Utilities Sector Weekly Tracker: Capacity Price Mechanism Reform Accelerates; 2025 Renewable Installations Surge to Record Highs

Date: February 02, 2026
Sector: Utilities (Power Generation, Grid, Renewables)
Rating: Overweight (Maintained)
Analysts: Yuan Li (S0600511080001), Ren Yixuan (S0600522030002)
Source: Dongwu Securities Research Institute

Executive Summary

The Chinese utilities sector is undergoing a structural revaluation driven by two pivotal developments in early 2026: the formalization of capacity payment mechanisms for thermal and storage assets, and the unprecedented scale of renewable energy installations recorded in 2025.

First, the National Development and Reform Commission (NDRC) and the National Energy Administration (NEA) released the "Notice on Improving the Capacity Price Mechanism on the Generation Side." This policy marks a definitive shift in the revenue model for coal-fired power plants, raising the proportion of fixed costs recovered through capacity prices from ~30% in 2024-2025 to no less than 50% thereafter. Concurrently, the mechanism extends to grid-side independent new energy storage and pumped hydro storage, establishing a standardized compensation framework based on peak-shaving capabilities. This regulatory evolution enhances the earnings visibility and stability of thermal power assets, transforming them from cyclical commodity players into essential reliability providers with utility-like cash flow characteristics.

Second, data from the NEA confirms that China’s power installation capacity reached 3.89 billion kW by the end of 2025, a year-on-year increase of 16.1%. Notably, solar PV additions hit 315 GW and wind additions reached 119 GW in 2025 alone. This massive influx of renewable capacity, while driving down marginal electricity prices in some regions (January 2026 grid proxy purchase prices fell 8% YoY), underscores the urgent need for the very flexibility and capacity services that the new pricing mechanisms are designed to reward.

From an investment perspective, we maintain an Overweight rating on the sector. The core investment logic has shifted from pure volume growth to a dual-driver model: (1) Value Re-rating via Policy Reform: Thermal power and nuclear assets are seeing their "reliability value" monetized through capacity payments, supporting higher dividend yields and stable ROEs. (2) Quality Growth in Renewables: As curtailment risks are mitigated by market-based trading and improved grid absorption, leading green power operators are transitioning from subsidy-dependent models to market-competitive entities.

We recommend focusing on high-dividend, low-cost hydro assets (e.g., Yangtze Power), nuclear giants with visible growth pipelines (e.g., China National Nuclear Power, CGN Power), and thermal leaders benefiting from capacity price hikes (e.g., Huaneng Power, Huadian Power). Additionally, we highlight the emerging value in asset-heavy renewable operators and charging infrastructure firms empowered by Real World Assets (RWA) tokenization and spot market participation.

Key Takeaways

1. Policy Breakthrough: Capacity Price Mechanism Deepens, Enhancing Revenue Certainty for Thermal & Storage Assets

The release of the "Notice on Improving the Capacity Price Mechanism on the Generation Side" represents the most significant regulatory update for the power sector in recent years. It systematically addresses the "missing money" problem in power markets where high renewable penetration depresses energy-only prices, thereby threatening the financial viability of dispatchable capacity.

A. Coal-Fired Power: Fixed Cost Recovery Ratio Raised to ≥50%

• Mechanism Adjustment: The proportion of fixed costs for coal-fired units recovered through capacity prices will be increased from approximately 30% in 2024-2025 to no less than 50% starting in 2026.
• Implication: This significantly de-risks the earnings profile of thermal power generators. By guaranteeing the recovery of half of their fixed costs (depreciation, finance costs, basic maintenance) regardless of utilization hours, the policy reduces the volatility associated with coal price fluctuations and demand cycles.
• Market Flexibility: The notice allows local authorities to adjust the lower limit of medium-to-long-term transaction prices for coal power and relaxes the mandatory signing ratios for medium-to-long-term contracts. This encourages the adoption of flexible pricing mechanisms, allowing thermal plants to better capture value during peak demand periods while maintaining baseline revenue stability.

