In the past few decades, China has experienced rapid growth in coal power, leading to the country’s increased CO₂ emissions, which reached 8.25 billion tons in 2012 (IEA).

Climate Policy Initiative examines the financing of Chinese coal power plants, beginning with an overview of the current state of the coal power sector, with the aim of exploring financing levers which could optimize electric power growth while also greening the system. In particular, we focus on state-owned enterprises (SOEs), the state-owned and state-controlled companies which dominate the coal power industry.

Our analysis finds the following:

1. Coal in China is largely owned and financed by state-owned or controlled entities. State-owned enterprises own 61% of installed coal power capacity in China, and own controlling shares in an additional 33%.

2. Aggressive capacity targets, low-cost debt, and tariff structures have largely driven coal capacity expansion. Government policy has driven the growth of coal power, through capacity targets (300 GW of new coal power capacity in the 12^th Five Year Plan), as well as through various finance and fiscal levers designed to maintain profits for the SOE coal power generators and to enable them to reach policy targets, including:

• Electricity tariffs are adjusted to cover generation costs and other expenses while providing reasonable profits for an average plant.
• The dispatch scheme allocates roughly equal operating hours to generators in a region, with almost uniform tariff rates applied to the same type of generation, incentivizing electricity capacity expansion as a means of improving generator revenue.
• Low-cost debt capital is available to generators through state-owned banks, and new equity capital can be obtained through SOEs’ listed companies.
• SOEs’ liability to asset ratio has increased from around 70% a decade ago to around 80% today, highlighting SOEs’ reliance on debt finance.

Recent changes in the underlying economic background, including, notably, environmental and health concerns and weakened industrial demand, have led to the slowdown of coal power growth. Government support to coal power has decreased as a reflection of this shift, with adjustments in tariffs and lending rates, as well as an increase in SOE dividend requirements.

3. The reduction of government financial support has limited impact, however, because SOE financing of coal capacity expansion has become largely self-sustaining. SOEs have increasingly become financially self-sustaining through increased integration, diversification, access to public markets, and most importantly, through reinvestment of profits and tariff revenues to cover asset depreciation expenses:

• Due to the high growth rate of the asset base over the last decade, tariff revenues to cover depreciation expenses alone are now large enough to fund almost half of the total capital expenditures of SOEs.

• As spending on new coal plants now only makes up a fraction of total capital expenditures, annual tariff revenues to cover depreciation expenses are now 30% more than their annual coal power capital expenditures.

• Because of the growing financial independence of SOEs, they are now capable of developing and operating coal power without overly relying on external finance, positive profits, or continued policy support.

There may be opportunities for the government to optimize electricity power growth while also transitioning to a low-carbon system, through more sustainable coal power expansion. Adjusting the dispatch scheme, tariffs, and SOEs’ access to debt capital may have the potential to optimize coal power expansion, support SOE revenues, increase flexibility services needed in a low-carbon electricity system, and support mixed ownership reform in the electricity sector.