Under the background of stable coal supply and price, coal-fired power generation industry

1. Basic situation of coal-fired power generation industry

1.1 Thermal power is mainly coal-fired power generation

At present, China comprehensively uses a variety of different ways to generate electricity, including thermal power generation, hydroelectric power generation, wind power generation, solar power generation, nuclear power generation and so on. In terms of installed capacity, by the end of 2021, China's installed capacity of generating units was 2.377 billion kilowatts, of which thermal power, hydropower, wind power, solar power and nuclear power units were 12.97, 3.91, 3.28, 307 and 53 million kilowatts, respectively. The proportions were 54.56%, 16.45%, 13.82%, 12.90% and 2.24%, respectively. In terms of power generation, the power generation capacity of power plants above designated size in 2021 will be 8.11 trillion KWH, of which the power generation capacity of thermal power, hydropower, wind power, nuclear power and solar power will be 5.77, 1.18, 0.57, 0.41 and 0.18 trillion KWH. The proportion was 71.13%, 14.60%, 6.99%, 5.02% and 2.26%. Overall, China's thermal power unit installed capacity accounts for more than 50%, thermal power generation accounts for more than 70%, thermal power is an important source of power in China.

The principle of thermal power is to use the heat energy generated by burning coal and other combustible materials to heat water, thus producing steam. Steam drives the steam engine and produces mechanical energy. The steam engine runs the generator and produces electrical energy. Generally speaking, thermal power generally refers to coal-fired power generation, gas power generation, fuel power generation, biomass power generation and so on. By the end of 2021, the installed capacity of coal-fired power units in China will reach 1.109 billion kilowatts, accounting for 85.52% of the installed capacity of thermal power units. The installed capacity of gas units was 109 million kilowatts, accounting for 8.37%; The installed capacity of other units was 79 million kilowatts, accounting for 6.11%. The installed capacity of coal-fired units accounts for more than 80%, and thermal power is mainly coal-fired power generation.

1.2, coal power industry chain

In terms of the industrial chain of coal-fired power generation, the upstream is mainly composed of the thermal coal industry, and the representative enterprises are China Shenhua and Shaanxi Coal Industry. The coal-fired power generation industry is in the middle of the industrial chain, and the representative enterprises mainly include Huaneng International and Huadian International. The downstream is mainly composed of the power grid industry and power users, and the representative enterprises of the power grid industry are mainly the State Grid and the Southern Power Grid, etc. The power grid company transmits power to the terminal power users through the transmission and distribution network.

Located in the upstream of the thermal coal industry is a cyclical industry, we combed the data of 18 enterprises in the Shenwan thermal coal Index, 2017-2021 average gross margin and average net margin between 24% and 31% and 2% to 12%, respectively, profitability fluctuation is large. In addition, we combed the data of 27 enterprises in the Shenwan Thermal Power Index, and the average gross profit margin and average net profit margin in 2017-2021 were between 1% and 18% and between -9% and 8%, respectively, with large fluctuations. Generally speaking, when the price of thermal coal rises, the profitability of thermal coal enterprises will increase. As thermal coal is the main raw material of coal-fired power generation enterprises, with the price of thermal coal, the profitability of coal-fired power generation enterprises will decline. The same goes for thermal coal when prices fall. Therefore, the profitability of midstream coal-fired power generation enterprises and upstream thermal coal enterprises shows a reverse change relationship.

1.3. Market concentration is expected to increase

In terms of market competition, we have sorted out the data disclosed by the listed companies in the industry. By the end of 2021, the installed capacity of coal-fired units of Huaneng International, Guodian Power, Datang Power, Huadian International and Zheneng Power is 9211.82, 7739.96, 4795.40, 4236.00 and 2887.50 million kilowatts, respectively. The proportions were 8.31%, 6.98%, 4.32%, 3.82% and 2.60%, respectively. The total installed capacity of coal-fired power units of the five listed companies accounts for 26.03% of the country, and the market competition pattern is relatively dispersed, mainly because local governments usually hold and support local thermal power enterprises in order to ensure power generation and electricity consumption, such as Zhejiang Power Company listed in Zhejiang Province and Guangdong Power company listed in Guangdong Province.

We believe that China attaches more importance to the control of energy consumption of coal-fired power generation. In 2021, the National Development and Reform Commission issued the Notice on the transformation and Upgrading of National Coal power Units, requiring further reduction of energy consumption of coal power units, and in August 2022, the National Energy Administration issued the Standard on Further Improving energy Efficiency and Flexibility of coal power plants. It is required to promptly integrate and revise the binding standards related to the assessment of coal power efficiency and flexibility, such as the energy consumption quota of unit product of conventional coal-fired generating Units, and the future energy consumption standards may be further improved. Some thermal power plants with weak technical strength and financial strength are more difficult to promote the transformation of coal power units, will not be able to meet the stricter energy consumption standards, superimposed by high coal prices, such thermal power plants will lose market competitiveness. According to the data of the enterprise check, as of October 2020, there are 11,400 existing thermal power-related enterprises in China, but as of February 2022, there are only 4,276 existing thermal power-related enterprises in China. Taking Guangdong Electric Power A as an example, in 2021, the holding subsidiary of Guangdong Electric Power A acquired the capacity indicators of small thermal power units of Huangpu Power Plant and Yunfu Power Plant to improve its own strength. We believe that in the process of stricter energy consumption standards, large thermal power plants with strong comprehensive strength may merge and integrate some small and medium-sized thermal power plants, so the market concentration is expected to increase.