Southeast Asia’s renewable energy development plans-
The Southeast Asian region, with its abundant natural resources and favourable topography, offers immense potential for energy production from renewable sources. However, the current use of renewable energy remains limited. According to estimates by the International Energy Agency (IEA), the share of renewable energy in the total energy generation of the six countries in the region (Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam) is only 15 per cent.
Across the region, only the Philippines and Thailand have achieved any significant renewable energy deployment (with installed capacities of 5.4 GW and 2.1 GW, respectively). Even in these markets, the potential in wind and solar energy remains untapped. With energy consumption in Southeast Asia projected to nearly double by 2035 and most countries dependent on energy imports, governments are becoming aware of the urgent need for increasing renewable content in their energy mix.
In recent years, several countries in the region have announced clean energy targets and put policies in place to attract investments into this sector.
Southeast Asia Infrastructure reviews the prospects of renewable energy in the region including proposed targets and policies for their achievement…
Largely untapped potential
The region has vast renewable energy potential that remains largely underdeveloped. For instance, Indonesia is estimated to have a geothermal potential of about 29 GW which is around 40 per cent of the world’s total geothermal potential. Nonetheless, the current installed geothermal capacity is only 1,226 MW across seven geothermal working areas. The Indonesian government has begun to recognise that renewable energy can be an important element of its energy mix, as it endeavours to meet the country’s energy consumption that is expanding annually at 7 per cent.
Meanwhile, Malaysia, which has an installed renewable energy capacity of only around 72 MW, has immense potential, particularly in the conversion of palm oil waste into biofuels. According to the Malaysian government’s estimates, the country produced 80 million tonnes of dry residue from palm plantations in 2011, which could serve as a valuable source for the production of biofuels (solid, liquid, and gaseous).
Thailand also has considerable potential that is estimated at over 57 GW, of which more than 50 GW is solar. Currently, its installed capacity is only 2 GW, with solar power contributing only 78.7 MW.
The Philippines, which already has one of the most developed renewable energy markets in the region with an installed capacity of over 5,400 MW, can still expand in all types of renewable energy. Currently, around 36 per cent, or 1,966 MW, of its renewable capacity comprises geothermal energy. Its assessed geothermal potential is around 4,339 MW. Also, wind and solar power account for only 33 MW and 1 MW of installed capacity, respectively, against an estimated potential of 76 GW in wind and solar power potential of 4.5 to 5.5 kWh per square metres per day.
With a coastline extending over 3,000 km and its location in the Southeast Asian monsoon zone, Vietnam is estimated to have the largest wind power potential in all of Southeast Asia. Sector experts estimate the country’s wind potential at close to over 431 GW at a mast height of 80 metres and wind speed of more than 6 metres per second.
According to sector experts, the underachievement of the renewable energy potential in most countries can be attributed to weak market conditions and the state of energy policies in the region, among other factors. As W.I.Y. Byun, renewable energy and climate change project development specialist at Asia Renewables Pte Limited, pointed out, the biggest hindrance stems from the reality that market-driven private sector developers of the projects remain a minority. Moreover, the projects themselves are not market oriented, as he explained: “The potential is huge, but the reality is very underwhelming. Unless the economics of renewable projects become more competitive, they are, for the most part, less attractive financially.”
Ambitious expansion plans
Countries in the region have announced ambitious renewable energy targets to increase the share of renewable energy in the energy mix over the next 10–20 years, by focusing on different technologies to expand their renewable energy portfolio.
In the Philippines – the largest renewable energy market – the government is targeting tripling its renewable energy capacity by 2030 to over 15.2 GW under the National Renewable Energy Program. Geothermal and hydropower would continue to lead renewable capacity development, with a targeted installed capacity of 3,467 MW and 8,729 MW, respectively, by 2030. Meanwhile, the installed base of wind and solar energy is also proposed to be expanded aggressively by 2030 to 2,378 MW and 285 MW, respectively.
