China’s move to combine the country’s top coal miner with one of its biggest utilities will create a $280 billion juggernaut and likely spur consolidation.

The State-owned Assets Supervision and Administration Commission announced the deal between coal company Shenhua Group Corp Ltd. and utility company China Guodian Corp. at the end of August. With more than 225 gigawatts of installed capacity, the combined entity will be the world’s biggest power utility in terms of capacity. It will also be the leading producer of wind power in the world, with 33 gigawatts of capacity, as well as the biggest coal producer.

Shenhua accounted for 8% of the 3.6 billion tonnes of coal China produced last year, according to Reuters. While a small percentage, this was more than double the production of the country’s second-largest miner, Shanxi Coking Coal Group. Utility companies’ margins have been squeezed over the past year, due to cuts in mining capacity handed down from the government in an effort to curb pollution.

Power companies worry about losing coal supplies ahead of winter, when demand for power will surge. Many smaller utilities buy coal from Shenhua, and fear losing a major supplier if Shenhua reduces how much it sells to third parties. According to a source at a major utility, smaller, inland utilities may have “difficulties finding new suppliers” due to the high cost of sourcing from further afield. “We are very concerned whether they will give us enough supply for winter,” said a coal buyer for China Resources Power Group Holding, a top power company based in Beijing.

More deal-making is expected as other players in China’s energy sector look to shore up resources. Frank Yu, principal consultant for Asia-Pacific Power and Renewables at Wood Mackenzie said the prospect of competing for supplies could lead to more consolidation. “Other power generators will naturally worry about playing on an uneven ground with biased coal supply terms. That concern will facilitate other win-win mergers as countermeasures,” he said. Removing conflicts between coal miners and power generators is in line with Beijing's broader plan to reform the energy sector, Yu added.

Some industry analysts, less concerned about long-term impacts, point out that power companies typically have diversified sources of supply. Yet utilities are on the alert for supply constrictions. Last winter the government narrowly avoided a power crisis, following the measures to cut mining output, as well as tightening supplies and triggering a price rally.

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