Southeast Asia is showing a rising number of high quality investment opportunities in renewable energy (RE) sources, according to a new report.
Produced by clean energy investment firm Armstrong Asset Management, the report entitled, Entering a New Phase of Growth: Renewable Energy in SE Asia, analysed the region for its potential for renewable energy, citing opportunities in solar photovoltaics (PV), wind, hydro and biomass or biogas, and interest from both debt and equity providers to invest in them.
Compared to the price for power generation from marginal fossil fuel on an unsubsidised base, renewable energy offers Southeast Asia clean and secure power at fixed long-term rates that are lower in price.
Here is an overview of the report’s findings, together with some highlights of the investment opportunities and why renewable energy is worth investing on. Some key points first:
- It is now cheaper to produce renewable energy in some Southeast Asia countries than bulk grid power from imported natural gas and fuel oil;
- The cost advantage of renewable energy continues to grow in SE Asia as pricing, environmental and security risks associated with imported fossil fuels are more accurately evaluated;
- SE Asia has excellent renewable resources but rely on a high level of fuel oil for power generation due to their sprawling geographies and inadequate grid infrastructure;
- ASEAN-5 (Thailand, Indonesia, Philippines, Vietnam and Malaysia) will need to install between 168 and 192GW of new power generation capacity by 2025 to maintain its projected economic growth rate of 5.8%;
- Governments in all Southeast Asian markets are significantly expanding their commitment to renewable energy as a proportion of the energy mix.
From 2000 through 2006, however, the emerging markets of ASEAN-5 generally adopted a cautious approach to the development of renewable energy due to its perceived high cost.
The commitment to renewable energy only took hold and became a significant component of national power development plans in the ASEAN-5 against the background of (i) the rise in oil prices, (ii) the decline in RE costs and (iii) the level of concern surrounding energy security.
Over the past seven years, the impetus behind RE has continued to build in the region and the factors necessary to support private investment have been established.
The increase in the quality and quantity of RE project development and construction over the past 36 months is added confirmation that the sector is already in a phase of robust and sustainable growth.
The first and primary driver of recent growth is cost. In a growing majority of situations, RE is simply cheaper than the alternatives, and so utilities, distributors, independent power producers (IPPs) and end consumers are demanding more. In the case of solar, wind and hydro, it is a cost that is essentially fixed for 25 to 40 years.
Investors in fossil fuelled power plants on the other hand, must accept significant long-term fuel pricing and environmental risks, which are increasingly being factored into policy and buyer decisions.
SE Asia has excellent renewable resources that when combined with reductions in RE system costs, have resulted in RE now being cheaper than bulk grid power from imported natural gas and fuel oil. And in many cases, it is significantly cheaper.
Even good government policy takes time to implement and invariably evolves before gaining traction and achieving a critical mass. In Southeast Asia, significant renewable energy policies were first implemented between 2004 and 2006 due to the rising economic, political, environmental and social case for its deployment.
The high cost (as a proportion of GDP) and dependence on fossil fuel imports had become a rising headwind to economic growth and a key security concern for all governments in the region.
The commitment to renewable energy only took hold and became a significant component of national power development plans in the ASEAN-5 against the background of the rise in oil prices, decline in RE costs, and the level of concern surrounding energy security.
Energy policy rose to the top of the government agenda and policy makers started paying particular attention to the advances being made elsewhere in the world with regards to RE.
Thailand, the Philippines and Indonesia have committed to RE targets from 2025 to 2030. The successful installation and operation of projects following early initiatives, the maturing of supply chains and the readiness of private financing sources have allowed governments to commit more aggressively to a competitively priced and credible path of RE growth which would see these targets reached.
Lowering of non-economic barriers to investment in RE
In the 2010 working paper, Deploying Renewables in Southeast Asia – Trends and Potentials, the International Energy Agency (IEA) states:
“Substantial non-economic barriers, such as infrastructure and grid-related problems and regulatory and administrative hurdles, continue to be a major impediment to the deployment of renewables. These barriers can have high economic impacts by increasing the return on investment required by financiers, especially if their impact is primarily in the earlier investment-intensive project cycle phases. Investors are likely to require a high-risk premium to accept the possibility of policy changes affecting renewable energy project development.”
Support from policy makers can be broken down into four main categories: tariffs that better reflect the risks and are therefore able to attract capital; implementation of special fast track administrative and regulatory processes for RE; removal or reduction in subsidies extended to traditional energy (fossil fuels) or power generated from them (which strengthens budgets and makes funds available to upgrade energy infrastructure); and, implementation of measures and incentives which align the interests of incumbent utilities and grid operators with RE developers and investors.