B. Independent Energy Storage: First-Time Inclusion in Capacity Compensation

• New Framework: For the first time, grid-side independent new energy storage is explicitly included in the capacity price compensation scope.
• Pricing Standard: Compensation standards will reference local coal-fired power benchmarks, adjusted according to the storage facility’s peak-shaving capability. This creates a direct revenue stream for storage assets beyond arbitrage in the energy market, improving the internal rate of return (IRR) for standalone storage projects.
• Strategic Impact: This policy catalyzes the commercial viability of large-scale battery energy storage systems (BESS), aligning investor incentives with grid stability needs. It is expected to accelerate the deployment of independent storage projects, particularly in provinces with high renewable penetration and significant peak-valley spreads.

C. Pumped Hydro & Gas Power: Classified and Market-Oriented Approaches

• Pumped Hydro Storage: Adopts a "new vs. old" distinction ("old projects, old methods; new projects, new methods"). The goal is to promote market-oriented cost recovery, moving away from purely regulated returns towards mechanisms that reflect actual grid service value.
• Natural Gas Power: Provincial price departments are authorized to establish capacity price mechanisms for gas-fired units. The capacity price will be determined based on recovering a certain proportion of fixed costs. This supports the role of gas power as a flexible peaking resource, crucial for balancing intermittent renewables, especially in coastal and economically developed regions.

Investment Implication: The enhancement of capacity prices fundamentally alters the valuation logic for thermal and storage assets. They are no longer viewed merely as cyclical commodities but as essential infrastructure assets with bond-like yield characteristics. This supports a re-rating of P/E multiples and reinforces the attractiveness of their dividend yields.

2. 2025 Installation Data: Renewable Surge Continues, Total Capacity Hits 3.89 Billion kW

The National Energy Administration’s 2025 statistics reveal a continued, aggressive expansion of China’s power generation infrastructure, dominated by solar and wind.

*Note: Thermal capacity derived from cumulative data trends; specific 2025 end-total not explicitly broken out in summary but implied by addition data.

Analysis of Installation Trends:

1. Solar Dominance: Solar PV remains the primary driver of capacity growth. The addition of 315 GW in 2025 is a staggering figure, reflecting the continued cost competitiveness of PV modules and strong policy support for distributed and centralized solar projects. The cumulative capacity of 1.2 billion kW means solar now accounts for nearly 31% of total national installed capacity.
2. Wind Resilience: Wind power additions of 119 GW demonstrate robust momentum, despite supply chain constraints and land-use challenges in previous years. The cumulative wind capacity of 640 GW highlights its established role as a cornerstone of the non-fossil energy mix.
3. Thermal Expansion for Reliability: While renewables dominate headlines, thermal power additions surged by 63.4% YoY to 77.52 GW. This counter-trend expansion is not contradictory but complementary; it reflects the strategic necessity of adding dispatchable capacity to back up the intermittent renewable surge. The new thermal plants are increasingly designed for flexibility (deep peak shaving) rather than baseload operation, aligning with the new capacity price mechanism.
4. Hydro Slowdown: Hydro additions declined by 8.6% YoY, consistent with the maturation of major river basin developments in China. Future growth in hydro will likely come from pumped storage (as noted in the policy section) rather than conventional large dams.

Grid Integration Challenge: The sheer volume of new renewable capacity (434 GW combined wind/solar) places immense pressure on grid absorption capabilities. This reinforces the critical importance of the newly introduced storage capacity payments and the ongoing reforms in electricity spot markets to manage curtailment and ensure efficient dispatch.

3. Operational Metrics: Demand Stability, Price Softness, and Fuel Cost Moderation

A. Electricity Demand: Steady Growth Across Sectors

• Total Consumption: From January to November 2025, total societal electricity consumption reached 9.46 trillion kWh, a year-on-year increase of 5.2%. This growth rate is stable, slightly accelerating from the 5.1% recorded in Jan-Oct 2025.
• Sectoral Breakdown:
  • Primary Industry: +10.3% (Strong growth, likely driven by agricultural modernization and rural electrification).
  • Secondary Industry (Manufacturing): +3.7% (Moderate growth, reflecting the ongoing structural transformation of the industrial sector and moderate macroeconomic recovery).
  • Tertiary Industry (Services): +8.5% (Robust growth, driven by digital economy, data centers, and service sector recovery).
  • Residential: +7.1% (Steady increase, supported by electrification of heating/cooling and rising living standards).

