China’s coal IPPs to continue profit recovery

Spot thermal coal prices were down by around 20% from January to August 2023.

Coal-fired independent power producers in China are expected to continue their profit recovery in the second half of the year on the back of the ongoing moderation of coal prices and the upward adjusted tariffs.

In a report, S& Global Ratings said spot thermal coal prices in the first seven months of 2023 declined by around 20% compared with the average in 2022. This is due to the expansion of domestic coal production and cheaper coal imports.

"Longer-term, we expect the thermal coal price to return to the government-guided range and the market-based on-grid tariffs to better reflect power supply and demand dynamics," said S&P Global Ratings credit analyst Scott Chui.

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National power consumption rose by 5.2% year-on-year in the same period, with full-year growth expected to increase by around 6% according to forecasts by the China Electricity Council.

Meanwhile, Chui said coal power tariffs will “hold up” for the remained of the year on the back of their high proportion of power tariffs secured in annual sales contracts.

Rated issuers report an average of 2% coal power tariff hike in the first half of 2023 from last year, which translates to about a 20% premium to the coal-fired benchmark rates.

S&P said the potential risk of tariff cuts may pile up for 2024 and beyond with the softening of coal prices.

It added that the ancillary services market may create opportunities for IPPs as they are responsible for maintaining power grid stability.

China Resources Power Holdings and Huaneng Power International earn around $102.2m ($800m) and $209.3m (RMB1.5b) from ancillary services such as peak shaving.

“We expect secular growth in the ancillary services in China, and this should compensate the coal-power units for the likely lower utilization in the future,” it said.

$1 = HK$7.83; $1 = RMB7.17