Power shortage in China to worsen in 2012

But nuclear will remain key to China's energy policy with new approvals to start in 2012.

According to Macquarie Equities Securities, coal power capacity additions will also decline significantly in 2012/2013.

Here’s more from Macquarie:

Peak power shortages remain a structural issue and are likely to get worse in 2012 and 2013, as per the CEC, despite a recent tariff increase which alleviates some profitability issues. This is useful in the medium term for coal prices (higher utilisations at existing power plants), diesel demand (where power is short diesel genset will be used), and gas demand (long term when gas fired power plants are built). Our preferred plays on this theme are Chinese and Asean Coal (Shenhua, China Coal, SAR, Harum); Upstream Oil and Gas and Downstream gas (CNOOC, PetroChina, ENN Energy). Sinopec may suffer under this scenario.

Investment in the grid will be robust in the four following areas: 1) Distribution network; 2) Inner provincial transmission lines; 3) Inter-provincial transmission lines; 4) UHV line (where two lines have been approved). Shanghai Electric has the highest exposure out of the major power equipment stocks, but also Guodian Nari (A Share) and Boer Power (small cap).

Coal power capacity additions will decline significantly in 2012/13 (down 50%) due to poor profitability and stretched balance sheets at the IPPs, as per the CEC. This should have a detrimental impact on earnings for Harbin Power and Dongfang Electric which have 62% and 45% of their earnings (2010), respectively, coming from this area.

Wind remains challenging as connections are likely to be controlled and curtailment to continue medium term, as per the CEC. We think the growth and pricing outlook for the wind equipment players looks challenging (eg. Goldwind and Dongfang) but argue that this is in the price for the wind power producers (preferred plays are Huaneng Renewable and Suntien) and China High Speed.

Coal companies will continue to have pricing power over IPPs given market structure (controlled power prices vs "market" coal prices), as per the CEC. We prefer Shenhua and China Coal over the Power stocks (Huaneng Power, Datang Power, China Resources Power).

Nuclear will remain key to China's energy policy with new approvals to start in 2012, as per the CEC. We continue to prefer Shanghai Electric over Dongfang (because of 20% wind exposure) and Harbin Electric (unproven delivery.)