Source: CHEAA-run China Appliance Magazine

The buoyant coal-to-electricity market cooled down in 2018 after two years of fast expansion, posting a soft record as Beijing finished the shifting early on, Tianjin fell short of expectation in public bidding, and remaining cities offered limited subsidies for the projects compared to the two province-level cities.

Despite that, most enterprises have high hopes for 2019. Yu Jinjian, General Manager of Commercial Air Source Heat Pump (ASHP) sector of Haier, is one of the optimists. He believes that, “the number of cities implementing the coal-to-electricity policy will go up in 2019. We still have faith in this market.”

Household ASHP sector experienced the first fall yet ASHP air heaters surged

For ASHP industry players, the past 2018 has been a challenge. According to Yu Jinjian, ASHP market shrank in 2018 with a plunge in the number of remodeled households and the potential of central heating barely tapped.

After China’s household coal-to-electricity policy implemented broadly for three years, the sector experienced its first fall in 2018, posting domestic sales volume of 667,000 units, slightly down from the 677,000 units of the previous year, and sales value of 4.01 billion Yuan, a staggering 44.5% plunge compared to the previous 7.22 billion Yuan, leaving industry insiders in unprepared shock. Behind the drastically unmatched falling rates is a change of market dynamics: a sharp fall of ASHP water heating units and a jump of lower-priced ASHP air heating units which fail to fill the value void left by the former.

Public biddings on household ASHP air heaters accounted for 41.3% in 2018, water heaters 58.7%, which almost halved compared to the year before according to a report released by hp.hvacrhome.com. The report suggests that ASHP air heater sector, being a niche market a year earlier, came to a point of explosive growth in 2018. By Yu Jinjian’s calculation, the combined number of ASHP air heaters from successful biddings amounted to 333,000 households in 2018. Song Zhongkui, Secretary General of China Energy Conservation Association, discloses that, the combined number of ASHP air heaters installed in Beijing posted only 9800 units in 2017, all made by Gree. According to our sources, most industry insiders did not have a line of ASHP air heaters in 2017, and the few exceptions only tried their products out in limited pilot projects.

The shrunken market size took its toll on parts makers too. Chen Jian, Senior Director of Electrical Protection and Power Controls of Asian Region of Sensata Technologies, reveals that, “the sliding coal-to-electricity market led to a fall in our sales starting from the third quarter. And our sales of the fourth quarter was also softer than expected.”

A number of issues surface as coal-to-electricity market came to a downturn, of which price competition stands out as a principal problem. We learn from our interviewee from McQuay that, many medium- and small-sized enterprises born amid the snowballing coal-to-electricity market of 2017 stocked up high to seek profit. These inventory could hardly be absorbed by the market the following year, driving them undercut one another in biddings as a way of reducing inventory. As a result, product price, particularly of ASHP air heaters, went down. Our interviewee from McQuay says, “Despite the slowed pace of policy implementation, price competition further dampens the enthusiasm of ASHP industry players.”

The sector is expected to pick up in 2019 after softened under policy changes in 2018

Policy changes could be a major reason behind the softer-than-expected coal-to-electricity market of last year. Meng Wei, spokesperson of the National Development and Reform Commission, announced that, departments at all levels shall make sure people get through winter warmly. With this as the priority, she says, local heating can be powered by electricity, coal, gas or oil based on local circumstances. This comes following the surface of heating issues in some villages where traditional coal furnaces have been broadly torn down to install clean energy powered heating units in a bid to accelerate the implementation of coal-to-clean-energy policy, regardless of local circumstances.

This change hinted at tougher times ahead for the industry. An industry insider tells our reporter, “the shifting work in some places have been too aggressive, leaving heating a headache for some households whose coal furnaces had been dismantled without new heating equipment properly in place.” Looking to avoid this and ensure people’s interests, Meng Wei says, coal-fired heating is allowed in places incapable of electricity or gas-powered heating for the time being. We must make sure sufficient coal supply and the normal operation of the coal-fired heating systems in these places. “Basic infrastructures must be in place before local governments call for bids, as the policy required in 2018. This slows down the implementation of coal-to-clean-energy policy in many places where the establishment of electricity and gas lines and the installation of new heating equipment have been running at the same time.” An industry insider says.

Changes in local subsidy policy has also been a factor at play in the coal-to-electricity market last year. Our interviewee from McQuay says, “The strongest subsidy comes from Beijing, where only few outer suburbs needs remodeling at a market size of less than 100,000 units, a sharp drop compared to the scale of 300,000 to 400,000 units in 2017. Following in Beijing’s footstep, Tianjin also offers strong subsidy to support this policy. Yet it called for less bids in 2018 with a rather low price cap set compared to the year before when the combined quantity was 110,000 units. Most of the remaining areas only offers subsidies to offset part of the cost generated in initial purchase and installation with little subsidy on electricity cost from daily use, which is partly why people in these areas do not have a strong desire to buy higher-priced household water heating products.” This also drive up the sales of lower-priced air heating products.

Looking forward, many of our interviewees believe the market will pick up in 2019. We learn from our interviewee from McQuay that, the market size is expected to grow at a steady pace, and interviewee from Johnson Controls that, the coal-to-electricity market will expand to lower-tier cities and involve more households, aside the upgrading of existing projects in first-tier and second tier cities.

Central heating makes a new point of growth

It’s worth noting that the high percentage jump of AHSP central heating projects in 2018 are believed to point to a new area of growth. According to ChinaIoL.com, the market size of ASHP central heating projects came to 2.39 billion Yuan, a year-on-year rise of 31.25%.

It is learned that, many provinces including Beijing, Shanxi, Shaanxi, Hebei and Shandong have sped up their pace in implementing the policy last year. An industry insider says, based on the implementation of last year, it’s safe to say that commercial ASHP products designed for coal-to-electricity market is going high-powered.

The fast expansion of central heating projects draw in an influx of enterprises. Before the bidding starts last year, we learned from Hou Haisheng, Project Director of Gree’s commercial air conditioner division, that, Gree built up clean-energy heating stations with its air-cooled screw units in areas out of the reach of central heating systems, and applied them out through its pilot projects based in Langfang and Baoding cities of Hebei, Tianjin as well as Shandong.

Regarding the prospect of central heating projects, Yu Jinjian believes that this sector will be the backbone of coal-to-clean-energy policy later on, considering the government’s efforts in improving infrastructures and real estate companies’ efforts in revamping existing houses. Currently, many enterprises are looking at this sector. Our interviewee from Johnson Controls reveals that, central heating is an integral part of their business and the company plans to step up efforts in this sector. We learn from our interviewee from Phnix that, Phnix has deployed a batch of model projects in hotels, hospitals, schools, petrol stations, etc. From York’s side, York plans to roll out a product embedded with a heat recovery module. This sector has clearly become a battle field where enterprises duke it out for a share of the pie.

By Yu Jinjian’s estimation, the market of ASHP central heating will reach 0.5 billion square meters as of 2021. He says, “As to central heating, we’re going to rearrange our company structure, people, and product development priorities to accommodate to new changes in the market.”