Pioneering power grid scheme in Shenzhen is a step towards further transparency: Fitch

It can give additional revenue certainty.

Fitch Ratings has said that the announcement by China's National Development and Reform Commission of a regulated revenue scheme for Shenzhen's power grid is a significant step towards a more transparent regulated electricity transmission and distribution policy framework.

According to a release from Fitch Ratings, it expects this framework, if implemented on a national basis, to provide additional revenue certainty to China's electricity grid companies.

If the allowed returns, and the regulatory depreciation and costs are not inferior to what is allowed currently on a national basis, a pan-China roll out of this scheme would not be negative for the financial profiles of China's grid companies.

Here's more from Fitch Ratings:

The pilot framework broadly follows a revenue cap model, allowing the grid operator to recover operating and capital costs, together with a reasonable return on assets.

Under this framework, allowed transmission costs will include depreciation of power transmission assets, and maintenance and administration expenses as approved by the regulator, based on historical costs as well as peer benchmarking.

The allowed profit is calculated based on the value of the asset base, capital structure, a return on equity and debt based on the national benchmark borrowing rate.

While the existing framework for China's grid companies - State Grid Corporation of China (SGCC; A+/Stable) and China Southern Power Grid - does incorporate a similar framework, the profit spread for grid companies is eventually the difference between what is collected from electricity users and the on-grid tariff paid to power producers.

This mechanism exposes the grid companies to some volume volatility and is less transparent than the proposed framework in Shenzhen.