EB SECURITIES released a research report stating that for the thermal power sector, the business model is transitioning from a heavy reliance on annual long-term contracts for volume, price, and coal costs—the primary profit driver—towards a comprehensive marketization involving medium-to-long-term markets (for volume and price stability), spot markets (reflecting real-time supply and demand for power), and capacity markets (reflecting real-time load supply and demand). This shift is continuously optimizing the overall commercial framework.

The recent surge in the computing power and electricity sector has lifted the thermal power sector, primarily due to two factors: 1) Following a previous stock price correction, the thermal power sector offers attractive valuation; 2) The ongoing El Niño phenomenon presents a tactical opportunity for the sector. While the market has already factored in expectations for the sector's 2026 earnings trend, the bank will continue to monitor the impact of El Niño. An unexpected increase in peak load could elevate thermal power utilization hours, potentially ushering in a tactical opportunity for the sector. Additionally, the bank will watch for defensive rotations within the broader market.

Key points from EB SECURITIES are as follows:

**2026 Annual Long-Term Contract Prices Under Pressure, Sector Corrected Post Earnings Reports** Annual long-term contract prices for 2026 have seen significant declines across provinces, with Guangdong down 5.03% year-over-year, Jiangsu down 16.5%, and Zhejiang down 16.4%. Following the release of 2025 annual reports by major thermal power operators like Huaneng Power International and Huadian Power International, the sector began a correction. However, the sector rebounded after these companies disclosed their Q1 2026 reports, mainly due to a significant decline in Q1 fuel costs leading to relatively strong operator performance. Post-correction, valuation levels have dropped substantially, building potential for future sector gains.

**Impact of Higher Capacity Prices and Spot Market Launch Already Evident in Q1** For the thermal power sector in 2026, key changes on the pricing front include increased capacity subsidies and the launch of regional spot markets. By 2026, 18 regions had adjusted their coal-fired capacity price standards. Liaoning has the highest standard at 370 yuan/kW·year, followed by Jilin, Gansu, and Yunnan at 330 yuan/kW·year. Tianjin and Sichuan are at 231 yuan/kW·year, with the remaining regions at 165 yuan/kW·year. As of March 2026, seven provinces—Shanxi, Guangdong, Shandong, Gansu, Inner Mongolia West Grid, Hubei, and Zhejiang—have formally transitioned to operational spot markets. Twenty-one provinces have entered continuous settlement trial operations, including Fujian, Shaanxi, Liaoning, Chongqing, Hunan, Ningxia, Jiangsu, Hebei South Grid, Jiangxi, Henan, Shanghai, Jilin, Heilongjiang, Xinjiang, Qinghai, and Sichuan. These changes in the thermal power business model were already apparent in Q1.

**El Niño Development Could Bring Tactical Opportunity for Thermal Power** The National Climate Center predicts the onset of an El Niño state in May. During this year's main flood season, temperatures across most of the country are expected to be higher than average, with potential periodic heatwaves in North China, East China, Central China, South China, eastern Southwest China, and Xinjiang. If El Niño persists and intensifies, leading to an overall increase in power load, spot market prices for thermal power and utilization hours could see year-over-year improvement, creating a sector opportunity.

**Risk Analysis:** Systemic risks in equity markets; unexpected declines in on-grid tariffs; unexpected increases in coal prices; downturn in electricity demand; hydropower output falling short of expectations; slower-than-expected progress in industry reforms.