A new chapter of power sector reform: piloting direct purchase of electricity implemented in full swing

Transcription

1 July 1, 2009 Sector Research Power Sector Comments on major event in power sector A new chapter of power sector reform: piloting direct purchase of electricity implemented in full swing CITICS Research Yang Zhishan Tel: yzshan@citics.com Wu Fei Tel: wf@citics.com Event: On June 30, CERC, NDRC and the National Energy Administration jointly released the Circular on Issues Regarding Improving the Piloting Direct Electricity-Purchase between Customers and Power Plant. Comments: Piloting direct purchase of electricity is launched in full swing As early as March 2004, CERC and NDRC promulgated the Provisional Measures on Piloting Electric Power Subscribers Direct Purchase from Power Plants, which are taken as an important part of the power reform. However, the subsequent years have not seen the unveiling of relevant pilot plans or detailed rules. On March 6, 2009, MIIT, NDRC, CERC, and National Energy Administration jointly released the Circular on Conducting the Pilot Work on Electrolytic Aluminum Enterprises Direct Purchase of Electricity, selecting 15 such enterprises for the pilot. The coverage of this plan has been expanded from selected sectors to major industrial customers whose voltage is higher than 110KV and provisions regarding market access conditions for the two parties of the direct transaction, trading mechanism and prices have been fleshed out. We believe that as a part of work in deepening power reform, it means that piloting direct purchase of electricity has entered the phase of material operation. Regulate market access conditions: Major customers covered in the pilot are tentatively scheduled as major industrial customers whose voltage is higher than 110KV (66 KV) and eligible for the state industrial policies. Power generation enterprises covered in the pilot are recently tentatively scheduled as thermal power enterprises with single generator capacity of 300,000 KW and hydropower enterprises with single generator capacity of more than 100,000 KW, both being those put into operation in 2004 and thereafter. Trans-provincial (regional) power supply projects included in the national uniform distribution of electricity program are not covered in the pilot for the time being. Defining transaction prices: The electricity purchase price for major customers covered in the piloting direct purchase transactions consists of three parts, namely direct transaction price, on-grid electricity transmission and distribution prices, and government fund & surcharges, in which, direct transaction price is independently determined by major customers and power plants through negotiation without any third-party intervention; on-grid electricity transmission and distribution prices, in principle, is worked out with the average transmission and distribution price of power grid enterprises less the voltage grade price difference; major customers pay government fund & surcharges in accordance with the state regulations. Please read the disclaimer after the text

2 Major industrial customers eligible for this industrial policy will benefit directly while power grid operators and power plants make concession in electricity price in return for more sales volume. Essentially, the piloting direct purchase of electricity means that the power generation and power grid enterprises stimulate the growth of major industrial customers demand for electricity consumption through price cuts. Major industrial customers eligible for the pilot plan directly sign one year and one-year-plus contracts with power generation enterprises for purchase of electricity, which has direct role in reducing the electricity consumption cost of industrial enterprises and boosting the recovery of operation rate. In addition, this pilot plan will also further straighten out the unauthorized preferential electricity price policies unveiled by various local governments in previous stages. The direct transaction price is independently determined by major customers and power plants through negotiation, free from third-party intervention. Power generation enterprises close to large consumers and with large electricity consumption load and competitive generation cost advantages will be dominant in the negotiation for the purchase of electricity. Adoption of the piloting direct purchase of electricity may drive down on-grid electricity price for power plants in the context of over-supply, thus offsetting the rebounding electricity prices due to cancelation of preferential electricity price. On the other hand, this practice is also conducive for those energy-guzzling sectors to resume production, which thus will increase power plants utilization hours. In the piloting direct purchase of electricity, power grid enterprises will reduce electricity transmission and distribution prices. The electricity transmission and distribution prices therein is worked out based on the average transmission and distribution price of power grid enterprises less the voltage grade price difference, in which a 10% discount is provided for 110KV transmission and distribution price and 20% for 220KV (330KV) transmission and distribution price. The above is in line with the market-based pricing principle, because customers with higher voltage grade indicate more stable daily use of electricity and the supply cost is even lower. In the foreign power markets, the bilateral transaction between customers and manufacturers is the most important integral part of the power market, and the directly purchased electricity accounts for a big proportion of transactions in the power market. For instance, in California, over 90% of transactions in the power market come from long-term contracts for electricity purchase. The piloting direct purchase of electricity will be conducted at provincial level. In the current backdrop, we estimate that the contractual electricity covered in the initial period should stay at around 10%. Besides, as far as we know, in some provinces, planned electricity volume will be kept unchanged, and increment will be taken as the basis for signing the contracts, price concession made by power grid and power generation enterprises will result in the growth of demand for electricity consumption, so that it can reach the win-win goal of suppliers and customers. If major industrial customers in local provinces sign contracts based on full electricity volume, the impact on power grid and power generation enterprises will tend to be neutral. It can be learned that the efforts and specific plans of various local government to promote the pilot work will determine the interest allocation among the three parties. Please read the disclaimer after the text Jul.1,

