Asian Power - July to August 2014

ISSUE 64 | DISPLAY TO 31 AUGUST 2014 | www.asian-power.com | A Charlton Media Group publication

US$360P.A.

hindustan all out to tap solar

Why is Chairman Puri doubling Hindustan’s PV projects to $2billion in pessimistic times?

MICA(P) 248/07/2011

analysis Modi to revolutionize India’s power sector

sector report Why China may fail to meet the 14GW solar target

first The great leap forward toward energy security

country Report How the coup in Thailand is affecting the power sector

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PAge 22

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PAge 18

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FROM THE EDITOR Newly elected Indian Prime Minister Modi is certainly not short on advice about what to do with key economic sectors, particularly the power sector. This issue features experts’ comments on the things that the Minister needs to do boost the sector plagued with power outages. If fully implemented, experts believe that the new government’s target of zero interruption by 2022 could be achieved. Everyone, however, is warned that there are more challenges ahead than many seem to believe.

Publisher & EDITOR-IN-CHIEF Tim Charlton ASSOCIATE PUBLISHER Laarni Salazar-Navida production editor Roxanne Primo Uy GRAPHIC ARTIST Tamara Pangilinan Editorial Assistant Queenie Chan Editorial Assistant Alex Wong EDITORIAL INTERN Grace Littlewood ADVERTISING CONTACTS Laarni Salazar-Navida lanie@charltonmediamail.com

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Surely, India’s power sector offers vast investment opportunities simply because the supply is not enough to meet the demand amidst a glowing economy. As a matter of fact, about 400 million people in India still have no access to electricity. Coal makes up the major bulk of the country’s energy mix, but the country is also becoming more proactive in sourcing alternatives, particularly solar. Experts believe that solar power, despite initial challenges, is becoming a multi-billion dollar opportunity.

As a case in point, Asian Power’s recent interview with the Hindustan Powerprojects’ chairman revealed mega investment plans for the power sector, including a $2 billion investment to double photovoltaic projects by 2016.

Of course, Asian Power is not just about India. Flip through the pages and find interesting stories about Thailand’s coup and its impact on the energy sector, South Korea’s initial challenges as it takes wind energy more seriously, the Philippines’ stance on energy subsidies, and Indonesia’s lack of public investment.

Enjoy the issue!

Tim Charlton

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ASIAN POWER 3

EDITORIAL CONTENTS

09 FIRST IPPs to fill energy-hungry asia

REPORT 20 SECTOR Why China may fail to meet 14GW solar installation target

12 FIRST Why are China’s IPPs losing investment appeals

FIRST 08 3 key asian markets for power investors

OPINION 34 JOHN GOSS: Why China seeks more overseas energy resources

08 The great leap forward toward energy security 09 IPPs to fill energy-hungry Asia

REGULAR

09 The Chartist: China’s power demand 10 Indonesia’s lack of reform hurts

15 CEO Interview: Hindustan Powerprojects unveils mega plans

10 Philippines electric industry reform: what went wrong?

16 Modi to revolutionize India’s power sector

12 Singapore set for solar power boom

18 How the coup in Thailand is affecting the country’s power sector

12 Why are China’s IPPs losing investment appeals?

24 Turning wind into value: South Korea moves to tap huge

wind power potential

32 See how troubled power distribution companies are threatening Indian banks

Published Bi-monthly on the Second week of the Month by Charlton Media Group #06-09 E, Maxwell House 20 Maxwell Road

4 ASIAN POWER

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REGULATION

Electricity tariffs in Singapore to dip 0.05 cent per kWh Electricity tariffs will decrease by an average of 0.05 cent per kWh starting July 1 until September 30, Singapore Power subsidiary SP Services announced today.

Households can expect a $0.20 reduction in their monthly electricity bills, as the electricity tariff for households will decrease by .05 pp.

