Following the "fire sale" of new energy assets by State Power Investment Corporation (SPIC), recently, two more state-owned enterprises (SOEs) have been reported to be divesting their new energy assets, sparking wave after wave of market attention.

Huaxia Energy Network (public account hxny3060) has noticed that on September 27th, within the same day, China General Nuclear Power Group (CGN) first sold 100% of the equity of Shenzhen New Energy Company, followed by China Railway Group (CRRC) selling 40% of the equity of Hunan New Energy Company, which is also all the equity that CRRC holds in that company.

Recently, a summary and analysis at a mid-year work conference of a certain SOE stated that in recent years, nearly 40% of newly added new energy projects have been unable to achieve the promised rate of return, with some projects suffering continuous losses, and even incurring losses from the start of production, presenting a situation where "increase in quantity does not lead to increased profits" for new energy. For the subsequent development of new energy projects, "there will be a strong push to optimize the new energy production control system and to calculate the economic account of input and output."

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From the above, it is evident that the direction of SOEs is very clear: on one hand, they are accelerating the sale of existing new energy assets with low quality, and on the other hand, they are becoming increasingly meticulous in calculating the "economic account" in the development of new energy projects.

Since power SOEs are the absolute main force in the development of new energy in China, any of their actions and rumors about tightening new energy projects all touch the sensitive market nerves.

So, what's next, will power SOEs continue to tighten their new energy business? What are the underlying reasons for the subtle attitude evolution of power SOEs towards new energy? How will the adjustment of the pace of new energy development by power SOEs stir the market?

Controversy over the "tightening of new energy" direction

There is no lack of controversy over whether power SOEs are currently or will be tightening new energy.

Those who hold the contraction view have ample factual basis. Since August 2024, the "green electricity giant" SPIC Group has "led" the way in selling new energy assets, with its Inner Mongolia, Hebei, Shanghai, and Chongqing companies, among others, transferring and selling photovoltaic power stations.

In addition to SPIC, since the second half of this year, there has been a noticeable increase in SOEs listing photovoltaic power stations for sale. According to incomplete statistics, to date, there have been 30 new energy companies listing for equity transfer, involving SOEs such as: SPIC, State Grid, Three Gorges, China Power Construction, CGN, China Coal, CRRC, China Coal Geology Bureau, Dongfang Electric Corporation, etc.Some industry insiders, however, believe there is no need for excessive panic. One of their arguments is that while selling off assets, state-owned electric power companies are also initiating tenders for the acquisition of photovoltaic power station projects, including technical and property due diligence. In just August and September, companies such as the State Energy Group, Huaneng, China National Nuclear Corporation (CNNC), and Huadian have initiated more than 3GW of photovoltaic power station acquisition due diligence tenders.

Furthermore, since the beginning of this year, several large-scale base projects by the State Energy Group, Three Gorges, Waneng, Huaneng, Huadian, China Resources, PowerChina, and the State Power Investment Corporation have successively started construction. According to incomplete statistics, more than 34GW of photovoltaic large base projects have already commenced construction.

Both sides have their arguments. In reality, the evidence presented by both sides is merely a single aspect of a complex issue, each with limitations that are insufficient to support their conclusions.

Since the beginning of the year, state-owned enterprises have indeed been successively starting large base projects, but many of these projects were determined and completed in tenders in the previous two years. Many projects have started this year, and many more will start next year. The total capacity of wind and photovoltaic large base projects is 600GW, which is ultimately to be completed and connected to the grid before 2030. Therefore, judging whether state-owned enterprises are contracting new energy based solely on the start of projects is not a sufficient reason.

Similarly, it is also a hasty conclusion to determine that state-owned enterprises will contract new energy development based solely on the intensive sale of photovoltaic assets by 30 companies under their umbrella. After all, China's "dual carbon" goals are highly certain, and the path is first to promote "wind and photovoltaic replacement of coal" in terms of power sources. Recently, Qian Zhimin, the former chairman of the State Power Investment Corporation, estimated that China's new energy installation will reach 270GW by 2030, which means the future incremental space is more than double.

In fact, a more objective and rational judgment is that behind the sale of photovoltaic power stations by 30 state-owned enterprises and state-owned enterprises, these companies are "slimming down and reducing swelling" for their new energy assets.

