"China Power Report Q1 2014" Published

While China power sector is set to remain in a league of its own, storm clouds are gathering on the horizon. According to BMI's Country Risk analysts the Chinese economy is likely to enter recession over the coming months. Despite record new credit issuance in recent months, the manufacturing sector has once again entered contraction, and high household savings rates by no means suggest that consumer demand will remain unscathed. That said, a slowdown in power demand appears to be on the cards. Meanwhile, the country is trying to ease its reliance on coal, focusing on cleaner forms of power generation. However, we still expect coal-fired capacity to grow in real terms and dominate the energy mix to the end of our forecast period.

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In terms of fuel mix, conventional thermal sources play a key role and are expected to continue to dominate electricity generation in the coming years, as many projects under construction or planned will use coal or gas and China intensifies its efforts in prospecting and exploitation of conventional oil and gas resources. In particular, while other sources of power will play increasingly important roles, coal-fired sources of electricity dominate, and will continue to dominate, the electricity mix in China over the course of our 10-year forecast period. Yet, rising coal prices are once again a key threat to the profitability of power generation companies operating in the domestic segment, and Chinese utilities have placed collective pressure on the government to moderate proposed restrictions on imported coal, highlighting the difficulties China has in balancing the interests of its mining and power sectors as growth slows.

Aside from short-term considerations, and while it should be kept in mind that China will remain in a league of its own, macroeconomic and sector-specific factors also point to an equally moderate long-term outlook. In particular, we highlight that while the energy white paper published in October 2012 should not be taken at face value, the substantial emphasis the document puts on conservation, energy efficiency and emissions reduction is certainly significant and could influence the electricity markets.

That said, some more positive recent developments in the market include:

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