China's power sector is expected to see profit improvement and value revaluation after several cycles of tension around power supply and demand, with peak value of coal-fired power generation highlighted and the trend of electricity pricing expected to remain stable and slightly rising. Spot power market and ancillary services market mechanisms are expected to be further promoted, while the capacity and electricity pricing mechanism officially introduced and the cornerstone status of coal-fired power generation clarified. The construction of a new electrical utilities system under the dual carbon goal may continue to rely on the enrichment and investment of system regulation means.

The transformation target and stage: the low-carbon transformation stage is clearly defined, benchmarking the carbon emission level of gas-fired power generation. The first phase of the project is scheduled to start in 2025, with the main goal of starting construction of the first batch of coal-fired low-carbon transformation projects, with the requirement of a 20% reduction in carbon emissions per kilowatt-hour. The second phase of the project is scheduled to start in 2027, with the main goal of further expanding the low-carbon power generation technology route of coal-fired power generation, with significant cost reductions in construction and operation. The technical indicators require a reduction of about 50% in carbon emissions per kilowatt-hour of the project, which is close to the carbon emission level of natural gas generator units. Transformation project layout and technical route: three main routes of biomass co-firing, green ammonia co-firing, and carbon capture and utilization and storage (CCUS). 1) Biomass co-firing: after the transformation construction, coal-fired units should have the capacity to co-fire with biomass fuels of more than 10%. 2) Green ammonia co-firing: after the transformation construction, coal-fired units should have the capacity to co-fire with green ammonia of more than 10%. 3) Carbon capture, utilization and storage (CCUS): the project of implementing carbon capture, utilization and storage aims to promote the application of efficient geological utilization technologies such as carbon dioxide enhanced oil recovery and chemical utilization technologies such as carbon dioxide hydrogenation to methanol.

In summary, technology will lead the way, and costs will constrain promotion. At present, biomass power generation is highly dependent on the continuity and economy of fuel supply; co-firing with green ammonia is difficult to achieve economic benefits in terms of carbon reduction, and CCUS faces problems such as huge investment costs and high additional operating costs. SDIC Securities believes that the current main goal is still to conduct long-term reliability and economic verification of relevant technologies. Currently, the relevant technologies for low-carbon transformation of coal-fired power generation are still in the early stage of verification and demonstration.

The power and utilities sector fell 0.8% in July, outperforming the broader market; the CSI 300 index fell 0.6% to 3.442.1 in July; the top three industries in terms of growth were comprehensive (7.5%), non-banking financial services (5.7%), and retail trade (5.0%).

Analysis of monthly power demand: the growth rate of power consumption in June decreased slightly to 5.83% month-on-month. In June 2024, the total electricity consumption of the whole society increased by 5.83% year-on-year. By industry: the growth rate of electricity consumption in the primary, secondary and tertiary industries slowed down month-on-month. In June 2024, the year-on-year growth rates of electricity consumption in the primary, secondary and tertiary industries were 5.41%, 5.47% and 7.56%, respectively, while that of household electricity consumption increased by 5.19%. By sector: the growth rate of electricity consumption in the sub-sectors of manufacturing, high energy consumption and consumption all slowed down. In terms of sub-industry, the top three electricity consumption industries in the high-tech equipment manufacturing sector are computer and communication equipment manufacturing, metal products industry and electrical machinery manufacturing. In the consumer sector, the top three are wholesale and retail trade, transportation, warehousing, postal and real estate. In the six high-energy-consuming industries, the top three are electricity and heat production and supply, non-ferrous metal smelting and processing, and black metal smelting and processing. By region, power consumption in coastal provinces in the east is leading, while power consumption growth in western provinces is leading. In terms of elasticity coefficient, the power consumption elasticity coefficient in the second quarter of 2024 is 1.45.

Analysis of monthly power production: the year-on-year decline in thermal power output has widened, while hydro power output continues to grow rapidly. In June 2024, national power generation increased by 2.30%. By unit type, thermal power generation decreased by 7.40% year-on-year, while hydro power generation increased by 44.50%, nuclear power generation decreased by 4.00%, wind power generation increased by 12.70%, and solar power generation increased by 18.10%. In terms of newly installed capacity, a total of 37.12 million kW of new capacity was installed in June 2024, including 6.15 million kW of new thermal power capacity, 1.55 million kW of new hydro power capacity, 6.08 million kW of new wind power capacity, and 23.33 million kW of new photovoltaic capacity. In terms of the use of power generation equipment, the average utilization hours of power generation equipment in China from January to June 2024 was 1666 hours, a year-on-year decrease of 4.10%. Among them, the average utilization hours of thermal power were 2099 hours, down 2.01% year-on-year; the average utilization hours of hydropower were 1477 hours, up 19.21% year-on-year; the average utilization hours of nuclear power were 3715 hours, down 1.46% year-on-year; the average utilization hours of wind power were 1134 hours, down 8.33% year-on-year; the average utilization hours of photovoltaic power were 626 hours, down 4.86% year-on-year. In terms of coal inventory, daily consumption and Three Gorges reservoir outflow, inland coal inventory rose month-on-month, while daily consumption rose month-on-month; coastal coal inventory fell month-on-month, while daily consumption rose month-on-month; Three Gorges water level rose year-on-year, while reservoir water storage fell year-on-year.

Monthly analysis of the electricity market data: The average price of agent purchasing in August showed a slight rebound compared to the previous month. The average price of agent purchasing in August was 393.61 yuan/MWh, an increase of 1.61% month-on-month and a decrease of 6.06% year-on-year. The monthly trading price in Guangdong continued to decline in August, while the spot market price in July rose month-on-month. The spot trading prices in Shanxi and Shandong rose slightly month-on-month in July.

Industry News:

(1) The National Development and Reform Commission and the National Energy Administration issued a notice on the "Action Plan for Low-Carbon Transformation and Construction of Coal-fired Power Plants (2024-2027)";

(2) The National New Energy Consumption Monitoring and Early Warning Center released the integration and consumption of new energy in each provincial region in June 2024;

(3) The highest load of power grid has been reached in many places.

Investment perspective: Power operators are expected to benefit from the following areas: 1) coal-fired power integrated companies: Xinji Energy, Shaanxi Energy, Huaihe Energy, etc.; 2) national coal-fired power leaders: GD Power Development, Huaneng Power International, Huadian International, etc.; 3) regional power supply leaders with tight supply: Anhui Wenergy, Zhejiang Zheneng Electric Power, Shenergy, Guangdong Yudean; 4) hydropower operators: China Yangtze Power, SDIC Power Holdings, Sichuan Chuantou Energy, Huaneng Lancang River Hydropower Inc.; 5) equipment manufacturers and flexibility transformation beneficiaries: Dongfang Electric Corporation, Qingda Environment & Energy Group, Wuxi Huaguang Environment & Energy Group, etc.

Risk factors: The slowdown of macroeconomic development leads to lower than expected growth in electricity demand, and the progress of electricity market reform is slow. The implementation of policies to maintain adequate coal supply falls short of expectations.