In 2016, the average utilization hours of power generation equipment nationwide fell to the lowest level since 1964, and the situation of electricity overcapacity cannot be ignored. The situation in 2017 is even more severe: the China Electricity Council predicts that this year's electricity consumption growth will be only 3%, while Qiao Baoping, chairman of China Guodian Corporation, one of the five major power generation groups, warned that "in 2017, power companies will face comprehensive losses."

In 2017, the intensity of "de-capacity" efforts will be further increased. The National Development and Reform Commission previously revealed that, in addition to steel and coal, outdated production capacity in several new industries will also enter the "de-capacity" ranks this year. So will the power industry be included?

Electricity enters the era of overcapacity; power generation companies warn of "comprehensive losses"

For many years, "ensuring supply" was the primary task of China's power industry development, and many people still vividly remember the summer rotating power cuts. However, with the rapid improvement of China's power supply capacity, as well as the economic shift to a new normal with slower growth and slowing electricity demand, the supply-demand situation for electricity has undergone profound changes.

"Electricity overcapacity has existed since 2014, and the situation has become more severe in the past two years," Lin Boqiang, director of the China Energy Economics Research Center at Xiamen University, told China.com Finance.

"Average utilization hours of power generation equipment" is an important indicator reflecting the electricity supply-demand situation. The industry generally believes that if the annual utilization hours of equipment in a region are higher than 5,500 hours, it indicates that the region's electricity supply is tight and the scale of power generation can continue to expand; if it is lower than 4,500 hours, it indicates that the region has surplus electricity and generally no new power generation capacity should be added.

According to statistics from the China Electricity Council, in 2014 the national average utilization hours of power generation equipment had already dropped to 4,286 hours, the lowest level since 1978. In the just-passed 2016, this indicator further dropped to 3,785 hours, the lowest level since 1964.

In 2017, the electricity supply-demand situation will become even more severe. The China Electricity Council report stated that, considering factors such as the macroeconomic situation, the development trend of electricity consumption in the service sector and by residents, electricity substitution, policy adjustments in the real estate and automobile industries, and the high temperatures in the summer of 2016, it is expected that the total electricity consumption of the whole society will grow by about 3% in 2017.

Power generation companies are the first to feel that "winter is coming." Qiao Baoping, chairman of China Guodian Corporation, one of the five major power generation groups, said at a work conference that in 2017 power companies will face comprehensive losses, and power industry personnel must enhance their sense of crisis and avoid blind competition.

Zhou Dadi, vice chairman of the China Energy Research Society, told China.com Finance that power generation companies have maintained a relatively high scale of investment in recent years and are burdened with heavy financial obligations; previously, thermal coal prices experienced a round of increases, sharply increasing cost pressure on power generation; and this year, the on-grid electricity price has not been raised, while demand growth has slowed and power generation hours are insufficient, further squeezing profit margins.

The scope of "de-capacity" will expand, but the possibility of the power industry being included is small

In 2017, "de-capacity" enters a crucial year, and the intensity and scope of its advancement will expand. Xu Shaoshi, director of the National Development and Reform Commission, said at a press conference of the State Council Information Office on January 10: "This year, in addition to steel and coal, the scope of de-capacity will be expanded, and some sectors with low capacity utilization rates and relatively severe overcapacity will also be included in the de-capacity category."

However, several industry experts told China.com Finance that the possibility of the power industry joining the "de-capacity" ranks is very small.

Lin Boqiang said that the power industry has been "building large units and shutting down small ones" for many years, and so-called outdated capacity is very limited. "Small and poor-quality power plants have almost all been closed, and it is absolutely impossible to take action against advanced capacity," Lin Boqiang said.

Zhou Dadi also said that if the power industry were to join "de-capacity," there would be a situation of "not knowing whom to eliminate," because there are not many old units, and most are units expanded in the past decade.