PROJECT

Deutsche Bank eyes lending $1b for Japan’s solar gold rush According to a Bloomberg report, Deutsche Bank AG plans to lend about $1 billion for Japan solar projects, joining Goldman Sachs in funding cleaner energy as the government struggles to restart nuclear power plants after the Fukushima disaster.

6 ASIAN POWER

PROJECT

Struggling power sector threatens Indian banks India’s public and private sector banks continue to be at risk from the poor financial profiles of state electricity board distribution companies (discoms), a report by Moody’s revealed.

According to the report, almost 70% of total banking system assets are at risk because of their exposure to discoms.

PROJECT

REC revs up 6 solar plants in Thailand with a whopping 72MW European solar panel supplier REC announced the commencement of six REC-powered solar plants in Thailand, totalling 72 MW. Owned and operated by Yanhee EGCO Holding, this project generates enough power for 40,000 households.

PROJECT

Malaysia’s PETRONAS taps Siemens for power plant construction Malaysia’s state-owned petroleum corporation PETRONAS has given an order to Siemens in a consortium with MMC Engineering Services Sdn Bhd for the turnkey construction of the Pengerang Co-generation Plant (PCP).

Siemens says the PCP will be able to produce approximately 1,220 megawatts of power.

PROJECT

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FIRST electricity generation by 2020.” The Chinese government is set to spend USD39.5 billion on the development of solar power between 2011 and 2015, says Nagatham.

The greater degree of attention given to the development of renewable energy sources is not merely confined to China. In the Philippines, Asia’s second fastest growing economy in 2013, the government has also been taking steps toward renewables. “The need to achieve energy self-reliance to reduce fossil fuel dependence and to minimize the exposure to price fluctuations in the world market drives the acceleration and development of renewable energy resources for power,” says Mario Marasigan, renewables bureau director at the Philippine Department of Energy.

3 key asian markets for power investors

Andrew Affleck, Armstrong Asset Management

A whopping $1.6 trillion was invested in 2013 to provide consumers with energy, a figure that has more than doubled in real terms since 2000, according to the International Energy Agency’s World Energy Investment Outlook 2014. The same report states that investment in renewables rose from $60 billion in 2000 to a high point approaching $300 billion in 2011, before falling back since.

But three Asian markets stand out as the most viable ones for investment, according to Armstrong Asset Management, a private equity fund in Southeast Asia. “We think that the Philippines, Thailand, and Indonesia at the moment are the three primary markets which have a lot of the factors that we would like for investment,” says founder and managing director of Armstrong Asset Management Andrew Affleck.

Affleck adds that they use a top-down approach in choosing which countries to fund and looks at two primary aspects: the country and the working team. The process of getting approvals and constructing a project is a key consideration as well as the policies present in each country and the availability of experts to design, build and get necessary permits.

What’s in store for investors Resource abundance for renewables has made the Philippines very attractive, despite a lot of concerns with its bureaucracy.

Affleck, who has lived in Asia for more than 20 years, indicates that radiation in the country is generally good while some parts of the Philippines are rich in wind and hydro power resources.

Indonesia and Thailand are also wellsituated on the map, with solar and hydro being an asset for each country, respectively.

But according to the World Energy Outlook 2013, renewables-based power increases by more than the current total power output of Indonesia and Thailand combined.

Affleck adds that Thailand is already recovering from its recent political tensions that affected its investability. “Nothing is to be worried about as the long-term outlook for the country is positive,” he adds. “The general mood is that there is optimism around the potential but I think there are still practical challenges to achieving the kind of targets that are being sent. The optimism is tempered with realism around the speed that things can happen,” Affleck says.

8 ASIAN POWER

Climate change discussions drive renewable energy

The great leap forward toward energy security

T

he development of alternative sources of energy is gaining more and more attention, notwithstanding the fact that energy sustainability and climate change have been a hot-button issue for decades already. “Energy security is becoming increasingly important considering increasing demand.

