Huaneng Power International (HUNGF) Risk Analysis

Tuas Power derives its revenue mainly from sale of electricity to the National Electricity Market of Singapore (the "NEMS") through a bidding process and vesting contracts under which a significant portion of power sales is predetermined by the Energy Market Authority ("EMA"). The vesting contract regime in Singapore is targeted at mitigation of market power in the wholesale electricity spot market. The regime achieves this objective by assigning a quantity of vesting contracts to generation companies, thereby limiting their incentives to exercise whatever level of market power they may possess. Vesting contracts are a form of bilateral contract imposed/vested on the major power generation companies in Singapore. Vesting contract price is set by the EMA, which is Singapore's power market regulator. Vesting contract price is set at the long run marginal cost of the most efficient base-loaded technology plant employed in Singapore and is reviewed every two years. On a quarterly basis, the EMA allows for vesting contract quantity to be adjusted to account for changes in demand (due to seasonality) and the vesting contract price to be adjusted to account for inflation and changes in fuel prices. Such a mechanism helps protect the profit margins of the power generation companies in the Singapore market, such as Tuas Power, to a large degree. The quantity of vesting contract allocated to the power generation company depends on the proportion of such power generation company's capacity to the total licensed or planned generation capacity at the commencement of the vesting contracts regime. A portion of the volume under the Vesting Contract Scheme has also been allocated to the LNG Vesting Scheme - an incentive scheme where players who have committed to an initial tranche of LNG for Singapore are allocated electricity sale contracts. The volume allocated to the generation companies under the LNG vesting scheme is fixed for a period of 10 years until 2023. Following EMA's review of the Vesting Contract Regime in 2016, it is determined that the vesting contract level shall be maintained at 25% until the end of the first half of 2018 and it shall be reduced to LNG vesting level by the second half of 2019. The vesting contract regime will be phased out by 2023 when the LNG vesting contract expires, which could lead to volatility in electricity prices and adversely affect our business, financial condition and results of operation. In July 2018, EMA issued a determination paper to allow vesting contract holders with steam turbine generation plants, i.e., Tuas Power, Senoko Energy and YTL PowerSeraya, to retain their allocated vesting quantities irrespective of whether the steam turbine generation plants are retired. This will facilitate the three generation companies in making commercial decisions on whether and when to retire their steam turbine generation plants so as to reduce overhead costs and free up resources. In June 2019, EMA embarked on an industry consultation process on the implementation of a Forward Capacity Market ("FCM"). EMA indicated that it planned to develop and implement a FCM, which would function together with the current real-time wholesale spot energy market with ancillary services, to meet the objectives of (i) maintaining resource adequacy by providing adequate incentives to the existing and new generation capacity and ensuring that the power sector is sustainable and (ii) maximizing economic efficiency to minimise long-run costs to consumers. EMA announced on November 2,2021 that "will therefore defer the implementation of the FCM. EMA will continue to monitor market conditions and technological developments, and review the introduction of the FCM in the future."

