Excess capacity in China's thermal power generation is likely to worsen from now to 2017 due to falling coal costs and favorable on-grid tariff rates, Fitch Ratings said Monday in a report.
Despite government support of facilities that run on cleaner fuels, China's electricity producers have incentives to keep adding thermal power capacity before the end of 2017 as falling coal costs and favorable on-grid rates keep profitability high, Fitch said.
Annual fixed-asset investment in thermal power sources increased by 1, 13 and 22 percent in 2013, 2014 and 2015, respectively. Projects that have started construction are likely to be completed in the next two years, the report said.
Fitch expects investment returns in the thermal power sector to remain generally robust in the short term, largely because the sector can still enjoy a healthy "dark spread," or the difference between on-grid power tariffs and unit generation fuel costs.
However, severe overcapacity could cause competition that hurts returns in the longer run. Performance of individual independent power producers will start to diverge based on asset quality and location, according to the report.
Fitch believes that China will take further measures to rein in investment in the sector.
