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Announcement:

Moody's: Most Chinese coal-fired gencos can manage transition to market-based pricing

 The document has been translated in other languages

12 Nov 2019

Hong Kong, November 12, 2019 --

• New tariff mechanism to be introduced in 2020 consists of base price plus floating element

• Coal-fired gencos with solid market positions and strong operational profiles best placed to withstand risks

Moody's Investors Service says that the ongoing liberalization of China's (A1 stable) power sector will raise business and financial risk for coal-fired power generation companies (gencos), but that most can withstand the resultant market competition and potential industry consolidation.

"The immediate impact on most coal-fired gencos will be manageable, as the new tariff mechanism -- if implemented as planned -- will remove delays in passing through tariff adjustments and thus reduce margin volatility," says Ivy Poon, a Moody's Vice President and Senior Analyst.

"Moreover, the already narrowing spread between the unregulated and regulated tariffs suggests rational market competition and modest margin compression when the power market further deregulates in 2020," adds Poon.

The government introduced a market-based power sales mechanism in 2016 for all power gencos and a new tariff mechanism for coal-fired gencos, effective 1 January 2020. The measures form part of ongoing reforms in the power sector to bring competition, increase market efficiency and improve the pricing mechanism.

While the share of market-based sales has been rising over the past three years, tariffs under the mechanism are lower than the current regulated tariffs, reducing profit margins for most gencos, assuming coal prices remain flat. The unregulated power sales also increase risk and volatility.

The new tariff mechanism will only further increase the gencos' exposure to market-based prices, with any tariff reductions resulting from lower coal prices likely to pressure profit margins.

Among the rated coal-fired gencos, Moody's says those with strong market positions, efficient generation fleets and large business scales will be better placed to manage the increase in competition as China's power market opens up.

By contrast, small gencos with weak operating and financial profiles will be more vulnerable because of the growing market competition under the new tariff regime.

Subscribers can access the report "Power -- China: Coal-fired power generation companies will manage the transition to unregulated tariff regime" at: https://www.moodys.com/research/Power-China-Coal-fired-power-generation-companies-will-manage-the--PBC_1198364

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

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

Terry Fanous
MD-Public Proj & Infstr Fin
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

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