During periods of heavy rain, hydroelectricity production increases, dampening the spirit of coal-fired business, which suffers as its utilisation rates drop. Centred on dams along China’s biggest rivers, hydroelectric business franchises are non-replicable. They generate positive free cashflow, enabling room for dividend increases, and variable costs are low compared to their coal equivalents. We think this is dammed-good news for industry players.
One of the cheapest sources of clean energy
Hydropower is one of the cheapest forms of clean energy. It enjoys the lowest tariffs and compared to alternative power sources, its profitability and cashflow have been above average and much more stable. This is partly because domestic coal prices skyrocketed after supply-side-reform in 1Q16. But also the low variable cost of hydropower enables independent power producers (IPPs) to generate good cash profit without the need to worry about the cost of raw materials. From an environmental perspective, hydropower is a mature and low-carbon technology that enables China to keep its emission-control promises.
Hydropower offers stable power; organic growth comes from coordinated dispatch
Beijing in general supports the development of large hydroelectric stations. The energy carrier – water flow – can be reused in every power station along the same river. Hydropower can provide both stable 24-hour and increased output during peak demand hours, as well as ancillary services. Depending on the type of power plants built, flow can be adjusted. Optimising energy-utilisation rates and power-generation output are important sources of IPPs’ organic growth. Longer-term, as more wind and solar power connects to the domestic grid, hydropower’s fast responsiveness and flexibility will facilitate integration.