Global Investment Forum: Tailwinds behind EM renewables

The case for renewables as a steady source of yields in frontier markets remains subject to regulatory maturity, independence and stability, investors say.

Renewable energy sources are bound to play an increasing role in emerging markets’ power generation mixes, panelists argued at Infrastructure Investor’ Global Investment Forum in Hong Kong last week.

Jonathan Addison, investment adviser to the Sydney-headquartered Meat Industry Employees’ Superannuation Fund, observed that renewables weren’t as high on frontier markets’ agenda as other big infrastructure needs such as conventional power, water and food transport.
“The government needs to do whatever it takes to get those going – just to get power would be good,” he said.

Lubomir Varbanov, chief investment officer and head global equity at the International Finance Corporation (IFC), disagreed somewhat, arguing that a number of emerging nations already offered opportunities for solar investment. Yet he noted that “scale isn’t what most big investors may be looking for” in frontier markets, with some of the installations IFC targets providing no more than the power consumed annually by a small household.

“Renewables also includes hydro and we have seen the largest hydro projects in Brazil and Nepal”, he added. “Indonesia too offers opportunities now that it has been rerated so we are comfortable taking that risk.”

Jonathan Addison said that big hydro power generators could quite easily be connected to the grid, with some of the electricity exported to nearby countries. By contrast, he noted that solar was a “smaller scale like village and household-type of energy source and isn’t the sort of energy that can go into grid in a big way”. But as prices of panels and other inputs came down, he said, this could potentially change.

Raj Thammineni, a managing director for global real assets at JP Morgan Asset Management, confirmed that cheaper inputs made renewables increasingly attractive. He cited the example of solar plants currently being developed in the Mandalay region in Myanmar, which have a combined capacity of 300 megawatts and involve the New-York-based firm ACO Investment Group.

Varbanov explained that in China “we talk about demand for better air water and soil and that’s alongside expectation of growth in economy.”

Solar power in China had encountered two constraints other than cost, he said: curtailment and lack of regulatory certainty.

“Authorities are taking steps to address this but there are good examples of regular intervention that’s had a big impact on increased infrastructure investment. There is a lot of interest in natural gas for power generation and its opportunities in the short term but the regulatory regime is nascent. We are already considering downstream gas plays in china, for instance, but how long can it continue knowing there is no regulatory regime in place?”

Varbanov underlined that IFC has just completed financing for a first solar plant in Chile and is looking at wind in India, where thermal costs are increasing. “There are still issues regarding distribution but wind can be done there.”

He stressed that Latin America’s success in attracting private investors to infrastructure was largely due to governments carrying through their regulatory efforts over decades, and said IFC expected to generate average gross dollar returns of 20-22 percent dollar on such investments.