If we had to summarise investor sentiment toward the South-East Asian renewable energy market, it would be that investors are willing to put significant sums of money to work in the sector, they are buoyed by recent positive policy developments, but they remain aware that good investment opportunities are hard to come by.
Thailand is certainly one of the most promising countries in the region. “We see clarification by the Thai government on implementation strategies for renewable energy policies and that is a big step forward after years of delays and confusion,” says Gavin Smith, director of clean development at Vietnam-based investment firm Dragon Capital.
Take solar. Thailand’s solar sector had pretty much been in limbo until last year, when Thailand’s Energy Regulatory Commission launched a programme to grant 600 megawatts of solar licences to private developers. As a result, the Thai government estimates that more than $1 billion will be invested in solar this year, as it aims to increase capacity from 1.57 gigawatts (GW) in 2014 to 6GW by 2036.
Yet despite great growth potential for Thai solar, Smith stresses that investors have to be alive to the political context and be prepared to take on political risk. He adds investors have to be “extremely flexible” when looking at energy markets in the region, as they vary greatly in terms of resources, political and business environments.
John Yeap, a partner at law firm Pinsent Masons, echoes the rapid development of the solar sector – and not just in Thailand, where he was unsurprised to see oversubscribed tenders. “[Last year] was definitely the year of solar across Asia, thanks to the dramatic drop in the price of solar panels over the past five years.” He points out that a large amount of new solar capacity was also installed in China, Japan, India and Indonesia. The latter, in fact, is also seen as one of the region’s most promising markets.
Edgare Kerkwijk, managing director of renewable asset manager Asia Green Capital, argues that Indonesia offers the greatest renewables potential among South-East Asian countries. It helps that the government has ambitious renewable energy targets to match that potential, with 25 percent of all energy to come from renewables by 2025, through $38 billion in investments. At present, renewables account for between 5 to 6 percent of the energy mix.
Yeap is not so positive on the Indonesian geothermal sector, though, despite initial promise. He explains that a new geothermal law passed by the government in 2014 was expected to have stimulated the sector. However, it remained quiet last year, although he stresses geothermal is “a lot more challenging than other kinds of renewable energies [since] it takes longer to research and locate a site with stable, sufficient resources for development.”
Now that renewable policies are being clarified, a “lack of bankable projects” and poor “project implementation” emerge as two of the region’s key problems, Kerkwijk highlights. That contrasts with the ready availability of finance, which is only expected to increase now that a growing number of banks and multilateral institutions have decided to stop financing new coal-fired projects, pledging instead to channel that money to clean energy. Many export credit agencies have made similar promises during the COP21 meeting in Paris.
Considering the region’s enormous energy demands, Smith believes COP21 will help improve market conditions in developing countries, so they can better handle the “waterfall of financing” that is expected to come from developed markets.
However, as Yeap points out, coal will remain Asia’s main short-term energy source. Reliance on coal and gas will gradually decrease as government efforts to add more renewables come to fruition – but dramatic change is not expected anytime soon.