Wake-up call for Asia: Covid-19, renewable energy and climate resilience
More than ever, the current Covid-19 pandemic has shifted the spotlight to climate change, inspiring corporates and governments alike to make a renewed push for greater climate resilience in this region and the rest of the world.
By Daniel Mallo, Head of Natural Resources & Infrastructure
Though we continue to see disruptions in Asia’s energy sector for certain asset classes, the availability of capital and activity in the sector remain positive giving strong impetus for the adoption of renewable energy.
Impact of Covid-19 on ongoing energy projects
Across the spectrum of asset classes, oil and gas have proven to be the most volatile, with unprecedented price shifts and negative values headlining the market for the US region at one point in time. We also see volatile price movements in the mining market in recent months. The power sector, however, has proven to be more structured and resilient as transactions typically rely on long-term agreements and less on commodity price shifts.
Nonetheless, the ongoing Covid-19 has impacted the ability to execute energy projects that are currently underway. With construction halting and factories shutting down, there has been a dramatic loss in the demand for power (with demand currently standing 20-30% below demand last year). For instance, there are significant disruptions in the ability to use and procure critical equipment (e.g. electrical equipment, transformers, wind turbines) in countries such as India, China, Malaysia and Indonesia.
Projects that are in the midst of getting permits and approvals from governments have also been affected. A lot of what we finance in the power sector, at least in Southeast Asia, results from tender processes launched by the utilities. With people in lockdown, permits and approvals are distributed less readily and this has caused some delays in kickstarting projects that have been planned before the crisis.
Though still unclear, positive signals are evident in areas that have begun their recovery, such as China’s Hubei Province and South Korea. Demand in some of these areas have improved and returned to pre-Covid-19 levels, but recovery in markets like Malaysia, Indonesia and India are not quite there yet. Right now, it is still unclear if demand will ever recover completely to its original levels and what the pace of the recovery will be.
However, governments and corporates alike have leveraged their experience of mitigating the impact of Covid-19 while pushing the climate agenda. A greater focus has been placed on implementing clean technologies and supporting projects for greater climate resilience.
This could certainly accelerate renewable energy to be a greater part of the energy mix over the next 20 years.
Strong potential remains for energy transition in Asia’s power sector
Fortunately, capital has still been available for the power sector even in peak months of the crisis. For instance, Societe Generale recently closed a first-of-its-kind 181 megawatts (MW) solar photovoltaic floating project located in Taiwan’s inter-tidal area in April. This has proven that power and renewable energy remain a sweet spot in spite of the movements in capital over recent months. There is no doubt that the cost of capital has increased, but this is not found to be catastrophic as projects are typically 20-25-year assets. Even if we find ourselves paying a little more to finance projects today, there are multiple opportunities for refinancing in a more normalized market over the asset’s lifespan.
Asia is still a region where fundamentals are highly conducive for renewable energy. Even after incorporating for the impacts of Covid-19, the Asia Pacific region still has higher growth rates than anywhere else in the world. This will continue into the recovery, as Asia’s recovery rates are projected to be greater and faster than any other region. Alongside economic growth, the demand for power will also increase. There is a lot of unmet power demand in countries like India, Indonesia and parts of Southeast Asia where ten to hundred millions of people still do not have access to power or energy.
Innovation paves the way for Asia’s renewable energy future
Societe Generale’s transaction with Marubeni Corporation’s floating solar project in Taiwan is an excellent example of an investment in the renewable energy asset space that is unique to Asia. Many industry-watchers in London, Paris and New York have been very interested in learning more because they have not seen anything like it in their markets. Floating solar projects can be a solution to the thorny issue of land acquisition, as it can be very challenging to get land in certain Asian countries. It can also be used in conjunction with hydro-energy assets. For instance, big reservoirs in Asia can be used to deploy floating solar plants to create a bigger renewable energy asset. The next bright spot for Asia is the acceleration of the offshore wind business. Asia’s market (excluding China) was practically vacant two years ago, but today we are looking into multiple projects and have even committed investments in a 140-megawatt offshore wind farm in Japan.
Investments in offshore wind energy certainly has the potential to become a regional asset class, which is in step with accelerating the energy transition.
In terms of key markets that would attract investments and financiers, Indonesia has great potential for a coal-to-green transition because of its size and its potential demand for significantly more power. Vietnam’s green transition is also likely to emerge from the pandemic stronger than before as it has been beefing up on its manufacturing capacity, likely resulting in an increase in demand for power. With its very long coastlines which would be conducive for offshore wind infrastructure, Vietnam is poised to be a major market for offshore wind energy moving forward.
In conclusion, we believe that Asia remains well-positioned, despite the current Covid-19 crisis, to lead the way in the renewable energy market, accelerating the region’s energy transition in the years to come.