Thailand’s Alternative Energy Development Plan (AEDP) 2012–21 aims to derive 25 per cent of the country’s total energy consumption from alternative energy sources by 2021, compared to 21.4 per cent in 2011. The AEDP replaces the government’s previously announced 15-Year Renewable Energy Development Plan (2009–2022) that had set a lower target of 20 per cent.
Under the AEDP, the highest capacity addition target has been set for the solar power segment at 2 GW. Thailand also aims to increase its biomass capacity that constitutes more than four-fifths of the country’s alternative energy capacity by over 1,800 MW to 3,630 MW. Further, it intends to generate 2 MW of tidal energy and 1 MW of geothermal energy capacity, which are non-existent in the country.
In markets such as Malaysia and Indonesia, the targets are comparatively more ambitious. Malaysia plans a nearly 22-fold increase in the share of renewable energy in the energy mix from the current 0.5 per cent. The government’s National Renewable Energy Policy and Action Plan released in 2010 has announced targets of 6 per cent by 2015, 11 per cent by 2020, and 17 per cent by 2030. By 2015, the country aims to achieve an installed capacity of 975 MW, which would comprise 330 MW of biomass capacity, 290 MW of small hydro, 200 MW of solid waste, 100 MW of biogas, and 55 MW of solar photovoltaic (PV) capacity. Further, its National Biomass Strategy, launched in November 2012, is expected to generate a gross national income of RM 30 billion and create about 67,000 more jobs by 2020.
Renewable energy sources are expected to provide Indonesia with as much as 25 per cent of its electricity by 2025, up from around 5–6 per cent currently. While geothermal and biofuels are expected to constitute 9 share of 8 per cent of the country’s energy mix by 2025, hydropower would account for 3 per cent, followed by biomass (2.4 per cent), solar (1.1 per cent), and other sources. The government’s earlier proposed target announced in 2006 had been 17 per cent.
Supporting policies and initiatives
The countries have launched a host of policy and other initiatives to achieve their proposed targets. The most significant is the introduction of price support systems such as feed-in tariffs (FiTs). Setting the FiT at the right level is crucial for attracting sufficient investor interest and ensuring a successful outcome for the country’s economy as a whole. As Fernando Echerverria-Valda, director, Advisory Infrastructure Government & Utilities, PwC Services LLP, Singapore, explained: “Investors are generally more comfortable with FiT since it takes away the market risks. An attractive FiT combined with a creditworthy offtaker is what makes projects bankable.”
According to Echerverria-Valda, Thailand, one of the first countries in the region to introduce FiTs in 2006, has adopted the correct approach: “The Thai government has been able to set the FiT at the right level to generate enough interest, get a few good projects going and then it has put in cooling measures to make sure the growth in the market is occurring at a pace that the economy can absorb.” Thailand’s FiT regime has been in place for six years and has been adjusted downwards successfully in response to higher-than-predicted industry response.
High solar and wind tariffs (see Table 2 for prevailing FiTs) relative to other technologies have generated significant investor interest in these segments. As of October 2012, according to data from the Ministry of Energy’s Department of Alternative Energy Development and Efficiency, applications for around 986 renewable energy projects are in the pipeline, which could add close to 8,873 MW of capacity. Of these applications, around 32 per cent are for solar energy projects and 31 per cent for wind energy. Earlier, in 2010, distribution utilities had stopped the process of accepting applications for power purchase agreements for solar projects under the FiT regime, as the applications had exceeded the targeted capacity.
Malaysia, a late adopter of the FiT programme (in 2011), has one of the most structured tariff systems in place. Tariffs under its FiT programme are differentiated in accordance with the type of renewable energy and the size of the facility for projects up to 30 MW in size. Among the technologies, solar energy (of less than 1 MW) is paid the highest support tariff: RM 1.23 per kWh ($0.39) for 21 years. As Malaysia’s average electricity tariffs were close to $0.1 per kWh in 2011, the government’s support tariff for solar energy has ignited considerable interest in Malaysia’s solar and solar–diesel hybrid segments. As of October 2012, of the 668 applications approved by the government for projects under the FiT scheme, 94 per cent are for solar PV projects.