Access to indigenous sources of energy, namely fossil fuels, are in general declining, necessitating the search for alternative energy sources,” says Rajiv Vishwanathan, Associate Director of Credit Ratings & Research at Standard & Poor’s. Indeed, A case of two countries The growing concern over energy security has been driving several important developments in key fastgrowing Asian economies. An obvious example would be China, Asia’s fastest-growing economy in 2013. The country’s rapid economic expansion comes with a greater need to supply energy demand sustainably. This has translated to developments in the local renewable energy industry. According to GlobalData analyst Harshavardhan Nagatham, “China’s renewable energy capacity increased from 27.8 Gigawatts in 2001 to 183 GW in 2013, and alternative sources are expected to account for more than 20% of the country’s total

In both China and the Philippines, solid examples of developments in the industry can be seen.

Tangible results In both China and the Philippines, solid examples of developments in the industry can be seen. For instance, Nagatham states, “China is aiming to add 15 GW of solar photovoltaic, 5 GW of wind, 0.53 GW of geothermal, and 3.3 GW of biomass power by 2015.”

Meanwhile, in the Philippines, several projects have already taken off.

Marasigan cites the example of the 33 MW Bagui Wind Farm in Ilocos Norte in the Philippines, which has “20 units of 70-metre high Vestas (1.65 MW) wind turbines.”

Surprisingly, the social discourse on climate change is not doing as much to drive the development of the renewable energy industry.

“Ultimately, climate change would take a back seat compared to the need to ensure fuel security so it would not be a strong driver to renewable energy development,” says Vishwanathan.

Nevertheless, it seems that economic motivations for fuel security are enough to drive the continuation of such developments.

Asia-Pacific growth in the share of renewable energy sources, 2011-2020

Source: GBI Research, Power Proprietary Database

FIRST Countries like the Philippines are finding ways to encourage and promote renewable energy sources.

Boosting renewable energy Countries like the Philippines are also finding ways to encourage and promote renewable energy sources. Capongcol says they are developing mechanisms to boost renewable energy projects in the country.

“Aside from the fiscal incentives provided through the Renewable Energy Act of 2008, the feed-in tariff rules and rates have been established for various RE resources and net-metering is in place and pilot-tested,” she says. As fuel reserves are slowly depleted, renewable energy remains an attractive segment for both IPPs and government.

Asia is hotspot for IPP investments

IPPs to fill energy-hungry Asia

A

s the global economy evolves and production shifts to other regions of the world, countries in Southeast Asia become prime targets for independent power producers (IPPs) hoping to fill the void left by public utility companies. Subha Krishnan, industry analyst for Frost & Sullivan, says the region is a “hot spot for IPP investments.” This is especially true for the Philippines, Indonesia and Vietnam, which are unable to enhance energy capacity through public investment.

“Power shortages, tight reserve margins and power utilities’ lack of cash reserves are driving the liberalization

of power markets. It is increasingly costly and inefficient to remain as the sole power producer. This presents a significant opportunity for IPPs investing in Southeast Asia,” Krishnan explains.

Since 2001, the Philippine energy sector has been privatized and liberalized. “While Malaysia and Thailand have developed their IPP markets by letting private generators build greenfield projects, Singapore and the Philippines have created it by privatizing the generation assets of erstwhile state utilities,” Krishnan says.

Mylene Capongcol, power bureau director at the Philippine Department of

Energy, says this has made the country attractive to investors.

“Power generation is now a competitive business and open to the private sector. With the country’s increasing growth rate, it is projected that there will be a corresponding upsurge for the demand for electricity and this would require additional capacities. Putting-up the additional capacities offers a business opportunity to private sector power generation companies,” she says.

Scale of opportunity in Asia (with privatization)

Source: IHS CERA

The Chartist: china’s power demand China’s power consumption increased by 5.4% yoy in 1Q14 vs 4.4% in 2M14, as consumption in March was up 7.2% yoy.

However, growth was still weak compared with 7.3% yoy growth in full year 2013.

