Gf Securities stated that Guangdong's average spot power price reached 0.524 yuan per kilowatt-hour in April, with peaks exceeding 1 yuan/kWh, significantly higher than annual contract prices. Since April, national temperatures have been higher than the same period last year, with expectations for most regions to experience temperatures 1-2°C above normal this summer, which is anticipated to drive electricity consumption growth. The China Electricity Council forecasts a 5%-6% increase in total electricity consumption for 2026, indicating stable demand growth in the power sector. As thermal power companies release their first-quarter reports, initial market pessimism due to early-year tariff declines is being countered by some companies announcing better-than-expected tariff reductions, suggesting potential earnings surprises. Key views from Gf Securities are as follows:
The significant rise in Guangdong's spot power prices, effectively passing on higher costs, highlights a focus on tariff stabilization and recovery. The core reasons for the spot price surge are short-term supply-demand tightness and substantial increases in primary energy prices. On the supply-demand side, higher April temperatures and economic recovery in Guangdong led to rapid load growth. Supply constraints arose from spring maintenance, weaker hydropower output, and limited solar power, leading to increased reliance on gas-fired power, which became the marginal pricing source. Energy prices have continued to rise this year, with coal prices increasing from 682 yuan/ton at the start of the year to 775 yuan/ton. LNG prices have surged following Iran-US tensions, elevating thermal power costs and transmitting them to electricity tariffs, directly impacting Guangdong's spot prices.
Guangdong's tariff trends are representative, with cost increases more frequently reflected in monthly and spot prices. Jiangsu's monthly contract prices have risen for three consecutive months, with May prices approaching annual contract levels, suggesting that cost-driven tariff increases may spread nationwide. As wind and solar power are projected to account for 22% of generation by 2025, intraday volatility and price differentials in spot markets are expanding, benefiting thermal power's ability to capture higher prices through flexibility.
High temperatures in Q2 are expected to boost electricity demand, with thermal power returning to positive growth and a supply-demand inflection point emerging. National electricity consumption from January to March 2026 increased by 5.2% year-over-year. With higher temperatures since April and expectations for a hotter summer, electricity consumption growth is likely. The China Electricity Council projects a 5%-6% rise in total electricity consumption for 2026, indicating stable power demand growth. On the supply side, growth is slowing due to reduced thermal power approvals, declining new wind and solar capacity additions, and stricter grid connection constraints, leading to diminishing marginal benefits from new installations. Wind and solar generation grew only 9.3% year-over-year in Q1, while thermal power increased by 3.7%, marking a return to positive growth and signaling a power supply-demand inflection point.
Low expectations, low valuations, and high dividends make the power sector attractive for both offensive and defensive strategies. As thermal power Q1 reports are released, initial pessimism over tariff declines is being offset by some companies reporting better-than-expected results, indicating potential earnings beats. The revaluation trend continues, with multi-dimensional improvements underway: (1) Tariff-wise, expectations for regional contract price reductions are fully priced in, while recent coal price increases benefit monthly and spot price recovery; (2) Supply-demand dynamics are improving with slowing supply growth and unexpectedly strong AI-driven demand; (3) Power system reforms are accelerating, with expanded spot trading, capacity tariffs, and ancillary services likely to boost comprehensive tariffs; (4) Cash flow is improving due to reduced investments, better free cash flow, and higher dividend expectations; (5) Public fund holdings in utilities rose by 0.04 percentage points to 0.32% by the end of Q1 2026, still far below the sector's 2.86% market cap share. With low fund holdings stabilizing and increasing allocation demand, valuation upside and earnings potential make the sector well-positioned.
As the shift toward utility-like operations accelerates, focus on annual and Q1 reports: (1) Thermal power: High-performing, high-dividend companies like Huaneng Power International, Huadian Power International, China Energy Investment Corporation, Shenergy Company, and Huaneng Mengdian; (2) Hydropower: Sichuan Investment Energy with earnings beats and dividend increases; (3) Gas: Jovo Energy with coal-to-gas projects and Foran Energy catalyzed by green methanol; (4) Nuclear: China National Nuclear Power with profit flexibility after tariff recovery.
Risks include fluctuations in coal costs, lower-than-expected hydropower output, and variations in utilization hours.
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