The Philippines also has an FiT regime: the Electricity Regulatory Commission announced new tariffs in July 2012. The solar FiT was the highest at PhP 9.68 per kWh ($0.19), with run-of-the-river hydropower being granted the lower support price of PhP 5.9 per kWh ($0.11). Interestingly, the average electricity tariff in the Philippines is around $0.19 per kWh, making it among the highest in the region. Hence, a market for renewable energy can flourish more easily in this country, as rates closely match average grid power costs.
In July 2012, Indonesia set out revised renewable energy tariffs. Tariffs for geothermal energy projects were raised to $0.1 –0.18 per kWh from $0.097 per kWh. However, despite the introduction of FiTs, attracting investments in geothermal energy has been a challenge. Geothermal projects entail high upfront investments during the resource exploration stage to determine the exact commercial capacity. Moreover, average electricity tariffs in Indonesia (at about $0.07 per unit) are also low, thus making it difficult for higher-priced geothermal or other renewable projects to compete with other fossil fuel-based options.
Easing funds flow
Apart from FiTs, governments have also offered a slew of other financial incentives to developers. For instance, Thailand’s incentives include an eight-year income tax holiday and low-interest loans with an interest rate ceiling of 4 per cent. Investors can also seek financial assistance from the Energy Conservation Promotion Fund that has been created with a tax on per litre of all petroleum products sold in Thailand.
In Indonesia, the government has sought to entice geothermal project developers by providing financing assistance via its geothermal fund facility (over Rp 876.5 billion in 2012) with funds allocated from the government budget. Developers can tap into the fund for the collection of verified geothermal exploratory data and exploratory drilling activities, hence making geothermal projects more financially viable and bankable.
Based on a law passed in August 2011, the Thai government offers a counterguarantee on the power purchase agreements between developers and PLN, the state-owned utility, to bolster the confidence of investors.
The Malaysian government has established a renewable energy fund that comes from the cash accruals of an additional 1 per cent of the bills of all electricity consumers (except for those in lower-income groups within the 300 kWh consumption bracket) as of December 2011. The government provided a grant of RM 300 million for the initial corpus of the fund. In addition, to implement FiT and administer the renewable energy fund effectively, the government created a separate body called the Sustainable Energy Development Authority in September 2011.
Risks and outlook
Given the region’s tremendous potential for renewable energy and its rapidly growing economies with escalating energy bills, the promotion of renewable energy sources seems obvious. However, converting this potential into bankable projects for private investors remains challenging. According to Byun, one of the key challenges lies in the way projects are structured: “Most projects are not structured to be investible. Renewable projects, being smaller and very risk focused, do not satisfy most lender guidelines for risk management.”
Further, in several countries, the market fundamentals and governance structures are weak, with risks spilling over to renewable energy projects. In several countries, electricity is heavily subsidised, thus making it difficult for renewable projects to enter the market. As for others, the prevailing macroeconomic climate and governance structures increase the technology risks associated with renewable investments.
Nonetheless, there are countries that have established good track records in renewable energy investments and competitive electricity prices; thus, their renewable energy outlook is promising. In particular, the Philippines, Thailand, and Malaysia remain the most attractive renewable markets in the region, with over 10,000 MW of capacity under development. In other countries, renewable energy will remain a fringe resource until underlying impediments are resolved. These countries need to deepen their understanding of the benefits of renewable energy and develop their confidence in harnessing it. Byun summed up the current situation: “Further evolution is needed, especially from the supply side where more commercially oriented developers are needed to aggregate sufficiently large-sized investments. Otherwise, it will remain more of a side note, while fossil baseloads quietly take up the bulk of energy production.”
