A USD1 trillion power industry overhaul is just starting
A driver stands on the top of this truck filled with coal at an unidentified coal mine and accompanying facilities in Liuling
China’s move to create the world’s biggest power company is expected to be the first such mega-merger in the largest energy consumer.
The newly formed China Energy Investment Corp. – a combination of Shenhua Group Corp., the nation’s largest coal miner, and China Guodian Corp., one of its top-five power generators – may be the first of multiple consolidations, which Wood Mackenzie Ltd. estimates would include almost USD1 trillion in assets.
“The Shenhua-Guodian merger is just the beginning of a wave of massive consolidations in China’s energy sector,” said Frank Yu, a Beijing-based analyst at Wood Mackenzie. “The landscape of major power utilities could be fundamentally reshuffled.”
The merger is one of the clearest signals of President Xi Jinping’s commitment to consolidate China’s power industry as his government seeks to cut industrial overcapacity and accelerate the overhaul of state-owned enterprises. It also dovetails with efforts to lower the country’s reliance on coal and expand the use of renewables and natural gas. At 1.65 terawatts, China has more than 40 percent more generating capacity than the U.S.
“More central state- owned enterprise integration – particularly between power generators or between coal and power companies – will likely emerge,” Jenny Yang, director of China power and renewables at IHS Markit Ltd., wrote in a research note. “Some of the other large power generation companies will likely be targets for future mergers.”
China’s top five power producers were formed from the 2002 break up of State Power Corp., aimed at improving the sector’s efficiency. That followed the 1997 creation of State Power, which was carved from what was then the Power Industry Ministry to separate the business and regulatory functions of the sector.
“The 2002 reform was a success in terms of raising China’s power generation capacity, and achieved what it was designed to achieve: to break power monopoly and say goodbye to the old planned economy,” said Simon Powell, head of Asian utilities research at UBS Group AG in Hong Kong. “What it failed to achieve was to set rules for ‘economic dispatch’ or limiting what kind of power plants generators can and cannot build.”
In 2003, power supply was unable to keep pace with demand, with weekly power failures hitting more than half of China’s provinces and regions, as well as major cities including Shanghai. Power generation more than tripled from then until last year, hitting 5.9 trillion kilowatt hours. MDT/Bloomberg