The China Electricity Council forecasts that China’s power consumption growth in 1H14 will be 6% yoy, while the whole year’s growth will be slightly higher at 7% yoy as economic growth should gradually pick up in the second half.

Deutsche Bank now expects power demand to grow at 7.0% p.a. in 2014-16, slightly lower than the 7.3% yoy growth in 2013, as China’s economic growth moderates and shifts to less powerintensive industries, while traditional power-intensive industries such as steel, cement and aluminum are experiencing overcapacity.

Monthly power consumption–total

Source: Deutsche Bank, Wind

Monthly power consumption–industrial

Source: Deutsche Bank, Wind

ASIAN POWER 9

FIRST

Indonesia’s lack of reform hurts

IPP WATCH

POSCO Energy inks deal with Tongyang Power

T

he Indonesian government allocated a fourth of its total expenditure, or roughly $27 billion, to energy subsidies last year – a staggering amount that should be pruned if the country hopes to reduce poverty, ramp up renewable energy development and mitigate its vulnerability when world oil prices fluctuate, according to energy and development experts.

Fuel subsidies were first introduced with the noble goal of making energy affordable to Indonesians, but the poor only accrue a paltry amount of benefits compared with the rich, according to Ndiame Diop, lead economist, Indonesia at the World Bank. He cites data which reveal 40% of subsidy benefits go to the richest 10% while only less than 1% of benefits go to the poorest 10%.Aside from failing to uplift the poor, fuel subsidies also threaten green growth, says Rae Kwon Chung, director, environment & development division, UN ESCAP. Market distortion Fuel subsidies encourage excessive energy consumption and reduce incentives for energy efficiency, resulting in higher greenhouse gas emissions, local air pollution and resource depletion. They also distort competition and undermine

Power lines in a slum town in North Jakarta. Photo by Jonathan McIntosh

incentives to invest in cleaner energy sources and technologies, says Chung. Sustaining large subsidies on imported oil also makes Indonesia’s fiscal position highly vulnerable to volatile world oil prices.

“A lack of reform will continue to pose serious problems for Indonesia if the factors that have traditionally been core drivers of subsidy reformhigh international crude prices, low exchange rates and ensuing pressure on the budget-continue unabated,” says Lucky Lontoh, Indonesia program coordinator at Global Subsidies Initiative.

Lontoh questions the government’s lack of political will to increase fuel prices or shrink subsidy eligibility in the first two-thirds of 2014, which is the year of parliamentary and presidential elections. Although the growing pressure of budgetary constraints might just convince the new government to enact new reforms by the end of the year.

Suzlon Group gets nod for 100.8MW wind project 40% of subsidy benefits go to the richest 10% while only less than 1% of benefits go to the poorest 10%.

Philippine electric industry reform: what went wrong?

Everyone appears to blame the poor implementation of the Electric Power Industry Reform Act (EPIRA) finalized in the Philippines in 2001 but some say it’s not the sole culprit.

During the Power & Electricity World Philippines 2014 congress organized by Terrapinn, Roger Buendia, first vice president for trading and marketing at Aboitiz Power, said that the law is good but implementation was a little too late.

“During the time that supply was heavy, EPIRA could have worked. But we implemented it 10 years after, it’s not working anymore, because there’s a shortage in supply,” he added.

Ernesto Joseph Nocos, vice president for business development of the Alsons Energy Development Corporation, agreed that wrong timing plus wrong implementation are to blame. He indicated, however, that EPIRA was able to accomplish one of its main objectives: to take the challenge of providing generation capacity out of the government’s hands.

Nocos said that the government did not have enough resources and with EPIRA, power generation projects were able to come in and continue to arrive in the country.

10 ASIAN POWER

South Korea-based POSCO Energy, a subsidiary of POSCO, has signed a contract with the Tongyang consortium to acquire 100% of coal company Tongyang Power for consideration of KRW431bn.

