Chapter 1
Asian markets get serious about renewables
Climate change and economics prompt profound change across the region.
Governments in East Asia are considering the use of renewables to fuel projected demand growth to varying degrees. Japan has set a renewables target of 22%–24% by 2030, while Taiwan is aiming for 20% by 2025. Collectively, the Association of Southeast Asian Nations (ASEAN) set a target last year of securing 23% of its primary energy from renewables by 2025.
While fossil fuels still retain a grip on some markets, upcoming retirements will leave a gap that could be filled by renewables across much of the region. Japan, Taiwan and South Korea, for example, face projected thermal and nuclear capacity retirements totaling 89GW between 2020 and 2030, according to Wood Mackenzie.
Addressing climate change and managing risks arising from the climate crisis are also priorities for these markets, many of which are among the most vulnerable to climate change, according to the Global Climate Risk Index 2020. All have signaled an awareness of the need to tackle climate change, most via national or regional commitments in line with Paris Agreement goals.
The recent net-zero announcements by China, Japan and South Korea, as well as bans on the use or financing of coal by countries or regions including the Philippines, have marked a new direction for this part of the world. “The past 12 months have seen a period of profound change in Asia in terms of climate,” says Assaad Razzouk, Chief Executive Officer and co-founder of Singapore-headquartered Sindicatum Renewable Energy.
“Then there was a tremendous explosion of activity in Vietnam during this period, which shows what happens when a nation gets serious about renewables. We can’t ignore that these are the drivers that are going to increasingly play out [in this region] going forward,” Razzouk adds, referring to government actions in relation to low-carbon targets and strategies.
Northeast markets such as Japan, South Korea and Taiwan have already established a firm hold on renewable energy development. For most markets in Southeast Asia, however, the shift from a coal-based primary energy approach to renewables is less about climate change and more about economics. Certainly, renewable energy is becoming more competitive with non-renewable resources in markets around the world, points out Patrice Clausse, Chief Operating Officer of AC Energy International, the energy platform of Philippines-based conglomerate Ayala Corporation.
“I also mean competitive in a slightly broader sense,” Clausse adds. “Obviously, price per kilowatt hour matters, but there is also the ability to get finance and speed to construction and generation.”
The region certainly has a very robust pipeline of clean energy projects. EY research commissioned by the European Climate Foundation (ECF) last year identified more than 800 shovel-ready clean energy projects across Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan, Thailand and Vietnam, with a total investment potential of US$316b.
Aside from this growing demand for low-carbon power, however, these markets are starkly different. From currency, to geography, to the domestic banking landscape and government attitudes toward power market policy and climate risk, each market is governed by very specific fundamentals.
There has been a tremendous explosion of activity in Vietnam during this period, which shows what happens when a nation gets serious about renewables.
In addition to the high-level emissions-reduction goals set by governments in recent years, more specific support for renewable energy development typically comes from market design changes or policy developments. Indeed, policy has already made a difference to renewables development in many markets in East Asia.
Vietnam is a prime example of how government support can boost renewable energy development in this region. It implemented a system of subsidies, starting with a feed-in tariff (FiT) Phase 1 in 2016, and introduced other support mechanisms, such as a standard power purchase agreement (PPA). Vietnam has since become the largest solar market in Southeast Asia, with solar capacity of 16.5GW as of 2020, according to IRENA. Although offshore wind remains in its infancy in Vietnam, there is strong potential based on a target of 2GW–3GW by 2030 in the Government’s recent Draft Power Development Plan VIII (PDP 8).
“The aim of creating a fairly generous FiT was to put themselves on the map and build up local experience and knowledge before reverting to normal market forces,” Clausse says. “As an approach, this seems to have worked.”
This sort of visibility is important for developers eyeing new markets, says Benjamin Dumas, Senior Manager, International Business Development at solar developer Lightsource BP. “We do not want to go into markets without medium-term policy clarity. That doesn’t help to promote continuity, which enables the market to gradually consolidate, learn through experience, and eventually reduce kilowatt-hour costs for the end buyer.”
“Taiwan, for example, has set clear goals and established a route to market with its FiT. This allows developers to create a pipeline of projects and know there is a way to sell the electricity produced in the future by these projects,” Dumas continues.
“This strong visibility, the depth of the market and the correct risk allocation on contractual arrangements also enable projects to attract non-recourse project financing at competitive terms. It is worth tackling market-specific challenges – such as high development costs and technical issues relating to geography and weather – if the market in question has this depth, visibility and clarity,” he adds.