Interpretation: The divergence between secondary industry growth (3.7%) and tertiary/residential growth (>7%) indicates a shifting demand structure. The grid is increasingly serving high-value, flexible loads (services, residential EVs, HVAC) rather than just heavy industry. This structural shift favors utilities with diverse customer bases and advanced demand-response capabilities.

B. Electricity Generation: Mixed Performance

• Total Generation: Full-year 2025 cumulative generation reached 9.72 trillion kWh, up 2.2% YoY. Note that generation growth (2.2%) lagged behind consumption growth (5.2% for Jan-Nov), suggesting either increased imports, drawdown of stored energy, or statistical discrepancies in monthly vs. annual reporting periods.
• By Source:
  • Thermal: -1.0% (Jan-Nov: -0.7%). The decline in thermal generation volume, despite capacity additions, confirms the displacement effect of renewables. Thermal plants are running fewer hours, making the capacity price component of their revenue even more critical for profitability.
  • Hydro: +2.8% (Jan-Nov: +2.7%). Modest growth, reflecting normal water conditions after the volatility of previous years.
  • Nuclear: +7.7% (Jan-Nov: +8.1%). Strong, consistent growth driven by new unit commissions and high availability factors.
  • Wind: +9.7% (Jan-Nov: +9.6%). Solid performance, benefiting from new capacity additions.
  • Solar: +24.4% (Jan-Nov: +24.8%). Exceptional growth, directly correlated with the massive capacity additions. Solar is becoming a major contributor to total generation volume, not just capacity.

C. Electricity Prices: Downward Pressure in January 2026

• Grid Proxy Purchase Price: The average grid proxy purchase price across provinces in January 2026 was 374 RMB/MWh, representing an 8% YoY decline.
• Regional Variations:
  • Significant drops were observed in key industrial provinces. For instance, Jiangsu dropped from 452.5 RMB/MWh in Dec 2025 to 393.7 RMB/MWh in Jan 2026. Guangdong fell from 456.3 to 378.9 RMB/MWh. Shandong saw a decrease from 512.5 to 436 RMB/MWh.
  • Some regions like Hainan saw price increases (606.6 to 623.2 RMB/MWh), likely due to specific local supply-demand tightness or fuel cost pass-throughs.
• Driver: The price decline is primarily attributed to the surge in low-marginal-cost renewable generation (especially solar) during daylight hours, which suppresses spot and medium-term prices. Additionally, mild winter temperatures in many regions may have reduced heating demand, easing supply tightness.
• Implication for Investors: Lower energy prices pressure the energy component of generator revenues. However, this makes the capacity component (now enhanced by policy) relatively more valuable. It also benefits industrial consumers, potentially stimulating further electricity demand in the long run.

D. Coal Prices: Moderate Increase, Still Below Previous Year

• Current Price: As of January 30, 2026, the port price for 5,500 kcal thermal coal at Qinhuangdao was 692 RMB/ton.
• Trends:
  • WoW: +1.02% (Slight weekly increase).
  • YoY: -8.10% (Significant decrease compared to Jan 2025).
  • Monthly Average: The January 2026 average was 692 RMB/ton, down 69 RMB/ton from January 2025.
• Impact on Thermal Power: The YoY decline in coal prices is a major tailwind for thermal power profitability in 2025/2026. Even with lower utilization hours, the margin per kWh generated improves when fuel costs drop. Combined with the new capacity payments, thermal power companies are positioned for strong earnings stability and potential dividend growth.

