Would China Finally Solve the Renewable Subsidy Deficit?

The Chinese renewable industry was in excitement last week for a rumour

Allegedly, the Ministry of Finance (MoF) is considering to solve the country’s severe renewable subsidy payment issue by a new measure.

Rumour has it: the MoF is gauging the option to task China Development Bank (CDB) or State Grid (SGCC) to issue bonds to pay out subsidy to the renewable developers. Most of these developers have been suffering from the deferred payment for years.

The delayed and deferred subsidy payout has been a prolonged issue in China. We roughly estimated that at least 70-80% wind and solar projects have, in fact, yet to receive the full subsidy payment.  

But why does the ministry hope to seek a solution now–after years kicking the can down the road? And would “bond” the right answer?

China’s Renewable Subsidy Deficit: Rooted Issue

China has since 2006 developed the “Renewable Energy Development Fund” (REDF), as a cash pool to subsidize the country’s renewable projects. [Read our previous explanatory article on China’s REDF, subsidy and renewable feed-in tariffs. ]

The REDF collects renewable subsidy surcharges from industrial, commercial and residential electricity consumers in sectors. Those in Tibet, Xinjiang regions and the agriculture electricity users are except for the surcharge obligations.   

From the beginning, the fund risks of insufficient collection. Over the years a mounting deficit has been piled up, estimated to reach $300B by the end of this year. 

There are three rooted causes of the deficits in our view:

  1. Insufficient Surcharge Collection: this is in large part that is due to the existence of many “self-production” electricity consumers who built off-grid generation sources for their power demand. It was almost impossible for the grid operators to collect all the surcharges, resulting in some 30%-40% or ¥20-30B amount missed every year. 
  2. Unexpected Surge of Renewable Growth: Beijing’s economy regulator determines the surcharge fee based on their plans and estimations of renewable capacity growth. But the development was much faster than the expectation. The solar PV sector, especially, achieved its capacity target (set to accomplish in 2020) back in 2017 and continues to see speedy capacity growth. The “excessive” projects beyond the plan led to a heavy subsidy burden.  
  3. Insufficient Raise of Surcharge Rate: between 2006-2016 Beijing has raised six times the surcharge fee—from initially 0.1 cents to 1.9 cents (per kilowatt-hour). But since then, the decision-maker is unwilling to increase the rate again, out of concern for public acceptance. And from 2016 till now, China’s renewable market has been through an epic expansion. 

Among the three factors, our analysis suggests that insufficient surcharge collection has been the No.1 factor leading to the deficit. 

Devastating Consequences to the Whole Value Chain  

The deficit has led to a devastating consequence for the whole renewable value chain. 

Due to the fund’s lack of cash, the finance and economy regulators—MoF and NDRC—had introduced several measures to put off the issue before 2019, most of which seemed only to kick the can down the road. 

A key policy was the introduction of the “Subsidy Catalog,” which review and enlisted renewable projects periodically. Only those included in the catalogue would be able to receive the subsidy. 

But as the deficit issue continues to mount, the catalogue issuing has become slower and slower. Those failed to get into the catalogue has never received the subsidy. And even worse, those included in the list still suffered from delayed payment. 

[One of the devastating consequence is that the companies with weaker borrowing capability would go bankrupt. Last years, a wave of renewable power asset sales emerged, which is the direct consequence. Read our two-part review on renewable companies’ asset sales wave: Part-1, Part-2 ]

2019 Actions to Tackle the Issue 

Beijing has since 2019 unleashed three critical measures to address the prolonged issue.  

  1. Subsidy Sunset “补贴退坡”The most drastic action is to stop subsidizing new wind and solar projects. In 2019, Beijing set cut-off time (approval day before the end of 2019) for projects seeking subsidy and added the grid-connection time limits to trim the number of projects eligible for the subsidy.  
  2. Switching Concept “合理利用小时”: The regulator also introduced a “reasonable utilization hour” concept to cap subsidy demand. Wind and solar projects (already eligible for subsidy) would no longer obtain subsidy payout based on 20-year production. Instead, the rewarded subsidy will be based on a fixed amount of time set by the regulator. So far, the exact amount for different projects has not been announced. 
  3. Payment Defined by Income “以收定支”: the regulator would pay out subsidy to new projects based on the annual incremental collection amount. Priorities will be given to distributed projects and those with higher technology and efficiency scores.

That means although a sizable portion of the projects would still not be able to secure payment initially. The subsidy deficit theoretically would end in some years, as long as electricity demands (thus renewable surcharges) continue to grow. 

The industry is commonly expecting the deficit amount would peak around 2028.  

2020: Bond to the Rescue?

The new proposal of MoF to issue specific bonds to pay out subsidy came as somewhat a surprise, following the previous measure. 

Previously, the regulators did not show a strong determination to solve the deficit issue at once. Instead, temporary measures to delay a painful solution appeared to be the preferred option.  

The new suggestion from MoF, however, sent out some different political and economic signals. 

“Renewable Dip” is Coming

It shows that the deficit issue has become even more urgent. The mounting account receivables in renewable companies’ balance sheets have snowballed to a systematic risk challenging the livelihood of the whole sector. [Read our analysis on China’s wind and solar market between now and 2025]

As the sector is soon to step in winter of installation dip, many companies—especially the smaller and private players without a strong borrowing capacity from the financial market—face looming bankruptcies scenario. 

Solving the deferred payment, thusly, is more urgent. 

“Internal Circulation” Strategy

China’s shifting economy strategy could be another factor behind MoF’s move. Amidst deteriorating US-China relation, Beijing’s top decision-makers have emphasized on stimulating economic development based on “internal circulation” (or self-resilience), which seems to put international expansion at a secondary place. 

On the energy supply, the recent emphasis on “internal circulation” means Beijing’s preference would be “domestic” sources including renewables, hydro and nuclear power—over oil & gas which heavily relies on imports.  

The new preference may push MoF to take more serious measures to save the struggling renewable companies, many of which set off an asset sales wave last year. 

Technical Issues Remain,  

If true, the speculated bond issuing would have a significant impact on the landscape of China’s renewable investment. Solving the deficit would help thousands of companies to survive in the upcoming winter and stimulate investment after the dip. 

However, the possibility or technicality of the measure faces many problems, in our view. While the speculation suggests MoF intends to have State Grid for the bond issues. Energy Iceberg believes that:

The grid would be unwilling to cooperate, as the move would harm its financial interests–the firm is already struggling with major revenue drop under government’s pressure to cut electricity price.

Moreover, legally speaking, the obligation of the subsidy payout is on the REDF and the electricity consumers but not on the grid operators.

If anything, the bond idea shows that Beijing remains steadfast in its position to avoid raising electricity prices (or surcharges)—regardless of whether the consumers are underpaying. 

Low electricity prices remain part of Beijing’s top priority. That is not so much of some good news for the country electricity market reform.  

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