Coal and power giants merge to boost thermal energy reform

China’s largest coal company plans to merge with a power giant to boost the nation’s thermal power reform.

China Guodian Corp, one of the nation’s five largest power groups, said today that its merger plan with China Shenhua Energy Co has been proposed to the State Council.

Such a plan would create China’s largest power company, which would be called the State Energy Investment Corp, Guan Weizhu, head of Guodian’s safety production division, announced at a conference.

The new group will have a generation capacity totaling 226 gigawatts, with assets exceeding 1.8 trillion yuan (US$121 billion).

This announcement has answered why Shenhua and Guodian suspended the trading of their listed companies on June 5. At that time the two groups said they were having big issues being approved by authorities, which could cause the fluctuation of their stock prices due to great uncertainty.

The merger came amid the nation’s call for thermal power reform.

The National Development and Reform Commission today teamed up with the National Energy Administration to unveil a notice to boost the supply-side reform of the thermal power industry, which suggested that coal companies will be reorganized with power giants to help enhance efficiency and profitability.

While Shenhua predicted it reaped 24.3 billion yuan in net profit over the first half of the year — 147 percent higher than a year ago, thanks to the coal price surge following a cut of oversupply — electricity companies suffered, especially in the thermal power sector due to the price increase of their raw material.

Over the first half of the year, the domestic electricity and heating industry posted total profits of 147.7 billion yuan, 34.6 percent down from a year ago, the largest decline compared with other industries, the National Bureau of Statistics said.

Over the first seven months, 16 of the 17 thermal power companies which have unveiled half-year reports predicted losses, according to Citic Securities.

The merger between coal and power companies would boost industrial synergy and offset the losses caused by price fluctuations, said Alex Liu, analyst at UBS which specializes in energy and public utilities.

The Shenhua-Guodian merger, meanwhile, is a measure of China's state-owned enterprise reform. Thermal power is one of the key sectors in which the central government hopes to enhance competitiveness and profits through SOE reforms.