According to Nomura, the acquisition of Tongyang Power will increase POSCO’s capacity to 5,300MW by 2021 from its existing power production capacity of 3,300 MW, through Incheon LNG Power Plant (3,000MW) and Gwangyang Gas Power Plant (300MW).

Suzlon Group announced its Notice to Proceed (NTP) from foreign investor CLP India for a 100.8 MW wind power project.

Located at Tejuva in Rajasthan, the project will comprise 48 units of Suzlon’s S97- 2.1 MW wind turbines with Doubly Fed Induction Generator (DFIG) technology.

This is the latest addition to Suzlon’s wind portfolio of over 8000MW projects.

KEPCO to build more coal and nuclear units

Ernesto Joseph Nocos, Alsons Energy Development Corp

Electrical substations in Binan, Laguna

KEPCO is scheduled to commission three nuclear reactors with a combined capacity of 3,800 MW, four coal-fired units with 3,760 MW, and seven coal-fired units with 6,470 MWs in 2014-2017.

According to Moody’s, the shutdown of three faulty KEPCO nuclear reactors in 2013 is unlikely to disrupt the company’s plans to build more units. “The government quickly called for extensive inspections and the replacement of substandard parts,” the report said.

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FIRST

Singapore set for solar power boom

T

he next time your plane swoops down Singapore, watch out for roof lights beaming at daytime. Singapore is rising to be a major clean energy hub in Asia by harnessing solar power to its fullest potential.

“Solar energy is the most suitable choice for the tropical climate in Singapore,” says Anton Finenko, an energy analyst at the Energy Studies Institute, NUS. Singapore’s already limited land area is key to the sector’s growth. “Due to scarce and very expensive land, most of the future projects in Singapore will be rooftop,” he says, adding that this mode will help people save money, as 80% of the population lives in high-rise HDB buildings.

Growth opportunities Experts say that with technology, the cost of generation using renewable energy has been steadily declining. This makes clean energy an attractive investment. Singapore has identified clean energy, especially solar energy, as a key growth industry. International solar companies such as Hanergy, Juwi, Phoenix Solar, REC Solar, SunEdison, Trina Solar and Yingli Solar have set up regional operations in Singapore.

The government has identified research and innovation, project development and financing as the sector’s strengths. While the scale of the projects in Singapore is rather small, compared with other countries in the region like Malaysia or Thailand, solar energy is seen as the next big investment opportunity.

“When we look at Singapore, the installed solar capacity, despite having grown significantly over the past four years, is still at only around 12MW. Rooftop PV has so far been, and is likely to continue to be more relevant for Singapore, compared to ground-mounted systems. This is both in terms of land availability and project economic viability.”,” says Lim Wen Bin, Associate Director, Power & Utilities, KPMG in Singapore.

But to boost growth, Sharad Somani, KPMG’s Asia Pacific Head of Power & Utilities, says the government needs to set specific targets for renewable and solar energy. “If we look at top 3 or 4 power dealers, they are bombarded by their own licensed conditions and they have their own installed capacities,” he says. Somani adds that Singapore will need to explore unique models even as the Energy Market Authority is trying its best to encourage solar projects without disrupting market mechanisms.

The government role The Ministry of Trade and Industry says Singapore is keen to encourage the use of renewable energy to reduce its reliance on imported fuel. “Among the various renewable energy options, solar has the greatest potential for wider deployment in Singapore. We plan to raise the adoption of solar energy to 350 MWp by 2020, up from about 15 MWp of grid-connected capacity today,” its spokesperson says.

Singapore is also looking into solar leasing where building owners can purchase solar

Why are China’s IPPs losing investment appeal?

With spot coal prices stubbornly high, don’t be surprised to see investors losing their appetite for China IPPs soon.

