China's thermal power overcapacity likely to worsen: Fitch

Falling coal costs and favourable on-grid tariff rates are main cause of the problem

Excess capacity in China's thermal power generation is likely to worsen until next year due to falling coal costs and favourable on-grid tariff rates, according to global ratings agency Fitch.

Fitch Ratings said in a report on Monday that despite the 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 next year as falling coal costs and favourable on-grid rates keep profitability high.

Annual fixed-asset investment in thermal power sources increased by one, 13 and 22% in 2013, 2014 and 2015 respectively.

Projects that have started construction are likely to be completed in the next two years, state-run Xinhua quoted the report as saying.

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, the report said.

Fitch believes that China will take further measures to rein in investment in the sector.

China plans to lay off 1.8 million workers in the coal and steel sectors in the next 3-5 years to deal with excess capacity.

China is the largest producer and consumer of coal in the world and is the largest user of coal-derived electricity, generating an estimated 73% of domestic production from coal.

It ranks third in the world in terms of total coal reserves behind the US and Russia.