Urgent electricity companies to unleash “coal” have accelerated coal and electricity integration projects

A latest research report of the China Fuel Union’s fuel sub-committee shows that although the five major power generation groups have accumulated more than 60 billion yuan in losses for three consecutive years, the five major power coal business segments generally benefited in 2010. Among them, Huaneng Group’s coal sector revenue last year 8 billion yuan, CLP investment reached 6.5 billion yuan, Guodian Group was 3 billion, Datang and Huadian also nearly 2 billion yuan in revenue. The report pointed out that under the background that power companies are subject to a general loss of high coal prices, “coal power integration” has been promoted as a national strategy in terms of policies, and will become an important pillar for power companies to realize profitability in the future.

Leading companies first taste "sweetness"

As early as in 2008, the SASAC had issued a document to allow power companies such as Guodian and Datang to add new services such as "primary energy development for coal and other power sources" on the basis of homepages such as power production. At the same time, it can enjoy various tax and fee reduction policies for the coal industry. In October last year, the State Council issued the “Some Opinions on Accelerating the Merger and Reorganization of Coal Mine Enterprises”, which explicitly proposed to encourage coal, electricity, and transportation companies to operate in an integrated manner, and coal-electricity integration was thus promoted to the national strategic level.

With the support of policies, some leading domestic enterprises have started to expand upstream to expand resources. According to relevant statistics, in 2010, Huaneng Holdings’ coal production reached 48.86 million tons, Guodian coal output reached 47 million tons, Datang Coal produced 11.35 million tons, and Huadian produced 9.31 million tons. The CPI has a production capacity of 54.1 million tons and a capacity of 72.75 million tons per year, making it the third largest coal producer in China after Shenhua and China Coal. According to the plans formulated by each group, by the end of the “Twelfth Five-Year Plan”, the respective coal self-sufficiency rate should reach more than 30%. The CLP Investment Group has set the target at “100 million tons of annual output and 50% self-sufficiency rate”.

Cui Lian Fuels Branch President Xi Jiechen told reporters that "coal power integration" allows power companies to benefit most directly from investment savings, resulting in corresponding reductions in operating costs such as depreciation and repair costs. And some enterprises have even begun to taste the "sweetness" from coal and electricity joint ventures. Guodian Power's 2010 annual report recently pointed out that although the thermal power business was difficult to manage, the company still passed the integration of coal and electricity transportation in Inner Mongolia and other regions to control the company's total unit price of standard coal to rise less than the market average.

Business risk is hard to ignore

The related analysis pointed out that compared with electricity, the coal industry is characterized by strong professionalism, large security risks, and large initial investment, and the recovery cycle is slow, which will increase the risk of electricity enterprise operation to some extent. This has also become the industry’s biggest concern for coal-electricity integration operations.

In the report, Chen Shui-bian’s control of coal resources has brought about a large amount of capital-occupied risks for some companies. In the second half of 2009, Huadian International invested more than 2 billion yuan to acquire shares in local coal mines, resulting in an average ROE of -20.89%. Huadian International’s cash flow from operating activities for the year was 17.3 billion yuan, an increase of 73.8% year-on-year.

In this regard, Jie Juechen believes that the future of electricity companies to engage in coal and electricity integration should strengthen cooperation with coal companies to participate in the form of shares is mainly responsible for the operation and management of the late power plants, play their respective advantages, which will not only reduce operational risks, but also ensure project integration Maximize benefits.

Liu Zhenqiu, deputy director of the price division of the National Development and Reform Commission, also wrote in the media recently that the size of a company exceeding a reasonable boundary will cause internal costs to exceed the market transaction costs and reduce economic efficiency. Therefore, in the future, the power companies must be guided to choose coal companies with relatively single product varieties, implement vertical integration, or select some of the lower cost coal-based power generation coal resources for direct exploration, development and production to reduce social transaction costs.

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