Why the renewable energy transition is unstoppable in Southeast Asia?

22/04/2020

Daniel Mallo, Head of Natural Resources & Infrastructure for Asia Pacific at Societe Generale, shared his insights on the opportunities, trends, challenges and gamechangers for the renewable energy sector in Southeast Asia.

Despite heavy historical reliance on coal, Southeast Asia is in the middle of a transition to renewable energy. As one of the fastest-growing regions in the world, the overall outlook for renewables is undeniably bright – if you know where to look. Daniel Mallo, Head of Natural Resources & Infrastructure for Asia Pacific at Societe Generale, shared his insights on the opportunities, trends, challenges and gamechangers for the renewable energy sector in Southeast Asia.    

How is the outlook for the renewable energy sector in Southeast Asia?

The renewable energy transition is an unstoppable force and its potential in this region remains tremendous. We have countries in this region, where despite the challenges posed by the current Covid-19 outbreak, continue to show high growth rates and high demand for power. If we look at the latest projections from the Asian Development Bank, a majority of countries in Southeast Asia is expected to continue to show positive GDP growth rates and high demand for power. So firstly, the fundamentals are there for the demand side. 

Secondly, the renewable resource is generally good in the region, and thirdly, renewable energy is still an asset class that attracts many investors, local, regional investors but increasingly international investors, who are looking to deploy capital in this region for growth and higher returns. 

How does the current Covid-19 situation disrupt the renewable energy sector?

The Covid-19 outbreak has led to the disruption of the financial markets and the physical construction markets due to lockdowns in a number of countries. In the short-term, we will see more difficulties in proceeding with building renewable energy projects, access to sites and availability of workers which would lead to delays and possibly availability of renewable tariffs. We will also see a rising cost of capital with funding costs for banks going up. 
However, these disruptions do not mean the renewable energy industry will come to a stop. In the medium-term, we will face presumably delays in procurement and tender processes by the various energy utilities providers. This could lead to delays in the industry’s pipeline of projects for 2H2020 and even next year. 

What do we need to attract investors to the nascent renewable energy markets in Southeast Asia?  

What is key is a stable and transparent regulatory framework and this would make the relatively young renewable energy markets in countries like Vietnam, Indonesia and Philippines appealing to investors. As the industry grows and the projects get bigger, then cost reduction becomes the key driver beyond the initial impetus of supportive government policy, which can take the form of renewable targets or feed-in tariffs that incentivise the deployment of renewable energy technologies. 

What are some challenges to the renewable energy industry in Southeast Asia?

Short-term incentives, such as temporary feed-in tariffs, can be counterproductive as they tend to expire relatively soon. This can make it difficult and risky for developers to rush their projects to meet these tariffs’ hard deadlines, and as a result this can push the industry back a little. 

Which country in Asia is good benchmark for having a strong renewable energy industry?

Taiwan has been extremely successful in developing a renewable energy industry, primarily in offshore wind, because there was a clear resolve by the government that they wanted to move away from nuclear and coal and promote the renewable energy industry, so they put in place a transparent and permanent regulatory framework.
What is the current mood of investors raising capital for renewable energy in Southeast Asia?

Firstly, due to the current volatility in the public debt and equities markets, the cost of capital has gone up considerably. When we talk about financing a renewable energy project in Indonesia or Vietnam, it tends to take longer, several months, to put those financings in place. However, in an environment where the institutions are more conservative and tend to preserve capital or allocate capital in a reduced manner, what we continue to see is that renewable energy remains a sweet spot for investors. While institutions may shy away from commodities-based investments in light of the increased price volatility, there is still substantial liquidity available for the renewable energy space, and for solar energy in particular.

Secondly, even if the cost of financing has gone up, renewable energy projects represent a long-term investment, so there is tremendous value to finance, even at a premium, shovel-ready projects with a Power Purchase Agreement (PPA) in place and the ability to build. So, we should not base a 20-year financing decision purely on the market volatility over the past few weeks as there are likely to be opportunities in the next 1-2 years to optimise the cost of financing.

What is a gamechanger for the renewable energy sector in Southeast Asia?

A gamechanger for the wind energy sector in Southeast Asia could be going offshore. For instance, two years ago there was zero megawatts of offshore wind power generated in Taiwan, but today there is in excess of 1500 megawatts generated by projects that are currently operational or under construction (read more here). The size of those offshore wind farms can be significant; an offshore wind farm could have a capacity of several hundreds of megawatts of power which is the equivalent of many solar farms put together. So naturally we see a strong potential for offshore wind to accelerate the renewable energy transition in countries like Vietnam which have long coastlines -and good resource for offshore wind power. 

“The renewable energy transition is an unstoppable force. Asia, particularly South East Asia, is starting from a lower base but things will only accelerate from here, with global investors focusing on the region as they see greater growth potential and better returns compared to mature markets. Renewable energy is in the sweet spot with respect to the ability to raise capital, as many investors are increasingly shying away from fossil fuel investments and channeling increasingly large amounts of capital into the renewable energy space,” Daniel Mallo, Head of Natural Resources & Infrastructure for Asia Pacific at Societe Generale.

Daniel Mallo Head of Natural Resources & Infrastructure, Asia Pacific Societe Generale