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Analysis of the Causes of the Great Rise and Fall of Thermal Power Enterprises
This year, the profits of China’s five major power generation companies have experienced a wild rollercoaster ride, surging by 2.7 times. According to official data, from January to August this year, the combined profit of Huaneng, Datang, Huadian, Guodian, and China Power Investment reached 49.04 billion yuan. In the same period in 2012, their total profit was only 13.14 billion yuan. The sharp increase in profits has been largely driven by thermal power, which has shifted from loss to profitability in a short time.
This kind of dramatic fluctuation is not new for the thermal power industry—it's the second time it has gone through such a "roller coaster." In 2008, for example, some companies went from being profitable to losing money within just one year. Take Datang Group as an example: it made over 7 billion yuan in 2007 but suffered a loss of nearly 7 billion yuan in 2008, creating a 14 billion yuan swing in just one year.
So why do thermal power companies experience such extreme volatility in profits? Some blame delayed or incomplete coal price adjustments, while government officials argue that rising coal prices are matched with limited electricity price adjustments. For instance, in 2008, the state raised electricity prices twice, but losses still occurred due to issues like overcapacity, monopolistic behavior, and inefficient management among thermal power firms.
However, the author believes that while government analyses offer some truth, they don't fully explain the massive profits seen this year. If the previous losses were due to poor management, how could companies improve so quickly to turn around? It’s unlikely that internal improvements could happen overnight.
Some may suggest that this year’s high profits are due to falling coal prices. While that’s true on the surface, it doesn’t answer why coal prices dropped or why the linkage mechanism didn’t fully pass on the savings to consumers. The real issue lies in the coal-electricity price linkage mechanism itself. Currently, only 70% of coal price changes are reflected in electricity prices, with the remaining 30% absorbed by power companies.
This partial linkage allows power generation firms to benefit when coal prices fall, but also forces them to absorb costs when prices rise. Over the years, this has led to significant financial pressure. For example, in 2004, the self-absorbed cost was 4.4 billion yuan; by 2008, it had jumped to 45.6 billion, and in 2011, it reached a staggering 97.3 billion yuan.
Recognizing this problem, the government adjusted the policy at the end of 2012, reducing the percentage of coal price fluctuations that power companies must absorb from 30% to 10%. This change directly contributed to the second "roller coaster" effect—this time, a huge profit boom for thermal power companies.
It’s important to note that these swings are a natural result of the system. Even though the five major power groups now make nearly three times more than before, their overall profit margins remain below the average for central enterprises. Thermal coal accounts for about 70% of their costs, and even a small price increase can be a heavy burden.
Looking ahead, the reliance on thermal power will continue to dominate China’s energy supply structure. Ensuring the stable operation and expansion of thermal power remains crucial for national energy security. The lessons learned from these ups and downs highlight the need for systematic thinking and evidence-based decision-making. Only by understanding the full picture can we build a more sustainable and resilient power sector.