For example, the Shandong Narentai Company sold by the State Power Investment Corporation has a net asset return rate of only 1.8% in 2023, which is an inefficient asset. As is well known, the photovoltaic electricity price in Shandong is notoriously "competitive," hence the State Power Investment Corporation is not planning to develop new photovoltaic projects in Shandong.

The central government has become alert to the "obesity and bloating" of new energy businesses of state-owned enterprises. In July this year, the central inspection team pointed out during the inspection of the State Power Investment Corporation that the photovoltaic industry of the State Power Investment Corporation is "big but not strong," and the corresponding rectification plan requires "refining the existing stock and optimizing the incremental."

That is to say, the next step in new energy development for state-owned enterprises is not a simple issue of contraction or expansion. It is about "refining the existing stock and optimizing the incremental," slimming down and strengthening the body, and getting rid of unprofitable existing assets, as well as abandoning unprofitable incremental assets when necessary.

State-owned enterprises need to pass the "assessment" barrier.The shift in attitude towards new energy business by central state-owned enterprises (SOEs) must first pay attention to the proposition of "refining the existing stock and optimizing the incremental growth," as this involves how the State-owned Assets Supervision and Administration Commission (SASAC) will assess the performance of central SOEs in the power sector.

Following the introduction of the "dual carbon" goals, on December 30, 2021, SASAC published the "Guiding Opinions on Promoting High-Quality Development of Central Enterprises and Achieving Carbon Peak and Carbon Neutrality," requiring central SOEs to achieve a renewable energy power generation capacity ratio of over 50% by 2025.

As of now, apart from the State Energy Investment Corporation, several other power central SOEs have either met or are close to achieving this assessment target: the State Power Investment Corporation's clean energy installation ratio has reached 70.26%; China Huaneng Group is at 49%; China Huadian Corporation is at 52.4%; and Datang Corporation is at 47%.

However, SASAC's assessment of central SOEs includes other indicators, some of which are even more important than achieving the installation ratio. In January 2022, at a press conference held by the State Council Information Office, SASAC proposed the goal of "two increases, one control, and three improvements" for the target assessment of central SOEs' operational development.

Specifically, "two increases" refer to the profit total and net profit growth rates being higher than the national economic growth rate; "one control" means that the asset-liability ratio should be kept within 65%; "three improvements" refer to a further increase of 0.1 percentage points in the operating income profit rate, a 5% increase in labor productivity per employee, and a further increase in R&D funding.

Firstly, let's consider the indicator that the asset-liability ratio should be controlled within 65%. As of the first half of 2024, China Huaneng Group's asset-liability ratio was 70.03%, Datang Corporation's was 70.50%, and China Huadian Corporation's was 68.23%. The State Power Investment Corporation did not disclose its ratio, but it is believed to be above 70%. In contrast, the State Energy Investment Corporation, which is the most profitable in coal, has the most coal-fired power, and the lowest clean energy installation ratio, has an asset-liability ratio of only 59.35%.

New energy development requires a very high level of investment. The high asset-liability ratio of power SOEs is not unrelated to the rapid development of new energy in the past two years. As of the first half of 2024, the new energy installation of the five major SOEs reached 400 million kilowatts, most of which were constructed in the last two to three years, with a total investment close to 2 trillion yuan. This does not include subsequent projects of large-scale wind and solar power bases, and "desert and Gobi" bases.

The power SOEs' power source investment generally adopts a model of 20% capital and 80% bank loans. Under such circumstances, it is difficult to control the asset-liability ratio within 65%. On the one hand, to achieve a transformation of the installation structure, continuous investment is required, while on the other hand, the debt ratio must be controlled.

Secondly, let's look at the profitability of power SOEs.

For power SOEs to effectively control the asset-liability ratio, they must rely heavily on their own project capital. Project capital undoubtedly comes from the profits of power SOEs. However, power SOEs have just experienced huge losses in coal-fired power in 2021 and 2022, and due to various reasons, it is difficult to predict significant profits from coal-fired power in the future. Where will the substantial capital investment come from?Not long ago, Chen Zongfa, the chief expert of the China Electricity Council, wrote an article pointing out that as of the end of June 2024, about 30% of the national coal-fired power generation still faced losses. Although coal-fired power generation has recently experienced a "small spring," the huge losses formed by some coal-fired power enterprises in the early stage have not been digested in time, resulting in serious insolvency and high dependence on entrusted loans, shareholder financing, and group guarantees.

