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Limited impact on China's power sector from US-China trade tensions, says WoodMac

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While sentiment in China, as a result of trade war with US, affected its 4Q18 GDP figures, Wood Mackenzie's Frank Yu noted strong demand growth in China's power sector despite trade turbulence with the US.

Power demand growth was been phenomenal in 2018. The first 10 months hit 8.7% year-on-year growth. Industry remains the greatest driver, contributing 55% of the total growth until October. The four energy-intensive industries – ferrous and non-ferrous metallurgy, construction materials and chemicals – alone accounted for 20% of the total growth. The residential, commercial and service sectors also saw double-digit growth.

Another positive factor is fuel substitution efforts, which have helped unlock latent power demand. Wood Mackenzie estimates the coal-to-electricity initiative created 130 TWh and 145 TWh electricity demand in 2017 and 2018, respectively.

It also helps that the US-China trade dispute has had limited impact. Wood Mackenzie estimated total power demand in 2018 could fall by 0.5% (32 TWh) based on tariffs on US$34 billion of goods with effect from July. And while the escalation of tariffs to US$200 billion of goods in September pressures power demand growth, the stronger-than-expected rebound in exports will dampen the impact.

The effects of the tariffs have been limited for three key reasons. First, the majority of China’s manufacturing is weighted towards domestic markets not exports. Second, the US remains small in China’s export mix for many commodities and China is developing alternative markets. And, finally, the US is primarily targeting high value-add industries. It is an easier win for the US, but it also lowers the disruption to China’s power demand.

Strong power demand and close scrutiny of new coal-fired power projects resulted in fewer curtailments for renewables in 2018. The government is moving away from the feed-in tariff system to competitive auctions for new solar and wind projects. To support this, China aims to implement long-overdue renewable portfolio standards (RPS) starting from 2019, after three rounds of extensive public consultation.

Market-based power sales reached 28% of the total output in Q4, though most transactions were intra-province. Wood Mackenzie expect these restrictions to gradually disappear and the government seems committed to ending the equal-share generation quota system.

Key things to watch in 2019 will be the implementation of the RPS, day-ahead power trading in Guangdong and the readiness of the national carbon market launch.

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