China power sector poised to restart reforms

Grid companies are first in line.

It has been reported that the first draft of “Opinions regarding the Deepening of the Power Sector’s Reform” has been completed and submitted to the National Development and Reform Commission (NDRC) for discussion.

According to a research note from Nomura, the above draft includes two key contents. The first is to separate the power transmission and distribution businesses, and to encourage private capital to invest in the power distribution sector.

The second is to restructure the earnings model of the grid companies, with the current earnings from the spread between on-grid and retail tariff to the potential fixed power transmission fee in future.

Here's more from Nomura:

Our comments: Limited short-term impact on China IPPs; but positive for the long term with more market-driven mechanism. Although the power sector reform has been discussed since 2012, we note that the reform progress has lagged behind the target.

The draft, therefore, can be seen as a signal from the government that it intends to restart the reform, especially pursuant to President Xi’s inclination towards accelerating the SOEs’ reform in China.

Short-to-mid-term impact: We believe the short- to mid-term impact will be mainly on the power grid companies. With the potential to separate the power transmission and distribution businesses, this will gradually weaken the monopoly position of the power grid companies, in our view.

Long-term impact: On a longer-term basis, with the weakening position of the power grid companies, this may help to increase the transparency and efficiency of the power sector value chain, and in turn expand the reform to other parts of the power sector, including the effective implementation of the coal-power tariff linkage mechanism, promotion the direct power trading between IPPs and the large power users, etc.