More than 20 hydropower stations are planned along the jinsha river, China's largest hydropower base, CCTV reported recently. The wududong hydropower station, a superplant currently under construction on the lower reaches of the jinsha river near the border of sichuan and yunnan, is scheduled to be filled with water in July 2020 and put into operation in December 2021. It is the fourth super hydropower station in China and the seventh in the world to reach 10 million kilowatts.

(source: WeChat official account "xiananghui" ID: Encoreport author: xiananghui studio)

In the future, the four cascade power stations on the jinsha river -- ududan, baihetan, xiluodu and xiangjiaba -- will have an installed capacity of 46.46 million kilowatts, equivalent to two "three gorges projects", generating about 190 billion kilowatt-hours of electricity annually, and will become the world's largest green energy project base in the 21st century.

According to the national "13th five-year plan", installed capacity of power stations in operation and under construction has accounted for 63% of the planned total installed capacity. The development of hydropower sector has obviously entered a mature stage. On the one hand, hydropower is becoming mature; on the other hand, thermal power is constantly facing challenges. Under the expansion posture of hydropower, water and fire present completely different market status. Due to abundant inflow, hydropower generation in the first half of the year increased by 11.8% year-on-year. According to the performance data show that the net profit of hydropower sector home to 1.28 billion yuan Q2, a year-on-year growth of 43.9%. (data source: Choice hydropower listed companies)

In nuclear power, wind power utilization hour under the circumstances of year-on-year decline. In the first half of the year, the number of hours spent on hydropower increased by 169. The precipitation in the middle and lower reaches was abundant by region. The hourly increase of hydropower utilization in fujian, hunan and jiangxi was up to 870, 764 and 586 hours, respectively, and the increase of hydropower utilization in yunnan, sichuan, guizhou and guangxi was 300, 20, 90 and 88 hours, respectively. However, the utilization hours of hydropower in hubei province decreased by 91 hours. In the first half of the year, hydropower output from Yangtze power, huaneng hydropower and state investment power increased by 5 percent, 57 percent and 7.5 percent, respectively. Large hydropower company reported in the performance is expected to show a steady increase in the trend. (data source: wind database)

In the first half of this year, the thermal power industry was affected by the slowing growth of electricity demand and the diversion of hydropower. In the first half of this year, the thermal power generation only increased by 0.2%(8.0% growth in the same period last year and 6.0% in the whole year), and the utilization hours decreased by 60 hours compared with the same period last year. At the same time the first half of the thermal power companies profit improvement also benefited from the fall in coal prices.

The development of hydropower plate has entered a mature period. The stability of generating hours also reflects that China has gradually stepped out of the era of large-scale hydropower station development. In 2017, the average dividend rate of major hydropower enterprises was 59.29%, and the dividend rate of hydropower leader Yangtze power was as high as 67.20%. The bibcock of hydropower has gradually occupied the best quality water resources, stable cash flows, and diminishing the large equipment guarantees high dividends of investment is expected to continue in the future, with steady cash flow and high dividend high-quality water resources enterprises is a guarantee of future sustainable profit value, with the thermal power enterprises is a stark contrast to the situation.

Current situation of hydropower industry

The proportion of installed hydropower capacity declined slightly. In 2018, the proportion of installed hydropower capacity dropped from 18.5 percent in 2015, mainly due to the diversification of the power structure and accelerated deployment of photovoltaic, wind power and biomass energy. There are significant regional differences in the layout of hydropower enterprises. Northwest and southwest regions have significant advantages in natural conditions, most of which are large conventional hydropower stations. Central, eastern and southern China are mainly pumped storage power stations.

Industry policy

At present, there are two aspects of national policies on hydropower industry: one is to promote consumption of hydropower and the other is to accelerate the layout of pumped storage power stations.

In October 2017, the National Development and Reform Commission and the National Energy Administration issued a notice on promoting consumption of hydropower in southwest China, which clearly pointed out that it would promote market-oriented trading of hydropower across provinces and regions, and encourage the development of spot market trials of electricity. Released in March 2018, the national energy administration of the renewable energy electricity quotas and assessment method (draft) ":" in the electricity market reform to encourage and support priority given to use renewable energy electricity, according to the principle of priority to the development of renewable energy and fully given power construction and running management." According to the 13th five-year plan for hydropower development, the target for hydropower development is: about 60 million kilowatts of conventional hydropower stations and 60 million kilowatts of pumped storage power stations will be started nationwide, and 60 million kilowatts of new hydropower will be put into production. The total installed capacity of hydropower will reach 380 million kilowatts by 2020, including 340 million kilowatts of conventional hydropower and 40 million kilowatts of pumped storage. In the future in east China, central China, south China, north China and other areas dominated by thermal power generation, can make full use of the flexibility of pumped storage power stations, adjust the power supply balance.

Hydropower operation

The business model of hydropower enterprises is simple. The core factors that affect the operation of hydropower enterprises are the total installed capacity, average hours of power generation, on-grid electricity price and depreciation of fixed assets.

The above profit structure can be further simplified to:

Profit of hydropower sector = total installed capacity × average hours of power generation × on-grid electricity price -- depreciation of fixed assets -- other costs.

Obviously, the installed capacity, the number of hours of power generation and the on-grid price jointly determine the operating income of hydropower enterprises, and the depreciation of fixed assets of units is the main component of the cost of hydropower enterprises.

The profitability of hydropower enterprises is closely related to the above operational indicators: profitability is directly proportional to the total installed capacity, hours of power generation and on-grid electricity price, and inversely proportional to the depreciation of fixed assets and financial expenses. Benefiting from the fuel free cost, the unit electricity generation cost after hydropower production is lower, and the profitability is strong. The profit of hydropower enterprises fluctuates with the income from electricity sales, depreciation fees and financial expenses. For the on-grid tariff, under the backward pricing method, the on-grid tariff of hydropower and the benchmark on-grid tariff of thermal power will change in the same direction. At present, the on-grid electricity price of thermal power is at a low level, while the price of coal is at a high level. In the future, once the on-grid electricity price of thermal power is raised under the coal-electricity linkage mechanism, it will bring higher electricity sales income to hydropower enterprises. The depreciation life of the fixed assets of the existing hydropower enterprises is less than the actual planned service life. It is expected that the generation cost of hydropower enterprises will be greatly reduced after the depreciation is completed.

High-quality hydropower enterprises often have the following characteristics

First, the power delivery channel is smooth, power consumption capacity of the region's hydropower enterprises, the number of hours of power generation is higher. Second, enterprises with large installed capacity and multiple hydropower stations in the same basin. Third, it is a large hydropower project with complete supporting power grid, power generation and stable electricity sales.

Take huaneng hydropower as an example. The enterprise is a leader of high-quality hydropower and its scale is expanding day by day. As the second largest hydropower generation company in China, huaneng hydropower has a large class of high-quality hydropower assets and is responsible for the development of hydropower resources in the main stream of lancang river. It is the core leading enterprise of west-east power transmission and cloud power transmission.

Revenue of huaneng hydropower in 2016-2018 was 115.5 billion yuan, 12.85 billion yuan and 15.52 billion yuan, with year-on-year growth of -10.9%, 11.2% and 20.8%. Realized the return of net profit 5.1, 21.9 and 5.80 billion yuan, year-on-year growth of 77.8%, 330.8% and 165.1%. The decline of the company's operating income and net profit in 2016 was mainly caused by the decline of electricity consumption, the impact of yunnan electricity reform, and the significant decline of the on-grid electricity price due to the increase of marketization rate. The fast growth of revenue and return net profit in 2018 is mainly due to the year-on-year growth of electricity generation by 11.62%, and the year-on-year increase of average settlement price by 15 yuan/KWH. (source: Choice annual report)

In the first quarter of 2019, the revenue of huaneng hydropower reached 4.44 billion yuan, with a year-on-year growth of 49.7%, and the net profit of its parent reached 800 million yuan, with a year-on-year growth of 137.4%. Both the revenue and profit maintained high growth, mainly due to the increase in installed capacity and capacity expansion. Due to the increase of electricity transmission from the west to the east and the relatively abundant inflow of water from lancang river basin, the electricity generation in the first quarter of 2019 increased by 43.3% year-on-year. (source: Choice enterprise quarterly report)

Affected by the accelerated process of marketization, the development of the hydropower industry is now significantly accelerated

Huaneng hydropower is located in yunnan province, where the supply of electricity exceeds the demand, and nearly half of the electricity is sent from the west to the east. It takes the lead in promoting the reform of the power system, and the process of marketization of electricity is much faster than that of other regions. By the end of 2018, about 85.1 billion kilowatt-hours of market-oriented electricity were traded in yunnan province, with a year-on-year growth of 21%. Market-oriented electricity consumption continued to grow at a high rate. Therefore, after the rapid promotion of the marketization of hydropower and electric power in 2015-2016, the online bidding led to a significant decline in the on-grid electricity price, and the performance of the electricity sold in the current period was average. The company's profitability in 2015-2016 was significantly lower than that of the market, which was a downturn.

At present, the proportion of marketized transaction electricity of huaneng hydropower has greatly exceeded the national average of 32%. According to the annual report of the enterprise, the marketization rate of 2017-2018 hydropower reached 82.2% and 69.4%. The electricity price is basically mature in the game among power purchasing enterprises, power selling enterprises and power grid companies. The income of huaneng hydropower increases with the increase of electricity sold, and the comprehensive gross profit rate is expected to maintain a high level.

As a renewable energy generation mode, hydropower will continue to receive policy support and preferential consumption of hydropower will increase its share in the electricity market. Due to the limitation of natural conditions, the project cost of conventional hydropower stations is gradually increasing. In the future, conventional hydropower stations will enter the stage of stock game. Large hydropower enterprises are expected to expand the installed capacity through acquisition of small and medium-sized hydropower stations. The pumped storage hydropower station is supported by the policy and will be the first choice for hydropower development in the region dominated by thermal power. In the future, with the improvement of marketization degree and the maturity of hydropower industry, lower and lower large hydropower enterprises will have a larger and larger proportion of power delivery. At the same time, the stability of on-grid electricity price in power system reform will make the cash flow of hydropower enterprises very stable, so as to ensure the steady increase of profitability of hydropower enterprises.

The constant increase of market-oriented consumption capacity, stable on-grid price and stable cost are the guarantee of sustainable profitability of hydropower, which is also the direction for thermal power reform, spot trading and supply-side regulation of coal market in the future.