E. Hydropower Conditions: Normal Water Levels, Strong Inflow Growth

• Three Gorges Reservoir Status (Jan 30, 2026):
  • Water Level: 169.42 meters. This is within the normal operating range and compares favorably to 166.76m in Jan 2025 and 155.32m in Jan 2023 (a dry year).
  • Inflow: 7,460 cubic meters/second, a 65.8% YoY increase.
  • Outflow: 9,230 cubic meters/second, an 11.7% YoY increase.
• Interpretation: The significant increase in inflow suggests improved hydrological conditions compared to the same period last year. This bodes well for Q1 2026 hydro generation volumes, supporting the earnings of major hydro operators like Yangtze Power. The stable water level indicates effective reservoir management, balancing power generation with flood control and navigation needs.

4. Sector-Specific Investment Logic & Recommendations

The deepening of electricity market reforms and the distinct operational trends across sub-sectors lead us to refine our investment recommendations. We categorize opportunities into five key themes:

Theme 1: Green Power (Wind & Solar) – From Subsidy to Market Maturity

• Core Logic: The three major headwinds facing green power—curtailment, electricity price volatility, and subsidy arrears—are gradually alleviating.
  • Curtailment: Improved by grid upgrades and the deployment of storage (supported by new capacity prices).
  • Price: While spot prices may dip, the entry of renewables into the market allows them to capture premium prices during peak periods and participate in green certificate trading.
  • Subsidies: Ongoing resolution of historical subsidy debts improves cash flows.
• Investment Strategy: Focus on operators with strong project development pipelines, low financing costs, and expertise in market-based trading.
• Top Picks:
  • Longyuan Power (H): Leading wind operator with vast scale and improving market trading capabilities.
  • Zhongmin Energy: Strong regional focus with high-quality assets.
  • Three Gorges Energy: Massive pipeline and strong balance sheet.
  • Longking Environmental: Recommended for its exposure to environmental services linked to power generation and potential synergies in carbon management.

Theme 2: Thermal Power – Reliability & Flexibility Value Realization

• Core Logic: Thermal power is transitioning from a baseload provider to a flexibility and reliability provider. The new capacity price mechanism (≥50% fixed cost recovery) fundamentally underpins this transition.
  • Reliability Value: Paid via capacity charges.
  • Flexibility Value: Earned through ancillary services and peak-spot price arbitrage.
  • Cost Side: Coal prices remain moderating YoY, supporting margins.
• Investment Strategy: Select companies with high-efficiency units, strong positions in load centers (where capacity prices may be higher), and robust dividend policies.
• Top Picks:
  • Huaneng Power International (H): Largest listed thermal generator, significant beneficiary of capacity price reforms.
  • Huadian Power International (H): Strong asset quality and improving profitability.

Theme 3: Hydropower – Cash Cow with Market Upside

• Core Logic: Hydropower offers the lowest levelized cost of electricity (LCOE) among all sources. With major depreciation cycles ending for older dams, profit release is accelerating.
  • Volume: Stable to growing, dependent on hydrology (currently favorable).
  • Price: Benefiting from market-oriented pricing reforms, especially in provinces with tight supply.
  • Dividends: Exceptional cash flow generation supports high and sustainable dividend yields.
• Investment Strategy: Hold as a core defensive position with growth optionality.
• Top Pick:
  • Yangtze Power: The premier hydro asset in China, with unparalleled scale, low costs, and a proven track record of dividend growth. The injection of Wudongde and Baihetan assets has further boosted its capacity and earnings potential.

Theme 4: Nuclear Power – Deterministic Growth & ROE Expansion

• Core Logic: Nuclear power is experiencing a renaissance in China, with 10+ units approved annually for four consecutive years (2022-2025).
  • Growth Visibility: The approval pipeline ensures steady capacity additions through the 2030s.
  • Financials: As new units come online, capital expenditure peaks and then declines, while operating cash flows surge. This leads to a significant expansion in Return on Equity (ROE), potentially doubling from current levels as the asset base matures.
  • Dividends: Improved cash flows allow for progressive dividend increases.
• Investment Strategy: Long-term hold for growth and income.
• Top Picks:
  • China National Nuclear Power (CNNP): Leading developer with a diverse portfolio.
  • CGN Power: Pure-play nuclear operator with strong operational efficiency.
  • Watch: CGN Power (H) for potential valuation arbitrage.