3 Fig.1: National electricity prices in 2007 National electricity prices in 2007 (RMB/kWh) National average selling prices Average selling price: major industrial electricity consumption Average selling price: electricity consumption of residents Average government fund and surcharge Average national on-grid electricity price Average on-grid electricity price: central enterprises Average national on-grid electricity price: local enterprise Average national on-grid electricity price: wind power Average national on-grid electricity price: Nuclear power Average national on-grid electricity price; thermal power Average national on-grid electricity price: hydropower Transmission and distraction price: State Grid, including wire loss Transmission and distraction price: State Grid, excluding wire loss Transmission and distraction price: CSPG, including wire loss Transmission and distraction price: CSPG, excluding wire loss For power grid operators, turning profitable depends on electricity price hike. In Aug. 2008, NDRC raised on-grid electricity price for thermal power generators by RMB0.02 per KW/h on average, the second hike within a year, but maintained power grid operators selling price intact. This asymmetric price adjustment caused State Grid and China Southern Power Grid to suffer a combined loss of RMB10 bn in 1Q09 and the annual loss therefrom is estimated to reach at least RMB 40 bn. Based on the national power consumption of 7.8 trillion KW/h in 1Q09, the RMB0.02 per KW/h cut will result in ~RMB15.6 bn profit erosion, which is sufficient to cover losses of State Grid and China Southern Power Grid (CSPG) and pull them into black. To change the loss-making situation of power grid operators as well as lay foundation for further reform in power sector and given the trend of CPI after hitting the trough, we believe selling price for electricity by power grids may well be raised in 2H09. Fig.2: profit of State Grid Fig.3: profit of CSPG) ROE ROE Net profit (RMB100 mn) Gross margin Net profit (RMB100 mn) Gross margin A 05A 06A 07A 08A 09Q1 8% 6% 4% 2% 0% -2% -4% A 05A 06A 07A 08A 09Q1 12% 10% 8% 6% 4% 2% 0% -2% The supportive power transmission and distribution plan is expected to be unveiled Since there is no independent and improved system for electricity transmission and distribution prices, the piloting plan can temporarily base on the average electricity transmission and distribution prices of power grid enterprises only, and provincial competent authorities may submit opinions to NDRC for approval. To tie in with the promotion of the piloting direct purchase of electricity, NDRC and other ministries and commissions are developing new plans regarding the electricity transmission and distribution price. The new plan will, on the basis of the current electricity transmission and distribution prices, make revision in Please read the disclaimer after the text Jul.1,

4 combination with the local situations, and thus initially define the electricity transmission and distribution prices for major customers direct purchase of electricity in various provinces. New measures for the administration of electricity transmission and distribution prices of power grid enterprises are expected to be unveiled in 2H09. The improvement of the electricity transmission and distribution price mechanism is an important base for the power reform, and a clear and specific electricity price formation mechanism is necessary to further push forward the on-grid bidding, separation of transmission from distribution, and other important contents of power reform. This pilot program opens a new chapter for reform in the power sector Since 2002 when the separation of power grids from power plants was implemented, there has been no material progress in power sector reform. We predict that after this pilot program is rolled out, power sector reform will be deepened in the direction such as straightening out electricity transmission and distribution prices, piloting reform of regional electricity markets, separation of power transmission from distribution etc. Therefore, piloting direct purchase of electricity implemented in full swing marks an important step forward in China s power system reform, opening a new chapter for the market-based operation of China s power industry. Table 1: Memorabilia of China s power reform Date Contents Separating government administration from enterprise management in the power industry. The Ministry of Electric Power was cancelled, and the State Power Corp undertakes the five major regional group companies, seven provincial companies affiliated to the Ministry as well as Huaneng and Gezhouba groups directly under the Ministry. Mar The State Council approved the Plan for Power System Reform, deciding to set up power system reform working group headed by the State Planning Commission, responsible for organizing the implementation of power reform plans. Dec State Power Corp was split into two power grid companies and five major power generation groups, namely State Grid, CSPG, and Guodian, Huadian, Huaneng, Datang, and China Power Investment Corporation. Mar National Electricity Regulatory Commission was established, starting to perform its responsibilities as the power market regulator, and achieved the separation of governmental administration from regulation. Jun Plan for Electricity Price Reform was distributed Northeast China Grid power market pilot Feb Oct Apr Aug Dec Mar Mar Regulations on Power Supervision and Administration were issued. RMB7 bn power assets were sold in public, 920 project solicited investors from all sectors Opinions of Power System Reform Working Group on the Implementation of Deepening Power System Reform during the Eleventh Five-Year Plan Period was approved by the State Council State Council approved the Measures for Energy Conserving Power Generation Scheduling (tentative) NDRC, Environmental Protection Administration, CERC, and State Energy Office issued the Working Plan for Energy Conserving Power Generation Scheduling, with piloting provinces covering Guizhou, Guangdong, Henan, Jiangsu, and Sichuan SASAC, NDRC, Ministry of Finance, and CERC jointly issued and distributed the Opinions on Regulating Employees of Power System in Investing in Power Generation Enterprises CERC stipulated the Tentative Measures for the Supervision and Administration of Power Generation Right Transaction Mar National Energy Administration was established SERC released the Tentative Measures for the Settlement of Electricity Fare between Power Generation Enterprises and May 2008 Power Grid Enterprises SASAC released the Opinions on Regulating State-owned Enterprises Employees in Holding Shares and Investment (draft Jun for comments) MIIT, NDRC, CERC, and National Energy Administration jointly released the Circular on Conducting the Pilot Work on Mar Electrolytic Aluminum Enterprises Direct Purchase of Electricity, selecting 15 such enterprises eligible for national industrial policies and direct purchase of electricity for the pilot. Source: CITICS Research Please read the disclaimer after the text Jul.1,

