Energy Central-News Article

Latest Utilities Network Analysis

It was reported by the National Energy Administration (NEA) that Mainland China had installed 53GW of new solar capacity over 2021, falling short of solar industry expectations for 70GW. This has led us to make upward revisions to our near-term outlook, and we now expect to see stronger growth over the decade, at an average annual rate of approximately 50GW. The recent spike in growth is partly due to the ending of subsidy payments at the end of 2021 as well as a number of new reforms to policy which are creating room for long-term growth. 55% of all new additions came from the residential sub-sector. We had expected such an acceleration in residential solar systems owing to the NEA outlining that it intended to mandate a minimum target of 20% rooftop solar capacity across several pilot counties as well as 30% on commercial and industrial buildings and 40% on government buildings.
The shifting development priorities in Mainland China’s energy and utilities infrastructure sector is apparent in latest fixed asset investment data, which show investment in water infrastructure rapidly growing. This corresponds with our long-term expectation that investment in water will grow as urbanisation trends continue to place demand pressures on existing facilities, especially in lower-tier cities and rural areas.
China National Offshore Oil Corporation (CNOOC) plans to add six liquefied natural gas (LNG) storage tanks at the Binhai LNG terminal in the province of Jiangsu. The six tanks will add 1.62mn cubic metres of LNG storage to the terminal. The government of Henan Province will invest in two of the tanks. Construction on all six tanks is scheduled to be completed in 2023. The first phase of the LNG terminal will have an annual receiving capacity of 3mn tonnes and is scheduled to be completed by the end of 2021.

Utilities Costs And Availability

Large-scale government investment in utilities infrastructure has facilitated Mainland China's huge industrial output and robust economic growth over recent years, aiding the functioning of businesses in the market and keeping utilities costs moderate. In terms of fuel, coal will remain the dominant source of power for the next 10 years due to its low cost. However, the market is gradually moving towards a reliance on cleaner energy, such as renewables and nuclear, which could increase electricity costs in the medium term until the new infrastructure is in place and fully available to businesses and households. Internet connections are also relatively cheap to obtain in Mainland China. The market receives a score of 59.9 out of 100 for Cost of Utilities, placing it ninth out of 18 markets in the East and South East Asia region and 55th globally.

Businesses in the services sector benefit strongly from Mainland China's extensive internet penetration and increasing dominance in the technology field. E-commerce businesses have been able to take advantage of this widespread internet penetration among the general population to establish a strong presence in Mainland China, while the market's fast download speeds increase efficiency in business operations. Despite the challenges posed by the market's geographical and population size, the coverage of the electricity grid and the availability of fuel is extensive; however, massive demand for energy places a huge strain on infrastructure and availability, with resulting electricity and fuel shortages posing serious risks to business activity. In addition, the market is the world's top net importer of crude oil, leaving it exposed to disruption to the fuel supply chain. Businesses are also affected by the growing problem of water shortages, with the rapidly expanding population placing pressure on existing infrastructure. This is compounded by the issue of low water tariffs, which lower costs for businesses but encourage waste. Overall, Mainland China scores a high 67.8 out of 100 for Availability of Utilities, ranking it sixth in the East and South East Asia region and 36th globally.

Electricity

Mainland China has spent a significant amount of money on overall infrastructure development over the past several decades for its electricity network to offer widespread coverage, assisting to lower the cost of business operations. However, pressure placed on the supply by the large population and industrial growth means that risk of shortages and pollution pose future challenges to business activity. Mainland China has begun to invest in alternative sources of electricity supply, including nuclear energy and renewables. Mainland China has eight nuclear reactors under construction, accounting for 23% of new reactors currently under construction globally. The market has the largest nuclear energy expansion plans in the world. Mainland China is also leading the way globally in terms of investment in expanding non-hydroelectric renewable power, with growth plans leading the country to become the largest market in the world for renewables by 2025. Mainland China has invested extensively in renewable power sources (such as solar and wind) over the past five years, but inadequate transmission infrastructure means that many facilities are not connected to demand centres and operate below capacity. Continued investment in transmission infrastructure is essential for meeting Mainland China's goals of reducing its reliance on coal-fired base load capacity and ensuring the long-term viability of renewable projects. Our Key Projects Database reflects the small but growing focus on transmission projects and notes that Mainland China has USD11.5bn worth of ongoing transmission and distribution projects.

