Could China's coal-fired power generation finally see a drop this year?

Power consumption outlook is still muted at 3% in 2016-2025.

Slowing power demand in China will exacerbate the fall in coal-fired electricity generation, which has already started to take hold across the country - largely due to the government's commitment to cutting pollution and halting environmental degradation.

The implementation of various policies aimed at curbing coal consumption, such as the closure of coal mines and coal-fired power plants, the establishment of a cap-and-trade carbon emissions system (scheduled to begin in 2017) and coal import bans, are bearing fruit.

Now the question lies: Is China's coal-fired power generation actually going to drop in 2016?

Georgina Hayden, Senior Commodities Analyst, BMI Research:

The ongoing economic slowdown in China and the government's continued efforts to tackle coal consumption are having a significant impact on China's power sector and we have adjusted our forecasts accordingly. 

We believe coal-fired power generation will undergo a decline over 2016 and 2017, and then register only slight annual increases thereafter. The outlook for power consumption is similarly muted, with annual average growth rates of 3% between 2016 and 2025, as China's economy shifts away from power-intensive manufacturing.

We believe that coal-fired power generation contracted by 3.05% over 2015, but are now forecasting coal to contract further over 2016 and 2017, by 2.2% and 2.1%, respectively. 

China's power mix continues to evolve, in line with the slowdown in China's economy - which is curbing power consumption - and the ongoing efforts by the Chinese government to tackle pollution, which is resulting in reduced coal consumption. This, coupled with the gain in prominence of cleaner fuels, such as gas, nuclear power and renewable energy, is having a significant impact on China's power sector.

Over our forecast period, we expect coal-fired power generation to register just a 2% increase from 2015 to 2025, whilst other fuels will post much higher growth levels - albeit from a lower base. Natural gas and nuclear power will both increase by over 300% and non-hydro renewables will more than double. Oil power will decline as it is gradually phased out of the power mix over the coming decade.

This represents a downward revision to our previous forecasts (1.9% and 2.5%) and takes into account our newly revised power consumption forecasts and the ongoing commitment to coal reduction by the government, highlighted recently by the active role China took in the UN COP21 climate change negotiations in December 2015 (see 'UN INDCs Underscore Power And Renewables Views', October 6, 2015). In fact, we believe that China's coal-fired power generation will recover only marginally, after falling sharply until 2017, and will not surpass 2013 levels (just under 4,000TWh) before the end of our forecast, with annual average growth rates of 0.9% between 2018 and 2025.

Ivy Poon, Moody's Assistant Vice President and Analyst:

Sluggish power consumption growth in China will pressure the country's power generators (gencos) and power transmission and distribution companies (gridcos), although both groups of companies still have sufficient headroom within their credit profile to withstand these headwinds.

China's structural rebalancing and a slowdown in energy intensive industrial activity are muting electricity growth, with risks increasingly skewed to the downside for the country's power sector.

Clean and renewal gencos are slightly better positioned than coal-fired gencos to withstand the weaker demand, owing to supportive de-carbonization policies. And the moderate-to-strong financial profiles of gridcos continue to provide a cushion against adverse market changes and sizeable capital expenditure.

While Moody's base case scenario assumes that national power consumption will see muted growth over the next 12-18 months, we can expect a more structural shift in power demand in the longer term as China's economy shifts from the traditional model of heavy industry-led and export-led growth toward a consumption-led and service-driven economy.

We expect the cyclicality in the power sector will gradually decline as a result, reflecting the sector's increasing exposure to the more stable tertiary industry -- which mainly comprises the services sector -- and residential customers.