Theme 5: Asset Revaluation – PV & Charging Infrastructure via RWA & Spot Markets

• Core Logic: Distributed PV assets and electric vehicle (EV) charging networks are being revalued through financial innovation and market integration.
  • RWA (Real World Assets): Tokenization and securitization of stable cash flows from PV and charging stations attract new capital classes.
  • Spot Market Participation: Aggregators and operators that can optimize dispatch in real-time capture additional value.
• Investment Strategy: Focus on technology-enabled operators and asset managers.
• Top Picks:
  • Southern Grid Energy Service: Leader in integrated energy services.
  • Langxin Technology: Digital solutions for energy distribution and charging.
  • TGOOD (Te Rui De): Major EV charging equipment and operator.
  • Shenghong Shares: Power electronics and charging module supplier.

Risks / Headwinds

While the outlook is positive, investors must monitor the following risks:

1. Demand Growth Miss: If macroeconomic recovery stalls, electricity demand growth could fall below expectations (currently ~5%). This would reduce utilization hours for all generators, particularly impacting thermal and nuclear assets that rely on volume for variable profit contributions.
2. Electricity Price Volatility: The move towards market-based pricing introduces volatility. While capacity prices provide a floor, energy prices can fluctuate wildly based on weather, fuel costs, and renewable output. Unexpected price caps or regulatory interventions could limit upside.
3. Coal Price Resurgence: Although currently down YoY, coal prices are subject to global geopolitical shocks, supply chain disruptions, or domestic safety inspections. A sharp rise in coal prices would erode thermal power margins, partially offsetting the benefits of capacity payments.
4. Hydrological Uncertainty: Hydropower generation is inherently weather-dependent. A recurrence of drought conditions (as seen in 2022/2023 in Sichuan/Yunnan) would severely impact the output and earnings of hydro-heavy portfolios like Yangtze Power.
5. Policy Implementation Lag: While the capacity price mechanism is announced, its detailed implementation varies by province. Delays or unfavorable local rules could slow the realization of expected revenue boosts for thermal and storage assets.
6. Renewable Curtailment: Despite storage investments, the sheer speed of renewable additions (315 GW solar in 2025) risks outpacing grid absorption capabilities, leading to higher-than-expected curtailment rates and wasted energy, particularly in northwest China.

Rating / Sector Outlook

Sector Rating: Overweight (Maintained)

We maintain our Overweight stance on the Utilities sector. The combination of policy-driven revenue stability (capacity prices) and structural growth (renewables/nuclear) creates a compelling risk-reward profile. The sector is transitioning from a defensive, low-growth utility model to a dynamic, reform-driven investment theme with clear pathways for earnings growth and dividend enhancement.

Key Catalysts for 2026:
* Full implementation of the 50% capacity price recovery for coal power.
* First full year of grid-side storage capacity payments.
* Commissioning of new nuclear units approved in 2022-2023.
* Potential further declines in coal prices.
* Progress in green electricity trading and carbon market integration.

Investment View

1. Market Performance Review (Week of Jan 26-30, 2026)

The utilities sector experienced mixed performance last week, reflecting broader market volatility and sector-specific news flows.

• SW Utilities Index: Declined 1.66%.
• Sub-Sector Performance:
  • Hydropower: Outperformed with a +0.30% gain, demonstrating its defensive appeal amidst market uncertainty.
  • Wind Power: Declined 2.49%.
  • Thermal Power: Declined 2.78%.
  • Nuclear (China National Nuclear Power): Declined 3.15%.
  • Gas: Declined 3.20%.
  • Solar PV: Underperformed with a 4.53% drop, possibly due to profit-taking after recent rallies or concerns over trade barriers/module pricing.

