Energy has been hailed as one of the main heroes for developing nations and, across Asia Pacific, access to energy has contributed to rapid economic growth. However, the region accounts for almost 80 per cent of rising emissions globally, and demand for energy has increased by 80 per cent since 20001. The main culprit? Coal-fired electricity. Besides being responsible for more than half of energy use, Asia is also where many of these coal-fired power plants sit today. To compound the problem, majority of energy growth in the region has been met by increasing fossil fuel use, particularly oil and gas. Oil as a fuel has seen the fastest growth.
There is undoubtedly an urgent need to meet demand in a secure, affordable, and sustainable manner. Adopting clean energy provides a multitude of benefits. Diversifying energy sources improves energy security, resilience, affordability, and universal energy access. Clean energy like solar photovoltaics can be implemented easily in rural areas. Its costs also tend to be more resistant to global market shocks.
The Missing Pieces in the Clean Energy Puzzle
All that considered, why are clean energy projects not being implemented as fast as many would like in emerging Asia?
Investments for clean energy in Southeast Asia have been much lower than needed for its current clean energy goals. According to the International Energy Agency2, only US$9 billion was invested in clean energy projects in 2018, compared to the US$15 billion per year needed for current renewable target goals. The investments in Southeast Asia between 2014 and 2018, have been led by private capital; these made up 95 per cent of the source of investments in solar and wind projects, and 40 per cent of the source of investments in hydropower and geothermal projects.
However, there is a limit to how much the private sector can single-handedly drive the implementation of clean energy projects. Projects must first be commercially viable and bankable. This means governments need to address the need with public funds or create the enabling environment such as a clear and stable regulatory framework to attract more private capital and push for wider adoption of clean energy. The recent volatility of the economic landscape also serves to exacerbate the situation. As there is an even greater need now for more targeted use of public funds, new international and regional sources of private capital can help Southeast Asian countries meet their clean energy goals.
Another key reason emerging Asia has not maximised the potential of clean energy is the complexity around issues such as grid stability and connectivity, off-take security, and regulatory and legal frameworks. These issues involve investment risks and often require time to solve. If these risks are not well allocated to the party best able to manage them, the result could be higher financing costs and even a hindered ability to attract financing.
Governments that have created enabling policy frameworks to manage these roadblocks and risks surrounding them have seen more successful implementation of clean energy projects. Many countries in emerging Asia have been improving their policy and procurement frameworks for clean energy, but further reform is still needed to attract more private capital.
Fixing the Frameworks
Feed-in-tariff (FiT) schemes are often used as support mechanisms in the promotion of clean energy projects as they guarantee adequate compensation for the energy producers. When Vietnam announced an attractive FiT rate of US$9.35 cents per kWh for solar projects applicable for projects commissioned by 30 June 2019, it sparked international and local interest, resulting in high growth of solar energy projects in the country. However, the country’s power purchase agreement (PPA) raises a number of challenges for potential international investors due to issues such as unsuitable allocation for curtailment and termination risks. This has impacted bankability of projects and resulted in challenges for international players seeking opportunities in Vietnam. Jennifer Tay, Partner (Capital Projects & Infrastructure) of PwC Singapore, said as Vietnam transits from a FiT regime into a competitive bidding scheme for solar projects, the Vietnam Government needs to address the above-mentioned bankability issues in order to keep the interests of existing players and further attract more players in order to have a low price from the competitive bidding process. PwC contributed to the development of the "World Bank. 2019. Vietnam Solar Competitive Bidding Strategy and Framework" which provided recommendations on the strategy and framework for Vietnam’s Solar competitive bidding programme with the intention of scaling up the deployment of solar at competitive electricity purchase tariffs.
The Association of Southeast Asian Nations (ASEAN) plays an important role in this by helping to build implementation capacity through cooperation and facilitating the scaling up of renewable energy deployment. The ASEAN Plan of Action for Energy Cooperation (APAEC) sets an aspirational target to increase the component of renewable energy in the ASEAN energy mix to 23% by 20253. Key action plans include building capabilities among high-level ministers and other key implementors on clean energy policy and regulatory frameworks, investment and financing, and technology and innovation. Infrastructure Asia supported these initiatives by convening private sector expertise to share key policy considerations for bankable energy projects at the first ASEAN Workshop on Optimising Investment Frameworks on 28 May 2019.
To further support the building of implementation capacity, Infrastructure Asia and the World Bank Group are collaborating on a capacity building programme for regional government officials titled “Growing Infrastructure – Enabling and Structuring for Private Sector Participation”. This curated programme will address the oft-cited needs of key project officials in terms of developing capabilities in designing and implementing projects and creating an enabling regulatory environment for international private sector. It also intends to build capabilities both in preparing infrastructure projects for sourcing for international private financing and innovation and by providing networking and peer-to-peer learning opportunities. Aimed at senior- and mid-level government officials - who carry out the bulk of the approving and execution work for infrastructure projects - the first run of the course will focus on implementation of clean energy projects and is expected to begin in late-2020.
Sealing the Deal with Innovative Financing Solutions
To increase the number of bankable cases, innovations from the private sector can help fill some of the gaps and move clean energy projects forward. The increased corporate-led demand of clean energy in the region may present such an opportunity.
The recent trade wars have also resulted in a greater need for supply chain diversification, urging international companies to move into the region. Giles Cooper, Co-Director for law firm Duane Morris Vietnam, said that Vietnam is recognising this potential. Duane Morris had helped develop an action plan and template agreements for implementing pilot corporate PPAs in Vietnam as part of the USAID-funded Vietnam Low Emissions Energy Program. With corporate clean energy deals growing rapidly around the world, Giles expects the same to pick up in Vietnam.
Traditional finance tools used in developed markets may not be suitable for emerging markets as the projects involve different risks and may yield longer term returns. Apart from aids, grants, and green bonds and loans (read our other blogpost on Green Finance in Emerging Asia), less used solutions like loan guarantees, partial risk guarantees, and other credit enhancement approaches and instruments can help clean energy projects take off.
A “blended financing” approach can also be used to make clean energy projects bankable. For example, the Danida Sustainable Infrastructure Finance provides concessionary loans for funding of sustainable infrastructure projects which cannot otherwise be financed on commercial terms in emerging markets. In some cases, this may add the additional financing needed to push projects into bankability. To boost the financing of such as clean energy projects, Infrastructure Asia and Danida Sustainable Infrastructure Finance signed a Memorandum of Understanding in February 2020. With these unique funding mechanisms combined with the experience and regional influence of Infrastructure Asia in the region, new blended financing solutions can be employed to catalyse private finance and support the advancement of infrastructure projects.
The Final Picture – Clean Energy Projects for more
Infrastructure Asia provides high-level advisory, builds capabilities, and connects best-in-class solutions to facilitate the implementation of infrastructure like clean energy projects. Through greater collaboration between regional governments, multilateral development banks, and the private sector, we can reimagine and create sustainable, bankable, and investible infrastructure of the future, for people and economies.
This article was collated by Thomas Lu and Seth Tan and benefitted from the information and views shared by:
- Jennifer Tay, Partner (Capital Projects & Infrastructure), PWC Singapore
- Giles Cooper, Co-Director, Duanne Morris