(ChinaCoalResource, Sept 27, 2006) Standard and Poor's said the outlook for China's independent power producers (IPPs) is stable, adding though that structural inefficiencies in the sector continue to threaten the credit health of the producers.

'For the country's biggest power generators, a balance between supply and demand in the coal market, recently adjusted tariffs rates and new capacity coming on line should improve cash flow generation over the next 12 months, supporting a stable outlook for the sector,' the ratings agency said in a research note.

China's IPPs are vulnerable to margin squeezes due to the imbalances caused by the liberalized coal sector and the regulated tariff-setting system, which does not permit full cost pass-through, S&P noted.

Following years of power shortages, China's power producers are increasing capacity as much as possible, the note said.

By the end of 2005, total generating capacity was at 508 gigawatts (GW), and another 75 GW is expected to come online this year, followed by an estimated 80 GW to be added in 2007.

The capacity increases are mainly linked to a dispatch scheme based on market share rather than a producer's cost to supply a particular grid, the note said. It added that the scheme keeps inefficient players in the market, thereby driving down producer margins, leading to overcapacity and pressure on plant utilization rates.

Some markets are experimenting with 'power pool bidding,' through which tariffs are determined by the lowest bid submitted by producers, the note added.

Financial pressure on IPPs has increased in recent years because of declining utilization rates, rampant capacity expansion and greater debt financing and this has contributed to S&P downgrades for Huaneng Power and Datang Power, the rating agency said.

source:ChinaCoalResourceChina energy power