According to the APP of Zhongtong Finance, with the continuous transformation and upgrading of China's industrial structure, as well as the continuous growth of per capita electricity consumption, the total electricity consumption of the whole society is expected to maintain a long-term growth trend. With the expansion of the scale of new energy installation, the demand for "peak shaving" will not increase, and the pressure will continue to increase. The role of coal and electricity as the "ballast" of coal-fired power generation may be further strengthened, and coal-fired power generation is expected to usher in a new round of equipment installation boom. At present, the development of "coal-electricity joint venture" is catalyzed by policies, and the certainty of the profit model of "coal-electricity joint venture" is greatly enhanced. Therefore, coal enterprises, especially thermal coal enterprises, should actively develop thermal power business based on their resource advantages to achieve stable and long-term profitability growth.

Zhongtai Securities' main points are as follows:

The role of coal and electricity as the "ballast" and "peak shaving" of coal-fired power generation is strengthened, and policies encourage the integration and development of "coal-electricity joint venture".

Coal and electricity have a very prominent role as a "ballast". For a long time, coal-fired power generation has occupied a dominant position in China's power system. With the continuous adjustment of the industrial structure, the elasticity of power consumption has gradually expanded. It is expected that the total electricity consumption of the whole society will still maintain a growth trend. The decade-long compounded growth rate of thermal power installed capacity from 2014 to 2023 is 4.8%, and the compounded growth rate of thermal power generation from 2001 to 2023 is 8.3%. The proportion of newly added installed capacity is decreasing due to insufficient new installed capacity, which accounted for 47.6% in 2023. However, the proportion of power generation is still maintained at a high level, accounting for 69.9% in 2023. The main position of power supply remains unchanged, and the role of "ballast" is highlighted.

The role of coal and electricity in "peak shaving" is increasingly prominent. On the one hand, policies are actively promoting the participation of coal-fired units in deep "peak shaving" of the power grid. With the continuous expansion of the scale of new energy installation, China's power system faces the dual challenges of insufficient adjustment capacity and greater pressure to maintain supply. As the most stable power source in the power supply system, coal-fired power generation can maintain the power balance of the power grid. As a power supply main body with relatively sufficient supply, it can adjust various types of power generation units to meet different load demands. Therefore, the National Development and Reform Commission has proposed to "intensify the reform of the flexibility of thermal power units in various regions" and "increase the enthusiasm of thermal power units to participate in peak shaving", and encourage thermal power to participate in peak shaving. The notice on "Accelerating the Construction of a New Type of Power System Action Plan (2024-2027)" issued in 2024 clearly proposed to "promote the further enhancement of the efficient adjustment capacity of coal-fired units, such as deep peak shaving, rapid ramp-up, etc., better play the role of coal-fired power supply guarantee, and promote the consumption of new energy".

On the other hand, with the continuous growth of the highest power consumption load and the continuous reduction of redundant capacity, the demand for coal-fired "peak shaving" is increasing. In 2023, the highest power consumption load of the power grid reached a new high of 1339.14 million kWh. The redundant capacity was 64.26 million kWh, which is a relatively low value in recent years. The continuous increase in the highest power consumption load of the power grid and the gradual decrease in redundant capacity indicate that the pressure of power grid "peak shaving" is gradually increasing. On the one hand, due to geographical factors, the development of hydropower and nuclear power has limitations. On the other hand, wind power and photovoltaics have disadvantages such as fluctuation, intermittency, and instability, and their capacity efficiency is poor. Therefore, in order to meet the continuously growing demand for the highest power consumption load, it is urgently needed to supplement the high-capacity and effective coal-fired installed capacity.

Coal-electricity joint venture can effectively ease the contradiction between upstream and downstream. The profit level of upstream and downstream coal and electricity has an obvious "seesaw effect," that is, the profit level of coal enterprises follows the fluctuation of coal prices, that is, high coal prices-high profits, low coal prices-low profits; while the opposite is true for power companies, that is, high coal prices-low profits, and vice versa. Taking 2022 as an example, when the Q5500 price of Qinhuangdao Port reached a new high of 1270 yuan/ton, the net profit margin of the Shenhua coal sector was 15.43%, while that of the Shenhua power sector was -0.65%. Coal-electricity joint venture can effectively alleviate the upstream and downstream contradictions. Policies encourage the development of "coal-electricity joint venture" and "coal-electricity integration" to promote the integration of upstream and downstream industries and improve the level of energy supply guarantee.