5 Analyst Certification Analyst(s) writing this report hereby certify: I. all views expressed in this report are personal views derived from public available information of the subject securities or issuer; II. The subject securities or issuers in this report are picked by the analysts themselves through top-down research, quantitative method or sectoral comparison. Disclaimer The report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject CITIC Securities Limited Company and its subsidiaries and affiliates (collectively CITICS ) to any registration or licensing requirement within such jurisdictions. All material presented in this report, unless specifically indicated otherwise, is under copyright to CITICS. None of the material, nor its contents, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express authorization in written of CITICS. All trademarks, service marks and logos used herein are trademarks or service marks or logos of CITICS. The information, tools and material presented in this report are provided for your reference only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CITICS have not taken any steps to ensure that the securities referred to herein are suitable for any particular investor. The contents herein do not constitute investment advice to any person and CITICS will not deem recipients as its customers by virtue of their receiving the report. Information and opinions presented herein have been obtained or derived from sources believed by CITICS to be reliable, but CITICS makes no representation as to their accuracy or completeness and CITICS assumes no liability for any losses or damages arising from the use of the material presented herein unless such liability arises under specific statutes or regulations. This report is not to be relied upon in substitution for the exercise of independent judgment. CITICS may have issued other reports inconsistent with, and reaching conclusions different from, the information presented herein. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them. To avoid any doubt, the opinions herein do not represent the standpoints of CITIC Securities Limited Company or any of its subsidiaries or affiliates. CITICS may, to the extent permitted by law, participate or invest in financial transactions with the issuer(s) of the securities referred to herein, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or options thereon. CITICS may, to the extent permitted by law, act upon or use the information or opinions presented herein, or the research or analysis on which they are based, before the material is published. CITICS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the companies mentioned herein. Additional information is available on request. Past performance shall be no indication and guarantee of the future performance. Information, opinions and estimates contained herein reflect a judgment at the date of its original publication by CITICS and are subject to change. The prices, values and incomes of the securities or financial notes referred to herein may decline or increase. Several investments may not be sold easily. Similarly, it may be difficulty for you to obtain accurate material regarding prices for or risks facing such investments. The investment and services referred to herein may not suit you. We suggest you consult an independent investment adviser. Nothing in this report constitutes investment, legal, accounting or tax advice nor a representation that any investment or strategy is suitable or appropriate to your individual circumstances. Nothing in this report constitutes a personal recommendation to you. The report is to be distributed to the market professional and institutional investment clients of CITICS. Those recipients who are not the market professional and institutional investment clients of CITICS shall consult independent financial advisers prior to making any investment decisions based on this report or requesting any interpretations hereon. CITIC Securities Limited Company and Subsidiaries and Affiliates 2009 copyright. All rights reserved. Notes on Ratings 1. Comparison Standard for Investment Recommendations Investment ratings are divided into stock ratings and industry ratings. The comparison standard is the market performance over the 6-month period upon the report issuance day with appreciations and depreciations of company stock prices (or industry indexes) over the 6-month period upon the report issuance day compared to S&P/CITIC 300 of the same period as the benchmark; 2. Ratings Standard for Investment Recommendations Appreciations or depreciations of company stock prices (or industry indexes) over the 6-month period upon the report issuance day compared to S&P/CITIC 300 of the same period. Stock ratings Industry ratings Ratings Buy Overweight Hold Sell Outperform Neutral Underperform Description CITIC/S&P 300 Index >20%; CITIC/S&P 300 Index 5% ~ 20% CITIC/S&P 300 Index -10% ~ 5% CITIC/S&P 300 Index > -10%; CITIC/S&P 300 Index >10%; CITIC/S&P 300 Index -10% ~10%; CITIC/S&P 300 Index > -10%; CITIC Securities Beijing Shanghai Shenzhen International Company Limited Add: 22/FL, China Fortune 26Fl.,CITIC Tower, Capital Mansion, No.6 B33Fl., Zhongmin Time Tower, 1568 Century No.1 Tim Mei Xinyuan Nanlu, Chaoyang Square, 12 Sun Gang Avenue, Pudong, Avenue, Central, District (100004) Road,. Shenzhen(518029) Shanghai (200122) Hong Kong Tel: (010) (021) (0755) (852) Fax: (010) (021) (0755) (852) Hot line: (010) service@citics.com Website: