Confusion and confusion in the deep waters of power transformation

In 2020, the new round of power system reform officially entered its sixth year. After six years of reform, the power market has entered a deep water zone and has also ushered in many gratifying changes. For example, the transmission prices of the five major regional power grids in North China, Northeast China, East China, Central China, and Northwest China have been re-determined, and the reform dividends have been further released; for example, the liberalization of power distribution and sales business has been accelerated, and the number of registered power sales companies nationwide is nearly 10,000 (incomplete statistics as of the end of 2019); for example, the comprehensive liberalization of power consumption plans in four industries such as coal, steel, nonferrous metals, and building materials; for example, pilot provinces such as Guangdong and Shandong have carried out continuous trial settlements...

Six years of power reform have achieved remarkable results, but the deeper the reform goes, the greater the resistance. As superficial problems are solved, deeper problems emerge one after another, and there are still many confusions in the various links of power generation, transmission, distribution and use.

State Grid’s confusion: What will the future hold after a sudden change of leadership?

The main profit model of power grid companies has always been to earn the difference between buying and selling electricity. For a long time, this has been a sure win. In 2019, this situation changed: on November 22, the State Grid issued Document No. 826 internally, pointing out that as the growth rate of electricity continued to decline, the rate of return on power grid business dropped sharply, the losses of enterprises at all levels of the company continued to expand, and the investment capacity continued to decline.

At the same time that State Grid announced its performance losses, China Southern Power Grid Company also issued the "Measures for Optimizing Investment and Cost Control (2019 Edition)", requiring strengthening of the entire process control of grid investment.

The traditional profit model is unsustainable. Where will power grid companies, especially State Grid, go in the future? How can we find new profit growth points while promoting the in-depth reform of electricity? The "three types and two networks" strategy in 2019 once made many people see the goal, but the sudden change of leadership before the Spring Festival in 2020 made this seemingly clear goal blurred again. The sudden outbreak of the new coronavirus in Wuhan also requires us to spend more time to understand the new coach's governing ideas, but it also makes everyone look forward to the next reform of the new coach.

The confusion of power plants: the traditional profit model is not working, where are the new economic growth points?

Power grid companies are faced with the dilemma of finding new profit growth points. Power generation companies, especially coal-fired power companies, are also faced with the same dilemma.

Like power grid companies, power generation assets have always been the most important and profitable sector of power generation groups over the past 15 to 20 years. However, as my country's economic growth slows down, downward pressure increases, and the growth of electricity demand slows down significantly, the oversupply of power capacity has become a source of risk in the power generation industry, constantly impacting the operating performance of the power generation industry.

The China Electricity Council's "2018-2019 National Electricity Supply and Demand Situation Analysis and Forecast Report" shows that as the main component of the operating costs of the coal-fired power industry, the price of power coal has remained high since 2017, and the procurement costs of coal-fired power companies remain high. In 2018, nearly 50% of coal-fired power companies across the country were still in the red. Among them, the operating conditions of the five major power generation groups play a major role in the overall performance.

What is more troubling to power generation companies than the high purchase price of power coal is the continuous reduction of electricity prices by the state in order to stimulate the overall economy. Relevant statistics show that since the launch of the new round of electricity reform in 2015, the average price per kilowatt-hour of power generation companies has dropped by more than 7 cents in order to reduce the electricity costs of users. Under the double blow, the operating performance of power generation companies has continued to decline. The original five major power generation groups, which own nearly 90% of my country's coal-fired power production capacity, realized a profit of 109.8 billion yuan in 2015, which was halved to 60 billion yuan in 2016 and fell to 40 billion yuan in 2017.

When visiting relevant markets, Xiangnenghui found that under the objective historical conditions of slowing electricity consumption in the whole society, supply-side structural reform, and the "ice and fire" of coal and electricity, how can the coal-fired power industry, which is in the overlapping period of reform in multiple fields, change the previous simple and crude way of capacity expansion and take the initiative to withdraw from traditional business? How to adjust the inertial thinking of enjoying the benefits of electricity volume and electricity price, and open up the blue ocean of business in a meticulous way? How to improve the industrial chain and value chain with clean, efficient, green and low-carbon as the orientation, and realize market-oriented operation and optimal allocation of resources? Although various power generation companies are exploring new profit growth points, there is still a lack of clear profit model.

The confusion of power sales companies: the price difference is getting smaller and smaller, should they persist or give up?

As a new product of power reform, the identity of power sales companies, especially private power sales companies, has always been controversial. In the eyes of some power grid and power generation companies, under the medium and long-term trading model, power sales companies that survive on price differences have no need to exist at all. Many power sales companies have also realized this. They have taken the initiative to help power users with value-added services such as energy conservation and emission reduction, load management, and try to get in touch with the incremental distribution network, but the results are often counterproductive.

"Diversified value-added services can indeed become a profit point, but in actual implementation, most value-added services need to be implemented offline, which requires a large cost investment. Many private power sales companies are actually unable to afford it. Choosing to cooperate with service providers in the user's location can be one way, but it is actually not easy. The users of the power sales company may be scattered throughout the province, and the service providers in different regions may not be the same company. Different value-added services have different types of service providers, so it is very difficult for the power sales company to integrate these resources. In addition, the user stickiness that the power sales model can provide is actually limited. Whether it can rely on the power sales cooperation relationship to convince users to choose the recommended cooperative service provider is also questionable." Roger (pseudonym), an industry insider, said that private power sales companies are like water without a source. They have no technology, no assets, no power supply, only a customer relationship. The more complex and complete the market is, the smaller their living space is.

Survival in the current market is difficult, and many private electricity sales companies are looking forward to the opening of the spot market.

"After the spot market is opened, power sales companies need to transform into technical and service-oriented ones. They need to be very professional and understand the rules. How many trading rules are there? What is the purpose of each trading method? What is the transaction price of each transaction? What factors determine it? This requires professional research and a lot of cost, which many power sales companies may not be able to afford." Zheng Yu (pseudonym), an industry insider, believes that the spot market may not be a good thing for private power sales companies, but it is valuable for power sales companies as a whole.

“The price difference is getting smaller and smaller, customer recognition of integrated energy management is not high, and it is difficult to see benefits from the distribution network business in the short term. A lot of money has been invested before, and a large amount of money will have to be invested to deal with spot market. Do you think I should persist?” The words of the person in charge of a power sales company expressed the voices of many power sales companies.

Reform has never been smooth sailing. It is normal for the main entities of power generation, transmission and distribution to encounter various problems when entering the deep waters. Fortunately, all parties involved in the power reform have not been intimidated by difficulties. They are crossing the river by feeling the stones and making brave attempts. It is precisely because of these brave attempts again and again that the problems have been solved again and again. This has long been proven by countless reforms in ancient and modern times, both at home and abroad.