China Huaneng Group President Li Xiaopeng expects the firm to maintain its growth momentum this year, although the power industry might be saddled with possible coal shortages.

Li said the company, one of China's five largest power conglomerates, expects to generate 204.8 billion kilowatt-hours of electricity this year, up more than 5 percent from 2004.

Li unveiled the plan yesterday at Huaneng's annual working conference in Beijing.

"Huaneng aims to become a large conglomerate with competence on the international market," said Li.

But this year's growth will be much lower than Huaneng's expansion in 2004.

Huaneng generated 194.78 billion kilowatt-hours of electricity last year, an 11.7 percent increase compared to 2003, according to Li.

As China suffers from widespread power shortages, Huaneng and other power generators have been operating around the clock to increase their output since last year.

China, the world's second-largest energy consumer behind the United States, produced 2,187 billion kilowatt-hours of electricity in 2004, rising nearly 15 percent year-on-year, according to the China Electricity Council.

The country's annual power output is expected to hover between 2,200 to 2,300 billion kilowatt-hours this year, analysts said.

According to Li, the company's increased output this year may help lift its revenue by nearly 15 percent year-on-year to more than 60 billion yuan (US$7.2 billion) in 2005.

Its annual profit is expected to increase by 8 percent in 2005 compared with 2004, but Li did not offer a specific figure.

At yesterday's meeting, Li attributed the company's stunning performance in 2004 to Huaneng's improved management and technology, and its sustained efforts to ensure a stable coal supply despite long-standing coal shortages.

But Huaneng and its counterparts in China's power industry suffered from a coal price surge last year.

The coal price, which accounts for half of a power plant's costs, increased by 30 percent in 2004 on a year-on-year basis.

The industry was also hit by the declining quality of coal.

Statistics from the China Electricity Council show 26 municipalities, provinces and autonomous regions had restricted electricity supplies, mainly because of the power industry's tight coal supply situation.

Industry experts said Chinese power companies will face tougher challenges this year, including a further coal price increase, deteriorating coal quality and a coal shortage.

Coal suppliers and electricity generators failed to sign the expected number of long-term coal supply contracts during the 2005 Coal Ordering Conference which ended earlier this month.

The conference signed contracts for 140 million tons of coal for power generation, which only accounts for a small proportion of total demand, Sun Yucai, vice-chairman of the China Electricity Council, said yesterday.

Huaneng signed contracts for 50 million tons of coal during the ordering conference, but its actual demand this year is expected to reach 80 million tons, a senior Huaneng official told China Daily.

Although coal suppliers and buyers signed long-term contracts, it will not be easy for the coal suppliers to stick to the terms of these agreements, according to industry insiders.

Industry experts said this is due to the striking difference between the price of coal for power generation and for domestic use.

Regulated by government policies, coal sold to power generators is priced at a much lower rate than other sectors experience.

"Coal suppliers, like other market players, of course prefer to sell their products at a higher price," said one Huaneng official.

Coal prices have seen several jumps over the past few years, so the profit margin of the power industry, whose pricing is controlled by the government, has greatly shrunk.

With an aim to pass the cost increase to end users and improve the power companies' profits, China started the coal-power pricing linkage mechanism early this year.

But the new mechanism involves risks for power companies, warned industry experts.

Power companies have to take in 30 percent of their cost increase under the new pricing linkage mechanism.

Besides, coal prices may further increase this year, said experts.

Along with these challenges, China's power industry still foresees vast development potential, said Sun from the China Electricity Council.

China has approved 70 million kilowatts of new generating capacity for 2005, an increase of 20 million kilowatts from last year, according to industry sources.

The great demand for power in China will fuel the industry's rapid development, said Sun.

Facing these tough challenges, Huaneng said it will continue to improve its management and make efforts to control costs.

While maintaining power generation as its core business, Huaneng plans to invest in financing, coal and transportation, said company sources.

The company also expects to further explore the international market by acquisition and co-operation.

The year 2005 marks a critical point for China between the 10th Five-Year Plan (2000-05) and the 11th Five-Year Plan (2006-10), and as a giant State-owned enterprise, Huaneng's 2005 performance will exert significant influence on the power industry and China's overall economic development, said Li.

(China Daily January 21, 2005)