Since the promulgation of the Guiding Opinions on "Coal-Electricity Joint Venture" in 2016, the "coal-electricity joint venture" model has entered a period of rapid development. Coal enterprises have significantly increased their equity interests in power plants, and the scale of installed capacity of equity interests has grown rapidly. The compounded annual growth rate from 2016 to 2021 was 14.6%, reaching 0.34 billion kW in 2021, accounting for 31% of the installed capacity of thermal power generation. The coal-fired power generation of units in the "coal-electricity joint venture" has lower fuel costs and obvious cost competitive advantages, so central enterprises represented by China Shenhua and China Coal Xinji Energy actively participate in "coal-electricity joint venture".

Catalysts: control coal prices, float electricity prices, and extend the profitability of the industrial chain by "coal-electricity joint venture".

The long-term contract system is strengthened, and the profit space of coal enterprises is restricted. The regulatory policies for long-term contracts are becoming stricter, and the proportion of market coal is decreasing. Since the sharp rise in coal prices in 2021, the supervision of long-term contracts has become increasingly strict, especially in the areas of fulfillment and signing. The supervision is gradually becoming clear and the requirements are becoming clearer, which in turn has led to an increase in the proportion of coal-fired power supply by coal enterprises, and a decrease in the supply of market coal for non-electric industries such as chemicals and cement.

With the implementation of price limit policies across the regions, the profit margin of coal enterprises is restricted. According to the Notice on Further Improving the Coal Market Price Formation Mechanism released by the National Development and Reform Commission on May 1, 2022, a reasonable range for medium- and long-term trading prices has been determined. The reasonable range of prices for Qinhuangdao port's coal (5500 kcal) is set at 570-770 yuan/ton, and relevant trading price ranges for different provinces and municipalities have also been formulated. With the introduction of price limit policies and a reduction in market coal sales due to stricter regulation of long-term contracts, the profit margin of coal companies is being squeezed against the backdrop of coal market prices exceeding long-term contract prices.

The market-oriented reform of coal-fired electricity prices opens up the profit space of power plants. On October 11, 2021, the National Development and Reform Commission issued the Notice on Further Deepening the Market-Oriented Reform of Coal-Fired Power Generation Grid Prices, requiring that all coal-fired power generation should generally enter the power market and that grid prices should be formed through market transactions within the range of "benchmark price + floating up and down", and that the fluctuation range of market trading prices for coal-fired electricity should be expanded to no more than 20% above and below the benchmark price. After electricity prices rise, the profit margin of the thermal power industry has significantly increased. On November 8, 2023, the Energy Bureau issued the Notice on Establishing a Coal-Power Capacity Price Mechanism, which established a coal-power capacity price mechanism from January 1, 2024, replacing the single-price power generation price with a two-part tariff composed of capacity-based and quantity-based electricity prices.

Capacity-based electricity prices can hedge against the risk of falling electricity prices and bring incremental revenue to thermal power enterprises. According to estimates, assuming that power plants are 100% covered by long-term contracts for coal procurement, the average difference between corresponding coal prices and the upper limit of Q5500 long-term coal contract prices under the scenarios of provincial/municipal benchmark electricity prices, benchmark electricity prices + 10%, and benchmark electricity prices + 20% is 3/73/142 yuan/ton, respectively. The significant increase in the coal-fired electricity prices has improved the profit space of power plants.

In terms of investment targets, China Shenhua Energy (601088.SH) and Huaihe Energy (600575.SH) are key recommendations, while China Coal Xinji Energy (601918.SH) and Inner Mongolia Diantou Energy Corporation (002128.SZ) are worth following.

Risk Warning: The risks include uncertainty of policy implementation, impact of new energy, and outdated information data in research reports.