Similar to electric power companies in other countries, we are subject to governmental and electric grid regulations in virtually all aspects of our operations, including the amount and timing of electricity generations, the setting of tariffs, the performance of scheduled maintenance, and the compliance with power grid control and dispatch directives as well as environment protection regulations. There can be no assurance that these regulations will not change in the future in a manner which could adversely affect our business. The tariffs for our planned output are subject to a review and approval process involving the National Development and Reform Commission ("NDRC") and the relevant provincial government. Since April 2001, the PRC Government has been implementing a tariff-setting mechanism based on the operating terms of power plants as well as the average costs of comparable power plants. Pursuant to the NDRC circular issued in June 2004, the tariffs for our newly built power generating units commencing operation from June 2004 have been set on the basis of the average cost of comparable units adding tax and reasonable return in the regional grid. Any future reductions in our tariffs, or our inability to raise tariffs (for example, to cover any increased costs we may have to incur) as a result of the new tariff-setting mechanism, may adversely affect our revenue and profits. In addition, the PRC Government started a program in 1999 to effect power sales through competitive bidding in some of the provinces where we operate our power plants. The tariffs for power sold through competitive bidding are generally lower than the pre-approved tariffs for planned output. In the more recent few years, power sales through competitive bidding only accounted for a portion of our overall power sales. Nevertheless, the PRC Government is seeking to expand the program. Any increased power sales through competitive bidding may reduce our tariffs and may adversely affect our revenue and profits. Furthermore, the PRC Government started in 2009 to promote the practice of direct power purchase by large power end-users. Pursuant to the circular jointly issued by NDRC, the State Electricity Regulatory Commission ("SERC") and China National Energy Administration in June 2009, the direct transaction price shall include the direct transaction price, the grid transmitting price and the governmental fund and additional charges, of which the direct transaction price shall be freely determined through negotiation between the power generation company and the large power end-user. The price of direct power purchase shall be subject to the demand in the power market. Furthermore, the scale and mode of the transaction are also subject to the structure and level of development of local economy. In terms of power generation companies engaged in direct power purchase, direct power sales constitute a portion of the total power sales, thus affecting the power sales of the Company. For the past few years, the PRC Government continued the reform in the area of direct power purchase by large power end-users. In 2013, China National Energy Administration officially launched the direct power purchase program in seven provinces where we have power plants and the program has been steadily rolled out in other provinces. The tariff-setting mechanism is evolving with the reforming of the PRC electric power industry. The PRC government announced a number of development and reform plans for the power market in 2016, covering areas including laws and regulations, comprehensive pilot plans, power transmission and distribution prices and supply side dynamics, the establishment of the power exchanges, rules and market administration committees, and opening up incremental distribution business. In 2017, the development and reform plans have been further expanded to the nationwide scale, with multiple issuances made by the PRC government governing power development plan, electricity transmission and distribution price, opening up of the electricity generation and consumption plans, supply side dynamics, electricity power spot and ancillary market development, electricity exchange rules, market supervision and clean energy consumption, etc. In 2018, the development and reform entered into an implementation stage, reflected in the areas of distribution price reform, establishment of the power exchanges and ancillary market and the incremental distribution network reform, etc. In 2019, the development and reform entered into a "deep-water zone" with long- and mid-term power exchange markets, power commodity exchange markets and ancillary service exchange markets established and relevant rules and policies adopted. In 2020, MOF, NDRC and China National Energy Administration ("NEA") issued Several Opinions on Promoting the Healthy Development of Non-Hydro Renewable Energy Power Generation to clarify the responsibilities of consuming renewable energy power for each provisional administrative region. In 2021, NDRC and NEA issued Notice on Further Deepening the Market-Based Reform of the Electricity Tariff for Coal-fired Power and Notice on Further Developing Time-of-Use Pricing Regime to provide further guidance on tariff pricing. Currently, the percentage of the direct power purchase accounts for more than 80% of our total power sales, which may have an adverse effect over our operating results basing on the relatively lower tariffs generally for this portion. There is no assurance that government regulations on the industry will not change in a manner which could adversely affect our business and impact our results of operations, that we will be afforded sufficient time to adjust the operation of our business in answering to the promulgation of such changes and amendments before they come into effect and apply to our business operations, or that such adjustment measures we take can effectively help us to navigate the new regulatory environment and ease the negative impacts brought by such new changes and amendments on our business operation. See "Item 4 Information of the Company – B. Business Overview – Pricing Policy" for example. As a result, any such regulations and the adjustments we make in answering thereto may lead to changes to the way we operate our business, including without limitation how we formulate our production plan under a new industry regime with respect to dispatch and pricing, and how we manage our operating costs in relation thereto, which may in return have a negative impact on our business and cause the price of our ADSs to incline.

The Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form 20-F for the year ending December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor's, control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects. On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA is reduced from three years to two, then our shares and ADSs could be prohibited from trading in the United States as early as 2023.