Another major source of profit for state-owned electric power companies is the growing installed capacity of new energy. However, under the unclear situation of new energy consumption electricity and electricity price policy, the profitability of new energy projects is still full of uncertainty at present.

From the above two points, state-owned enterprises are facing great pressure in assessment. This also requires state-owned enterprises to no longer be "extravagant" in the development of new energy, and they must be meticulous and choose the best.

The market impact of "keeping detailed accounts"

Under the pressure of debt ratio and profit assessment indicators, state-owned enterprises do not need too much reminder from the central inspection team, and they must take the initiative to "refine the stock and optimize the increment". They can no longer "pick up everything in the basket". This subtle change in attitude will stir up the "spring water" of new energy development.

Firstly, state-owned electric power companies will continue to optimize the structure of new energy development, and the attitude of taking projects and negotiating terms will change.

The poor performance of existing projects needs to be continuously sold off, which is not only to reduce future "burdens" but also to promptly recover funds to cope with the assessment of asset-liability ratio and raise capital for future projects.

For future incremental new energy projects, which provinces to take projects and which provinces to avoid projects, the increasingly "picky" state-owned electric power companies will also think carefully, with the ultimate goal of significantly optimizing the layout structure of project development. Which provinces have stronger new energy consumption capacity, which provinces have more friendly time-of-use electricity prices, and which regions have more assured power grid construction, will inevitably be more favored by state-owned electric power companies.

In this process, the bargaining power of state-owned electric power companies relative to local governments will also be enhanced. In the past, in the process of fighting for new energy projects, there has been a long-term interest game between state-owned electric power companies and local governments - such as the need to do industrial supporting, build bridges, roads, schools, and public donations. In the future, it may not be the case, and state-owned electric power companies may no longer agree if the "asking price" is too high.

Secondly, state-owned electric power companies that adjust the pace of new energy development and construction will also enhance their bargaining power in the procurement process of photovoltaic components and wind turbine equipment. In other words, the pressure to lower prices will be more severe.An internal employee from a state-owned energy construction company once expressed to Huaxia Energy Network that it is becoming increasingly difficult to make money from the construction of new energy projects undertaken by state-owned enterprises (SOEs).

For industry professionals, it is particularly important to pay attention to the impact on the prices of photovoltaic (PV) modules and wind turbine equipment.

Currently, the market environment for PV modules and wind turbine equipment is characterized by "strong supply and weak demand." If this is compounded by the selective purchasing behavior of SOEs, which can be described as "picking the best and leaving the rest," it will exert greater pressure on the prices of wind and photovoltaic equipment. On the positive side, when SOEs purchase equipment, they will also place greater emphasis on product quality, which is undoubtedly beneficial for the success of high-quality production capacities.

Furthermore, SOEs will become increasingly disinterested in small and scattered projects, especially distributed projects. For instance, during the first half of this year, China Huaneng Group adjusted its focus on the development of photovoltaics, suspending the advancement of distributed photovoltaics and clarifying the preferential development of centralized photovoltaics.

It should be said that the focus of SOEs in new energy development was never on distributed photovoltaics. The resources for distributed photovoltaics are relatively dispersed, and SOEs, which are accustomed to large-scale centralized development of new energy, find it difficult to manage. Centralized development is more suitable for the appetite of SOEs.

In addition, due to the concentrated generation period of photovoltaic power, it lacks competitive advantage in the electricity market. Therefore, SOEs will also pay more attention to a reasonable combination of wind and photovoltaic resources in their subsequent preferential development of centralized new energy.

In summary, China's "dual-carbon" transition, with its goals and methods, is highly determined. Currently, China's installed capacity of wind and photovoltaic new energy has reached 1.2 billion kilowatts; by 2030, China's installed capacity of wind and photovoltaic new energy will double; and by 2060, to achieve carbon neutrality, China's installed capacity of wind and photovoltaic new energy will grow to around 6 billion kilowatts.

Even though SOEs are currently making phased adjustments to the pace of new energy development, the potential for new energy installation in China remains enormous. SOEs are and will continue to be the "main force" in the future, and there is still much to look forward to.

The norm for the foreseeable future will be the continuous optimization of SOEs' new energy development, focusing on "refining the existing and improving the new," and keeping a close eye on the economic accounts. Development will not be blind and extensive without regard for benefits. New energy companies that wish to continue doing business with SOEs will need to shift their thinking accordingly.