Are the days of cheap finance for Chinese solar over?

The Chinese PV industry has benefited from the availability of substantial finance over the past two decades, supporting the development of the renewable, zero-carbon capability essential for meeting the goals of the Paris climate agreement. Easy access to finance has led to unsustainably low prices and unnecessary losses, however, impacting China’s ability to sustain support for renewable energy systems. As the nation expands clean power installations and enhances grid-balancing capacity, maintaining consistent financial support has become more challenging.

From pv magazine 05/24

Around 20 years ago, when the global PV industry was in its infancy, China’s involvement in it was minimal. Technological expertise was concentrated in the Western world, particularly in the universities and technology companies of Europe. At that time, PV power plants were a rare sight across China’s vast landscape.

Fast forward to the present day and the industry’s landscape has undergone a dramatic transformation. Data from trade body the China Photovoltaic Industry Association (CPIA) reveal that China’s share of global production capacity for key components such as polysilicon, silicon wafers, solar cells, and PV modules exceeded 80% in 2023. According to China’s Ministry of Industry and Information Technology (MIIT), China’s production figures in 2023 were staggering: more than 90% of the world’s solar-grade polysilicon, 98% of solar wafers, more than 85% of solar cells, and more than 80% of PV modules.

Moreover, China’s National Energy Administration (NEA) reported that the country connected 217 GW of solar to the grid in 2023, representing 56% of the global total and surpassing the combined installations of all other parts of the world.

The growth of China’s PV industry was achieved thanks to supportive government policy, at a regional and national level; the industry’s access to a free and open market; and the emphasis Chinese companies place on technology. The ample financing channels and significant capital available in China were also a crucial element. The PV industry is capital-intensive. It requires substantial financial resources for development and China’s access to abundant capital has been instrumental in driving the solar sector forward.

In the past, China’s capital investment in PV has focused on two areas. Firstly, investment has been directed toward building up the entire solar industry chain, encompassing production capacity of polysilicon, silicon wafers, solar cells, and PV modules, along with ancillary components such as PV inverters, mounting structures, backsheet materials, and solar glass. Additionally, investment has been made into the research and the development of PV technology, talent acquisition and training, and the establishment of robust sales networks. This capacity has been built out primarily by private enterprises, with funds sourced through equity finance.

Secondly, guided by government plans and directives, large scale PV power plant projects have been undertaken by major state owned energy companies in China. These projects involve the construction of extensive ultra-high voltage transmission networks to support the grid, energy storage systems for balancing renewable energy output, and the establishment of integrated renewable energy bases in northern China that combine solar, wind, energy storage, and hydrogen technology. Financing for these initiatives primarily comes from bank loans facilitated by government support at various levels.

Manufacturing buildout

In contrast to other industries, the major manufacturers in China’s PV sector are predominantly private enterprises. The PV industry in China emerged following the country’s reform and opening-up policies, which began in the 1980s. As the private economy began to flourish under these policies, proactive Chinese entrepreneurs swiftly seized the opportunities presented by the nascent PV sector.

The early growth of Chinese PV companies was assisted by proactive support from local governments focused on economic development in the early 21st century. These companies benefited from a diverse range of financing sources, including angel investors, private equity, co-investments from state owned enterprises, funding from special government funds, bank loans, and other forms of support from state-owned entities. For instance, Suntech, a pioneering PV company, faced financial challenges in its early stages. With the assistance of the Wuxi municipal government, however, Suntech not only received complimentary land for its factory and preferential corporate tax rates but also attracted capital injections from local state owned enterprises, and interest-free loans from local banks.

The rapid success of Suntech, and later LDK, underscored the significance of the PV industry, drawing increased government backing for the sector. Local authorities acknowledge that financial backing for PV investment initiatives significantly expedites project execution and advancement. Upon project completion and the commencement of production, these initiatives concurrently fulfill local government expectations regarding various economic metrics such as local GDP growth, tax revenues, and job creation. Consequently, governments at all administrative levels proactively support enterprises in securing diverse forms of finance, encompassing loans and equity investments.

Furthermore, as leading companies formulate plans for capacity expansion investment, numerous local authorities have extended invitations with favorable terms and conditions. These offerings often include complimentary land allocation or purchase discounts, extended tax exemptions or incentives, utility and manpower assistance, and additional financial backing. In this scenario, module manufacturers seek the most advantageous terms and substantial incentives (such as land, loans, and policies) for collaboration.

Stock markets

Chinese PV companies predominantly rely on the Chinese stock market as a vital financing avenue. By listing themselves through an initial public offering (IPO) on the Shanghai or Shenzhen stock exchanges, these companies gain direct access to substantial capital for investment projects and capital replenishment. Moreover, this listing positions them for long-term financing opportunities in the stock market through private placements or the issuance of convertible bonds and shares.