Not all governments have followed this example, however. “In all of these [markets], regulatory changes play a role in clearing the path to getting projects permitted,” says David Ludwig, Director Asia-Pacific at German solar developer ib vogt. But he adds: “Getting access to the grid and the market remains difficult in many parts of Asia. There isn’t yet a proven route to market in many regions for non-government tenders.”
Ludwig points to the Philippines as a market offering greater clarity in this respect. Other markets at later stages — even those basking in recent success — could still encounter issues going forward. “The Vietnamese market is fully government-run, so outside the government procurement program, even if there was huge demand from corporates, it can’t be served,” he adds.
Chapter 2
Market-driven solar solutions emerge as subsidies disappear
Capacity needs to be balanced by wind and other technologies to reduce grid constraints.
At the other end of the renewable energy development spectrum, the more advanced markets in the region are now following Europe into subsidy-free territory. “Nations like Japan already have vast amounts of solar but represent what we’ve already seen in Europe — the second wave of solar where subsidies have gone, and we are now seeing the emergence of market-driven solar solutions. This is even more exciting than the first wave,” says Ludwig.
While solar certainly continues to be an attractive option in this part of the world, this type of capacity must be balanced with other technologies to reduce grid constraints or issues. Wind could provide this balance. Research from the Global Wind Energy Council (GWEC) shows that nearly 56GW of new wind power capacity was installed in Asia-Pacific last year, a 78% year-on-year increase that has brought total capacity to nearly 347GW. While mainland China accounted for more than 90% of last year’s growth, Taiwan (0.13%), Vietnam (0.22%), South Korea (0.29%) and Japan (0.81%) had individual increases of between 449MW (Japan) and 74MW (Taiwan), according to the GWEC.
For the various land-limited markets in this region, floating offshore wind also has great potential. The governments of Japan, South Korea and Taiwan have already communicated bold ambitions in this area, piquing industry interest. According to the ECF report: "The pipeline of Japan, South Korea and Taiwan can significantly exceed the national offshore wind targets, indicating strong market interest in the offshore wind sector.”
While the Japanese Government (pdf) plans to quadruple offshore wind generation capacity to 45GW by 2040, South Korea announced details of the world’s largest offshore wind power project in February 2021. Its current offshore capacity is 125MW, and this project would make up 8.2GW of its 2030 offshore wind target of 12GW.
An estimated 15GW of capacity will make Taiwan the second-largest offshore wind market in Asia-Pacific after China by 2035, according to GlobalData analysts. Market stability, including a robust PPA market, has led to the development of several major projects, including the 128MW Formosa 1 and 376MW Formosa 2, as well as Taiwan Power Company’s 109MW Changhua Phase 1 project.
As the region’s offshore wind sector has developed in recent years, bottom-fixed turbines have been used for shallow water projects of less than 50m. However, Rasmus Wandrup, Chief Technology Officer at Swancor Renewable Energy, says floating wind technology could help these markets add even more wind capacity in the future.
“Floating wind technology has advanced rapidly in the past decade and is now considered a viable solution for offshore wind development for water depths greater than 60m,” Wandrup says. “Although it is still undergoing final commercial viability, the industry has recognized significant benefits.”
He says this includes more environmentally friendly foundations, local fabrication and installation opportunities, and the ability to support larger turbines compared with traditional fixed-bottom turbines.
The Philippines shares many of the same fundamental drivers as Malaysia, alongside high electricity costs and an integrated grid with a liberalized market. Like the more developed markets of Singapore and Japan, the Philippines has a spot market for electricity.
Market participants believe the right fundamentals to drive the future growth of resources in other parts of East Asia are also present in several newer renewables markets in the region. In addition to more established markets such as South Korea, Vietnam and the Philippines, Ludwig says Malaysia will be a key area of focus for solar developer ib vogt over the next few years.
“In Malaysia, the fundamentals are very strong,” he explains. “There is high irradiation, land is available, the political system is stable, and it has a very good regional rating. Even though it is not US dollar-based revenue, the currency is very financeable, and the Government has been consistent in issuing large-scale solar tenders on an annual basis.”
Although the specifics of the market are different, the Philippines shares many of the same fundamental drivers as Malaysia, alongside high electricity costs and an integrated grid with a liberalized market. Like the more developed markets of Singapore and Japan, the Philippines has a spot market for electricity.
Referencing solar specifically, Ludwig says: “Last year, we saw the first true bilateral business-to-business PPAs in this market. We see a similar combination of fundamentals to other growth markets. Also, local financing is available, which is always important.”
