(The following was released by the rating agency)
SEOUL/BEIJING/SINGAPORE, March 06 (Fitch) China’s plan to reform energy use and resource pricing has positive implications for the country’s centrally owned electricity grid and nuclear power companies. But the reforms are likely to leave thermal generators out in the cold.
In his formal report to the National People’s Congress (NPC), Chinese Premier Wen Jiabao outlined the government’s plan to optimise the country’s energy structure, promote the clean and efficient use of traditional energy sources, safely and effectively develop nuclear power, and increase the share of new energy in the country’s total energy consumption. The NPC speeches and documents underline our view that there is strong government support for China’s energy sector. Moreover, the way in which support is allocated among the centrally owned energy companies will continue to distinguish the haves - the oil, grid, nuclear and city gas companies - from the have-nots, the thermals.
The plans confirm the gradual implementation of market pricing for oil products, city gas and some electricity tariffs over 2012-2015, but leave room for the National Development and Reform Commission (NDRC) to direct the market by ad hoc adjustments, and freedom to gradually introduce market mechanisms. This means the government will continue to favour the centrally owned grid and nuclear power companies over the more fragmented thermal generators such as Huaneng International (‘BB+’/Stable), Datang International (‘BB’/Stable), China Power International Development (‘BB’/Stable), and Huadian International (‘BB-‘/Stable).
The NPC documents confirm China’s commitment to “safely and effectively” developing nuclear power. We believe this is a clear vote of confidence for nuclear to be the main plank of China’s non-carbon energy drive and gain further momentum after total nuclear generation grew by 13.3% in 2011. Favourable adjustments to nuclear on-grid pricing will ensure the cash flows of the nuclear generators remain healthy, and provide support for overseas uranium acquisitions.
For thermal generators, tighter emission controls not only imply a higher capex burden, but also emphasise that coal will remain out of policy favour. Moreover, a relatively low 4% CPI target nationally will not translate into on-grid electricity tariff rises in provinces where the thermal generators produce at a loss. Nevertheless, coal will remain the backbone of China’s power generation for the foreseeable future, and the NDRC’s NPC documents make specific mention of a clean thermal power programme estimated by the Ministry of Environmental Protection to require CNY260bn of additional capex across the industry by 2015.
The pricing reforms will hold good news for oil companies over 2012-2015, even though the government will not immediately lift controls on product prices that affect the oil companies’ low refinery margins. However, as China’s refiners are fully integrated, the margin lost in the refinery can be partially made good both upstream and downstream.
Pricing reform aims to lift China’s gas tariffs to international LNG pricing levels by 2015, and so raise the margins of upstream suppliers PetroChina (‘A+’/Stable) and Sinopec (‘A’/Stable) without taking away from the healthy downstream margins of city gas companies such as China Resources Gas (‘BBB+’/Stable) and ENN Energy (‘BBB’/Negative). The NPC’s tighter emissions controls on coal underline the importance of oil and gas for China’s energy security, and therefore the likelihood of on-going overseas acquisitions.