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Analysis of the Causes of the Great Rise and Fall of Thermal Power Enterprises
This year, the profit trajectory of China's five major power generation groups has been like a roller coaster, with a net increase of 2.7 times. According to statistics, from January to August this year, the combined profit of Huaneng, Datang, Huadian, Guodian, and China Power Investment reached 49.04 billion yuan. In contrast, during the same period in 2012, their total profit was only 13.14 billion yuan. This sharp growth in profits is largely attributed to the recovery of thermal power operations, which had previously suffered losses.
The thermal power industry has experienced similar dramatic swings before. In 2008, for example, it went from profitability to loss within just one year. Taking Datang Group as an example, it made over 7 billion yuan in profits in 2007, but by 2008, it had lost 7 billion yuan—a difference of more than 14 billion yuan in just one year.
So why do the profits of thermal power companies fluctuate so drastically? In previous years, the companies cited delayed or incomplete coal price linkage mechanisms as the main cause of their losses. However, government officials argue that rising coal prices were not fully offset by electricity price adjustments. For instance, in 2008, the government raised electricity prices twice, yet thermal power companies still faced significant losses due to excessive competition, overcapacity, and inefficient management.
While the government’s analysis has some validity, it fails to explain the sharp rise in profits this year. If improved management and better market order were the causes, how could such changes occur in less than a year? It seems unlikely that companies could make such rapid improvements.
Some might argue that this year’s large profits are due to falling coal prices. While that is true on the surface, the question remains: why did coal prices drop, and why didn’t they fall further? The answer lies in the coal-electricity price linkage mechanism. The current policy links coal prices to electricity prices at a ratio of 70% to 30%. That means when coal prices rise, electricity prices only increase by 7 cents for every 10 cents of coal price increase, with the remaining 3 cents absorbed by the power companies themselves.
This mechanism allows power generation companies to manage costs more effectively, while also creating a balance between upstream coal producers and downstream power users. Initially, this policy worked well, especially in its early stages. However, as coal prices continued to rise rapidly, the accumulated pressure became too much to handle through internal efficiency gains alone.
By 2011, the cost burden from coal price increases had reached 97.3 billion yuan for the five major power generation groups. At this point, internal cost-cutting measures were no longer sufficient, leading to the first “roller coaster†effect in the thermal power sector, with many companies suffering losses.
In response, the government adjusted the policy in late 2012, reducing the portion of coal price increases that power companies had to absorb from 30% to 10%. This change directly contributed to the second “roller coaster†— a surge in profits for the thermal power industry.
It's important to note that these extreme fluctuations are essentially a return to a more balanced state. Although the five major power generation groups have seen their profits nearly triple, their overall asset return rates are still only slightly higher than the average for central enterprises. With thermal coal accounting for about 70% of their costs, even a small increase in fuel prices can be a heavy burden.
Looking ahead, the dominance of thermal power in China’s energy mix will remain unchanged for the foreseeable future. Maintaining the normal operation and expansion of thermal power is crucial for ensuring national energy security.
The lessons from these ups and downs highlight the need for systematic thinking and evidence-based decision-making. Only by understanding the complex interplay of policies, market forces, and operational efficiency can we build a more stable and sustainable power sector.