Following months of speculation in the outside world, the government of president Xi Jinping in late August approved the merger of Shenhua Group Corp, the country’s top coal mining company, with China Guodian Corp, among its largest power generators, the State-owned Assets Supervision and Administration Commission has announced. With assets of 1.8 trillion yuan ($271 billion), the new entity will be the world’s second-biggest power company by revenue and largest by installed capacity, according to estimates by Bloomberg New Energy Finance.

Shenhua Group, which will change its name to China Energy Investment Corp, will absorb Guodian Group and become the parent of the reorganised entity, according to filings by both companies with the Hong Kong exchange. The listed companies are also planning to form a coal-fired power joint- venture, which is subject to shareholder and regulatory approvals.

The new company will have an installed capacity of more than 220 GW, overtaking French state-owned EDF and Italy’s Enel. EDF had a net installed capacity of 137.5 GW last year, according to company publications. Enel had a total installed capacity of 83 GW as of June 30 this year.

The merged entity will account for 13% of China’s power-generation and of its coal- mining capacity, according to analysts at Citigroup Inc. who put the new company’s totals at 221 GW and about 500 million tons a year, respectively.

Political pressures

President Xi’s government is also seeking to lower the country’s reliance on coal power and increase the use natural gas, as well as wind, solar, hydropower and nuclear. The generation capacity of the merged company will be 23 % renewables, according to BNEF.

Beijing has promised to cut its coal production capacity to curb pollution and shift the economy towards a consumer-driven one, while also trimming some over-capacity industrial sectors. It has halted construction of dozens of new coal-fired power plants across the country this year to address overcapacity.

Benefits

Bloomberg New Energy Finance has analysed the benefits to both participants in the merger and it believes that Shenhua will be able to lower its reliance on coal-fired capacity, currently about 90 %, by gaining some of Guodian’s clean energy assets. Guodian will be able to benefit from Shenhua’s coal supply and price risk management, as well as its integrated infrastructure of railways, harbours and vessels.

One of many?

The Shenhua-Guodian tie-up may be the first among a handful of possible mergers in China’s power industry as policy makers try to cut industrial overcapacity and the number of state-owned enterprises. The choice of partners would seem to confirm the direction of state-owned enterprise reform, with companies in the same industry merging to reduce redundant investment and improve efficiency.

The merger announcement concluded months of speculation about the various possible combination, first reported by analysts in May and June this year.

State owned China Shenhua and China Coal Energy Co Ltd, the nation’s leading coal producers, which had in June 2015 dismissed rumours of a merger, this year submitted merger plans to China’s State Council for approval. At the time several consolidating moves were being considered by China’s state controlled firms in the energy sector, which have been burdened by mounting overcapacity, and these speculations, but leaving aside Shenhua and Guodian, remain on the table.

China Huaneng Group, China’s largest power generator, and another top five company, State Power Investment, were also looking at a merger. Beijing was reported to be assessing three other large scale coal power mergers involving eight companies with combined assets of almost $855bn, to create three new power giants. China Huadian and China Guodian Corp were linked with China National Nuclear Corp; China Datang could have merged with China General Nuclear Power Corp and Shenhua Group; and China Huaneng, the country’s biggest coal-fired power producer, was linked with State Power Investment Corp, a coal-fired-power company that also owns State Nuclear Power Technology Corp.