Top Performers (Weekly):
1. ST Shengda: +22.6% (Speculative/Restructuring play)
2. Jinkai New Energy: +7.4%
3. Jiaze New Energy: +6.9%
4. Beijing Holdings: +4.5%
5. ST Jinhong: +4.4%

Worst Performers (Weekly):
1. Jiufeng Energy: -12.7%
2. Chuan Neng Dongli: -12.0%
3. Shanghai Electric Power: -10.6%
4. Suihengyun A: -10.5%
5. Luxiao Technology: -10.4%

(See Table 1 in Appendix for detailed monthly/weekly comparisons)

2. Detailed Sub-Sector Analysis & Stock Selection

A. Thermal Power: The "Utility" Transformation

The narrative for thermal power has shifted decisively. No longer just a cyclical play on coal spreads, it is now a capacity play. The NDRC’s decision to raise fixed cost recovery to ≥50% effectively insulates these companies from severe downside risk.

• Financial Impact: For a typical coal plant, fixed costs (depreciation, interest, labor) constitute a significant portion of total costs. Recovering 50% of this via a guaranteed capacity payment transforms the earnings profile. Even if utilization hours drop due to renewable competition, the base revenue remains secure. Variable profits from energy sales become an "upside option."
• Valuation: We expect P/E multiples to expand as earnings volatility decreases. Dividend yields, already attractive, are likely to grow as cash flows stabilize.
• Recommendation: Buy Huaneng Power International (H) and Huadian Power International (H). Both have large fleets of efficient supercritical units and are well-positioned in key load centers. Their H-share discounts offer additional safety margin.

B. Hydropower: The Cash Flow King

Hydropower remains the gold standard for stable, high-yield investing in China.

• Operational Update: The Three Gorges data (inflow +65.8% YoY) is a positive signal for Q1 2026. After the dry spells of 2022-2023, normalization of hydrology is a major tailwind.
• Financials: With the completion of major capex cycles (Wudongde/Baihetan injections complete), free cash flow is robust. Depreciation schedules for older assets are winding down, leading to natural profit growth.
• Recommendation: Strong Buy Yangtze Power. It is the ultimate defensive growth stock. Its ability to generate consistent cash flows allows for sustained dividend increases, making it a core holding for institutional portfolios seeking yield and stability.

C. Nuclear Power: The Long-Term Growth Engine

Nuclear is the only low-carbon baseload source that is scalable in China.

• Pipeline Visibility: The approval of 10+ units annually provides a 5-7 year visibility window for capacity growth. Each new unit contributes significantly to earnings upon commissioning.
• ROE Expansion: As mentioned, the maturation of the asset base (lower relative capex, higher operating leverage) will drive ROE higher. We project ROE could double from current levels over the next decade for leading players.
• Recommendation: Buy China National Nuclear Power (CNNP) and CGN Power. CNNP offers diversification (wind/solar mix), while CGN is a pure nuclear play. Both are poised to benefit from the "green" premium and stable regulatory environment.

D. Green Power (Wind/Solar): Navigating the Market Transition

The era of guaranteed subsidies is over. The future belongs to those who can trade effectively in the spot market and manage curtailment.

• Challenges: January’s 8% drop in proxy purchase prices highlights the pressure on energy-only revenues. Solar, in particular, faces midday price suppression.
• Opportunities: Companies with integrated storage, strong trading desks, and access to green certificate markets will outperform. The sheer volume of additions (315 GW solar) means scale matters.
• Recommendation: Longyuan Power (H) for wind leadership. Three Gorges Energy for balanced growth. Longking Environmental for its niche in environmental tech and carbon services.

E. Emerging Themes: Storage & Charging

• Storage: The new capacity price mechanism for independent storage is a game-changer. It creates a bankable revenue stream. Look for companies with large pipelines of independent storage projects.
• Charging/PV Assets: The mention of RWA (Real World Assets) and spot market empowerment suggests a financialization trend. Companies like TGOOD and Langxin Technology are not just hardware providers but platform operators that can aggregate and optimize distributed assets.

