Asia’s renewables revolution

While infra investors shouldn’t expect a repeat of the $5bn Equis Energy deal any time soon, they can look forward to a wealth of renewables opportunities. Each market poses its own challenges, though.

When Singapore-based Equis Funds Group sold its renewables platform to New York-based Global Infrastructure Partners, Canadian pension PSP Investments and China’s sovereign wealth fund China Investment Corporation, the industry couldn’t help but notice.

It wasn’t just the hefty price tag, which at $5 billion has made it the largest renewables transaction to date, but also the fact that it happened in Asia, a region characterised as not offering the type of large-scale transactions found in areas such as Europe or North America.

One obvious conclusion to be drawn is that investors are committed to the sector and the region.

Andrew Affleck, founder and managing partner of Armstrong Asset Management, a Singapore-based investment firm specialising in renewables in Southeast Asia, provides a more in-depth interpretation.

“The Equis transaction has set some important benchmarks for renewable energy in Asia; the positive ripple effect is already tangible,” Affleck notes. “The first key point is the value of scale and proving the fact that it can be achievable in a five- to seven-year time frame. Secondly, in order to achieve that scale and value, the approach must include both developed and developing markets.

“As to the ripple effect, the awareness created from the Equis transaction has led other investors to explore if this business model can be replicated with other established development teams looking to scale their business in the region,” he adds.

Edgare Kerkwijk, managing director of the Asian Energy Transition Fund, a vehicle launched last year by Swiss investment firm SUSI Partners and South Pole Group, a financier focused on climate-related projects, agrees. “The Equis deal was quite unique as they managed to develop a large portfolio with a footprint across Asia-Pacific – from India to Japan to Australia,” he states.

“For any investor that wanted an immediate sizeable portfolio with full APAC coverage, this was the only opportunity available,” he says, referring to a platform that comprises 180 assets totalling 11.1GW in generating capacity across seven countries.

“We therefore will not see a similar deal soon and investors will need to build their own regional pipeline and/or consolidate existing smaller players,” he continues. “The latter is something we will see in coming years.”

Taiwan: Gateway to Asia
Allard Nooy, chief executive of InfraCo Asia, an infrastructure development and investment firm focused on frontier and emerging markets in South and Southeast Asia, believes similar deals will occur “when offshore wind in Taiwan gets off the ground, which is going to be massive,” he tells Infrastructure Investor.

How massive? Andrew Kwok, senior vice-president, private infrastructure, Asia at Swiss firm Partners Group, provides an example.

“At roughly $5 million per megawatt, the development of 5GW will require $25 billion in investment,” he says. The figures are not arbitrary. According to Kwok, nearly 11GW of projects received EIA approval last December. Of those, nearly half will be greenlit by the Taiwanese government within the next couple of months.

“It’s incredible the pace at which the European strategics have entered the local market,” Kwok comments. “And it’s very clear that they see Taiwan as the stepping stone into Asia and probably the brighter spot outside Europe. It’s really a boom market for offshore wind in Taiwan,” he says.

Partners Group is no stranger to the country. In mid-2016, it invested more than $200 million in a solar platform alongside Cathay Life Insurance, Taiwan’s largest insurer.

The Swiss firm acquired a controlling stake in the joint venture, which aims to develop 550MW of solar power by 2020. Once completed, the portfolio will be supported by 20-year power purchase agreements with Taiwan’s state-owned utility.

“We saw a very attractive policy support regime for both utility-scale solar and offshore wind,” Kwok explains. “All of the policy support mechanisms that were promised by the incoming government [of President Tsai Ing-wen] were pretty much enshrined in the Power Act of January 2017, so you had force of law. And so, all the targets for nuclear shutdown and all the impetus that attracted us were there,” he adds.

Aside from setting ambitious goals – the government plans to shut down all nuclear plants and triple its installed solar capacity to 20GW by 2025 – it also began re-zoning state-owned land for solar ground-mount installation.

Vietnam: Bankability clouds
Vietnamese solar is also attracting investor attention, but it’s not always positive.
Last September, the Vietnamese government issued its final model PPA for solar power projects, largely ignoring calls from investors, business groups and lenders to address issues such as a provision for international arbitration, termination arrangements and grid connectivity.

