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Announcement:

Moody's: China's national carbon trading platform poses a challenge to coal-dependent power producers with high emission rates

 The document has been translated in other languages

20 Dec 2017

Hong Kong, December 20, 2017 -- Moody's Investors Service says that China's (A1 stable) plan to set up a national carbon emissions trading platform will likely affect the profitability of coal-dependent power producers with high emission rates in the long run because of rising emission costs and lower power generation.

However, the platform will likely improve the profitability of renewable energy producers and coal-dependent power producers with low emission rates in the long run driven by higher power generation and carbon credit revenue.

The new platform will have no immediate impact on the ratings and outlooks of power producers rated by Moody's because any meaningful effects will likely come in 2020 or after when the platform becomes fully functional. But power producers may increase future capital expenditures if the government sets higher emission reduction targets, which will accordingly raise their leverage.

On 19 December, China's National Development and Reform Commission (NDRC) announced its "National Carbon Emission Trading Market Development Plan for Power Producers".

Based on the plan and the press conference hosted by the NDRC:

(1) The national carbon emission trading platform will be set up in Shanghai and Hubei Province.

(2) The NDRC has set a three-stage plan to develop the emission market, comprising: (a) Fundamental Development Stage (to take a year) for building up the infrastructure on emission trading, (b) Pilot Run Stage (to take a year) for conducting trial emission trading, and (c) Perfection Stage (no specified timing) for elevating the platform to the required standards.

(3) The NDRC has not set any hard emission reduction targets so far, but will likely set the target at a low level in initial years.

(4) The power sector will be the starting point. Power producers with more than 26,000 tons of annual carbon emissions will be subject to the plan's requirements. About 1,700 entities will be included with total annual emissions of over 3 billion tons, amounting to about 30% of China's total emissions in 2016. The NDRC will include more sectors in the plan in the future.

(5) In principle, power producers with higher emission rates will have to reduce power generation or acquire more emissions permits. But power producers with lower emissions rates will be eligible to generate more power or sell surplus emissions permits for additional revenue.

(6) The national platform will complement the development of the Green Power Certificate program.

In the longer run, Moody's expects the plan will encourage power producers to adjust power generation mix to optimize profitability based on prevailing emission levels of their coal-fired generation units. This will lead to lower carbon emissions for the entire sector.

Also, Moody's expects trading among coal-dependent power producers will likely be more active than trading between renewable energy producers and coal-dependent power producers because the relatively sizable demand and supply of carbon quota.

Moody's will monitor the implementation of the national emissions trading platform and assess the potential impact on rated power companies as more details (including emission targets and definitions of high and low emission rates) become available.

Coal-dependent power producers rated by Moody's include the following:

(1) Beijing Energy Holding Co., Ltd. (A3 negative),

(2) China Resources Power Holdings Co., Ltd (Baa2 stable),

(3) China Shenhua Energy Co., Ltd. (A1 stable),

(4) Guangdong Hengjian Investment Holding Co Ltd (A3 stable),

(5) Huachen Energy Co., Ltd. (B1 stable),

(6) Shanghai Electric Power Company Limited (Baa2 negative),

(7) State Power Investment Corporation (A2 stable), and

(8) Zhejiang Provincial Energy Group Co. Ltd (A2 stable)

Renewable energy producers rated by Moody's include China Longyuan Power Group Corporation Ltd. (A3 stable) and Panda Green Energy Group Limited (B1 stable).

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ivy Poon
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Vivian Tsang
Associate Managing Director
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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