Thermal coal prices seem to have hit a trough, and the likely rebound will drastically lower the margins and erode the profitability of China IPPs, analysts warn. “IPP margin cycle has peaked, as we see limited downside to spot thermal coal prices. As such, the sector lacks investment catalysts to reach new highs.” says Rick WK Ng, analyst at Maybank Kim Eng. “Given limited downside to spot coal prices, there is minimal room for further margin expansion. We project average EPS growth for the five IPPs (Huaneng, CPI, Huadian, CRP, and Datang) we are initiating will be around 8% in 2014E, and 0% in 2015E, vs. 75% in 2013.”

Despite this souring short-term outlook made more volatile by a possible tariff cut, investors may still choose to dip into China IPPs due to their cheap valuation and high dividend yield.

This is an understandable gamble, say analysts; especially for those that choose to be optimistic.

“IPPs’ cheap valuation and high dividend yield are particularly attractive for European investors. We believe the tariff cut is likely this year, but it could be the final one given limited downside risk of domestic coal prices. We also expect IPPs would maintain their profitability given limited upside risk for coal and gradual deregulation in the energy market,” says Yan Shi, analyst at UOB Kay Hian.

Ng recommends CPI and CRP due to their higher exposure to hydropower and wind power, respectively, two sectors which have a particularly bright outlook.

12 ASIAN POWER

Singapore rooftop photovoltaic projects

electricity. “Innovative business models such as solar leasing could facilitate the deployment of the solar energy in Singapore. Solar leasing helps the customer to bear the upfront installment costs as well as the maintenance expenses,” Finenko says.

Unlike in many other countries however like Thailand and Malaysia where they have 10-50 MW solar projects coming up, Somani believes that Singapore will not see any single project of this kind but only rooftop projects.

Maybank’s FY14E net profits vs 1% change in average coal cost

Maybank’s FY14E net profit decline for every 1% average tariff cut

Source: Maybank Kim Eng

Source: Maybank Kim Eng

China IPPs’ profitability feared to erode

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ASIAN POWER 13

Ratul Puri

Chairman, Hindustan Powerprojects

14 ASIAN POWER

CEO INTERVIEW

Hindustan Powerprojects unveils mega plans Chairman Ratul Puri discussed recent developments, from the renaming of their company to plans to double its photovoltaic projects to $2 billion by 2016, amidst various apprehension about the solar sector.

H

industan Powerprojects, formerly known as Moser Baer Projects and with a vision of commissioning 7000 MW of power by 2020 in thermal, solar and hydro is a leading player in the energy sector from India. The Company is in the advanced stage of commissioning over 5000 MW of combined power assets at an estimated investment of INR 32,000 crores (USD 5.15 bn) in the next couple of years.

In addition to the above, the company is also developing over 6100 MW of capacity using conventional and unconventional energy sources in India, Europe and the USA. Hindustan Power has consistently been focusing on giving maximum returns to its stakeholders through corporate growth and social responsibility. The company is head quartered in New Delhi and has power generation assets in the states of Chhatisgarh, Gujarat, Tamil Nadu, Odisha, West Bengal, Madhya Pradesh, Punjab, Uttar Pradesh and Himachal Pradesh in India and in countries like Germany, Italy, US, UK and Japan.

Asian Power recently caught up with Hindustan Powerprojects chairman Ratul Puri to discuss recent developments from renaming of their company to plans to double its photovoltaic projects to $2 billion by 2016.

During the last five years, under his guidance the company has partnered with best in class investors to be part of its growth story. Today in a short period, the company has assets to the tune of USD $2 billion which is a standout achievement for any organization in the country.

What’s the update on your thermal power plants? Have you determined the dates for commissioning?

Hindustan Thermal projects (the thermal arm of Hindustan Powerprojects) focuses on generating power through coalfired power stations in India. The arm is developing thermal Power projects with a combined generation capacity of about 5000 MW in the states of Madhya Pradesh and Chhattisgarh.

The thermal arm is poised to commission phase 1 of its Anuppur assets of 1200 MW during the current year.

Hindustan Powerprojects is aiming to set up a 2520 MW thermal power plant in multiple phases in the village of Jaithari, district Anuppur.

