China to set up special purpose firms to tackle unpaid renewables subsidies

The massive build-up of solar and wind power in China over the past decade has created a thorny problem: ever-growing arrears owed to the renewable energy companies eligible for subsidies. On Wednesday, Chinese media reported that the central government would establish two special purpose companies to settle the issue.

The Beijing and Guangzhou Renewable Energy Development Settlement Service companies will be solely responsible for raising funds from the market to pay off overdue subsidies worth hundreds of billions of RMB, taking a large portion of the burden off the government budget. The two companies will be able to finance such payments through the issuance of bonds and other instruments, with backing from the government. 

China’s subsidised electricity price (feed-in tariff) for renewable energy was a major driver behind the early take-off of renewables installations. Solar and wind firms were given a guaranteed, above-market price for their energy, attracting a large number of developers into the sector. But the growth of power projects eligible for subsidies soon outpaced the build-up of the funding pool for the subsidies. Delays in payments became increasingly common. By the end of 2021, overdue subsidies had grown to an estimated 400 billion RMB (US$59.7 billion). Over 90% of new renewable projects built between 2016-2020 received no subsidy funds.

The delay in subsidy payments has severely affected the cash flow and financial wellbeing of renewable energy developers, whose bank loans and other forms of financing are often pegged to revenues from subsidised power sales. 

In 2021, China ended more than a decade of feed-in tariffs for new solar and onshore wind projects, as projects became increasingly cost-competitive with other energy sources. The setup of the two companies puts a backstop on the further accumulation of unpaid subsidies. Market observers expect the subsidy issue for existing projects can be settled once and for all, bringing financial relief to a sector whose further expansion is crucial for China’s achievement of carbon neutrality before 2060.

Read China Dialogue’s earlier coverage of the renewable subsidy scheme in China