Foreign Exchange Rate Risks
The Group principally operates its businesses in Mainland China with most of its transactions settled in RMB. Apart from certain bank borrowings as well as cash and cash equivalents, the Group’s assets and liabilities are mainly denominated in RMB. The Group held borrowings denominated in JPY and USD during the year. Volatility of RMB exchange rate against JPY and USD may increase the exchange risks of the Group, thus affecting its financial position and operating results. As at 31 December 2020, the Group’s borrowings denominated in foreign currencies amounted to RMB3,038,381,000 (31 December 2019: RMB3,371,773,000). The Group will continue to keep track on the movements of exchange rate and, if necessary, take responsive measures to avoid excessive foreign exchange rate risks.
With the Group’s strengthened efforts in developing all kinds of new power projects, funding adequacy will have an increasing impact on the Group’s operations and development. The financing market is affected by a number of factors such as the liquidity of the lending market and the economic environment, which in turn may also affect the effectiveness and costs of the Group’s borrowings.
The Group has always leveraged its capability of accessing the Mainland China and overseas markets to optimize its funding sources, increase the credit facilities and lower its financing costs. Various cost-saving and efficiency enhancement initiatives have also been adopted in the Group’s business management to lower administrative and operating expenses. Moreover, the financial services framework agreement with SPIC Financial also helps to reduce funding risks.
As at 31 December 2020, the Group had sufficient available undrawn financing facilities amounting to RMB51,888,347,000 to safeguard against funding risks.
At the beginning of each year, the management reports to the Board on the working capital budget for the year and estimates the credit facilities and facilities reserves required for the year to ensure the Group has adequate financial resources to support the continued operation and development of projects in the foreseeable future. The management will also review the situation regularly to take contingency measures.
Risks Relating to Policy Changes
The cancellation of the coal price and coal-fired power tariff linkage mechanism (煤電價格聯動機制) since January 2020 has promoted the marketization of coal-fired power transactions. It is expected that the coal-fired power tariff will be further affected by the market conditions and the supply and demand of coal, as well as the results of negotiation or the competitive bidding between both parties of power supply and demand.
In March 2020, the National Energy Administration published the Notice on the Issues Related to the Construction of Wind Power and Photovoltaic Power Projects in 2020 (《關於2020年風電、光伏發電項目建設有關事項的通知》) to give priority to promoting the construction of wind power and photovoltaic power grid parity projects without subsidies, pursuant to which, those wind power and photovoltaic power projects which are either already grid-connected or still in the process of applying national subsidies within the approved effective term are strategically encouraged to transform into grid parity projects voluntarily, with a view to accelerating the progress of grid parity. The development of grid parity projects and competition for subsidies allocation led to declining on-grid tariffs and profitability of new energy projects. Conditions for profit margins are required to be implemented properly in the preliminary stages in order to reach the expected profit level. With less funding subsidies from the State, applications requirements are relaxed for projects once their land and connection compatibility documents are ready, which has facilitated the large-scale development of new energy projects and has rapidly increased the proportion of clean energy of the Company.
In April 2020, the National Development and Reform Commission published the Draft for Solicitation of Comments regarding the tariffs for power supply industry, with a view to gradually canceling the official tariffs for industrial and commercial use, among which, the tariffs will be determined by the market force while the tariffs for power transmission and distribution will be approved by the government and under its stringent control. It is expected that such measures will deepen the system reform of the power industry, thereby leading to more market-oriented electricity tariffs. From the perspective of the development of the electricity market, such measures will further reduce or even remove the market entry barrier, which will encourage more entities to participate in market-driven transactions.
In August 2020, the National Development and Reform Commission and the National Energy Administration jointly published the Draft for Solicitation of Comments regarding the integration of wind power, photovoltaic power, hydropower and coalfired power storage and the integration of power source, power grid, power charge and power storage. The draft proposed the complementary mix of various types of power generation, including wind power, solar power, hydropower and coal-fired power, to meet specific local needs by taking into account the resources conditions and energy characteristics within the area, while increasing the proportion of energy storage as appropriate. This is expected to result in new power generation and consumption models, thereby helping to explore the development of a new generation of power system that highly integrates power source, power grid and power charge. The large scale of the installed coal-fired power capacity of the Group has imposed immense pressure on the reduction of carbon emission. Upon commencement, the two integration projects with coal-fired power as the major means of adjustment and peak shaving have become the key resources for the massive and base-oriented development of new energy. In the future, the Group may establish large-scale new energy bases surrounding its existing coal-fired power plants.
At the 75th General Assembly of the United Nations held in September 2020, the Chinese President pledged to achieve a carbon dioxide emissions peak by 2030 and carbon neutrality by 2060 through more effective policies and measures. Looking forward, China will have to meet its goal of carbon neutrality in the energy field via integrated measures, including energy restructuring, energy conservation and emission reduction, energy efficiency enhancement, as well as carbon capture and storage. China will accelerate the leapfrog transition of the national energy structure from coal-fired power generation-oriented to clean and low-carbon energy-oriented.
