China, a large coal country, has coal reserves and recoverable reserves at the forefront of the world, whose coal reserves were 170.9 billion tons in 2018. As the main energy source and important raw material in China, coal always accounts for more than half of the production and consumption of primary energy, thus laying an important position for thermal power generation in the domestic power industry. In 2019, thermal power accounted for about 59.2% of domestic installed power capacity.
The profit of a product depends on its income and cost. From the perspective of the income and cost of thermal power, revenue is mainly affected by electricity prices, of which downstream power demand has a direct impact on the power generation. The cost is mainly affected by the price of the coal. Therefore, electricity price, power generation, and coal price are the three core factors that affect the profitability of thermal power.
Marketized Electricity Prices Are Less Affected by Policy Fluctuations
In the first quarter of 2019, the market average electricity price of a large-scale power generation group was 0.3406 yuan per kilowatt-hour with an increase of 0.0099 yuan from the same period last year. Since the fourth quarter of 2017, the average electricity price in the coal-fired electricity market has been rising for five consecutive quarters.
Considering that the epidemic has a severe impact on the global economy, the government decided to continue the phased policy of reducing electricity costs in the first half of the second half from the perspective of reducing the burden on enterprises. Based on the actual situation and overall consideration, we believe that the loss of this policy is mostly borne by the two major power grids. At the same time, more than half of the electricity generated on the power generation side is market-based electricity price, which will not have been affected by the policy.
Resumption of Production and Rising Temperature in Summary Drive Demand for Electricity
In 2019, the thermal power generation in China reached 5.156 trillion kWh, accounting for 72 percent of the total power generation. Affected by the epidemic, the domestic thermal power generation amounted to 1.174 trillion kWh from January to March this year, a decrease of 8.2 percent compared with the same period in 2019. But the electricity consumption has gradually recovered with the orderly progress of the subsequent work resumption.
The summer has driven demand for electricity. According to the prediction of the National Climate Center, a weak El Nino event will formally form in 2020, resulting in the temperature in most parts in China may be about 1degree Celsius, which is expected that the demand for cooling power in summer will continue to rise. Comprehensively considering the increase in electricity consumption due to work resumption and the rising temperature, we expect the growth rate of electricity consumption in 2020 to be close to 3 percent.
El Nino Event Provides Growth Breakthrough for Thermal Power
El Nino event caused less precipitation in the central region, which makes growth room for thermal power. The weak El Nino event will cause the overall precipitation to have a spatial distribution of "more north and south, less middle". In central region provinces such as Hubei and Sichuan, precipitation may fall back to the average level, whose output of hydropower is lower than the previous scale, providing more growth room for thermal power generation.
Coal Prices Decreased Month by Month
Since this year, the coal price has decreased month by month. At present, the coal price is about 610 yuan per ton which continues to decline compared with the tax-free standard coal price of 650 yuan per ton in the first quarter. It is estimated that the average price in the second quarter of 2020 will be 515 yuan per ton, which is 98 yuan lower than the average price of 614 yuan per ton last year and is expected to be the largest decline in the average coal price in the 2020 quarter.
It can be seen that under the condition that the marketized electricity price is unchanged, the reduction in thermal power generation and coal prices provides new vitality for the development of the entire thermal power industry. The operating costs of Huadian Power and CCIC Energy have fallen significantly, and the net profit in the first quarter of 2020 has increased.
At present, the power industry in China has shifted from a stage of high-speed growth to a stage of high-quality development, where new problems and difficulties will come to us. However, it still has many unique advantages at present and in the future on the whole, which are irreplaceable by other non-fossil energy sources for a long period time. In the face of the increasingly stringent green development requirements, the thermal power generation industry must increase scientific and technological innovation to promote the industry's green development.
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