In addition to this, we have also signed a long term PPA of 35% with Government of Madhya Pradesh and for 361 MW from Uttar Pradesh. Almost 90% of the construction work has been completed and the COD is as per the defined schedule.

The company has set new benchmarks in the power sector by achieving critical milestones in terms of land acquisition, coal and water linkage, securing various statutory and other clearances, and awarding of various contracts within a short timeframe.

How is the renaming of your company affecting your operations so far? Can you give us a little background on how you arrived at the decision of renaming your company?

As the company focuses on generating power only, the restructuring of the company has been done to sync with its operations. Changing the name of the company to Hindustan Power is a part of the company’s transition and long term strategy, and the new name was more suitable to the company’s present power and energy portfolio.

The ambiguity with regards to its operations has been removed to a large extent and significantly, the entity is seen

as managed by professionals rather than as a family owned business. The multiple queries on whether the business wants to take projects not in power generation have stopped. The name change is also likely to help during the proposed IPO of its Clean energy arm.

Hindustan Powerprojects aims to cover all energy deficits in India by 2020, backed by a substantial investment of Rs 32,000 crore of investments. With six more years to go, how is your company moving toward achieving this goal?

The Company has been performing towards a growth trajectory, even during the trying times. The growth route is poised for the next leap with the commissioning of 7 GW MW of power over the next few years in the thermal, solar and hydro power sectors.

Additionally, the company is also developing over 6,100 MW of capacity using conventional and non-conventional energy sources in India, Europe, and the USA. In size and scale, we have the largest solar capacity under generation or in the pipeline. The company will invest around Rs 4,500 crore during current fiscal for 200 MW of solar and 1200 MW of thermal capacities.

How do you strike a balance between your renewable portfolio and thermal power plants?

We have a very positive approach towards developing the power and energy sector amidst the current scenario. As conventional energy in the country is already facing a crisis scenario, hence Hindustan Power has created the strategy to develop the renewable forms of energy to help India meet the brewing energy crisis.

India overcame an energy mix to address the power deficit scenario it is currently facing. Developing and commissioning a thermal asset typically takes 5-9 years; whereas a solar farm can be commissioned in 12 months. Understanding this cycle, we have a couple of thermal projects and will focus on solar to ramp up the business viability.

How important is your recent deal with the Uttar Pradesh Power Corporation from a business point of view?

The country is going through a phase where all states aspire to provide an uninterrupted supply of power. To be able to do that, these PPAs are fundamental. The PPA with Uttar Pradesh Power Corporation is very critical as it assures that the projects receive their due quantum of raw materials.

Why is Hindustan doubling its photovoltaic projects to $2 billion by 2016? How do you respond to some pessimism about India’s solar power sector?

Currently, Hindustan Power has around 320 MW of operational solar capacities in Gujarat, Punjab, Uttar Pradesh, and Tamil Nadu among others. Additionally, it has 120 MW of solar capacities located in Europe. The company plans further expansions in India and Japan.

The Cleanenergy is poised to reach 500 MW of solar power in next few quarters. There is no or low thermal project pipeline which is scheduled to go online between 2017-2022, which means the incremental source of power has to come from other sources like solar, wind, hydro, etc. Consider, India receives more than 310 days of clear sunshine, so we have bet on solar.

ASIAN POWER 15

analysis: india power

About 400 million people in India have no access to electricity

Modi to revolutionize India’s power sector The prime minister’s party’s big win is expected to spur unprecedented energy growth.

W

ithin the next decade, everyone in India will be enjoying uninterrupted power for 24 hours a day, seven days a week. Or so the government says, as it promises to achieve that target by 2022 under the helm of Prime Minister Narendra Modi, the newly elected leader of the world’s third largest economy.

Prospects for the country’s energy sector soar high with his party, the Bhartiya Janata Party (BJP)led National Democratic Alliance (NDA), forming its own government for the first time since 1984.