At the same time, Zhou Dadi emphasized that the electricity market has structural overcapacity: the share of clean energy is still relatively low, and the share of coal power is relatively high. The overcapacity is because in the past two years the pace of coal power construction has exceeded the growth rate of electricity demand, so structural adjustment is needed, that is, further controlling the scale of coal power.

Although experts analyze that a "top-down" de-capacity push in the power industry is unlikely, it does not rule out that companies will spontaneously adjust according to their own marginal costs. In this regard, the China Electricity Council recommended in its report: "Promulgate as soon as possible targeted policies for the diversion of employees of electricity 'zombie enterprises,' reduction or exemption of bank debts, and other aspects. It is recommended to help power companies clean up and dispose of inefficient and ineffective assets and manage loss-making enterprises, and to provide certain financial subsidies."

Electricity overcapacity brings both "danger" and "opportunity": market-oriented reform ushers in a window of opportunity

The impact of electricity overcapacity should be viewed from two sides. From the perspective of advancing power system reform, now is precisely an "opportunity period."

"For power system reform, the main obstacles are two: rising prices and supply shortages. But when there is electricity overcapacity, neither of these situations exists, so now is the time when reform resistance is smallest, an opportunity window," Lin Boqiang said.

The reason why the 2002 round of power system reform stopped at "separation of plants and grids" and did not further promote "bidding for grid access" was also related to the electricity supply-demand situation at that time. Zhang Guobao, former director of the National Energy Administration, stated in a 2013 retrospective article on the ten years of power reform that relatively loose electricity supply is a prerequisite for bidding for grid access. "In previous years, electricity supply was always tight, leaders attached great importance to the threat of inflation, the contradiction between coal and electricity was prominent, and solving the electricity supply shortage as soon as possible became the main contradiction, so bidding for grid access was difficult to implement," Zhang Guobao said in his article.

In 2015, a new round of power system reform marked by Central Document No. 9 was launched. Under the condition of loose electricity supply, this round of reform advanced rapidly and blossomed everywhere, and a multi-model pilot pattern has initially taken shape. As of January 2017, except for the Tibet Autonomous Region, which is still formulating a pilot plan, 21 provinces (autonomous regions and municipalities) have carried out comprehensive pilots for power system reform, 9 provinces (autonomous regions and municipalities) and the Xinjiang Production and Construction Corps have carried out pilots for reform on the electricity sales side, and 3 provinces (autonomous regions) have carried out pilots for nearby consumption of renewable energy, forming a pattern dominated by comprehensive pilots and multi-model exploration.

In addition, supporting documents such as the pricing system have also been introduced successively. In December 2016, the National Development and Reform Commission formulated and issued the "Measures for Pricing of Transmission and Distribution Prices of Provincial Power Grids," which clarified the main contents of the independent transmission and distribution price system, the calculation method of transmission and distribution prices, and the incentive and constraint mechanisms for power grid enterprises. Together with the previously issued "Measures for Supervising and Reviewing the Costs of Transmission and Distribution Pricing," this marks that China has initially established a regulatory framework system for power grid transmission and distribution prices.

In terms of market-oriented electricity trading, within the business scope of China Southern Power Grid, the five provinces (regions) of Yunnan, Guizhou, Guangdong, Guangxi, and Hainan have all established power trading institutions in the form of joint-stock companies; within the scope of State Grid Corporation, the three provinces (municipalities) of Shanxi, Hubei, and Chongqing have also completed the establishment of joint-stock power trading institutions. In 2016, the national market-oriented trading volume of electricity, including direct trading, exceeded 1 trillion kWh, accounting for about 19% of the total electricity consumption of the whole society. The average electricity price was reduced by about 7.23 cents per kWh, saving users more than 57.3 billion yuan in electricity costs.

"In 2017, power market-oriented reform will accelerate, and the amount of electricity participating in bidding for grid access will increase further," Lin Boqiang said. Previously, the National Development and Reform Commission also revealed that it is formulating the "Notice on Orderly Liberalizing the Power Generation and Consumption Plan," which is planned to be issued in due course.