Haitong: Electricity prices are heavily regulated, with the thermal power industry returning to a public utility model.

Haitong released a research report stating that in the current electricity market, on one hand, local governments have set multiple and contradictory goals for electricity prices. They want to lower electricity prices to reduce the burden on users, ensure that power plants maintain incremental power to maintain power security, and also consider the development of energy storage and price stability, but these goals are difficult to achieve together in practice. On the other hand, policy efforts continue, such as achieving basic full coverage of provincial spot markets by the end of 2025, bringing new opportunities for industry development. Looking ahead to 2025, the profitability in Q1 of 2025 is expected to increase. The current PE ratio of thermal power is below 10 times, the dividend ratio is still increasing, while the overseas power leaders have a PE ratio of around 20 times, making them worth looking into. Haitong's main points are as follows: Local government's multiple electricity price goals are difficult to achieve together Last week, the Shanghai Composite Index rose by 2.3%, the ChiNext Index rose by 4.7%, China Yangtze Power rose by 0.5%, and Huadian Power International Corporation rose by 3.1%. Currently, local policies have various requirements for electricity prices, wanting both lower electricity prices and incremental power plant output to ensure power security. They also want to ensure price differentials, develop energy storage, and maintain stable electricity prices without fluctuations for users. The profitability of thermal power this year has mostly increased, and if coal prices do not drop significantly, spot electricity prices may gradually stabilize and rise, leading to a better performance in the sector. Achieving basic full coverage of provincial spot markets by the end of 2025 is beneficial for industry development "Key Points of Energy Regulation Work in 2025": (1) Improve basic rules and regulations. Study and establish a national unified electricity market evaluation system. (2) Optimize market mechanism functions. Continue to promote the construction of spot markets in each province and achieve basic full coverage of provincial spot markets by the end of 2025. Spot electricity prices have upper limits but no lower limits, which may reduce the enthusiasm for power investment in Sichuan, but strengthen the utility attributes Sichuan's capacity electricity price is set at 50%, with an upper limit of spot electricity price set at 0.51 Yuan/kWh (the more capacity, the less fluctuation in electricity prices) and adjusts the upper limit of electricity prices based on fuel costs. The province has a coal-fired power linkage mechanism, but there is an upper limit with no lower limit. According to Sichuan's notice regarding the clear rules for the limit of thermal power spot market bidding prices, the declared price limit = fuel cost adjustment factor + other variable costs. The adjustment factor is tentatively determined as 1.3. The declared upper limit for thermal power spot market prices is 0.51 Yuan/kWh, and the government-authorized contract price for coal-fired power in 2025 is 0.4392 Yuan/kWh. The government-authorized contract electricity quantity is, in principle, the net electricity volume covered by long-term electricity market trading contracts within the province. Most governments hope to maintain price differentials for electricity, but do not want peak values to be too high, they only want to reduce off-peak values (often at the expense of lowering prices for new energy sources), while also wanting new energy sources to develop quickly locally Ningxia's notice regarding optimizing the long-term electricity market transactions in 2025: (1) User and thermal power transaction: peak-hour prices are not lower than 150% of flat-hour prices, and do not exceed 180% of the benchmark electricity price. Off-peak-hour prices do not exceed 50% of flat-hour prices (no lower limit is set here). Important information: 1. Wind power: In 2024, China's newly added wind power grid-connected capacity is about 88 million kilowatts (YOY +15.94%). By the end of 2024, the cumulative grid-connected capacity is about 530 million kilowatts. 2. From 2024 to the end of 2028, the feed-in tariff for solar thermal power in Qinghai is set at 0.55 Yuan per kilowatt-hour (including tax), and does not participate in market-based transactions. 3. In 2024, China imported a total of 543 million tons of coal, YOY +14.4%, reaching a new historical high. Profitability is expected to increase in Q1 of 2025 The current PE ratio of thermal power is below 10 times, and the dividend ratio is still increasing. Overseas power leaders generally have a PE ratio of around 20 times, making them worth looking into. Risk warning: (1) Economic growth expectations and monetary policy may lead to significant market style fluctuations. (2) The direction of electricity market liberalization is determined, but the development time is difficult to determine.