China’s carbon neutral goal: Beijing approves creation of power grid equipment giant to meet decarbonisation needs

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Beijing has given the green light for the formation through merger of a central government-controlled electricity transmission and distribution equipment giant, as part of a reform of industry and state-owned enterprises to drive efficiency.

The move, which involves the consolidation of XJ Group and six units under dominant power distributor State Grid Corporation of China, will create a company with more than 100 billion yuan (US$15.5 billion) in assets according to state media reports.

Some of the companies make products and supply software that enables the automation of power grid management, which enhances the distribution system’s capacity and flexibility to absorb intermittent renewable energy. This will help China meet its net zero carbon emissions goal by 2060 and fight climate change.

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“Stripping out the noncore businesses of State Grid and enhancing the competitiveness of the entire sector is a big topic under China’s power system reform,” said Dennis Ip, head of utilities and renewables research at Daiwa Capital Markets. “[This drives the company to] focus more on power grid operation, power supply, power trading and dispatch, and the construction of transmission and distribution projects.”

The latest restructuring involves its distribution equipment businesses, which will result in the establishment of a yet-to-be named company under the supervision of the central government. It will absorb China XD Group and six State Grid units – XJ Group Corporation, Ping Gao Group, Shandong Electrical Engineering and Equipment Group, Jiangsu Nari Group Hengchi Electrical Equipment, Jiangsu Nari Turbostar Electric and Chongqing Nari-Bori Transformer.

“As informed by XJ Group, and upon approval by the State Council, it is agreed that XJ Group will be merged with companies including China XD Group,” Hebei province-based XJ Electric said in a statement to Shenzhen’s bourse on Wednesday.

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XJ Group is a provider of automation and grid management solutions. China XD is a Xian, Shaanxi province-based maker best known for its high-voltage switches, transformers and insulators. Henan province-based Ping Gao makes switch gear and circuit-breakers and Shandong Electrical is China’s largest power transmission equipment maker, focusing on transformers, towers, cables and wires. The three Nari units belong to State Grid and have different product focuses.

Beijing embarked almost two decades ago on a “big-bang” reform with the break-up of former power behemoth State Power Corporation into five generation firms and two distribution outfits to drive efficiency and cut industry costs.

State Grid, the larger of the two distribution firms, has been asked to gradually spin out its noncore operations – including some power plants – to promote a fairer and more competitive industry landscape.

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“By legally unbundling the electrical equipment makers from State Grid, it is probably easier for the regulators to verify the cost of investing and maintaining the transmission and distribution assets owned by State Grid, [which will facilitate] transmission and distribution tariffs setting,” said Lucas Zhang Liutong, director of WaterRock Energy Economics. “It will also provide a more robust market structure for fair competition to supply equipment and services to State Grid via competitive tendering processes.”

However, Beijing is asking State Grid’s equipment makers to merge with its domestic competitor XJ Group, which may actually reduce competition in the domestic market, which is expected to grow substantially as huge grid investment is needed to absorb the fast-growing renewable energy output, he said.

“My best guess is that the merger is to create a big equipment maker and service provider that can compete well in the overseas market, especially in nations targeted by Beijing’s Belt and Road Initiative,” Zhang added.

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Little financial data has been publicly disclosed by the groups that will be merged. However, four of their listed units – XJ Electric, Henan Pinggao Electric, China XD and Shaanxi Baoguang Vacuum Electric Apparatus – reported a combined revenue of 16.6 billion yuan, a net profit of 750 million yuan and total assets of 76.6 billion yuan in the first half of this year, according to stock exchange filings.

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