The rise of renewables
October 2018 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES
Financier Worldwide Magazine
October 2018 Issue
The global energy landscape is rapidly changing and in recent years has undergone substantial change. More countries (especially in Asia) are industrialising and growing, each of which has a desire to seek security of supply through many factors, including diversity of their portfolios. Electrification is a key requirement of governments to sustain economic growth, but also uncertainty over electricity prices and climate change (which has been a long-term driver) has created an impetus to move away from more traditional methods of energy supply.
Of the estimated 1.2 billion people who today lack access to modern energy services, more than 95 percent live in developing countries either in Asia or sub‑Saharan Africa. This is a substantial deficit that any developing nation will need to fix on the road to greater economic growth and industrialisation.
Any way you look at it, Asia is a key factor in the world’s pursuit of a sustainable energy future.
Current trends in Asia
Asia, the world’s largest continent, is where renewable energy use is expanding rapidly. Asia accounts for a sizable portion of the world’s GDP and the top five banks in the world are dominated by Chinese banks. In Southeast Asia, energy demand has increased by 60 percent in the past 15 years.
Asia fuelling energy and renewables growth. Along with other considerations, Asia provide an excellent platform for renewables growth. It is not beyond belief that Asia could decisively help the world significantly curb carbon emissions and mitigate climate change. This is evident throughout Asia.
One cannot ignore China’s rise as an energy powerhouse, with the ‘One Belt One Road’ initiative underpinning funding for many projects, including renewables projects. It is an important initiative, especially when taking into account other funding initiatives, such as the US-led economic initiative, which intends to expand its technology, energy and infrastructure initiatives in emerging Asia economies.
India, meanwhile, is considering more and more renewable projects to try and meet its future energy demand, sustainably and also to diversify its portfolio of energy.
There is a distinct appetite in Central Asian economies for renewable energy projects. This is in part driven by sustainability and a need to reduce imported fuels. However, it cannot be ignored that some of this growth is driven by lateral bank structuring and funding.
Deal structuring. There also appears to be a shift away from the feed-in-tariffs (FIT) mechanism.
As of 2017, we have seen a shift by the majority of Asia-Pacific economies to a more competitive selection process, especially for utility-scale solar and wind projects. Although countries vary in their approach and transparency, there is a general move toward a more competitive selective process.
Geographical trends. There is a lot of growth in each of the Asia-Pacific countries. Below, we provide a snapshot of some of them.
Under the Ministry of New and Renewable Energy, India has seen real growth in large-scale solar projects, growth in the last 10 years of around 400 percent. But it will likely not be able to reach its ambitious 2022 solar target of 100GW.
There is a strong drive from China in the renewables space, with the recent new legislation governing the sector and the One Belt One Road initiative, despite the possible slowing of its domestic market.
New Zealand remains a quiet achiever in the renewables space. Hydropower is New Zealand’s primary source of power generation, and nearly 20 percent of the country’s electricity supply comes from geothermal sources. While New Zealand has an ambitious renewables target of 90 percent by 2025, it is well on the way to achieving it.
Thailand has a strong renewable energy sector. Around US$2bn was invested in the Thai solar market in 2015.
Malaysia recognises the need for diversification. Despite large-scale solar success in 2016, solar feed-in tariffs are largely closed after a strong period of investment.
Singapore makes no pretences about its plans to continue to import natural gas to meet domestic energy needs, backed by its strong development in the liquid natural gas (LNG) sector. That said, Singapore has a growing market in rooftop solar, with some firsts in ‘solar leasing’ (which provides a great platform for the private sector to participate) and potential floating solar projects.
Indonesia’s renewable energy market has not seen any notable developments at a national level in recent times.
Sri Lanka has historically seen high levels of hydropower as the baseload of its electricity sector. It is seeking to rely on hydropower to reach its ambitious 2020 target of 60 percent renewables contribution. However, there is the perpetual issue of the unpredictability of hydrology. This has seen a drive to diversification, with several proposed solar projects in the pipeline.
Japan has set a 22-24 percent renewables contribution by 2030 (noting the nuclear target is 20-22 percent). This has contributed to continuing liberalisation of the electricity sector and growth in wind and solar sectors. Japan is driving the development of a residential rooftop solar power market.
The Republic of Korea’s renewable investments continue, but have largely been concentrated in the domestic market on two large offshore projects: a large offshore wind farm and tidal station, both near Jeju Island.
Fiji has perhaps the most ambitious renewable energy target of 100 percent by 2030. In order to facilitate this target and encourage private investment, the government has revamped its electricity legislation and reformed its state-run power company.
Coal – has it plateaued?
While renewables costs continue to fall, sustained investment levels in coal and natural gas across Asia-Pacific suggest that varied energy mixes will likely be the norm across the region for years to come – and the possible plateau of the growth of coal as a future fuel source.
There has been a lot of uncertainty around coal as a primary fuel source for several reasons, including a global shift away from the development of coal-fired power stations, restricted financing for coal-fired projects and development, and the Paris Agreement which was signed on 12 December 2015 and entered into force on 4 November 2016.
Growth in the renewables sector is essential for meeting the ambitious global objectives for carbon mitigation in the Paris Agreement.
Many countries have renewed carbon reduction targets, which vary in ambition but all with the effect of increasing growth in renewable energy. There has been growing momentum since the Paris Agreement, with renewable investment hitting new records. Indeed, by March 2016, investment in renewable energy had doubled that of coal and gas. A surge in global investments in renewables to around US$500bn annually from 2020 will be critical for meeting the goals of the Paris Agreement and securing a safe climate future.
That said, coal will continue to be an important source of fuel for many Asian countries that either have an abundance of coal resources or that are committed to coal (through developed or developing coal-fired power solutions).
The changing nature of oil and gas companies
The nature of energy companies is ever changing. For example, we are seeing fund-backed oil and gas companies and more recently (on the back of the pressure from the Paris Agreement), many conventional oil & gas and power players rebranding themselves as ‘energy’ companies with renewable businesses. Shell, for instance, has established ‘New Energies’ – a division created to invest in renewable and low-carbon power solutions. ENGIE is committing to “reach, by 2021, 3GW of installed capacity of onshore wind farms and 2.2GW of solar photovoltaic power plants”, according to Gwenaëlle Huet, chief executive of France Renewable Energy.
In view of these developments, we are likely to see increasing competition for both greenfield and brownfield renewable assets in Asia-Pacific; and the market is likely to see some consolidation as large players enter into or expand in the sector.
Marc Rathbone is a partner at CMS. He can be contacted on +65 6720 8278 or by email: marc.rathbone@cms-cmno.com.
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Marc Rathbone
CMS
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