China’s Power Producers Face Bankruptcy Threat – Analysis

By Michael Lelyveld

China’s coal-fired power plants are facing the threat of bankruptcy as a result of government policies and soaring prices for coal, industry groups say.

On Sept. 11, the South China Morning Post reported that companies in the power sector had petitioned authorities for increases in electricity rates to stem losses and avoid bankruptcies due to record coal costs.

In a letter to municipal regulators, the Beijing Electric Power Industry Association pressed for higher end-user rates, citing losses among five member companies ranging from 20 million yuan to 192 million yuan (U.S. $3 million to $29.7 million) in the first seven months of the year, the Morning Post said.

The complaint follows a similar letter in August from 11 generating companies serving the Beijing-Tianjin-Tangshan power grid, warning that they were “on the verge of bankruptcy” as a result of the squeeze between fixed rates and surging coal costs.

“It has severely disrupted normal electricity transactions and stable electricity supply … operations are extremely difficult, with some companies experiencing capital chain ruptures,” the generators said.

The letter was signed by companies including Datang International Power Generation, China Huaneng Group, China Huadian Corp. and CR Power, Reuters reported.

Thermal coal prices hit a high of 1,028 yuan (U.S. $159.46) per metric ton on Sept. 9, according to Reuters. In July, prices soared 65.3 percent from a year earlier, although regulated end-user rates have dropped so far this year, it said.

China’s rules on rate increases are the subject of conflicting accounts.

Power companies were previously allowed to raise rates by up to 10 percent to cover higher operating costs. But in October 2019, the government’s top economic planning agency, the National Development and Reform Commission (NDRC) barred all rate hikes for industrial and commercial users, the Morning Post said.

A provision of the NDRC “guidance” document leaves it unclear as to when the rate freeze is supposed to end. Under the rule, the rates were not allowed to “float” in 2020, but the NDRC “can regulate the post-2020 floating patterns according to the situation,” the document says.

Even without the freeze, a 10-percent adjustment would not cover the generating costs from this year’s huge increase in coal prices, said Philip Andrews-Speed, a senior principal fellow at the National University of Singapore’s Energy Studies Institute.

“This is insufficient to compensate generators for the recent rise in coal prices. But the government is not keen to let prices rise further as that will add further downward pressure on the economy,” Andrews-Speed said.

The trouble for China’s domestic coal plants have highlighted the need for major changes in the country’s energy and environmental policies after more than a decade of intermittent power shortages and conflicts over state controls.

On Tuesday, President Xi Jinping suggested that some partial policy changes may be in the works.

In a videotaped statement to the annual session of the U.N. General Assembly on Tuesday, Xi pledged that China “will not build new coal-fired power projects abroad.” Chinese coal projects have been a significant source of pollution in countries that have joined in China’s Belt and Road Initiative.

Xi’s commitment was hailed by John Kerry, the U.S. special presidential envoy for climate change, as a “great contribution” and an “important decision,” Reuters reported.

Homegrown problem

But Xi said nothing about the larger problem of China’s continuing construction of domestic coal plants.

The environmental group Greenpeace East Asia estimates that 250 gigawatts (GW) of domestic coal-fired power capacity remains under development, despite warnings that the new plants will lose money as the costs of renewable energy sources come down.

In the meantime, the government is scrambling to come up with short-term fixes for the plants that are already losing money.

On Tuesday, the NDRC said it was sending joint teams with the National Energy Administration (NEA) to unspecified regions, companies and ports to see that directives on energy supplies and price stabilization are carried out, Reuters reported.

The agency said it has lowered the minimum inventory level of coal for power plants to seven days, setting the maximum at 12 days in an apparent attempt to ease market demand.

The pressures on generating companies are the result of a series of policy decisions in response to economic conditions and market forces in recent years.

In February 2020, the NDRC ordered a 5-percent rate cut for businesses and commercial users to support recovery from the COVID-19 crisis, projecting that it would save 59 billion yuan (U.S. $9.1 billion) for some 50 million customers by midyear. The cut was later extended through the end of 2020.

But the government had already reduced rates by about 10 percent annually in 2018 and 2019 in an effort to boost corporate profits and sagging economic growth.

The policies backed by Premier Li Keqiang were in keeping with fiscal stimulus measures, including reductions in taxes, fees and social security contributions.

Over time, the stimulus measures have compounded the effect on coal prices by promoting growth and increasing demand for China’s main fuel.

The cost of the first cut in electricity rates fell primarily on grid operators but the burdens from subsequent reductions have been borne by generating companies.

At the same time, the government supported increases in coal production to ease energy shortages. As economic growth rates rebounded from the record plunge in the first quarter of 2020, coal prices rose with recovery in demand.

Back to business

COVID-hit coal mines have struggled to keep pace with demand, putting more pressure on prices. A wave of deadly mine accidents also led to government safety inspections, slowing output down.

The NDRC responded by calling for more imports. But in December, it excluded coal shipments from Australia, China’s leading supplier, in an escalating row over human rights violations and foreign policy differences.

Analysts are divided over how much the political feud with Australia has affected China’s prices, but coal costs have set a succession of new highs since then.

The government’s reluctance to pass on the increased coal costs to consumers and end-users of electricity in the form of rate hikes reflects the “usual tension” between market forces and state control, Andrews-Speed said.

The China Electricity Council (CEC) has called for “further price reforms to create a market-based system that will allow fuel cost fluctuations to be fully reflected in end-user prices,” the Post reported in late July.

The conflict and cost-shifting have also been mirrored in the economy as a whole.

In August, China’s producer price index (PPI) climbed 9.5 percent from a year earlier to a 13-year high, the National Bureau of Statistics (NBS) reported, but the consumer price index (CPI) inched up only 0.1 percent.

The low CPI figure benefitted from falling pork prices and the heavy weighting of food in the index, while coal mining and washing was a main contributor to the PPI surge, a senior NBS statistician said.

But the wide disparity in factory gate and retail price growth reflects the government’s effort to contain this year’s boom in commodities, which has swept through sectors including crude oil, liquefied natural gas (LNG), iron ore, copper and coal.

In recent months, the government has resorted to a series of non-market tactics to keep inflation in check by pressuring producers to absorb higher input costs.

In July, the NDRC said it would “closely monitor” price changes and futures trading to “maintain market order,” threatening to crack down on violations such as hoarding, the official English-language China Daily said.

In June, the agency also issued new rules for publishers of private commodity indexes in an apparent attempt to discourage reporting of price increases and inventory levels.

The bankruptcy warnings suggest that there may be a limit to the government’s use of such coercive measures to restrain prices.

As coal inventories at power plants have dropped, generating companies have started restocking for winter earlier than usual, Reuters reported. The move seems likely to put further strains on supplies.

The crisis for coal-fired generators comes as environmental groups and climate activists are raising pressure on China to stop building new coal plants.

Although China has made major strides in developing renewable energy sources, it still relies on coal for about 60 percent of its electricity needs.

Despite international criticism, China’s provinces still plan to add 104.8 GW of new coal-fired generating capacity, Greenpeace said in August.

But the latest figures on China’s electricity consumption suggest that demand growth may be slowing down.

In August, power use rose just 3.6 percent from a year earlier. In the first eight months of the year, consumption increased 13.8 percent, the NEA said.

Electricity use in the secondary industrial sector including manufacturing was nearly flat in August with an increase of 0.6 percent from a year before, the NEA said.