More GDP with less water and pollution Micro-level water ...

More GDP with less water and pollution

Micro-level water-nomics: evaluating sectoral water risks

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION © China Water Risk, 2018, all rights reserved

29 August 2018

2015

Recognition by the Water

International Journal

2012

“…when at HSBC, the no

water, no power report was

one of our signature

pieces.”

Nick Robins, Co-Director,

UNEP Inquiry

2013“We off-loaded our entire

coal portfolio after sitting

down with you”

European fund

Using WEN to start a water-nomics

conversation in finance &

policymaking

2016Global policy

arena with

IRENA & Rare

Earths

2014Keynote & panelist

alongside water

laureates

Mainstreaming water as a financial risk …


Macro & micro perspectives …


Water risk for power sector…

>70INVESTMENT

PROFESSIONALS

FROM ~50 INSTITUTIONS

10ENERGY LISTCO’S

3WATER RISK VALUATION

APPROACHES

1. SHADOW PRICING

2. EXPOSURE TO WATER STRESS

3. REGULATORY RISKS

COAL-5

SHENHUA ENERGY

CHINA COAL

YANZHOU COAL

INNER MONGOLIA YITAI COAL

DATONG COAL

Others86%

COAL

OUTPUT

14%

POWER-5

HUANENG POWER INTL

DATANG INTL POWER

GUODIAN POWER DEV

HUADIAN POWER INTL

CHINA POWER INTL

Others81%

THERMAL

POWER

GENERATION

19%


Investors say they are worried about risk …


1- Exposure to water stress

79 MINES137 POWER PLANTS

79 MINES

135 POWER PLANTS


15%

90%

87%

100%

83%

13%

100%

0% 100%

Shenhua

China Coal

Yanzhou

Yitai

Datong

Extremely high

Medium to high

Medium to high

Extremely high

Extremely high

46%

54%

81%

51%

34%

26%

9% 18%

7%

12%

29%

9%

9%

16%

10%

6%

34%

37%

0% 100%

Huaneng

Datang

Huadian

Guodian

CPI

GLOBAL MAP CHINA MAP

15%

90%

87%

100%

83%

13%

100%

0% 100%

Shenhua

China Coal

Yanzhou

Yitai

Datong

Extremely high

Extremely high

Extremely high

High

High

High

44%

53%

62%

41%

34%

31%

29%

20%

8%

16%

12%

8%

10%

7%

29%

16%

32%

37%

0% 100%

Huaneng

Datang

Huadian

Guodian

CPI

1- Exposure to water stress

POWER-5

GENERATION

COAL-5

OUTPUT


2. Shadow pricing

-11%

-4% -10%

-5%

-24%

-8%

-12%

-4%

-9%

-3%

0%

10%

20%

30%

40%

50%

EBITDA / Revenue

Huaneng Datang GuodianHuadian CPI

31%

39%

20%

36%

44%

-2% -1%

-5% -2%-3% -1%

-1% -2%

-13%

-5%

-10%

0%

10%

20%

30%

40%

EBITDA / Revenue

Shenhua China Coal Yanzhou Yitai Datong

34%

11% 10%

22%

9%

POWER-5COAL-5

Current

EBIDTA/Revenue

Potential loss of

profitability due to

water risks

Tool #2 WRM

Tool #1 CBWCRT

3 observations

1. Impact varies across sectors

2. Impact varies across companies

3. Impact varies across tools

• water use power > water use mining

• ≠ water use levels & locations

• ≠ assumptions


2. Shadow pricing

26%

82%

13%

50%

18%

42%

24%

45%

Sufficient to screen out companies' exposure to water risks

A good first step but needs complementary detailed analyses

Misleading because it is not a real price

Strongly Agree & Agree Neutral Disagree & Strongly Disagree

Using shadow pricing for water risk valuation is...

Convenient approach to integrate water in decision making

Shadow water prices too high to be realistic water tariffs (up to 12USD/m3)

Can be thought as a proxy for water risks in general

What investors say: a good first step, but a first step only


3. Regulatory risks & compliance costs

Water quality targets

60%

84%

93%

0%

20%

40%

60%

80%

100%

Shenhua ChinaCoal

Yanzhou Yitai Datong 2020Target

Mine water recycling rate

Source: China Water Risk based on companies reports, NEA

75-95% depending

on water scarcity

Water recycling targetsWater use targets

3,84

0,720,53

2,4

0,46

0

1

2

3

4

Air cooling(withdrawal)

Closed-loop(withdrawal)

Once-through(consumption)

2002 2012

Norm of water use for thermal powerUnit: m3/MWh

Source: China Water Risk based on CNIS


A word on disclosure

60%

84%

93%

0%

20%

40%

60%

80%

100%

Shenhua ChinaCoal

Yanzhou Yitai Datong 2020Target

Mine water recycling rate

Source: China Water Risk based on companies reports, NEA

0,34

1,88 1,82

0,0

0,4

0,8

1,2

1,6

2,0

Shenhua China Coal Yanzhou Yitai Datong 2010 2015 Target

Mine water drainage associated with coal production

Unit: m3/tonne

Source: China Water Risk based on companies reports and NEA-NDRC Action Plan to Develop Mine Water

Utilization, 2013.

Companies National average

0,04

0,2 0,2

0,3

0,45

0,0

0,1

0,2

0,3

0,4

0,5

Shenhua China Coal Yanzhou Yitai Datong Grade I Grade II Grade III

Freshwater use for coal production - mining & processing

Unit: m3/tonne

Source: China Water Risk estimates based on companies reports and MEP Cleaner Production

Standard-Coal Mining & Processing Industry (HJ446-2008). Water use includes coal mining and processing.

Companies MEP Standard

? ?

??? ? ? ? ?

?INCOMPLETE

DISCLOSURE


A word on disclosure

The majority of disclosure is only on 1 or 2 of the total 5 indicators

analysed, there is still clearly room for improvement

Two mid-performers are

electricity and smelting, with

lagging disclosure rates of 47%

and 48%. Meanwhile,

agriculture is the clear laggard


Clustered risk – regional & sectoral

Water 10

43%150 suppliers

3%11 suppliers

34%118 suppliers

Lenders / investors / companies should stress test for China pollution regulations


400 registered liquor enterprises in

Chishui basin in 2013, as well as power

plants and paper making factories

Clustered risk – basin level

Embedding environmental risks into lending = basin level risk assessments

Collective action

within & across industries ?

Apr 2018 ... China

publishes first-ever book

on ERA … CWR invited

to write the water risk

chapter

Jan 2017 ... CWR invited to talk at

PBOC & to join ERA task force


Disclaimer

Information provided has been obtained from, or is based upon, sources believed to be reliable but has not been independently

verified and no guarantee, representation or warranty is made as to its accuracy or completeness. Information contained in this

document is current as of the date specified above and is subject to change without notice. Information contained in this

document relating to investments, valuations, unrealised data, and projections is indicative only, and has been based on

unaudited, internal data and assumptions which have not been independently verified or audited and are subject to material

corrections, verifications and amendments.

This information is not intended to constitute a comprehensive statement of any matter, and it should not be relied upon as such.

None of China Water Risk , its sponsors, affiliates, officers or agents provide any warranty or representation in respect of

information in this document.

This document is for information purposes only and should not be construed as an offer, or solicitation of an offer, to buy or to

make any investment. website.

This document, is strictly confidential. This document, graphics and illustrations must not be copied, in whole or in part or

redistributed without written consent. (© China Water Risk, 2018, all rights reserved).

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