OREANDA-NEWS. The overcapacity in thermal-power generation in China is likely to worsen in 2016 to 2017, Fitch Ratings says in a new report.

Fitch believes China's electricity producers are likely to keep adding thermal-power capacity between now and end-2017 - undeterred by five straight years of sliding utilisation rates and despite Beijing's support of facilities that run on cleaner fuels - as falling coal costs and favourable on-grid tariff rates keep profitability high. Annual fixed-asset investment (FAI) into thermal power sources increased by 1%, 13% and 22% in 2013, 2014 and 2015, respectively. Despite Beijing's recent attempts to curb over-investment, the projects that have started construction are likely to be completed in the next two years.

Fitch expects investment returns in the thermal-power sector to remain generally robust in the short term even though plants are operating at lower utilisation rates and on-grid tariffs were cut at end-2015. This is largely because the sector can still enjoys a healthy dark spread - the difference between the on-grid power tariff and unit generation fuel cost - especially after the government revised the coal-electricity linkage pricing mechanism in late 2015.

However in the longer run, severe overcapacity, without tariff controls by the government, could cause competition that hurts returns. Individual independent power producers' performances will start to diverge based on asset quality and location. The extent of thermal-power overcapacity will become clearer when the central government unveils details of the 13th Five-Year Plan (2016-2020) for the sector in 2016 or 2017. Fitch believes that China will take further measures to rein in investments in the sector.