It’s a fact. Renewable Energy is cheaper than imported gas and oil. What’s more, renewable energy offers South East Asia clean and secure power at fixed long term prices which are lower than the price for power generation from marginal fossil fuel on an unsubsidised base. This came out in a just-released report by Armstrong Asset Management called “Entering a New Phase of Growth: Renewable Energy in SE Asia”, which clearly shows the opportunities for investment and the cost advantages of coming clean. Read more
Report released 1 May 2012:
Renewable Energy Is Cheaper than Imported Gas and Oil
By Edward Douglas, Investment Director, Armstrong Asset Management, Singapore
Renewable energy offers South East Asia clean and secure power at fixed long term prices which are lower than the price for power generation from marginal fossil fuel on an unsubsidised base.
As part of its on-going analysis of the potential in South East Asia for renewable energy (RE), Armstrong Asset Management has produced a report “Entering a New Phase of Growth: Renewable Energy in SE Asia” which shows that there are a rising number of high quality solar PV, wind, hydro and biomass/biogas investment opportunities in all of the key markets with interest from both debt and equity providers to invest in them.
Let me provide an overview of our findings and in particular highlight what we see as the opportunities for investment in the renewable energy sector in S E Asia. Some key points first:
- It is now cheaper to produce renewable energy in some South East 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 192 GW of new power generation capacity by 2025 to maintain its projected economic growth rate of 5.8%;
- Governments in all South East Asian markets are significantly expanding their commitment to renewable energy (RE) as a proportion of the energy mix.
According to a recent study from Centre of Strategic & International Studies (CSIS), on Sustainable Energy Futures in South East Asia in December 2012, the ASEAN-5 (Thailand, Indonesia, Philippines, Vietnam and Malaysia) will need to install between 168 and 192 GW of new power generation capacity by 2025 to maintain its projected economic growth rate of 5.8%.
As with the rest of the world, where nearly 50% of newly installed electricity capacity in 2011 (208 GW) was RE, it offers clean and secure power at fixed long term prices which are now lower than the price for power generated from marginal fossil fuel supplies on an unsubsidised basis.
From 2000 through 2006, the emerging markets of ASEAN-5 generally adopted a cautious approach to the development of renewable energy due to its perceived high cost.
But the commitment to RE really took hold and became a significant component of national power development plans across the breadth of ASEAN-5 against the background of (i) the rise in oil prices, (ii) the declines in RE costs and (iii) the level of concern surrounding energy security.
Over the past 7 years, the impetus behind RE has continued to build in the Region and the factors necessary to support private investment have been established.
We believe the increase in the quality and quantity of RE project development and construction witnessed over the past 36 months is 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, 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 – 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 which, 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; in many cases, significantly cheaper.
Even good government policy takes time to implement and invariably evolves before gaining traction and achieving a critical mass. In SE Asia, significant renewable energy policies were first implemented between 2004 and 2006 due to the rising economic, political, environmental and social case for a greater emphasis on 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 SE Asian governments.
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.
As RE costs have come down and the future pricing and security risk of imported fossil fuels better appreciated, policy support in SE Asia has continued to strengthen to the point where government targets and commitment are very much in line with those in Europe and other leading international advocates of greater RE adoption.
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 has 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
We also consider how the strengthening regulatory and policy frameworks are helping RE developers and investors in SE Asia to overcome both economic and non-economic barriers and thereby accelerate the growth of RE capacity.
In its 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 which 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 make funds available to upgrade energy infrastructure;
• 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 RE 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 the Thailand, Indonesia and the Philippines markets.
Private Capital Availability
The economic attractiveness, policy support and supply chain development has allowed many sources of both equity and debt to get comfortable with the risks associated with the construction and operation of RE power assets. There is now growing interest from a wide range of 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. 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 & Depth of Opportunities
The accumulated investment into RE globally is now paying dividends globally as it translates into a positive feedback loop of volume, experience, costs and investment.
SE Asia 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, which further lowers the cost of RE, which further drives growth. Asia’s rising prominence as a focus for RE investors is detailed in a number of 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, July 2012 from IPSOS Business Consulting which illustrates a growth of RE in ASEAN from 9.8 GW of installed capacity in 2010 to a projected 53.8 GW 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.
For the reasons listed above, the depth and breadth of RE investment opportunities have improved significantly over the past 3 to 4 years. There is a rising number of high quality solar PV, wind, hydro and biomass/biogas investment opportunities in all of our key markets with interest from both debt and equity providers to invest in them.
Although the fast improving economics and compelling 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.
Due to recent rises in feed in tariffs and implementation of supportive regulations, developers are now making good progress in developing the excellent but under-exploited hydro and wind resources of the region. We therefore expect the rate of growth of these technologies to be a major boost to the sector.
We also see increasing opportunities in biogas and biomass power generation where higher tariffs and the maturing of the sector are presenting attractive opportunities for investment.
We have looked in some detail into three key SE Asia Markets – Thailand, Philippines and Indonesia – and produced country reports.
Here are a few highlights on a country by country basis:
Thailand now has more than 2800 MW of installed RE energy and has successfully achieved all of its main policy milestones to date on its path to a RE target of 25% of energy use by 2021.
Thailand is expected to announce a significant increase in the 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 SE Asia’s most liberalised and highest priced power market where many small to medium scale independent power producers already sell power to cooperatives/distributors and industrial off-takers under PPA’s.
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 IPP’s 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 utility (PLN) is obliged to purchase electricity generated from generation facilities with a capacity of more than 1MW and up to 10MW;
In 2009 (Ministry of Energy Regulation No. 31) a new tariff 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.
About Armstrong Asset Management
The Armstrong S.E. Asia Clean Energy Fund is a private equity fund that invests in small-scale renewable energy and resource efficiency projects in Southeast Asia. This strategy is driven by the high energy demand and strong market fundamentals in the region. Armstrong Asset Management will seek to provide investors with a gross return in excess of 20% per annum.
The geographic focus of the Armstrong S.E. Asia Clean Energy Fund is principally in three countries: Indonesia, Malaysia and Thailand. The Manager can allocate up to 25% of the funds gross assets outside these primary countries but within South East Asia, including the Philippines and Vietnam.
For the full report on “Entering a New Phase of Growth”, go to http://www.armstrongam.com/market-research