Financing renewable energy in Asia-
Energy needs in Asia are huge. If the region continues its high rate of growth, Asia’s share of world energy consumption could rise from around a third in 2010 to more than half by 2035. Raw energy consumption in the region will more than double. Meeting these needs in a sustainable way will require a shift in investment away from fossil fuels towards renewable energy sources.
Despite the growing consensus on the need for renewables, both governments and investors continue to question the affordability and profitability of large-scale investments. Significant upfront costs and long payback periods of renewable energy projects have often discouraged investors from financing these projects. And with government finances already overstretched in many countries, the public sector will find it hard to meet the large financing needs of renewable energy.
Improving the financing mechanisms for renewable energy projects is essential to lower financing costs and make the transition towards renewable energy more affordable – for investors, governments and consumers. The large pool of investable funds available in Asia suggests that the private sector can play a major role in providing financing.
While banks have been the traditional route for financing renewable energy projects, new Basel III regulations could make banks more reluctant to lend for the long term.
This suggests that bond markets can play an important role in financing renewable energy projects, just like for infrastructure projects. With heightened interest in investing in renewable energy, there is a large pool of potential investors. To attract these investors, however, the investment will have to be packaged in a form that they are familiar and comfortable with, which traditionally has been bonds.
Companies in the renewable energy sector have increasingly tapped bond markets. The June 2015 Asia Bond Monitor estimated that since 2010, total bonds issued by renewable energy corporations globally have increased from $5.2 billion to $18.3 billion. Asia has been leading the way in issuing bonds, with the bulk of it coming from the People’s Republic of China.
The growing popularity of green bonds – bonds where the issuer has committed to use the proceeds for projects with environmental benefits – can provide a further boost to renewable energy financing.
In 2014, total issuance of global green bonds reached $30.5 billion, more than double the amount in 2013. Since they were introduced, most green bond issuances have originated from international organisations like multilateral development banks, development banks and export credit agencies. The Asian Development Bank (ADB) recently raised $500 million from its inaugural green bond issue, aimed at channelising more investor funds to ADB projects that promote low-carbon and climate-resilient economic growth and development in Asia.
The rise in green bond issuances has been supported by growing interest in investing according to environmental, social and governance criteria. The Global Sustainable Investment Alliance found that assets invested based on sustainable principles grew from $13.3 trillion to $21.4 trillion between 2012 and 2014. As a proportion of professionally managed assets, the share of sustainable-related investment rose to 30.2 per cent in 2014 from 21.5 per cent in 2012.
However, while the share of assets managed according to sustainable criteria has increased in all regions, it is important to highlight that the share in Asia is very low at only 0.8 per cent, way below the global average and far behind the almost 60 per cent share in Europe. This could explain why in Asia green bonds have been slower to take off, and why so far there have been only two Asian corporate green bond issuances.
Governments also need to ensure there is a stable, long-term regulatory framework because renewable energy projects have long gestation periods. While the cost of renewable energy has fallen, it still tends to cost more than fossil fuel-based energy. To help narrow the cost differentials, there may be a need to provide guarantees or set up dedicated funds to finance renewable projects. Greater investment in renewable energy could lead to economies of scale and greater familiarity among investors, diminishing the need for guarantees or special funding.
Narrowing the information gap can also help reduce the perceived risk of renewable energy investments.
Before investing in infrastructure projects, investors typically would like to examine the track record of similar projects. Without historical data on past financial performance, investors may be reluctant because they lack the information to make the necessary estimate of future returns. Making historical data publicly available would improve transparency in the investment process. Governments can also provide more information about the availability of renewable energy from their assessment and mapping of renewable energy resources.
Thiam Hee Ng works on financial integration, macroeconomic surveillance, and early warning systems. He manages the Asian Bonds Online web portal and the Asia Bond Monitor, a quarterly report on local currency bond market developments in Asia. Prior to joining ADB, he worked for the United Nations Industrial Development Organization and the Central Bank of Malaysia. He was awarded his PhD and MSc in economics from the University of Wisconsin-Madison, USA; and his bachelor’s degree in economics from the University of Cambridge, UK. He has been a CFA charterholder since 1999.
