China’s simultaneous development of renewable and coal power continues. CHN’s 500 MW Longyuan offshore wind project in Hainan was approved by the local government, while 13 GW of coal power projects were approved in multiple provinces since mid-September.
After Southern Hebei, it is now Henan’s turn to increase the peak-valley price differences of its power to more than 1 CNY/kWh. Critical peak prices will be more than quadruple that of valley prices, underlining the province’s intent on forcing the transfer of peak load electricity to periods of lower demand.
The China Electricity Council, one of China’s main power industry associations, has released a report recommending increasing the coal power benchmark price by 16% to reflect the increase of power generation costs. While such a move might increase power prices in the different electricity markets, it could also increase revenues for renewable projects and lessen the subsidy burden the central government is facing. We provide a short analysis of this report in our Corporate Net Zero Pathways column.
CHN Longyuan Hainan 500MW offshore wind project approved by local government
China has approved 13 GW new coal power generation projects since mid-September 2022
Peak-valley power price difference exceeds 1 CNY/kWh in Henan
Catering industry is turning to hydrogen-fueled trucks to decarbonize supply chain - Foton, Yum China, and Air Products sign a strategic cooperation agreement for FCV
Corporate Net Zero Pathways: China Electricity Council Advocates to Raise the Coal-fired Base Price by 16%
CHN Longyuan Hainan 500MW offshore wind project approved by local government
CHN Longyuan Hainan 500MW offshore wind project has been approved by the local government. The project’s central point is 12 km from the coast, with water depths ranging between 12m and 26.5m.
The planned capacity of the project is 500MW, and 59 wind turbines with a single unit capacity of 8.5MW are planned to be installed. The total construction period of the project is 24 months, and the total investment is CNY 6 billion (USD 840 million).
China has approved 13 GW new coal power generation projects since mid-September 2022
According to statistics from Polaris Network, 18 coal projects have been approved, have started construction, or have passed the feasibility study since the beginning of September, representing 30 GW in capacity.
Among them, 7 have been newly approved, representing 13 GW in capacity. These include new projects or capacity expansion and upgrading projects. The power generation units range from 660 MW to 1240 MW in size and are scattered across several provinces such as Guangdong or Shanxi. Developers are the classic State-Owned Enterprises such as CHN Energy or Datang Group.
Peak-valley power price difference exceeds 1 CNY/kWh in Henan
Henan DRC has released the ‘Notice on the Improvement of Electricity Time of Use (ToU) Mechanism’《关于进一步完善分时电价机制有关事项的通知》.
The policy states that ToU electricity prices will be applied to both the purchase price in the market as well as the grid’s average retail price. The latter applies to power users that have yet to participate directly in power market trading. The policy also introduced a seasonal pricing mechanism – in January, July, August and December, power prices will be higher than other months.
The electricity price during peak and valley periods will increase 71% and decrease 53%, respectively, compared to shoulder electricity prices. Furthermore, a 20% mark-up on top of the peak hour price will be implemented for critical peak hours during these months.
Catering industry is turning to hydrogen-fueled trucks to decarbonize supply chain - Foton, Yum China, and Air Products sign a strategic cooperation agreement for FCV
Foton, Yum China, and Air Products have signed a strategic cooperation agreement during the 5th China International Import Expo. Yum China owns the franchising of several catering brands such as KFC and Pizza Hutin China.
It has an urgent need for cold chain transportation powered by new energy. The three parties will work together to plan for suitable application of hydrogen fuel cell vehicles and locate appropriate sites for liquidized hydrogen refueling stations.
Corporate Net Zero Pathways
China Electricity Council Advocates to Raise the Coal-fired Base Price by 16%
China Electricity Council (CEC) released a report titled ‘Research report on electricity price mechanisms adapted to a new power system’ recommending raising the average coal-fired power base price from 0.3736CNY/kWh to 0.4335CNY/kWh, representing a 16% increase. As far as CEC is concerned, the key problems in the Chinese electricity pricing mechanism include:
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The decoupling of the coal-fired power base price and the coal price, which results in the issue that on-grid power prices cannot correctly reflect the genuine cost of coal-fired power.
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Environmental attributes of new energy cannot be fully recognized. The incumbent RPS (Renewable Portfolio System) mandate is not effectively allocated to power consumers and is not fit for the intermittent characteristics of new energy.
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Transmission & distribution (T&D) pricing methodology needs to be improved, especially the large-investment-scale T&D projects serving specific provinces.
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It is difficult to effectively recover the cost of maintaining power system resilience.
According to CEC, in 2021, the coal power business of the five major power generation groups (i.e. CEC, SPIC, Datang, Huaneng, Huadian) suffered a total loss of CNY 142.7 billion (USD 20.2 billion). From January to September 2022, the coal procurement cost of the five power generation groups increased by about CNY 260 billion (USD 37 billion) YoY. Apparently, CEC, representing the China power industry mainly made up of thermal power companies, intends to advocate for a further liberation of coal power prices. If we look at the bigger picture, what changes could be brought to the power market in China if the average coal-fired power base price was raised by 16%?
Firstly, it would up-lift the average price of the power market
Coal-fired power would not be the only one to benefit from such a rise. Nowadays, most of the coal-fired power, except a few coal-fired power plants with priority dispatch and captive plants, are forced to sell electricity in the power market. Under such circumstances, the coal-fired power base price is used as a price reference for the transaction prices of the forward power market. Since the present rules set a price fluctuation range of +-20% based on the coal-fired base price for all the Mid-Long-Term(forward) contracts, if the new coal-fired base price suggested by CEC is implemented, the average price range could be 0.3468CNY/kWh - 0.5202CNY/kWh, which is 16% higher than the current price range.
In the western provinces, where penetration of renewable power is high and new energy projects must sell a large share of their annual energy production (AEP) in the power market (up to 65% in certain provinces), this would enhance the annual return of new energy projects due to the rise of the average price, all else being equal.
On the other hand, the price gaps between provinces in western China (e.g., Ningxia) and coastal provinces (e.g., Zhejiang) would become smaller, which may encourage new wind and solar capacity to be built in remote provinces and sell electricity locally given the interprovincial price gap reductions. This could effectively help local authorities meet their non-hydro RPS targets. In 2022, many remote provinces such as Shanxi have explicitly required new energy producers to trade in the local power market before selling to other provinces to help meet this year’s RPS target.
However, investors may also need to consider local consumption bottlenecks. According to the CEC, curtailment problems may resurface when all of the 9 clean energy bases (figure 1) will have been completed.
Secondly, it could increase the cashflow of new energy projects and ease the subsidy burden of the Chinese government
In China, grid companies are still the key off-takers for most of the new energy projects (at least for the guaranteed purchasing hours) and coal-fired base prices of different provinces are used by the grid companies as the power purchasing prices (i.e. on grid prices). The central government is responsible for paying the difference between the on grid price and the FiT (feed-in-tariff), which represents the subsidy. The rise of the coal-fired base price would write off a big chunk of upcoming subsidies to be paid by the central government, and in parallel, increase the cash flow of subsidized projects.
The project IRR of a solar project in Jiangsu, for example, with full grid-offtake may grow from 6% to 8%, all else being equal (Jiangsu’s existing coal-fired base price is 0.3991CNY/kWh). For provinces with lower coal-fired base prices such as Ningxia, Inner Mongolia, the change would be more significant. (CEC)
(MEE)
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