3. Corporate Announcements & Earnings Preview

Several key companies released 2025 preliminary earnings or significant announcements, providing insight into sector health:

• Positive Surprises:

  • ST Lida: Turned profitable (Net Profit 20-30M RMB vs. Loss of 949M RMB in 2024). Indicates successful restructuring.
  • Shennan Dian A/B: Won a major O&M contract in Cambodia ($208M), showcasing international expansion capabilities.
  • Li Xin Energy: Net Profit up 89-119% YoY, driven by new wind/storage projects and investment income from "Xinjiang Electricity Outbound" channels.
  • Jingkong Power: Net Profit up 383-507% YoY, primarily due to lower coal costs.
  • Dazhong Public Utilities: Net Profit up 91-121% YoY, driven by financial asset gains and stable operations.
  • Ganneng Shares: Net Profit up 32-51% YoY, benefiting from new thermal units and lower fuel costs.

• Negative/Cautious Signals:

  • Tianhao Energy: Expected loss of 200-300M RMB, due to losses in associates and asset impairments. Highlights risks in diversified energy investments.
  • Mindong Power: Net Profit down 72-58% YoY, due to asset impairments and reduced fair value gains.
  • Jiawei New Energy: Expected loss of 150-188M RMB, impacted by tariffs, forex losses, and impairments.
  • Suihengyun A: Despite lower coal costs, net profit guidance shows a wide range, indicating some operational headwinds or one-off items.

Takeaway: The earnings previews confirm the benefit of lower coal prices for thermal operators (Jingkong, Ganneng). They also highlight the risks of asset impairments and foreign exchange volatility for diversified/new energy players (Tianhao, Jiawei). This reinforces our preference for pure-play, high-quality assets (Hydro, Nuclear, Large-cap Thermal) over speculative or highly leveraged smaller players.

4. Valuation & Strategic Allocation

Given the current market environment and policy backdrop, we suggest the following allocation strategy for institutional investors:

Strategic Rationale:
1. Defensive Core (40-50%): Allocate heavily to Hydro and Nuclear. These sectors offer deterministic growth, high barriers to entry, and strong dividend policies. They act as the portfolio anchor.
2. Value Re-rating Play (30-40%): Overweight Thermal Power. The capacity price reform is a under-appreciated catalyst. As the market realizes the stability of their cash flows, valuations should rise.
3. Growth Satellite (10-20%): Selective exposure to Green Power and Storage. Focus on leaders with strong balance sheets and trading capabilities. Avoid smaller, highly leveraged developers.

5. Conclusion

The Chinese utilities sector stands at an inflection point. The Capacity Price Mechanism Reform is not merely a technical adjustment; it is a fundamental restructuring of how power generation value is recognized and compensated. By guaranteeing revenue for reliability, it unlocks the investment case for thermal and storage assets. Simultaneously, the record renewable installations of 2025 confirm the unstoppable momentum of the energy transition, creating both challenges (price pressure) and opportunities (scale, green premiums).

For institutional investors, the path forward is clear: Embrace the re-rating of traditional assets (Thermal/Hydro/Nuclear) while selectively participating in the mature phase of renewable growth. The era of speculative renewable boom is giving way to an era of operational excellence, market integration, and financial engineering. Companies that can navigate this complex landscape—leveraging policy support, optimizing market trading, and maintaining financial discipline—will deliver superior risk-adjusted returns in 2026 and beyond.

We reiterate our Overweight rating on the sector and recommend positioning portfolios to capture the dual benefits of dividend stability and policy-driven growth.

Appendix: Data Tables & Charts Reference

(Note: The following tables summarize key data points referenced in the report. For visual charts, please refer to the original source documents from Wind and Dongwu Securities.)

Table 1: Utility Sector Stock Performance (Week of Jan 26-30, 2026)

Source: Wind, Dongwu Securities Research Institute

Table 2: Key Operational Metrics (2025/2026)

Source: National Energy Administration, Wind, Dongwu Securities Research Institute

Table 3: Selected Company Earnings Previews (2025 Full Year)

Source: Company Announcements, Wind, Dongwu Securities Research Institute

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