China’s switch to financing overseas renewable energy projects from coal-fired power plants to be slow and challenging

By Eric Ng

China’s decision to stop building coal-fired power plants overseas is likely to open up opportunities for renewable energy project developers and financiers from the mainland, but the transition will be slow and challenging, according to industry observers.

This is particularly true of Southeast Asia, where there is a clear preference for renewable energy due to growing energy demand, but an immature regulatory environment and insufficient power grid investment present obstacles. For mass development to take off, guaranteed offtake, dispatch and tariffs are needed, besides robust power purchase agreements and a creditworthy off-taker – typically the grid operator, say experts.

“The region looks attractive for building renewable projects, especially solar farms, as nations there have fantastic solar irradiance,” David Fishman, a manager at power sector consultancy The Lantau Group, adding that it is the policies that makes these projects unattractive for international developers and financiers.

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President Xi Jinping told the UN last month that China will no longer build new coal-fired power projects abroad, and will increase support for low-carbon projects in developing countries. It was another positive boost from China for global efforts to fight climate change, after Xi announced a year earlier that it will aim to peak carbon emission before 2030 and achieve net zero emissions by 2060.

“China has yet to put at date on [the overseas coal ban] nor did they say whether the pledge would only cover financing from policy banks only or include other commercial or state-owned banks,” said Belinda Schäpe, climate diplomacy researcher at climate risk, finance and energy policy advocacy think tank E3G.

Following Xi’s speech to the UN, Bank of China said it will no longer provide financing for new coal mining and coal-fired power projects overseas from this month.

China was the last remaining public financier of overseas coal plants after South Korea exited from the business in April and Japan committed to do so by year-end. China Development Bank and Exim Bank of China, the major players, are yet to make any commitments.

Between 2000 and 2018, Chinese investment put 106.2 gigawatts of power generation capacity online in 83 nations, or two per cent of global capacity outside China, according to research by Boston University. Another 80.3GW were under construction or planned.

Of the total, 40 per cent were coal-fired plants, 27 per cent hydro and 11 per cent renewable energy. Some 40 per cent of the coal plants were located in Southeast Asia, 31 per cent in South Asia and 16 per cent in Africa.

Latin America took up 40 per cent of Chinese hydro power investment. Europe, Central Asia and Latin America hosted most of its wind farms investment while Latin America was the top solar farms destination.

While the figures suggest there is huge potential in Southeast Asia for Chinese sponsors to convert planned coal plants to renewable projects, many deterrents need to be addressed.

They range from regulatory changes such as guaranteed power tariffs, requirements to set up equipment supply chain and land use rights, said Frank Haugwitz, the founder of Asia Europe Clean Energy (Solar) Advisory.

Grid capacity constraint is another factor.

“If the Chinese parties were to replace the [planned] coal power capacity with renewable projects, do these countries have the capability to ensure the stability of their power grids? That is the most critical issue,” said Zhao Feng, head of market intelligence and strategy at Global Wind Energy Council.

Low subsidised power prices are a barrier in Indonesia, where China has been a major backer of coal power projects. The nation has only 0.3GW of installed solar farms, far short of its targeted capacity, Lantau Group’s Fishman noted.

For Chinese financiers, improving efficiencies is important for a successful transition from funding large coal power projects to smaller renewable ones, a path well-trodden by international banks.

This is because the amount of due diligence, time spent and non-construction costs of a 50 megawatt wind farm is similar to a 600MW coal power plant, said Martin David, head of projects for Asia-Pacific at international law firm Baker McKenzie.

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