The national goals set for carbon dioxide emissions peak and carbon neutrality bring unprecedented opportunities for clean energy development, create a huge potential market for low carbon and clean services, and allow green energy consumption to become a major player in achieving carbon neutrality. Yet, challenges come with carbon dioxide emissions peak and carbon neutrality. Burdened with the pressure to reach the carbon dioxide emissions peak, local governments may impose additional requirements on carbon emission. As a result, the new or existing power generating units of the Group may face sudden changes in policies that require the revaluation of coal-fired power projects. Carbon emission quota for coal-fired power enterprises in the carbon market will be further reduced inevitably. Although only a few outdated power generating units of the Group need to purchase carbon emission quota to meet the requirements at the moment, all coal-fired power generating units will face a shortage of quota in the future, resulting in a significant increase in the cost of carbon emission.
The Company will continue to monitor the changes in policies, adjust its strategies and exploit investment opportunities as they arise.
Risks and Prevention and Control of COVID-19
In the past year, COVID-19 pandemic became the new and highest risk facing by the globe. Under its impact, the growth of national total electricity consumption throughout China has slowed down in early last year, recording a year-on-year growth of 3.1%.
In terms of operations, as certain coal-fired power plants of the Group are located in Hubei province and Anhui province where the pandemic outbreak was relatively more serious, their electricity sold recorded a similar year-on-year decrease to some extent. Coupled with the delay in progress of varying degrees of the Group’s projects in construction under the impact of the pandemic, pressure was posed to the operating revenue of the Group.
During the year under review, the Group formulated emergency measures for pandemic prevention and control in a timely manner. It also established the leadership group for pandemic prevention and control, so as to ensure the proper implementation of all relevant planning, measures and requirements for pandemic containment. This has made positive contributions to pandemic prevention and control as well as resumption of work and production. As of March 2020, most of the projects under construction resumed and were back on schedule. Moreover, all projects commenced operation as planned during the year. With the pandemic gradually brought under control and national total electricity consumption increased in the second half of the year, total electricity sold by the Group for the year grew 5.47% year-on-year. Overall, the pandemic did not have any material adverse impact on the results of the Group.
In addition, the demand and supply, transportation and import business in respect of the fuel market are affected by the pandemic, particularly the import of coal is under strict control. Together with the regional control of varying extents on various areas, transportation of coal is further restricted, thereby posing new challenges to the coal inventory management and safe production of the Group. Leveraging precise market research and decisive judgement, the Group timely adjusted the purchasing strategy during the low season of the market in the first half of the year. It increased its coal reserve at staggered peaks and stored coal in low seasons for consumption in peak seasons. At the same time, it promoted coal blending and mixed burning to reduce average unit fuel cost and hence lowered the fuel costs significantly.
In terms of finances, currently the Group has sufficient available unutilized financing facilities. Furthermore, the counterparties of our electricity sales are mainly regional and provincial power grid companies, which have robust financial strength and good reputation. As such, counterparty default rates of the Group are extremely low despite the pandemic, and we do not expect any risk associated with the cash flow and bad debts of the Group arising therefrom.
According to the latest forecasts, the Board believes that the Group has sufficient capital to fund its working capital and capital expenditure requirements for the next 12 months after the year end. Construction projects are expected to have stable sources of funding. However, with the pandemic still raging, there is still uncertainty as to its impact on the domestic and global economy. It is expected the interest rates and exchange rates would be affected to different degrees accordingly in the future. We will closely monitor and timely control the financing costs.
In terms of staff protection, the Group promptly acquired face masks, protective suits, antiseptic solution and other protective equipment. It designated personnel to track and analyze the stock and consumption of all types of epidemic prevention materials regularly to ensure timely communication and replenishment. In addition, it expanded and connected the procurement channels of epidemic prevention materials at home and abroad, thereby facilitating the two-way flow of supplies. With a focus on local and overseas projects and business units in regions hit heavily by the pandemic, it coordinated and secured the supply of epidemic prevention materials. During the peak of the pandemic outbreak, it strived to support power plants in areas where the pandemic was severe by providing them with protective materials and drugs.
In response to the impact of the sudden pandemic outbreak on the economy and the demand for electricity, the Group has conducted a comprehensive analysis and formulated measures to meet our performance targets so as to focus on efforts such as marketing of electricity and management of coal procurement. Besides, the Group has made timely assessment on the uncertainties arising from the pandemic over the contract performance in relation to the construction projects, actively designed and implemented epidemic prevention and control measures to ensure normal business operation of the Group. Currently, China’s epidemic prevention and control measures have proven to be effective. Nevertheless, potential risks related to the pandemic still exist. Looking forward, the Group will continue to strictly implement government requirements on pandemic prevention and control by adjusting its regular disease prevention measures on commuting and travel by staff, external visitors and health declaration.