Supply chain readiness
The quality of development and the subsequent execution risks of green field construction of renewable energy projects are very much tied to the availability of experienced firms and individuals. As early policy initiatives took hold and the fundamental drivers of RE continued to improve, a critical mass was reached in solar, wind and small hydro, which allowed supply chains to mature to the point of sustainability.
Experienced and proven project development groups, world-leading RE equipment suppliers and a wide range of internationally recognised service providers now have local operations in SE Asia serving the growth in Thailand, Indonesia and the Philippines.
Private capital availability
Economic attractiveness, policy support and supply chain development have allowed many sources of both equity and debt to get comfortable with the risks associated with the construction and operation of RE power assets. Now, there is growing interest from various financing sources to invest in the sector. On the equity side, these include PE funds, corporates and increasingly, family offices.
Growth of new build accelerating
There has been significant and sustained growth in the construction and development of solar, wind and hydro projects across SE Asia over the past five years. Again, the quality of the resource and the increasing strength of policy support are driving the deployment of each technology in each market. Policy support means both financial incentives and the removal of technical (non-economic) barriers to entry.
Breadth and depth of opportunities
The accumulated investment into renewable energy is now paying dividends globally as it translates into a virtuous cycle of volume, experience, costs and investment.
SE Asia, specifically, is moving into its own phase of positive feedback where the larger and more established the broader Asia market becomes, the higher the quality of projects and management teams turn out, which lowers the cost of RE, and drives growth even further.
Along with the Armstrong Asset Management report, Asia’s rising prominence as a focus for RE investors is detailed in a number of other recent reports and market data releases including:
- Global Trends in Renewable Energy Investment 2012 from UNEP Collaborating Centre for Climate & Sustainable Energy Finance, which cites a 21% growth in investment from US$71 billion in 2010 to US$86 in 2011, making Asia second only to Europe as a region for RE investment;
- Meeting the Energy Challenge in South East Asia: A Paper on Renewable Energy, from IPSOS Business Consulting which illustrates a growth of RE in ASEAN from 9.8GW of installed capacity in 2010 to a projected 53.8GW by 2030 based on a consolidation of official government data;
- market research from IHS, the global energy research firm, which projects Asia as the largest solar PV market globally in 2013, compensating for the slow-down in Europe.
Although the fast improving economics and compellingly low-risk characteristics of solar PV have made it a recent focus for many RE investors looking at SE Asia, small hydro and wind remain the lowest cost sources of RE, and therefore, of high interest to policy makers.
Developers are now making good progress in developing these excellent but under-exploited resources thanks to recent rises in feed-in tariffs and implementation of supportive regulations. Therefore, the rate of growth of these hydro and wind technologies is expected to be a major boost to the sector.
Similarly, there are increasing opportunities in biogas and biomass power generation, where higher tariffs and the maturing of the sector are presenting attractive benefits to investment.
And across Southeast Asia, here are a few highlights of an in-depth look into three key markets: Thailand, Philippines and Indonesia.
Thailand, at present, has more than 2800MW of installed renewable energy. The country has successfully achieved all of its main policy milestones on its path to a RE target of 25 per cent of energy use by 2021. It is also expected to announce a significant increase in feed-in tariff for biomass-based power generation from approximately THB 3.8/kWh to THB 4.5/kWh to further stimulate development of the sector.
The Philippines is Southeast Asia’s most liberalised and highest priced power market where many small- to medium-scale independent power producers already sell power to cooperatives or distributors and industrial off-takers under power purchase agreements (PPAs).
Following the steep drop in the system costs of solar PV and the increasing availability of development funding for run-of-river hydro and wind projects, developers and IPPs are increasingly looking at small scale RE solutions to meet the power needs of their off-takers.
Indonesia has had a regulatory framework for renewable energy in place since 2006 under which the state-owned utility (PLN) is obliged to purchase electricity generated from generation facilities with a capacity of more than 1MW and up to 10MW.
In 2009 a new tariff (Ministry of Energy Regulation No. 31) was introduced for mini-hydro projects, together with measures to help deal with non-economic barriers (including a standard form PPA). This applies to projects with a capacity of more than 1MW and up to 10MW.
Edward Douglas is an investment director at Armstrong Asset Management Singapore, an independent clean energy assets managing firm that invests in small-scale renewable energy and resource efficiency projects in the region. Click here to read the full report.