Changes in the investment landscape in the Asia-Pacific region present new challenges for countries that rely on fossil fuels as their main energy source. Some developing countries in the region were previously insulated to a degree from the growing socio-political pressure to abandon fossil fuels. Many Asia-based financial institutions and export credit agencies, however, have recently joined the ranks of European, American and Australian financial institutions in exiting fossil fuels and shifting their focus to renewable energy projects. This shift has increased countries’ appetite to diversify energy sources and reduce reliance on fossil fuel and non-renewables in the region.
By way of example, Japan’s Mitsubishi UFJ Financial Group (one of the world’s largest banks by assets) ceased financing new coal-fired power projects as of July 2019 and Singapore-headquartered Oversea-Chinese Banking Corporation (the world’s largest investor in overseas coal projects) has recently announced that it is phasing out financing for coal-power plants. The pressure for change is now also coming from new directions — Suncorp became the latest Australian insurer to end coverage for new coal-mining and coal-power projects.
With this backdrop, we consider how a number of countries in the Asia-Pacific region are looking to diversify their energy sources.
When President Joko “Jokowi” Widodo came into office in 2014, he issued a mandate to add 35,000 MW of installed capacity to Indonesia’s power grid by 2019. Coal-fired powered electricity generation plants (especially those employing ultra- supercritical technology) have filled a substantial portion of this quota, such as the 2,000MW Central Java project, 1,000MW Cirebon Expansion IPP and 200MW Kalsel project in South Kalimantan. Recent initiatives suggest, however, that the Indonesian government is re-doubling its efforts to meet Jokowi’s target with renewable energy developments.
Many Asia-based financial institutions and export credit agencies … have recently joined the ranks of European, American and Australian financial institutions in exiting fossil fuels and shifting their focus to renewable energy projects.
In the last couple of years, a number of geothermal power plants (such as the 220MW Rantau Dedap project and the 80MW Muara Laboh project) and gas-fired powered plants (such as the 275 MW Riau IPP project) suc- cessfully secured financing and have begun construction. With President Jokowi winning re-election in April 2019 for another 5-year term, it seems likely this trend will continue. Nonetheless, the PLN (the Indonesian state-owned power offtaker) has conceded that it will remain reliant on coal as its main fuel for generating power, on the premise that the price of power generated by coal-fired plants is more economical.
As a point of comparison, Taiwan has made great strides in its diversifica- tion efforts over the last few years. In May 2019, the US$2.75 billion Yunlin offshore wind project — the largest offshore wind project financing in Asia — achieved financial close. Yunlin illustrates Taiwan’s success in making itself an attractive jurisdiction for investors and financiers with its deliberate agenda to diversify its energy sources, with a view to reducing dependence on nuclear power and coal. In Taiwan, renewable energy sources (including solar and hydro, in addition to wind) have the added advantage of being home-grown, whereas, in contrast to Indonesia with its ready access to coal, fossil fuels are predominantly imported.
With its robust investment environment and the political support extended to the renewables industry, many tout Taiwan’s success as a potential blueprint for the region.
“No country has put itself in a better position to become the world’s renewable energy superpower than China” said a recent report issued by the Global Commission on the Geopolitics of Energy Transformation. Another report by the UN’s renewable energy advisory body, REN21, showed that China led renewable energy investments worldwide for the seventh successive year, contributing to almost a third of the global renewable investment in 2018. Despite this positive press and the surge in domestic wind and solar power investments, China also remains the world’s largest producer of carbon emissions. Given the massive scale of China’s investments domestically and abroad, and growing dominance with renewable energy technology, it could be that China will shape global trends and spur a faster transition toward renewable energy.
With a rising demand for electricity to power its growing economy, Vietnam presents a promising opportunity for investors. The government has a deliberate agenda to expand power generation capacity and it is expected that a significant portion of this will be funded by private investment. In 2016, the Vietnamese government issued the Master Plan 7, setting out its vision for renewable energy projects to account for 10% of the country’s overall electricity capacity by 2020 and 21% by 2030. In support of these targets, the government has rolled out a series of regulations aimed at clarifying the legal framework and providing incentives for the development of renewable energy projects. These initiatives have already generated results with a number of projects getting the green light to advance. One such project is the Banpu Vinh Cau 80 MW wind power project which received an Investment Registration Certificate in July 2018 and should achieve commercial operation soon.
Another energy-hungry country, India, has a strong natural advantage in renewables as it receives (on average) twice as much sunshine as European countries, making solar a particularly attractive source of power. However, India also continues to rely on its cheap and abundant coal reserves, the fifth-largest in the world. While the government has set a target of having renewable energy capacity of at least 500 GW (40% of total capacity) by 2030 (up from 357 GW or 22% of total capacity), the investment environment continues to pose challenges. Significantly higher capital expenditure and project costs (compared to conventional power projects) hamper growth in the renewables sector. Without express government support, projects looking to acquire the significant parcels of land required for installation of solar facilities are also likely to suffer delays and protracted negotiations.
One of the first countries to have set a Renewable Energy Target, Australia is set to meet its target of 23.5 per cent renewable energy by 2020. A growing trend in the renewables sector in Australia is a new business model where power output is sold directly to end-users. For example, the Australian supermarket giant Coles, has signed a power purchase agreement to purchase over 70% of the 220 GW hours of electricity that will be gener- ated by three solar farms to be built and operated by UK-based renewables developer Metka EGN. An investor friendly jurisdiction with a robust legal system, Australia continues to present an attractive investment proposition for certain sponsors and financiers. Australia’s Foreign Investment Review Board has also introduced a slew of clarifications to its foreign investment rules which improve certainty and make it easier for foreign investors to land into Australia.
THE FUTURE OF DIVERSIFICATION
We expect this trend of reduced reliance on non-renewable energy sources to continue owing to the ‘push factor’ of a more challenging investment landscape for coal and a ‘pull factor’ of the falling cost of renewables. However, continued strong political support is necessary to incentivize private investments and to shift reliance from traditional energy sources.