Investment Rating - The industry investment rating is "Positive" and maintained [9] Core Viewpoints - Gansu Province's Development and Reform Commission has announced a draft notice for establishing a capacity price mechanism for power generation, which will raise the coal-fired capacity price to 330 RMB/year·kW starting in 2026, marking the beginning of a full cost compensation era for coal power [2][6] - The full recovery of capacity prices is expected to stabilize coal power profitability without significantly impacting user electricity prices, as the substantial drop in coal prices in 2025 supports this transition [2][13] - The capacity price reform signifies a fundamental change in the commercial model of coal power, ensuring that fixed costs are recovered, thus allowing coal power to return to its public utility attributes [2][13] Summary by Sections Event Description - Gansu Province's Development and Reform Commission has released a draft notice soliciting opinions on establishing a capacity price mechanism for power generation [6] Event Commentary - The capacity price will be set at 330 RMB/year·kW starting January 1, 2026, ensuring full recovery of fixed costs for coal power plants. The capacity supply-demand coefficient will play a crucial role in determining the actual compensation received by coal power plants [13] - The transition to a capacity price mechanism is expected to mitigate the risk of losses for coal power, with recommendations for investment in companies like Huaneng International and Huadian International, which are expected to benefit significantly from this reform [13]

Core Viewpoint - The coal power sector in China is undergoing a transformation with the implementation of a capacity price mechanism, which aims to stabilize revenues and support the transition to a dual-function role of providing basic energy security and system regulation [1][2]. Group 1: Capacity Price Mechanism - The capacity price mechanism will officially start in 2024, allowing coal power plants to earn a total of 95 billion yuan in capacity fees, with a capacity price of 2.07 cents per kilowatt-hour [1]. - This mechanism alleviates operational pressures on coal power companies by enabling them to recover fixed costs even when not generating electricity, thus providing a stable income source [1][2]. - The two-part pricing system includes a capacity price (fixed income) and an energy price (variable income based on output), which incentivizes coal power plants to enhance their operational flexibility [1][2]. Group 2: Impact on Coal Power Companies - The capacity price mechanism encourages coal power companies to upgrade existing units for flexibility, improving their ability to compensate for the intermittency of renewable energy sources like wind and solar [2]. - It stabilizes revenue expectations for coal power companies, reducing the impact of market fluctuations on their earnings and easing operational pressures [2]. - The implementation of the capacity price has led to improved collaboration among coal power companies and related departments, optimizing maintenance schedules to enhance peak generation capabilities [2]. Group 3: Future Optimization and Upgrades - There is potential for further optimization of the capacity price mechanism, particularly in regions with declining coal power utilization hours [3]. - The lifespan extension and upgrading of older coal power units are crucial for maximizing resource utilization and achieving economic efficiency [3][4]. - Current coal power units in China have an average operational lifespan of about 17 years, with a significant portion of units being relatively new compared to international standards [3]. Group 4: Challenges and Recommendations - Older units face challenges related to equipment, energy efficiency, and regulatory compliance, necessitating flexible upgrades to meet current energy demands [4][5]. - Recommendations include improving policies to support the lifespan extension of older units, ensuring reasonable investment recovery periods, and establishing technical standards for upgrades [5].