“We also struggle with the current form of the PPA,” InfraCo Asia’s Nooy admits. The Singapore-based firm partnered with renewable energy developer Sunseap International earlier this year, to jointly develop one of the first utility-scale solar farms in the country.
The Ninh Thuan solar project, located in the province by the same name, is a 168MW project scheduled to begin operation in mid-2019.

“The bankability issue is probably the largest issue for international lenders, at least,” Nooy says.

But, developer interest remains strong “because Vietnam offers an attractive feed-in-tariff system and an abundance of land that is ideally suited for solar power generation,” law firm Jones Day wrote in a January note.

A FiT of $0.935 per kWh (excluding VAT), has been set for solar projects achieving commercial operation before 30 June 2019 and for a 20-year term.

While the model PPA is compulsory for all solar projects, investors and developers can negotiate additional terms but no real amendment is allowed to the standard text.

Indonesia: Coal powerhouse
In Indonesia, transitioning to clean energy is even trickier. While the country has solid economic fundamentals and a strong demand for electricity it relies heavily on coal. Yet, this has not deterred the Asian Energy Transition Fund, which is aiming to raise €250 million within the next 12 months, from selecting Indonesia as one of the four countries it will invest in – Thailand, the Philippines and Vietnam being the other three.

“Single large projects are probably in the minority of where scaled investment will be achieved in the region over the next five years”

Asked whether renewables can compete with cheap coal, Kerkwijk replies: “At the moment, renewables are unable to compete with coal. The price of coal is currently around $0.05 to $0.06, while renewables are more expensive, given that the projects are relatively small and there are no economies of scale. We’ve heard that even some gas projects are being abandoned in favour of coal projects because coal is cheaper,” he adds.

While the country has set renewable energy targets, they are not binding. What’s more, state-owned utility PLN – the only power off-taker in the country – is backtracking on the renewable energy targets, since it had heavily invested in gas and coal projects based on assumptions that energy demand would grow at a rate of between 5 percent and 7 percent annually, which it hasn’t.

To spur investment in the renewables sector, Kerkwijk suggests that renewable energy targets be made mandatory and that PLN adheres to them.

“This should also be supported by the international community, which is funding PLN’s expansion programme,” he says. “Another suggestion would be to allow private companies to procure renewable energy directly, since many of them have indicated a preference to use renewable energy only.”

Armstrong’s Affleck agrees that in countries where fossil fuels are still subsidised, the implementation of renewables is still a challenge.

“Indonesia is certainly lagging other markets in the region, but ourselves and others will set important project construction milestones in the wind and solar sector during 2018, which should help catalyse change,” he says.

Armstrong Asset Management is currently investing its Southeast Asia Clean Energy fund, a $164 million vehicle targeting utility-scale renewables and resource-efficiency projects in the region. In addition to Indonesia, its primary countries of focus are Malaysia, Thailand, Vietnam and the Philippines.

Philippines: Renewables renaissance
The Philippines is another country in the region that has had a fitful path to energy transition. While the country had adopted two rounds of feed-in-tariff schemes – first in 2012 and then in 2014 – it currently has none.

Despite this lack of a framework, Nooy argues that funds are still flowing into the country’s renewables sector thanks to the enabling legislation that was passed in 2007.

“There were ceilings set on the first wave of wind, solar and hydro,” he explains. “This ceiling is now gone for both wind and solar and the market is maturing. Local lenders are much more familiar with the sector than they were before.”

While nearly half of the Philippines’ generation in 2016 was derived from coal, renewables accounted for 24 percent of the energy mix, according to the Philippines’ department of energy. Solar and wind represented only 2 percent of the renewables total, while hydropower accounted for 9 percent and geothermal stood at 12 percent.

“It’s just fantastic that you would see such a transaction in a market like the Philippines.”

The geothermal sub-sector is considered to be the most advanced segment of the country’s renewables market. Last year, it attracted the likes of Macquarie Infrastructure and Real Assets, which, along with local pension fund GSIS and Singaporean sovereign wealth fund GIC, acquired 48 percent of the listed shares of Energy Development Corporation, the world’s largest integrated geothermal company, for $1.3 billion.

