China Power
Investment
-140.08 -110.47
41.65
5.45
67.07
-25.91
35.87
47.71
76.48
45.59
-138.42
51.03
3.96
101.29
17.86
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Corporate
average
-120.51
48.99
16.19
74.68
18.54
3.3
Growth rate of coal price
628
21.7
579
598
25
20
15
10
5
-5
In the fourth quarter of 2009, China began
to implement a tighter monetary policy to
deal with rising inflation. The Chinese central
bank (the People's Bank of China, PBC)
has raised the loan interest rate and deposit
reserve rate of commercial banks five times
and nine times respectively since early October
2009. The undesirable side effects
of the PBC's actions were reduced funds
supply, limited credit, and soaring capital
project financing costs. As capital-intensive
enterprises, power generation companies
are facing a soaring interest expenditure on
existing liabilities (commercial bank loans)
and unprecedented difficulties in finding a
means to finance construction of new power
generation facilities.
One possible solution is to accept private
equity investment to offset the high cost of
commercial bank loans. But that approach
doesn't answer the question of what entity
would be interested in investing in these
troubled corporations without significant
market pricing reforms. Also, the power
generation corporations have traditionally
used debt financing to build new facilities
and have little to no experience with private
equity investment because the corporations
have never been an attractive investment.
The Result: Poor Financial
Performance
Unlike the thermal power business, other
power-related businesses-such as wind
power generation and coal production-
have guaranteed profits. The thermal power
business, operating as independent corporations,
has experienced little retail rate relief
while the cost of fuel has significantly
increased. The results are predictable: very
poor financial performance. From 2008 to
2010, the Top 5 lost the business equivalent
of about 12 billion yuan, about $1.88 billion
(Table 2). Given the current unstable
economy and the Top 5's heavy reliance on
thermal power for income and profits, these
companies' poor economic performance is
expected to continue until electricity market
reforms are completed.
A close look at Table 2 will reveal that
the thermal power portion of the portfolio
is the cause of the overall poor financial
performance for the Top 5. In fact, the
thermal power portion of the portfolio has
pushed the many financial ratios used to
evaluate corporate performance out of the
acceptable range. Two of those ratios are
the liability/asset rate and the rate of return
on equity capital.
High Liability/Asset Rates Persist.
An easy and effective method of gauging
a company's finances is to examine its assets
and liabilities. A too-high liability-to65
Coal
Price (yuan/ton)
Price growth rate (%)

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POWER October 2012

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