(Picture credit:morguefiles.com)
At an Asia Smart Grid session during SIEW, speaker Mr Shiva Susaria from ReEX Capital Asia shared that Asia as a region currently holds the largest share of renewable investments, and is also the same region where such investments are growing fastest. This is at a compound annual growth rate (CAGR) of 27 percent over the last five years (2006-2010) or 12 percent over the last three years (2008-2010).
Here, China leads the pack, with India close behind. However Asia is still highly dependent on fossil fuels for its energy needs in terms of installed generation capacity.
In terms of investment by technology, wind energy is the fastest growing and also the most dominant. Wind power is also expected to continue dominating globally over the next few years, thanks to the inherent scalability of wind energy, which allows it to serve a wide range of energy needs.
Solar energy, followed by biomass energy, is next in terms of investment by technology, with hydro energy and geothermal attracting the least investments. Southeast Asia is also mentioned as having immense potential for further renewable investments, but more robust policies and frameworks are required to provide the impetus for such investments in renewable energy projects to take place, particularly in the Philippines, Malaysia, Thailand, Indonesia and Vietnam.
Country Review: The Philippines
The Philippines is still heavily dependent on fossil fuels, which accounts for 67 percent of its installed electricity capacity as of 2010. However, renewable energy such as hydro and geothermal are growing fast, and already account for the remainder of its technology mix for electricity generation, with a 21 percent and 12 percent share, respectively. Such renewable technologies, however, still have a long way to go in realising their full potential within the Philippines.
Asset financing as well as equity investments by business houses, conglomerates and families are the most common modes of financing in renewable energy projects within the Philippines. Interest rates ranging from 8 percent to 12 percent over a 10- to 12-year tenure are typical in the country, with the Asian Development Bank (ADB) being the top lender for such projects so far.
Electricity tariffs in the Philippines are among the highest in the region at US$0.17/kWh, with additional feed-in tariffs currently under consideration for all renewable technologies. Foreign ownership is restricted to 40 percent, with few exceptions to date.
The main risks facing market players stem from the threat of sudden land acquisition by the government under existing legislation such as the Indigenous People's Rights Act (IRPA), as well as policy uncertainty such as delays in establishing a Renewables Portfolio Standard (RPS) policy and finalising the mechanism for renewable technology feed-in tariffs.
Country Review: Malaysia
Malaysia mainly relies on natural gas for its power needs--fossil fuels account for 73 percent installed electricity capacity as of 2009, with hydro holding a 26 percent share. Growth in renewable energy capacity in Malaysia has been stagnant with little to no increase experienced from 2007 through to 2009. There is, however, large potential for such renewable energy capacity to be installed in the country, with solar currently exhibiting the most potential.
Project finance, large businesses and venture capital/private equity players account for the majority of financing in renewable energy projects within Malaysia, with a 7.5 percent to 9 percent interest rate over a 10-year tenure being typical. Pure project financing is, however, still relatively hard to obtain in Malaysia from top financiers such as Maybank, the Korea Development Bank, the ADB and the Standard Chartered Bank Malaysia.
Market drivers for growth in renewable investments here are mainly attractive long-term feed-in tariffs over 16 to 21 years at a rate of US$0.27 to US$0.31 per kWh for solar energy; US$0.08 to US$0.1 per kWh for biomass; US$0.09 to US$1.0 kWh for biogas; and US$0.075 per kWh for small hydro.
However, annual capacity quotas for such feed-in tariffs continue to be relatively small, which limits growth in renewable energy projects/investments. Foreign ownership is also restricted to a maximum of 49 percent in order to qualify for feed-in tariffs and other incentives in Malaysia, further discouraging foreign investment in this area. The high wheeling costs and transmission losses inherent in the Malaysian electricity grid infrastructure are further risks that renewable energy projects in the country face.
Country Review: Thailand
Thailand is also heavily reliant on fossil fuels, with hydro being the largest source of renewable energy in terms of installed electricity capacity as of 2010. Growth in hydro-installed electricity capacity has been largely stagnant from 2008-2010, but other renewable energy are growing rapidly in Thailand with solar and biomass exhibiting the most potential to date.
Project financing, venture capital/private equity players, business houses and conglomerates as well as sugar and starch mills (focused on producing ethanol in Thailand) are the main modes of financing, with interest rates of 6.5 percent to 8 percent over a tenure of 10 years or more being common. Financing is relatively easy to obtain, with main lenders being local banks such as the Thai Military Bank (TMB), Kasikorn Bank, Siam Commercial Bank and Krung Thai Bank (KTB).
Base electricity tariffs in Thailand are low at about 2.6 baht/kwH. However, significant add-ons that vary according to factors such as the project size and renewable technology used are the main market drivers for growth in renewable energy project investments. For example, solar projects qualify for an add-on of 6.5 baht/kWh, with biomass add-ons being lower in the range of 0.5 baht/kWh to 1.5 baht/kWh.
A Renewable Portfolio Standard (RPS) in Thailand, which has set a target of 5 percent generation capacity from renewable energy technology for independent power producers that wish to sell to the Electricity Generating Authority of Thailand (EGAT), has introduced more certainty for renewable investments and will help to stimulate growth in this area.
Other main incentives include an eight-year tax holiday, import duty waivers and no restrictions on foreign ownership for projects valued above US$350,000.
Market risks exist mostly in the form of oversaturation in the solar photovoltaic (PV) market--2GW worth of applications have been received by the Thai government for an announced capacity of only 500 MW, making it four times oversubscribed. There is also growing competition for feedstock used in biomass, leading to price increases and possibly narrower margins for biomass projects.
The need to ramp up investments
There is a need to further accelerate investments in renewable energy projects in Asia as growth is still slow, although progress shown has been encouraging to date.
Alternative modes of financing also have to be explored and developed to stimulate as well as facilitate such renewable investments; early stage equity is an area where major gaps still exist. Risk management mechanisms have to be improved and built upon to enhance a project's bankability for renewable financing.
At the end of the day, a multi-dimensional approach is required, as there is no silver bullet in sight to address all problems easily. Instead, much thought needs to be given towards crafting a range of solutions tailored for areas such as efficiency in generation, distribution and consumption, and technology innovation.
BY : Chia Kang Yang, EMA staff