MIRA funded its portion of the investment through the Macquarie Asia Infrastructure Fund I, a $2.3 billion vehicle it closed in February 2016; and MAIF II, which it is currently raising with a target of $3.25 billion. It held a first close on $3 billion in December.

“It’s just fantastic that you would see such a transaction in a market like the Philippines,” David Luboff, a senior managing director at MIRA, remarks.

It also illustrates the region’s dynamic nature.

“Around three years ago, in October 2015, when we had our first close of MAIF, we probably wouldn’t have anticipated to have had such a transaction in the fund. So, things change,” Luboff says. EDC represents the largest transaction in MAIF I.

China: The SOE advantage
China is also a very important market for the Australian infrastructure fund manager.
“We are really excited by it and renewable energy does play a big role in our thinking in terms of transactions to look at and execute in China,” Luboff explains.
MIRA has recently invested in China’s renewables sector.

“It’s a portfolio of wind assets. We’re buying into an existing platform and our capital will get exposure to those existing assets and also to a secured development pipeline,” Luboff says. “There’s a huge amount of capacity that’s coming onstream so we’re attracted to these types of opportunities because you get the existing business but we believe in the growth story and so backing a platform we can grow is obviously very valuable to us,” he adds.

Luboff declines to get more specific other than to say the assets have an operating capacity of around 220MW currently and that the acquisition was made through a follow-on vehicle to MAIF.

For other investors, the Chinese market has proved frustrating.

“China is a market that is huge by any measure and no one wants to ignore it,” Partners Group’s Kwok remarks. “But as a foreigner you’re competing against SOEs [state-owned enterprises], which have an exceptionally low cost of capital,” Kwok adds.

“It’s kind of a dual-debt market: if you’re an SOE, you’ll be able to get something that is much more efficient than what a foreigner can get.”

Then there are all the historical problems regarding payment.

InfraCo Asia’s Nooy understands. While his firm’s mandate does not include China, he has lived in the country for a number of years and has worked on numerous infrastructure projects before that while based in Hong Kong.

“The problem has been particularly [pertinent] regarding wind, whereby subsidies were not fully paid for a number of investments,” he explains. “I think that’s where the frustration from investors partly comes from. Again, this is my personal view since as InfraCo Asia we’re not mandated for China,” he reiterates.

The bigger picture
While China’s scale – both in terms of its market as well as its projects – is huge, the same does not apply to Southeast Asian markets. Some investors Infrastructure Investor has spoken to have said project size is not large enough to attract institutional capital.

Kwok, of Partners Group, agrees that for onshore wind and solar that is generally the case.

“And the way to combat that is you land a local team. You run very fast when the policy becomes supportive and you secure a large pipeline that you then develop over the next three or four years,” Kwok continues.

“That’s the only way to do it. We can’t do it with a single project.”

Affleck, on the other hand, believes that the Equis Energy deal has turned that statement on its head. “Where there is a need and the grid can manage, there are already many large-scale (50MW-plus) projects under development and construction,” he says. “We have multiple projects across Southeast Asia in this category now.

“But single large projects are probably in the minority of where scaled investment will be achieved in the region over the next five years,” Affleck concedes.

Regardless of size, however, the number of opportunities will be significant given the region’s fundamentals. Energy consumption in Southeast Asia has doubled in the past 20 years and is expected to continue to grow at 4 percent annually through 2025, according to Affleck.

In addition, energy security, resource abundance, renewables’ levelized cost of energy and environmental degradation have compelled policymakers to set regional renewable energy targets at around 23 percent of total primary energy of supply by 2025 – a significant increase from just under 10 percent in 2014, Affleck states, explaining the reasons his firm is investing in the region.

AETF’s Kerkwijk agrees that there has been a dramatic shift in the past 12 months in the region since renewable technologies are now at grid parity. “In most regional countries, wind, solar and hydro can compete with other forms of power generation,” Kerkwijk says.

“We expect this to have a positive impact as energy regulators are becoming less averse to renewables as they see that they can compete with conventional power sources.”

If grid parity fuels investment in renewables the way carbon credits did back in the early 2000s or subsidies and feed-in-tariffs have done since, then we can’t help but agree with Kerkwijk’s assertion that “this is the third revolution in renewables in Southeast Asia.”