The Hydro-Energy Pivot: China's Drought Recovery and Coal's Retreat

The Yangtze River Basin, China's hydroelectric powerhouse, has faced severe droughts since late 2024, crippling hydropower generation and forcing a spike in coal-fired electricity. But as seasonal rains return in select regions, investors are watching closely for a potential shift: a rebound in hydropower output could reduce reliance on coal, reshaping energy markets and creating opportunities in renewable and grid-related stocks.

The Drought's Toll on Hydropower—and Coal's Rise

The Yangtze River Basin's 2022–2023 drought, the worst in decades, slashed hydropower output by an estimated 190 billion kWh, forcing China to burn more coal to meet energy demands. By 2023, installed hydropower capacity hit 422 million kW, yet generation fell 1% versus 2019 levels due to water shortages.

Recent rainfall patterns offer a glimmer of hope. Projections suggest that while southern provinces like Guangxi and Hunan may face exceptional deficits through 2025, northern regions could see improved runoff. The Three Gorges Dam, which accounts for 56.75% of the basin's annual runoff variability, remains a linchpin for managing this uneven recovery.

Renewables and Policy: The Push for Cleaner Energy

China's 14th Five-Year Plan mandates that renewables (wind, solar, hydropower) supply 25% of primary energy by 2025. Even as droughts persist, policy momentum is strong. For instance, the Yalong River Hydropower Base in Sichuan—a major hydropower hub—plans to add 30 GW of capacity by 2025, leveraging advanced reservoir management to mitigate drought risks.

Meanwhile, coal's role is under pressure. The National Development and Reform Commission (NDRC) has suspended over 100 coal projects since 2021, prioritizing low-carbon alternatives. A prolonged hydropower recovery could accelerate this trend, squeezing coal companies like China Coal Energy (HGT).

Investment Opportunities: Where to Look

1. Hydropower Firms with Diversified Assets
- CGN Power (00720.HK): A state-owned player with exposure to the Three Gorges Dam and smaller projects in drought-resilient northern basins.
- State Power Investment Corporation (SPIC): Involved in the Hanjiang to Weihe River water diversion project, which aims to stabilize water supply for hydropower.

2. Renewable Energy Plays
- Longyuan Power (00988.HK): A wind and solar leader, poised to benefit as coal's market share shrinks.
- Grid Infrastructure: Companies like State Grid Corporation (indirectly accessible via ETFs like ASHR) will profit from grid upgrades to integrate variable renewables and hydropower.

3. Water Management Tech
- Firms offering drought monitoring systems (e.g., satellite-based soil moisture sensors) or smart irrigation tools could see demand rise as farmers and utilities seek to mitigate water stress.

The Risks: Drought's Lingering Shadow

Prolonged deficits in critical regions like Guangxi and Yunnan could stall hydropower recovery, keeping coal demand elevated. Investors should monitor:
- Rainfall data for the Yangtze Basin (e.g., Guangxi's 3,678 rainfall stations).
- Policy shifts: If the government eases restrictions on coal to ensure energy security, coal stocks might rebound.

Conclusion: Timing the Pivot

The next 12–18 months will decide whether China's energy mix shifts decisively toward hydropower and renewables—or remains anchored to coal. For investors, hydropower firms with northern exposure, grid infrastructure, and renewables are the sweet spots. But stay vigilant: if droughts deepen, coal's retreat may slow, and water-stressed regions could become value traps.

Final Take:
- Buy: Hydropower and grid stocks with diversified portfolios.
- Avoid: Coal-heavy utilities unless policy signals reverse.
- Watch: Rainfall trends and Three Gorges Dam reservoir levels.

The hydro-energy pivot is underway, but its success hinges on Mother Nature—and Beijing's policies. Stay nimble.