Renewables - An Asian Source

Over the last century, non-renewable energy sources have been adopted at an exponential rate. However, in recent years, South and South-East Asia have witnessed an increased focus on the development of renewable energy projects. The driving factors behind this can be grouped into two main categories. 

By Allard Nooy, Chief Executive Officer, with contributions by Shalabh Singhania, Business Analyst and Raghav Koshik, Business Analyst, InfraCo Asia Development Pte Ltd

 

Before the onset of the industrial revolution, the world used to rely primarily on renewable energy sources such as solar, wind and hydro for most economic and commercial activities. However, as economies and population grew, the demand for electricity and transportation rose sharply. 

 

Due to this, the focus shifted from renewable energy (RE) to non-renewable energy (NRE) sources, such as coal, oil, and gas. NRE sources were adopted at an exponential rate as they could provide energy on a large scale, more reliably and at costs cheaper than RE. This uptake of NRE sources was further supported by advancements in technology, favourable regulation and an abundance of resources. Let us examine this further in South and South-East Asia, where the same trend has been prevalent for the last 30-50 years.

 

The economies of these regions have shown growth that sometimes touched double-digits, the bulk of which has been on the back of NRE and even nuclear energy. For example, in India and Indonesia, the proportion of RE is less than 30% and 11% respectively of the total energy generation capacity. However, in recent years, both regions have witnessed an increased focus on development of RE projects. This trend is supported by both the developers and financing institutions (FIs) that are focused on developing and operating RE projects. Not surprisingly, the driving factors are largely similar as those witnessed by NRE during the industrial revolution, but they can be grouped into two main categories. First is the improvement in economic returns and the second is the increased global focus on the environment and climate change, which has started to be recognised as not just a social cost but also an economic cost.

 

South and South-East Asia

 

These two regions together account for 10% of global electricity generated, of which the majority is from NRE. However, at a country level, there are a few nations such as Laos and Myanmar that are an exception to the trend due to their vast hydropower resources. Similar to other countries, most nations in these regions also relied on NRE to fuel their economic growth. Even after importing expensive fuel from overseas, NRE was cheaper than RE. This happened due to the high cost of establishing solar or wind projects and the inability to use these projects for base load power. From a revenue perspective also, either the tariffs were too low for projects to be commercially viable or there was an absence of guaranteed returns due to lack of a bankable PPAs.

 

Regional trends

 

In the last three to four years, the number of deals concluded in RE has exceeded those deals concluded in NRE. The trend is largely the same for all countries, except for those where RE has been the dominant energy source, typically due to hydro resources.

 

What has changed that is driving growth?

 

The main factors that are driving the growth in RE projects are changes in regulatory frame works, supporting legislation and favourable tariff reforms, increases in equity returns and a focus on reducing the negative environmental impact. However, in addition to the key factors, there is another driver. Financing institutions and developers have also been showing increasing interest in RE projects. It has been observed that financing institutions such as BNP Paribas and Societe Generale have started reducing funding for certain NRE projects. The motivation for this is to contribute towards the climate change programme. Developers, in addition to getting the desired returns, were motivated by Corporate Social Responsibility (CSR) funds to develop RE projects.

 

Focus on reducing the negative environmental impact

 

Over time, it has become evident that short-term economic growth always comes at the cost of long-term considerations. There is always a direct and indirect cost incurred in order to achieve the planned growth. Direct costs, in this context, imply deployment of more resources to achieve the same output. For example, direct costs could be construction of additional power plants to achieve a less than proportional rate of economic growth.

 

The indirect costs relate more to social costs. For example, increased spending on healthcare facilities to negate the harmful effects of economic growth driven by NRE. Indirect costs also impact on other economic activity such as agriculture production, seen sometimes with the devastating monsoons in India. These indirect costs were simply never captured in measuring economic growth. However, with the ever-increasing combined cost (direct and indirect) of meeting growth targets, the focus has shifted towards more sustainable and clean energy sources - RE. The main objective is reductions in economic and environmental costs (such as pollution reduction). Governments are also playing their part through strengthening legal frameworks and formulating policies that provide revenue assurance.

 

Increase in equity returns

 

Historically, returns from RE projects have been low. This has been due to multiple factors such as high capital and operational costs, lack of subsidies towards RE projects from governments, and subsidies towards fuel for NRE projects. This would naturally increase the overall life-cycle cost of RE projects and thus require a higher tariff rate per kilowatt hour (kWh) to achieve the desired return.

 

However, with changes in technology and increases in efficiency, the introduction of subsidies and grants, and better tariff rates, the overall life-cycle cost of RE projects has been reduced and made equity returns to investors attractive.

 

How has it changed?

 

Regulation

 

Governments in both the regions have started drafting or amending regulations in order to promote RE projects. Most of the countries have formed or at least issued draft versions of the regulations and laws that make the sector more attractive to developers and investors. 

 

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