Case Analysis Luotang Power Company

Background
Luotang Power Company is a 600 Mega Watt coal-fired power plant, located in Hubei Province, China, the parent company of which is China Hua Tong Power (HT Power). The major business is to generate electricity by coal burning and sell it to Hubei Provincial Power Company (HPPC), the major customer which is the only power transmission and distribution company in Hubei Province. Whereas the coal is purchased from Pindingshan Coal Company who is required to supply low sulfur bituminous coal that meets certain quality specifications. Regardless of the improved plant availability and fuel economy, the company wasn’t performing well for the financial result. A variances analysis indicated that the poor performance was due to a combination of shrinking revenue, increasing price of the coal and decreasing quality of the coal.

Company analysis
Macroeconomic analysis
A PESTE framework including political, economic, social, technological and environmental factors is used to contextualize the company in an industry framework.
Economic aspect:
China is the world second largest energy consumer behind the United States. The energy consumption has been boosted by strong economic growth over the past two decades. Its electricity consumption is influenced by fluctuations in the GDP growth. (Appendix1) Hubei led the four provinces fed by the central China grid with a 13.8% rise in economy and is said to be doubled in the next five years . This shows a positive prospect for the Luotang power plant.
Political aspect:
According to EMIS, currently, coal remains are the primary energy source in the country, accounting for about 68% of the total energy consumed. However, the Chinese government prioritized the development of renewable energy sources use to adjust its coal-concentrated energy consumption and production structure. Furthermore, Xinhua News Agency reported that Hubei Province intended to build 21 clean-energy plants within three years to reduce the use of traditional thermal power plants , thus reducing carbon dioxide emissions, which post a threat to Luotang.
Technological aspect:
With the improvement of technology, both the plant availability and fuel economy were improved, which led to the increase of production. However, new technology also facilitates the shift from traditional energy sources to renewable energy sources.
Environmental aspect:
Despite a coal burning power plant, Luotang was to be one of the least polluting coal power plants for the size in the country. Meeting the Chinese standards as well as the World Bank Standards, Luotang is doing well at reducing environmental concern.

Overall, the Chinese electricity market had total revenues of $425.8 billon in 2011, representing a compound annual growth rate of 14.5% between 2007 and 2011. The market is expected to grow further in terms of value with moderate but rather steady growth rates throughout the years up to 2016.

Microeconomics analysis
Porter’s 5 Forces Model is used to analyze the current business environment of Luotang Power Company.
Supplier:
According to the contract, Pindingshan Coal Company was required to supply low sulfur bituminous coal that met certain quality specification based on coal extracted from its mines in the neighboring Henan province. Despite the relative stable price of coal, the quality was actually declining. Lower heat content combined with higher water content coals were sending to the company, resulting in more coal consumed per net electricity generation. (Appendix3) However, Pindingshan is not the only player in the coal mining industry. Yanzhou Coal Mining Company Limited and Shanxi Lu’an environmental energy development Co., Ltd are also supplying coal in the nearby area, thus reducing the bargaining power of Pindingshan. (Appendix2)
Customer:
The major customer of Luotang is Hubei Provincial Power Company (HPPC), which is a state-owned power transmission and distribution company regarded as a monopoly in the province. Thus the bargaining power of HPPC is high as to the electricity price and the quantity to purchase. Unfortunately, its demand for electricity had fallen dramatically over the previous 12 mouths, thus posing a threat to Luotang.
Competitors:
HPPC has many of its own electricity generating units across Hubei province. Meanwhile there are more than 60 electricity-generating companies of all sizes in Hubei Province, among which the famous Three Gorges dam project alone has a capacity of 22500 MW. This to some extent limits the future growth of Luotang project.
New entrants:
To tackle the greenhouse gas issues, China is investing heavily in renewable energy. In 2012, $65.1 billion USD went to the clean energy sector including hydropower, solar energy and wind energy. Hubei Province has announced to build 21 clean-energy power plants. These new entrants would lead to fierce competition in the market of electricity.
Potential substitutes:
So far there’s nothing and no need to replace electricity. As a result, no potential substitute should be considered in the case.

SWOT analysis
Strength:
 Plant availability and fuel economy were improved over the year, which could increase production.
 Being the least polluting coal power plant means advance technology, effective management and high corporate social responsibility.
 Luotang was successfully at biding to sell electricity above the amount in contract, indicating a competitive management team.
Weakness:
 Approximately 80% of the initial construction costs was financed by debt, which together with falling revenues could reduce the confidence of investors and more seriously cause bankruptcy.
 Luotang lacks sources diversification as all electricity is generated by burning coal.
Opportunity:
 Luotang is somewhat protected from the effects of increases in fuel prices since the power purchase contract contains provisions to adjust electricity price.
 Hubei’s GDP growth was 11.3% in 2012 , among the top in middle China. Luotang City’s economic development is also booming, meaning that more electricity is needed in response to the economic growth.
 Coal market volume is still forecasted to be increasing, which implies the need for coal-burning power plants. (Appendix4)
 Further 2,000 MW expansions at Luotang would increase the company’s electricity output and market share.
Threat:
 The shift from traditional energy resources to renewable and clean energy resources could lead to less investment or elimination of coal-burning power plant.
 The price of coal relatively remains stable but the quality was declining, causing an increase in cost of production.
 Potential lower demand as a result of slowing economic growth
 Tightening safety and environmental regulations could increase the operating cost of plant because emissions should be reduced to meet relevant Chinese standard and world Bank Standard
 Electricity demand was controlled by HPPC, a monopoly in the area. So there would be limited opportunity to sell electricity above the contractual minimum, given that there are many other electricity generating units nearby.