China (Mainland) - Electricity Risks
Source: World Bank, Fitch Solutions
Source
Energy mix: (2020 forecasts): coal (62.4%), hydropower (17.5%), non-hydropower renewables (11.7%), nuclear (4.9%), natural gas (3.7%).	Electricity generation in Mainland China is predominantly fuelled by coal, followed by hydropower and other renewable energy sources; however, rapid growth in demand for electricity means that domestic coal resources are not able to meet generation needs. For this reason, Mainland China has started to focus on developing alternative sources of electricity, including nuclear. While Mainland China continues to remain reliant on coal for near-term power demand surges, we believe that efforts to curb pollution, reduce reliance and consolidate the sector will lead its gradual fall in the power mix. This will be replaced with cleaner alternatives, particularly in non-hydro renewables. Despite the imminent phase-out of subsidies by 2021, we believe that the reduction of grid bottlenecks and a continued reform push will support greater integration of renewables supplies, increasing cost-competitive with coal. Coal generation will gradually fall despite the near-term reliance on coal to meet the power demand surges. This will be made possible by surging power generation growth in the non-hydro power renewables, natural gas and nuclear power sectors, which will replace the share of coal in the power mix. Mainland China remains a global front-runner in nuclear power expansion and outperforms in terms of existing installed capacity and projects under construction. In order to accelerate the phase-down of coal generation, a key focus of power sector reform over the coming five years will be reducing the arbitrary dispatch of power at the provincial level.
Availability
100% of the population has access to electricity.	Electricity is widely available across Mainland China, in both urban and rural areas. Mainland China records just over 4,794KWh per capita of electricity consumption, according to the Energy Information Administration. Mainland China consumes more than half of the world's coal production and is the world's third largest net importer of coal, mostly from Australia and Indonesia. This reliance on imports reduces Mainland China's energy security, with any disruption to the coal supply chain likely to lead to a shortfall in electricity generation. Nonetheless, its import partners are diversified, reducing this risk. Mainland China is also one of the leading economies in terms of developing nuclear and renewable power, with a steady pipeline of projects set to ensure that disruption to the electricity supply remains limited.
Reliability
5.5% of total output is lost through transmission and distribution.	Significant public investment in the electricity network means that Mainland China has a widespread and reliable power supply, with constant electricity needed to keep its vital industries running. There is an average of just 0.1 power outages per month in Mainland China, leading to losses for businesses equivalent to 1.3% of sales value. This suggests that the impact from electricity shortages is lower than in other emerging markets in the region (power outages average 1.4 per month in East and South East Asia). However, power shortages have, in the past, led to businesses resorting to using expensive private generators in order to ensure a constant supply, which raises operating costs for investors.
Cost
USD0.11 per kilowatt hour (kWh)	The cost of electricity is not prohibitive for businesses, as it is the same as the regional average of USD0.11 per kWh. Getting connected to the grid is less burdensome in Mainland China, taking 32 days in comparison with the regional average of 50 days.
Other Risks
	Mainland China is home to half of the world's dams, but droughts hinder the hydroelectric sector, placing a strain on power supply. However, the government has invested heavily in electricity capacity and network expansion in order to ensure that the supply continues to meet rapid consumption growth. We note that coal-fired power prices have moved towards a more market-oriented floating mechanism, with a maximum upward revision of 10% and a downward revision of 15%, in effect from January 1 2020. Previously, these prices were linked to fixed domestic thermal coal prices. This has caused coal-fired power prices to be cheaper, which could strain profit margins of coal power developers if the cost pressure is not sufficiently passed on to thermal coal producers. That said, it will also make it more difficult for renewables to be cost-competitive with coal, positing some upside risk.
Planned Projects
	Overview: Mainland China is leading the way globally in terms of investment in expanding non-hydroelectric renewable power, with growth plans leading the country to become the largest market in the world for renewables by 2025. Nuclear: Mainland China has eight nuclear reactors under construction, accounting for 23% of new reactors currently under construction globally. The market has the largest nuclear energy expansion plans in the world. Climate Change Pressures: We believe that climate change and air pollution issues will continue to drive opportunities and support the continued expansion of the nuclear power sector. Mainland China reiterated its ambitions and commitment towards the use of nuclear power to meet with its Paris Agreement Climate goals at the International Conference on Climate Change (7-11 October 2019). In this way, it was announced in July 2019 that the authorities had launched the construction of three new nuclear power plants located in the provinces of Shandong, Fujian and Guangdong. This signals the end of an effective moratorium of new projects in the market, particularly as the Zhangzhou project in Fujian was the first approved by the State Council in three years. The power plant will use Mainland China's third generation Hualong One technology, with the first unit set to come online in 2024. Concurrently, nuclear projects in the pipeline continues to progress, noted by the commercial operation of several reactors over 2019, such as Taishan 2, which entered into commercial operation in September 2019, and Yangjiang 6, in July 2019. Solar: Solar capacity is set to nearly triple by 2027 to 357GW. Most ongoing wind and solar projects are being built by domestic companies that have strong price and regulatory advantages in the market, such as China Three Gorges Corporation and Hareon Solar.

Mainland China Utilities Network Analysis