As the Chinese economy continues to grow, it creates an insatiable appetite for electricity. Last year, the Chinese consumed 1,060 gigawatts (GW) of power and demand is expected to reach 1,500 GW by the end of the next decade.

To meet that growing demand, China has been on a power plant building spree. With about 620 coal-fired power plants currently in operation, the country plans to build at least 500 more over the next decade as well as expand its nuclear, solar, wind, and hydro production capacities.

Huaneng Power International (NYSE: HNP) will be one of the greatest participants in that building boom. Operating installed capacity of more than 56,000 megawatts across the country, it is one of the five largest independent power producers in the country.

The Chinese government has a heavy ownership stake in the company and, as a result, Huaneng enjoys easier access to capital than many of its competitors. That close relationship also means that it rarely encounters difficulties getting approval and permits for new power plants.

Unfortunately, that cozy relationship hasn’t historically translated to outsized earnings growth for Huaneng in years past.

Coal accounts for most of Huaneng’s generation capacity and, in an attempt to keep inflation in check, the government has capped at 70 percent the amount at which the company’s input costs can be passed through to the end consumer.

Consequently, during periods of strong coal prices, Huaneng has ended up eating 30 percent of its costs. That has traditionally taken a huge bite out of profits because the company is essentially subsidizing its end users. Still, Chinese regulators aren’t totally indifferent to the plight of coal burning electricity generators and boosted Huaneng’s collectable tariff by 10 percent at the beginning of this year, to help offset what were then strong coal prices.

But since then, coal prices have plunged and Huaneng has seen a surge in profitability. In the third quarter of this year, despite the fact that the company’s operating revenue grew by just 0.3 percent, its net profit shot up by nearly 200 percent, largely thanks to lower coal prices and its higher tariff.

That exponential profit growth should continue in the coming quarters, thanks to further tariff restructuring which will become fully effective at the beginning of 2013.

Back in July the National Development and Reform Commission (NDRC) introduced a three-tiered tariff structure to help encourage energy conservation. Under the program, consumers who use the least electricity and fall into the first tier (about 89 percent of households) will see no increase in prices. But users who fall into the second tier will have their price bumped by 0.05 yuan per kilowatt hour of use, while third tier customers will see a 0.30 yuan increase.

Next year, that tiered pricing structure will come into full effect across the country, including its highly energy intensive coastal provinces where most of Huaneng’s industrial customers are based. While the tiered tariff system is meant to encourage energy conservation, most of the industries served by Huaneng are small- to medium-sized enterprises for which it is simply more cost-effective to pay the higher tariff than implement expensive energy saving technologies.

They also have little control over their order flows so, while they will surely economize in other areas, they have little flexibility in adjusting their energy consumption habits. As a result, Huaneng should see its earnings get another bump.

Power shortages have also been a growing concern in China, particularly during peak seasons. The Chinese government is said to be debating further tariff increases, to help power producers fund more generation capacity themselves without relying on subsidies from the government.

Moreover, reformers are pushing the view that by further privatizing the country’s electric utilities, it is more likely that more capacity will be installed in areas where it is most needed rather than being diverted for political purposes. While it’s anyone’s guess if that point of view will actually prevail, it’s an encouraging sign.

From a balance sheet standpoint, Huaneng is one of the most attractive power producers in China. Its return on equity (ROE), a key measure of ute health in the US, has been constrained by Chinese tariff limits. However, ROE should reach about 9 percent for full-year 2012 and should approach 13 percent next year, assuming coal prices remain relatively subdued and drive further price appreciation.

While the company carries a fairly substantial about of debt, with a debt-to-equity ratio of 1.9, it is in a capital intensive business. It typically maintains about CNY15 billion in cash on its balance sheet, so it doesn’t have any difficulty meeting its near-term debt maturities.

Benefitting from growing demand and more generous tariffs, Huaneng Power International rates a buy under 40.