By establishing infrastructure to enable market participation in state-run procurement processes, governments in these markets are taking the initial steps toward the development of robust domestic renewables sectors. As happened in the past with more advanced markets in the region, this will encourage companies, investors and lenders to develop knowledge and experience ahead of the point when market participants are able to access the grid outside of government-run auctions.
Sindicatum’s Razzouk adds that there is even potential to improve on models that have been successful for neighboring markets. “Vietnam had a tremendous explosion of activity by introducing FiTs that were high and proving itself a serious offtaker,” he says. “It was all driven by energy demand growth of 9%–10% per year … Similar factors apply to markets like Indonesia and Cambodia, which have not yet taken advantage of those dynamics. They could create even more robust regulatory frameworks and PPAs that are more bankable to attract even more capital, without having to offer FiTs and going directly to reverse auctions.”
Chapter 3
Cooperation is key if the region’s potential is to be realized
Lack of finance and cross-border grid links risk impeding the growth of renewables markets.
Supportive government policies encourage the capital market activity needed to drive renewable energy capacity growth. For example, pricing PPA contracts in the local currency as opposed to US dollars can have a significant impact on market development. “This is an important decision that will affect which capital pools a market can attract and the cost of capital, as well as the level of experience the debt providers bring to the table,” says Clausse.
Such decisions are affected by the stability of the exchange rate and strength of the local finance or banking sector. “A market like the Philippines has plenty of local liquidity, so can definitely write local currency power contracts and PPAs,” says Clausse. “In Vietnam, where the local liquidity pool is smaller, this is more challenging, but not impossible. However, for a place like Myanmar, it would probably be impossible to get long-term financing on a local currency PPA.”
To strike the right balance when deciding on contract terms, governments and markets across the region have taken a range of approaches that will attract different capital pools. Similarly, the rating or perception of the governments running these markets will affect investment appetite.
“Ideally, a renewables transaction will combine equity and non-recourse debt, with lenders considering project cash flows and the project as security,” explains Razzouk. “To do that, the banks look at the regulatory framework and, in particular, the offtake agreements, and ask: who is promising to pay for the power, and what are the terms and conditions?”
Projects in Vietnam, for example, have been affected by concerns about the Government’s ability to terminate PPAs, as well as curtailment risk. A lack of coordination in planning and grid access has led to curtailments of up to 30% in 60% of all solar projects in the Vietnamese market, according to the ECF report.
The Philippines has plenty of local liquidity, so can definitely write local currency power contracts and PPAs. In Vietnam, where the local liquidity pool is smaller, this is more challenging.
The report also found that financing is only one of several barriers to development in this region. It states: “For most projects and geographies, the main challenges are non-financial and relate to inherent regulatory, administrative and commercial issues.” In addition to a need for policy clarity and standardization of PPAs, “insufficient grid capacity, delayed grid access and curtailments during operations” all impact the cost and availability of finance. Across the region, investment in grid capacity must happen alongside any further growth in renewables capacity to bolster investor confidence.
Establishing grid links across borders would not only help to ease the integration of large volumes of renewables but also support small, or land-limited, markets — such as Singapore and South Korea — in accessing renewable energy. Slow progress on this front risks impeding the growth of these renewables markets, leaving assets stranded or grids unable to cope with supply.
For some, this kind of regional cooperation should be more of a priority. Although the Australia-ASEAN Power Link is set to supply up to 20% of Singapore’s power needs from 2027, with solar shipped from Australia, Razzouk says it’s “pretty crazy” that geographically closer markets, such as Thailand and Malaysia, are not providing this power instead.
Change is happening — Malaysia and Singapore signed an agreement in October 2020 to cooperate more on energy issues — but it’s not fast enough, according to Razzouk. “There is a lot of work happening on regional cooperation, but it needs to go from desktop paperwork to real life,” he says.
There is a clear and growing demand for renewable energy in East Asia, and private sector interest is demonstrated by the robust pipeline of more than 800 projects. While the markets in this area are incredibly diverse, continued support by governments — both domestically and across borders — could help to realize the true growth potential of the region.
Summary
There is a strong outlook for demand in the incredibly diverse power markets of East Asia, and renewable energy will be increasingly important in fulfilling this. In the past year, China (by 2060), Japan and South Korea (both by 2050) have declared net-zero carbon targets. This is likely to accelerate renewables growth, building out the supply chain, driving down technology costs and attracting international investment. With continued support by governments — domestically and across borders — the true growth potential of the region could be realized.
