In view of a possible future supply surplus in China's power market, the nation's major electricity companies are competing to buy local assets and forge long-term alliances with big consumers, to consolidate their portfolios and profitability.

 

The Chinese power industry, which has suffered four straight years of shortages, is expected to see its gap filled within a couple of years by the completion of a series of new power stations.

 

Additional output is projected to exceed 70 GW (gigawatts) this year, roughly 14 percent of the nation's total generation capacity by 2005.

 

"From 2007, electricity production may even outpace local needs in certain areas," the National Development and Reform Commission has said.

 

The scenario, good news for the country's household consumers, is likely to see power majors take efforts to maintain their foothold and raise profit margins, say industry analysts.

 

Some state-owned firms are already moving to purchase local power companies assets which may depreciate in an over-supply market.

 

The nation's biggest electricity producer, China Huaneng Group, has recently announced takeovers of two local electricity firms based in East China's Shandong Province and Guangdong in the south.

 

The announcements followed the Beijing-based conglomerate increasing its stake in Inner Mongolia-based North United Power Co Ltd last year, and highlighted its accelerated acquisitions of local assets.

 

At the end of August, Huaneng teamed up with Shandong-based Lineng Group Co Ltd, to build new generations facilities with a total output of 4,000 MW (megawatts). Both sides have agreed to work on management, market and resources, Huaneng said in a statement.

 

Just three weeks ago, prior to the Shandong deal, Beijing-backed Huaneng made another ambitious move to buy a 24 percent stake in the local government-controlled Guangdong Yuedian Group, making Huaneng the second-biggest stakeholder in Yuedian after the local government.

 

Huaneng's aggressive portfolio expansion of fits in with the Beijing-backed power firm's long-term target to double its current capacity by 2010, which analysts said would be achieved through both building new plants and buying existing ones.

 

"The market change (from shortage of over-supply) will bring about very good opportunities for asset purchases," said Zhao Jiujing, a senior analyst with the Beijing-based State Power Economic Research Center.

 

Driven by the fast-growing domestic power market, Huaneng plans to spend as much as 250 billion yuan (US$31.25 billion) in the next four years to more than double its generation capacity, adding 50 GW worth of new facilities, its president Li Xiaopeng told China Daily in an earlier interview.

 

Adding further impetus to the intra-industry power purchases, the government has been encouraging consolidation within China's power generation sector in a drive to increase efficiency and enhance domestic firms' international competence.

 

An industry observer, who declined to be named, told China Daily that the smallest power firm will be shut out of the market in the future, citing the new industry rules.

 

"Many power majors are striving to expand their already large portfolios whether through setting up new plants or purchasing local assets," said the unnamed source.

 

But he also warned of the potential risks of building too many new power facilities, disregarding the market's actual demand, including a possible surge of realignment, with local assets moving to a small number of power giants.

 

Ye Rongsi, senior advisor to the China Electricity Council, said central and local governments should exert macro controls when appropriate to prevent possible industry monopolies developing amid the increasing acquisitions.

 

"Certain government controls should be in place to direct companies towards market-based reforms," said Ye.

 

The government is pushing long-awaited and cumbersome reforms in both the power generation and distribution sectors, with the aim of introducing more competition and liberalizing the market.

 

In another effort to secure a stable market share, some power companies are trying to get big users, such as aluminum and steel producers, to sign up for long-term supply contracts.

 

One recent deal was signed between China Power Investment Corp and the world's second-biggest alumina producer, Chinalco, on August 31. Forty percent of the cost of producing alumina the raw material for aluminum comes from electricity bills.

 

According to the agreement, both sides will work on power and aluminum projects in the resource-rich provinces of Liaoning, Shanxi and Qinghai.

 

"The two companies will look for further areas to co-operate in, and will try to improve each other's competitiveness by combining their expertise," China Power Investment said in a statement.

 

Industry insiders said the long-term deal between Chinalco and China Power Investment highlights power companies' vigorous efforts to secure stable and reliable consumers against worries of market over-supply.

 

"Joining with large consumers is a wise way to handle the possible supply surplus, and it is likely to become a trend," said State Power Economic Research's Zhao.

 

(China Daily September 28, 2006)