Policy plans for renewable energy project financing

Legal environment

In any project financing, whether domestic or transnational, the project is subject to the legal environment. This can result in risks to the projects that, if realised, affect the success of the project. In the past couple of years, China has enacted/amended a series of laws in relation to renewable energy projects from which project participants, particularly the project sponsor and lenders, have benefited.

Renewable Energy Law

The PRC Renewable Energy Law, which came into effect in January 2006, for the first time defines renewable energy to include hydroelectricity, wind power, solar energy, biomass energy, geothermal energy and marine energy. This law has proven to be a most influential vehicle for the promotion of cleaner energy technologies, with a stated commitment to provide special funds to finance the renewable energy industry. It offers financial incentives to stimulate renewable energy development, including discounted lending and a range of tax breaks.

Property Law

The PRC Property Law (中华人民共和国物权法) promulgated in 2007 to a large extent improves the legal and regulatory environment for secured lending. It expands the scope of security over property and redefines assets that can be mortgaged to include any property, property right, and assets associated with property (rights) unless specifically prohibited by laws or regulations. In addition, Article 181 of this law introduces the concept of security right over present and future assets – effectively creating 'floating charge', heretofore unrecognised by PRC law. The China-characterised floating charge enables a renewable energy project lender to take a security interest in all of the project company's assets then existing or thereafter acquired.

Implementation Regulations for the Enterprise Income Tax Law

The Implementing Regulations for PRC Enterprise Income Tax Law (中华人民共和国企业所得税法实施条例) were amended and restated on January 1 2008 and, in particular, provide a tax concession of three years exemption plus three years taxation at 50% of the full tax rate. This is for enterprises engaging in projects involving power stations utilising renewable energy like hydropower, wind power, marine energy, solar power and geothermal energy. The same preference can be applied to enterprises engaging in projects involving environmental protection and energy conservation, such as sewage treatment, refuse treatment, methane gas recovery, energy conservation and emissions reduction technologies, and desalination.

Foreign Investment Guidance Catalogue

The 2007 version of the Foreign Investment Guidance Catalogue continues to provide a generally favourable framework for foreign investment in many types of renewable energy projects. This includes construction and management of power stations utilising solar power, wind power, magnetic energy, geothermal energy, tidal energy, wave energy and biomass energy.

Fund sources

The most frequently used funds for renewable energy projects are from government, commercial banks and the private sector:

Government finance

Given the typical characteristics for renewable energy projects of longer maturity, larger amount and higher risks, government finance is an important channel for funding renewable energy development. The PRC Ministry of Finance issued the Interim Measures on Special Fund Management for Development of Renewable Energy in 2006 to initiate a national programme and provide financial incentives to the renewable energy industry. This was especially true for the energy utilised for oil substitution, cooling/heating in buildings and power generation. Sponsors of renewable energy projects can apply for either donor funds or discount loans with the local department of energy and the local department of finance.

Commercial bank debt

Renewable energy projects have also long been financed in the commercial banking sector. This is in part because commercial banks – especially the Big Four state-owned banks – have the funding flexibility to manage construction drawdown schedules and even multicurrency borrowings. However, these lenders favour wind power development and have less interest with other renewable energy projects due to their caution in exploring high risk industries.

Private sector finance

China's private sector is assuming a larger role in financing renewable energy projects. In many cases, public authorities face fiscal burdens of raising funding costs to a point where private financing may appear as the cheapest – or the only feasible – option. Moreover, private sector participation can bring other benefits. These include the end-user benefiting from a more competitive environment as well as mobilisation of the private sector's technological expertise and managerial competence for the public interest.

China's renewable energy industry is reshaping the market globally and policy plans aim to maintain this growth throughout the economic recession. Further preferential laws and the introduction of new financing sources for renewable energy projects can be expected.