For instance, Longi, a major vertically integrated player, went public on the Shanghai Stock Exchange in 2012. Over the subsequent decade, until the end of 2022, Longi raised more than CNY 26 billion ($3.6 billion) through various financial instruments including additional shares and corporate bonds. Similarly, Jinko, operating through its JinkoSolar and Jinko Technology business units, secured CNY 30 billion and CNY 20 billion, respectively, to expand production capacity and invest in power station projects. Trina Solar, within just three years of its 2020 listing, raised nearly CNY 30 billion in finance.

Since 2016, driven by the industry’s expanding global footprint and declining costs along the PV value chain, Chinese PV companies have increasingly opted to go public in the stock market to fulfill their financing needs for ever-greater capacity expansion.

Statistics from the Shanghai and Shenzhen stock markets indicate that approximately 110 Chinese PV companies are currently listed on China’s domestic stock markets. These companies encompass a significant portion of the PV industry chain, including key players. Notably, many of these companies – such as JinkoSolar, Trina Solar, and Canadian Solar (CSI) – conducted their IPOs in 2016 or later, even after opting to delist from overseas markets and to pursue a listing on a Chinese exchange.

Following their IPOs in China, these companies have engaged in annual refinancing activities in the stock market. According to analysis from the investment research department of finance company SinoLink Securities, the average amount of annual finance raised by these companies has been on an upward trajectory. In 2020, the total financing amount was around CNY 70 billion, which surged to nearly CNY 170 billion in 2022. Moreover, in the first half of 2023 alone, the financing amount is projected to have reached nearly CNY 169 billion. This substantial finance is primarily allocated toward supporting capacity expansion, R&D initiatives, and working capital replenishment.

A notable trend which has emerged in the last few years has seen some Chinese PV companies again exploring new overseas IPO opportunities. The previous wave of IPOs, in the early 2000s, predominantly targeted the US market, in the wake of such moves by Suntech and LDK. The current overseas IPOs are steering clear of the United States. Instead, companies are opting for European capital markets such as Switzerland and the United Kingdom, utilizing Global Depositary Receipts (GDRs) for finance. Since 2022, more than 40 Chinese PV and renewable energy firms – including Longi Green Energy, Aiko Solar, and First PV Materials – have either announced or successfully executed GDR offerings on Swiss Exchange SIX. In a notable instance in July 2022, wind and PV producer Ming Yang raised more than $700 million through GDRs on the London Stock Exchange.

Financing power generation

The PV power plant sector encompasses the investment, construction, operation, and management of solar power facilities. Given the capital-intensive nature of PV power plants, substantial financial resources are essential during the investment and construction stages. Secure and dependable finance avenues play a pivotal role in driving the growth of PV power plants. Moreover, financing approaches vary significantly based on the scale of projects, whether it be ground-mounted power plants, commercial and industrial (C&I) distributed-power plants, or residential PV installations.

Bank loans serve as the primary financing mechanism for large scale ground-mounted solar power plants. In China, these expansive PV projects are typically spearheaded by major state owned energy conglomerates operating under the purview of the central government’s State-owned Assets Supervision and Administration Commission (SASAC). Notable entities in this realm include CHN Energy, SPIC, CHD, China Datang, China Huaneng, and several smaller companies. These energy giants often maintain robust partnerships with leading national banks including the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), and the Agricultural Bank of China (ABC), among others. By leveraging substantial credit facilities from these financial institutions, they can effectively address capital requirements for their power plant ventures. Additionally, project companies frequently collaborate with local government entities in the project area, securing additional support from regional banks and various stakeholders to facilitate mutually advantageous agreements.

Green bonds present another significant financing mechanism. Since 2020, the People’s Bank of China (PBC), the National Development and Reform Commission (NDRC), and other relevant authorities have introduced a series of policies aimed at progressively defining the scope of green bond application, primary issuers, regulations, and guidelines. As a result, the issuance of green bonds in China has shown a consistent upward trend, with the total value of conventional green bonds issued by financial institutions in China reaching CNY 660 billion in 2022. The Bank of China (BoC) leads among all banks. Furthermore, the issuance of Asset-Backed Notes (ABN) – a type of green asset backed bond issued by non-financial enterprises – by the Market Dealers Association, has amounted to CNY 214 billion. Notably, several prominent central enterprises, such as Sinopec, the National Energy Group, and State Grid have actively participated in these initiatives. China has also successfully issued more than CNY 110 billion worth of green bonds to international investors.

Ground-mounted PV power plants offer stable long-term cash flows, making them an attractive option for investors and financial institutions looking to securitize assets. This involves using the cash flow as a basis for pricing securities, bundling the asset pool, and then distributing and selling it to investors. This process enhances asset liquidity and spreads out investment risk. While China boasts a relatively mature Asset-Backed Securities (ABS) market, the PV sector is still in its nascent stages. The complexity of projects involving multiple stakeholders and the challenge of accurately forecasting future cash flows, due to various factors, have hindered asset pricing and limited successful cases. Nevertheless, China is actively working on enhancing regulatory frameworks to address these challenges and pave the way for ABS issuance in the PV industry.

