BOCOM INTL: Deepen reforms in the new energy sector and promote market-oriented pricing, moderately easing market concerns about falling electricity prices.

BOCOM INTL issued a research report stating that the "Notice on Deepening the Market-based Reform of On-grid Electricity Prices for New Energy to Promote the High-quality Development of New Energy" has been issued, clarifying the new direction of reform for on-grid electricity prices and electricity volume for new energy. The core of this reform is to promote the comprehensive marketization of on-grid electricity prices for new energy, establish a new price settlement mechanism, and, by June 1, 2025, implement differential management for existing and new projects. The impact of the new policy on short-term profitability is considered to be minimal for large-scale new energy operators such as China Longyuan Power Group Corporation (00916/Buy) and CHINA RES POWER (00836/Buy). Key points from BOCOM INTL: New direction of reform for on-grid electricity prices and electricity volume for new energy. The National Development and Reform Commission and the National Energy Administration jointly issued the "Notice on Deepening the Market-based Reform of On-grid Electricity Prices for New Energy to Promote the High-quality Development of New Energy". The bank believes that the "Notice" proposes reform directions for on-grid electricity prices and guaranteed on-grid electricity volume, with key reform contents including comprehensive marketization of on-grid electricity prices, establishment of a new price settlement mechanism, and differentiation of existing and new projects from June 1, 2025 onwards: 1) Promoting comprehensive marketization of on-grid electricity prices: The policy direction is to promote marketization of on-grid electricity volume for wind power and CECEP Solar Energy generation projects, with on-grid electricity prices determined by market transactions, and there are expectations in this regard. 2) Establishing a new price settlement mechanism: After new energy participates in market transactions, a sustainable price settlement mechanism will be established at the settlement stage, and the electricity included in the mechanism will be settled at the mechanism price; 3) Differentiating strategies for existing and new projects: Existing and new projects will be differentiated from June 1, 2025, with mechanism prices for existing projects having good alignment with current policies, and the electricity volume can autonomously determine the proportion of mechanism implementation, but not higher than the previous year. The mechanism electricity price for new projects will be determined through market bidding, and the electricity volume will be determined by each region based on factors such as the annual non-hydropower renewable energy power consumption responsibility weight assigned by the country, and user capacity. The flexibility of wind/solar matching storage policies may increase. Additionally, the "Notice" also lists "Not approving the use of storage as a prerequisite for new construction, connection, and on-grid requirements for new energy projects." The bank understands that the policy may lead to a more flexible approach towards the storage capacity (storage duration or percentage relative to project installed capacity) for wind power and CECEP Solar Energy generation projects. The impact of the new policy on existing projects is mild, and the short-term profitability impact on large-scale new energy operators is minimal. The market currently has certain expectations for the marketization of wind and solar projects with rapidly increasing installed capacity in recent years. The differentiation management of existing/new projects set by the "Notice" can to some extent maintain the returns of existing projects. As for the new arrangements for electricity volume and prices for new projects, the bank expects that the development efforts of operators during the "15th Five-Year Plan" period will depend more on actual electricity demand and project returns, which will help stabilize the development of mainland new energy. For large-scale new energy operators such as China Longyuan Power Group Corporation and CHINA RES POWER, the bank believes that the new policy will have a minimal short-term impact on profitability and will also increase the predictability of electricity prices, alleviating concerns in the market about downward trends in on-grid electricity prices. Risk factors: Wind/solar on-grid electricity consumption lower than expected, new price settlement mechanism compensating less than expected, market-traded electricity prices declining more than expected.