Navigating the green transition: Financing trends evolve for Chinese power companies

The acceleration of industrial restructuring in China is increasingly evident as the country transitions into a "new normal" -- from a growth model centered on scale and speed to one prioritizing quality and efficiency for an improved economic system -- while moving toward net zero.

Emerging industries such as artificial intelligence-related sectors, electric vehicles and solar power components manufacturing have witnessed robust growth in power needs. These factors, combined with a rising frequency of extreme weather events, contribute to the country's new peak load record each year.

Growing power demand and firm net-zero commitments are facilitating the expansion of renewable energy capacity in China, which raised its energy consumption rate from non-fossil fuel sources to 18% in 2023 from 10% in 2013. With a 25% non-fossil energy consumption rate target by 2030, there is an anticipated rise in the development of renewable projects and a surge in investments aimed at innovative upgrades to facilitate decarbonization.

In August, the Chinese government issued an action plan to encourage power generation utilities to take the lead and increase investments by 25% to decarbonize the power sector. This comes amid slower-than-expected progress in China's carbon markets to reduce emissions from the coal-fired power sector.

Chinese power companies, particularly state-owned enterprises with over 60% of the domestic installed capacity, are stepping up to lead this transition. Historically, these companies have relied heavily on bank loans to finance projects, especially those that commenced before 2016. However, they began diversifying their funding sources following the high-level guidance from the China State Council, which urged state-owned enterprises to decrease corporate's leverage ratio in 2016.

This initiative was further reinforced in the Three-Year Action Plan for State-Owned Enterprises Reform (2020-2022), which stipulated that these enterprises maintain a liability-to-assets ratio of around 65%, five percentage points lower than the global median for power companies. As the demand for capital increase to fuel renewables shift, these companies must revisit and adapt their financing strategies to support this ambition.

Diversification of new financing products, such as real estate investment trusts, perpetual bonds and green bonds, is crucial for fueling renewable development in China over the coming years, S&P Global Commodity Insights said in a recent report on financing strategies of the key publicly listed Chinese power companies. The analysis breaks down mainstream debt and equity financing options, and provides a deep dive into the emerging financial tools in the market.

Debt financing remains crucial for funding renewable development, according to the Commodity Insights analysis.

In 2023, among 40 publicly listed power companies in China, 65% of their asset value was funded through financial debt and other obligations. Of the active debt securities issued by these companies, about 60% originated from financial leasing firms, followed by 25% from banks and the remaining mainly from corporate bonds or notes.

This shows that borrowing plays a significant role to finance renewable energy in China, with financial leases and bank loans being the most common options.

Project developers strategically select these debt financing tools to align their specific needs at various stages of project development and operation.

Companies are increasingly exploring equity financing options amid challenging conditions.

As the State-owned Assets Supervision and Administration Commission pushes for a liability-to-asset ratio of around 65%, Chinese power companies require a larger share of equity funding to support renewable growth compared to their global peers, whose ratio is approximately 70%.

As A-share initial public offering activity has slowed down, companies are leveraging their listed platforms to attract more equity funding, either by inviting their listed companies to acquire equity interests in the pipelines from their non-publicly listed affiliates, or by enhancing the value of the listed firms through strategic upgrades. Equity financing tools such as perpetual bonds and REITs are also gaining increased attention.

The market for diversified green financing tools is expected to grow in support of renewable development.

As part of the green financing ecosystem, products like green bonds, sustainability-linked bonds and green REITs are expected to gain popularity among Chinese power companies. However, the pace of development will depend on the evolution of the financial market and related supporting system.

With analysis from Chengyao Peng