A key reason behind the latest asset sale is the delayed and unfulfilled subsidy payment to renewable projects.
China has long established a unique subsidy mechanism to incentivize renewable power development. A “Renewable Energy Development Fund” (REDF) has been set up to subsidize renewable projects.
Ministry of Finance (MoF) managed the fund and has an essential say of the subsidy distribution.
However, in the past years, the REDF has witnessed an ever-expanding deficit in the fund, currently mounted to ¥200bn.
Due to the deficit, delayed subsidy payment to renewable producers becomes a standard practice; moreover, a sizable portion of China’s operating wind, solar and biomass farms have not been included in the subsidy list, and never secured any subsidy payment.
In the books, the subsidy has been mostly registered as “account receivable” and calculated into the profits. But companies face issues with their tightening cash flow, a significant risk factor the reason behind companies’ asset sales. [READ More on the Asset Sales Wave—Part 1]
REDF: Deficit Causing Subsidy Payment Delays
Essentially, the renewable subsidy in China— similar to a “renewable surcharge”— is the difference between the renewable feed-in tariffs and the coal-fired power benchmark.
The renewable feed-in tariffs are rates set by Beijing and the provincial governments. Renewable get paid based on the electricity they sell to the grid. [*off-grid sales have different and usually higher price set-ups.]
But the payments to the renewable companies are made in two parts:
- Part 1 is the electricity amount at the local coal-fired power benchmark price. Part 1 is paid out by the grid companies monthly according to the generation purchase from the renewable developers
- Part 2 is the renewable “subsidy amount”—or the differences between the local renewable FITs and the local coal power price. It is paid out separately by the REDF quarterly or annually.
It is important to note that renewable power plants need to be verified and included in a “subsidy catalog” managed by the MoF to be eligible for the subsidy.
But as the REDF is running at a significant deficit. So far, China has only issued seven batches of the catalog of eligible subsidized renewable projects, which encompass 147.9GW wind, 44.4GW solar, and 11.2GW biomass power capacities— representing only 80%, 25%, and 63% of the total installed capacities.
Even making it into the catalog, projects in the first six batched often encountered severe delays to their subsidy payment. And given the mounting deficit in the REDF, the market has long suspected that the MoF will not issue new batches of “subsidy catalog.”
That means a majority of the projects may never receive their subsidy, despite building their investment decisions and financing arrangement based on receiving the grant. The unfulfilled support, thus, jacks up the financial costs for most companies.
And now, these companies may need to prepare for writing off part of their account receivable, facing a decrease in the asset value of their power plants.
Subsidy Payout Maybe Never: More Asset Sales on the Way
Why is there a deficit issue in the first place? Several details of the REDF’s management are related to the current issue:
- Fund collection—surcharge paid by the power end-users: the REDF is collected by the grid operators (for the MoF) on the electricity consumers; according to China’s renewable energy law, all electricity users need to pay for a “renewable surcharge fee” based on their power consumption
- Renewable surcharge rate—determined by the NDRC: the economic regulator, NDRC, set and adjust the renewable surcharge rate based on the targets of renewable capacity. However, the regulators are subject to considerable political pressure to keep electricity costs and fees stable for the power users. China started to collect the renewable surcharges since 2007, and only raised five times the surcharge value, from initially 0.2 cents/kWh to 1.9 cents/kWh
- Renewable subsidy amount linked to coal-fired power prices: the subsidy amount equals to the differences between the renewable feed-in tariff and the provincial coal prices; the coal price rates are set and adjusted by the government according to fuel (coal) costs. The lower the coal power price becomes, the higher the subsidy amounts are. And the subsidy is linked to the fluctuation of coal commodity prices
Under such structure, regulators face political risks and are, naturally, less willing to raise renewable surcharges. Meanwhile, renewable power has been developing in a phenomenal pace, which way exceeded Beijing’s expectation. The regulators have reduced the FIT values for new projects over the years, but the reductions have been limited, slow, and gradual.
As a result, demand for subsidy spike. And Beijing’s hands to raise surcharge fees are tight. The mismatch of subsidy collection and distribution led to the deficit headache.
Beijing also blamed the inefficient collection of the renewable surcharge, claiming that part of the electricity end-users—the self-producing distributed power users—have never paid their subsidy surcharges. But it is doubtful how would a minority group of users’ avoiding the surcharge could lead to such a deficit.
In the past, the renewable industry was hoping and calling for the central energy rulers to take serious measures to catch up with the payment, especially by raising the rate of surcharge fees. Many argue that this must be the ultimate solution.
However, China’s current absolute No.1 political priority is to re-boost industry development and maintain social stability. Beijing has been emphasizing on lowering the energy bills—the “burden” upon the industries—to revive economic growth. To raise the surcharge under the current political climate is hard to imagine.
Last year, Beijing announced drastically to scape feed-in tariffs for future projects, sending a clear signal to avoid enlarging the subsidy payment. And recently, the MoF already announced next year’s subsidy budgeting, further limiting the subsidy payout to projects in the existing projects.
Notably, the budget next year includes no subsidy payout to PV projects at all.
These new measures show the unfulfilled subsidy is unlikely to be solved entirely. Asset write off may be a destined option for many companies; we might be seeing more asset sales on the way in the coming few years.
Risk Profile Determines Buy-in Options
Naturally, there are also opportunities to harvest from the asset sales and buy into the market.
There are already eager buyers for these assets. In the case of GCL Poly New Energy’s sales, the motivation of the buyer—China Huaneng—is easy to understand.
Used to be the No.1 power producer in China, Huaneng now seconds to China Energy Investment Corp (CEIC), which is born upon the merger between China Shenhua and China Guodian in 2018.
But many of its domestic peers have caught up and outperformed the old champion in renewable development. State Power Investment Corp (SPIC) has lower its coal power share (in total power portfolio) to under 50% by expanding renewable investment—becoming the global No.1 PV producer; CEIC owns the largest wind power portfolio on earth. Even smaller player China Huadian stands out with its natural gas strategy. [READ MORE on the Five Largest Power Utilities in China]
As de-carbonization become one of Beijing’s top mission, Huaneng must have felt the urgency to ramp up its renewable portfolio. That is the essential logic to buy in GCL Poly’s asset. [READ More on China’s moves to phase out coal-power asset ]
China’s state-owned enterprises and private companies have distinctly different risk profiles to cope with the looming financial risks of these assets.
The state-backed firms have much larger space to maneuver their cash flow issues, of robust borrowing capacity and support from China’s state-owned banks.
The state-run power companies also have more room to influence Beijing and local governments’ pricing decisions.
These two features allow state-owned firms like Huanneg to acquire renewable assets and to improve their business portfolio.
But would foreign developers step into the market via this opportunity?