Distributed PV

Bank loans remain a crucial source of financing for C&I solar projects. China’s unique power pricing structure – where industrial and commercial electricity rates are notably higher than residential rates –  combined with the projects’ strong self-consumption capabilities, often result in attractive returns on investment (ROI) for C&I solar ventures. Even during the 2020-22 period, when module prices were elevated due to supply chain disruption, ROI averaged between 6% and 8%. Following a significant decline in module prices in 2023, many C&I projects achieved remarkable ROI levels exceeding 20%, making them favorable for securing bank loans.

For developers with lower credit ratings and for residential PV projects, financial leasing is emerging as a prominent avenue of funds. Specialized financial leasing firms collaborate with module manufacturers and end-users to provide project funding. These partnerships allow module manufacturers to expedite project development and earn revenue while end-users utilize future power generation proceeds to repay the financing costs. Over the past few years, financial leasing has evolved into various models such as direct leasing, operating leasing, cooperative construction, and engineering, procurement, and construction (EPC) leasing, to cater to the diverse requirements of project developers and end-users. According to a representative from Jiangsu Financial Leasing Co., approximately 20% of residential PV projects in Shandong province benefit from financial leasing support.

Price collapse

Abundant financing channels have fueled a continuous influx of funds into China’s PV industry, propelling its rapid growth. This surge in investment has also heightened the level of risk, however, leading to instances of overcapacity and volatile market conditions. Since 2020, driven by a positive outlook on clean energy prospects amid global carbon-emission reduction efforts and China’s commitments to carbon neutrality, substantial capital has been injected into the industry through various financing avenues, sparking an unprecedented wave of capacity expansion investment.

An sample analysis of announcements from listed companies reveals that between 2020 and the close of 2023, China raised more than CNY 2.3 trillion to expand production capacity across key segments of the PV industry chain. Approximately CNY 700 billion was allocated to polysilicon, CNY 290 billion to silicon ingots and wafers, more than CNY 820 billion to solar cell and module production, and around CNY 490 billion for components such as solar glass, inverters, racking, trackers, backsheet materials, and ethylene vinyl acetate (EVA) and polyolefin (POE) encapsulant films. According to the CPIA’s report, with the continual addition of new capacity, China was expected to surpass effective capacities of 1.88 million metric tons (MT) for polysilicon, 892 GW for wafers, 844 GW for cells, and 861 GW for modules at the end of 2023. Actual production figures are notably lower than those nominal capacities, standing at 1.43 million MT for polysilicon, 622 GW for wafers, 545 GW for cells, and 499 GW for modules.

Amid severe overcapacity, a price war appears inevitable. Starting from the first quarter of 2023, prices began to decline across every segment of the industry chain. For instance, in April 2024, the bidding price for PV modules used in ground-mounted power plants plummeted to approximately CNY 0.85/W, marking a significant, 55% decrease from the approximately CNY 1.9/W recorded at the start of 2023. Similarly, the EPC offer for system costs has also experienced a notable decline, dropping by 57% to approximately CNY 1.5/W in April, compared to around CNY 3.5/W at the beginning of 2023.

The collapse in prices has severely impacted profit margins, leading to a significant downturn in China’s PV industry stock market performance in 2023. Major players such as Longi, Trina Solar, and JA Solar experienced drastic declines in their stock prices with many seeing falls of more than 50%. This sharp decline in stock prices has had a domino effect on company finance avenues.

Firstly, the decrease in share prices has negatively affected companies utilizing equity pledges to secure credit from banks. The diminishing value of the pledge has forced companies to either meet margin calls or reduce their credit facilities. Secondly, the challenging market conditions have made it difficult for companies to pursue refinancing options, resulting in the cancellation of numerous approved refinancing plans. Additionally, many companies have opted to withdraw their IPO applications to avoid issuing shares at lower-than-expected prices.

According to data from the Shanghai and Shenzhen stock exchanges, more than 30 companies have suspended, postponed, or canceled refinancing plans worth a total CNY 26.5 billion since the fourth quarter of 2023. Other companies – including Aiswei, a prominent inverter maker – have withdrawn IPO applications and halted the listing process to mitigate the impact of the market downturn.

The decline in stock prices has not significantly impacted the PV installation market. Major energy groups responsible for achieving China’s “30-60 dual-carbon” goals and driving domestic economic growth through investment have maintained strong credit partnerships with state owned banks. Despite facing challenges such as new low prices for photovoltaic modules, these companies are swiftly progressing toward their PV installation targets. The primary obstacle they face is the connection capacity of the state grid.

In a recent analysis by S&P China analyst Dan Hu, it was predicted that China would reach 226 GW of PV installations in 2024, contributing to a global installation total exceeding 500 GW for the year.

This post appeared first on PV Magazine.

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