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12/11/2019 17:55

Impact of new tariff on most coal-fired gencos manageable

[ET Net News Agency, 12 November 2019] Moody's Investors Service said that the ongoing
liberalization of China's (A1 stable) power sector will raise business and financial risk
for coal-fired power generation companies (gencos), but that most can withstand the
resultant market competition and potential industry consolidation.
"The immediate impact on most coal-fired gencos will be manageable, as the new tariff
mechanism -- if implemented as planned -- will remove delays in passing through tariff
adjustments and thus reduce margin volatility," said Ivy Poon, a Moody's Vice President
and Senior Analyst.
"Moreover, the already narrowing spread between the unregulated and regulated tariffs
suggests rational market competition and modest margin compression when the power market
further deregulates in 2020," added Poon.
The government introduced a market-based power sales mechanism in 2016 for all power
gencos and a new tariff mechanism for coal-fired gencos, effective 1 January 2020. The
measures form part of ongoing reforms in the power sector to bring competition, increase
market efficiency and improve the pricing mechanism.
While the share of market-based sales has been rising over the past three years, tariffs
under the mechanism are lower than the current regulated tariffs, reducing profit margins
for most gencos, assuming coal prices remain flat. The unregulated power sales also
increase risk and volatility.
The new tariff mechanism will only further increase the gencos' exposure to market-based
prices, with any tariff reductions resulting from lower coal prices likely to pressure
profit margins.
Among the rated coal-fired gencos, Moody's said those with strong market positions,
efficient generation fleets and large business scales will be better placed to manage the
increase in competition as China's power market opens up.
By contrast, small gencos with weak operating and financial profiles will be more
vulnerable because of the growing market competition under the new tariff regime. (KL)

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