Chinese coal IPPs' margins to stabilise amidst falling prices

Price discounts in electricity trade may rise to 50% of generation of many IPPs.

Margins for Chinese coal independent power producers (IPPs) are expected to stabilise in 2019 as a declining trend in coal prices and in average tariffs may cancel each other out, according to S&P Global Ratings’ 2019 industry top trends report.

Coal prices, which are said to be the most sensitive variable to profits, are likely to moderately slide down from the high in 2018, the report added. “Release of new coal production capacity and softening demand may drive the trend of coal prices in 2019,” S&P Global Ratings said. “On the other hand, the chance is low for official on-grid tariffs cut by the regulator.”

Average tariffs may decrease slightly from 2017, given the price discounts in electricity trade which may rise to 50% of generation of many IPPs, the report noted. For Chinese grid companies, transmission and distribution (T&D) tariffs may stay largely stable under the new regulations.

Meanwhile, the average tariffs for wind and solar power are forecasted to trend down as a result of reducing subsidised tariffs, the increasing market trade of renewable energy and the auction-based allocation of new capacity quota.

“The emerging subsidy-free pilot projects in 2019 will also drive down average tariffs of some products over the next two to three years,” S&P Global Ratings said. “In Hong Kong, the resetting of tariffs has lowered the permitted returns of two electric utilities to 8% from 9.99%. These companies will start to have full-year effects of the tariff reset in 2019, resulting in lower operating margin and cash flows.”

The report further noted that whilst the capital expansion needs of IPPs will mainly come from investment in clean energy, investments in coal power may likely be contained. “Meeting deleveraging target set by the government will also constrain the expenditure by state-owned IPPs.”