China's new thermal capacity nosedived by almost 50% to 29GW

The government is dead serious about trimming dependence on coal-fired power.

Fitch analysts expect capacity additions to be high in 2017, with large thermal and renewable capacity still under construction. The pace of the thermal capacity trend has slowed down in 2016, with only ~ 29 gigawatts (GW) of net additions in 9M16 compared with ~ 55.9GW of net additions in 2015. 

However, even in the recently announced 13th Five Year Plan, the government still allows around 200GW of coal-fired power to be added within the next four years, until 2020.

Fitch added that the government has announced certain policies to provide improved utilisation for renewables and nuclear, at the same time taking measures to slow the pace of renewable capacity additions.

"We expect ‘dark spreads’ (the difference between tariffs collected and the cost of generation) to suffer from increased coal prices. China revised the Coal-Electricity Tariff Linkage Mechanism in 2015, which requires  the on-grid power tariff to be reviewed yearly to account for coal-price changes in the previous year on a regional basis," it said in a report.

Additionally, analysts do not expect an on-grid tariff hike in early 2017, given that 2016 year-to-date average coal prices are still below the levels in 2015 and 2014.

"We expect coal prices to moderate from today’s levels due to policy action, while no upward tariff adjustment will mean that dark spreads will compress. Generators in areas with low-on grid tariffs or higher coal costs will suffer more," it explained.