The President’s agenda Modi has committed to drawing up a National Energy Policy that will spur growth, focusing on the development of energy by speeding up much needed reforms in the coal sector and pushing for renewable energy.

The new leader’s agenda is to overhaul the coal industry, expand gas grids, and enhance solar and nuclear power leading to “unbroken power for every household.”

“A landslide victory has given the present government an opportunity to implement its manifesto without any delays or hindrances,” said PwC power expert Umesh Agrawal.

According to Agrawal, the country expects reforms in the sector, especially given the achievements in Gujarat under 16 ASIAN POWER

Umesh Agrawal

Surendra Rao

Ray Tay

the leadership of Shri Narendra Modi.

Modi has already stated his intention to combine related topics into single super Ministries: in Health, Transport and Energy. The latter is likely to combine Power, Renewable Energy, and Coal, said Surendra l.

Rao, former chairman of Central Electricity Regulatory Commission.

“He does not mention nuclear energy and oil and gas though these are also related to power. But combinations even if not fully done, will help a lot, for example, in improved domestic coal supplies for power generation,” he said.

The BJP manifesto, among others, states that clearance approvals for projects will be expedited and tax laws simplified.

The ailing energy sector, experts believe, needs a radical change if it is to provide for the country’s growing 1.2 billion population.

India’s electricity situation Currently, about 400 million still do not have access to electricity, and blackouts are constant across the country. In New Delhi, officials have enforced cutbacks by cutting off electricity to shopping malls after 10pm and have asked government offices and colleges to turn off air conditioners.

India’s per capita consumption for FY 2012-13 was 917 units, which is very low compared with other emerging markets

Brazil (2,438) and China (3,298).

“The primary reason for the same is lower access to electricity, as only 67% of households used electricity as main source of lighting,” he says.

But demand for electricity continues to rise. In ExxonMobil’s “A View to 2040: The Outlook for Energy,” it stated that since 2005, India has surpassed Japan and Russia to become the third-largest energy consumer behind China and the United States; “a position it will likely retain through 2040.”

But Agrawal says the new government might be able to ensure faster clearance processes for major projects and quicker bidding processes for mega power projects to reduce generation costs.

Coal India Limited (CIL), the government company, which owns most of the coal mines and produces almost 85% of the coal in India, has failed to keep up with the required generation capacity, leading to inadequate fuel supply to coal-based projects.

The government, Agrawal says, may consider breaking up CIL into multiple companies, “which would help bring in greater efficiency and much needed competition to the sector.”

Coal power India is one of the world’s largest coal consumers, with coal consumption

analysis: india power hostile to foreign investment.

“The BJP’s dominance in the lower house increases our expectation that it will be able to push through tough reforms needed to revive India’s investment cycle,” says Ray Tay, AVP and Project and Infrastructure Finance of Moody’s Investors Service.

He said the new government is expected to address the financial health of state-electricity boards (SEBs).

Financially stronger SEBs, Tay says, would be able to bear the higher cost of expensive imported fuels needed to make up for insufficient domestic gas and coal production.

“The key issue relates to cost passthrough so that SEBs can reasonably recover costs of supplying power in a predictable and timely fashion.

Such reform would instill greater confidence in the sector and contribute to investments, which are necessary to address India’s power shortage,” Tay says.

Such improvements would also benefit large power companies like NTPC Limited, Tata Power Company Alternative sources Limited and GAIL (India) Limited.

The country is also expected to harness A paper by BNP Paribas Equities geothermal power by fast-tracking Research, states that Modi will “set projects. The government recently in motion investment-friendly cleared three major defence and energy policies and prune subsidies.” projects, including the approval of a “Subsidy rationalization, a revival long-delayed proposal to raise the height of the investment cycle (expediting of the Narmada dam to provide more administrative decisions in mining, water irrigation and power generation. transportation, power generation) and Agrawal adds that the new simplification of the tax regime [are] government is also likely to ensure on top of the government’s agenda. that the share of renewable energy We raise our end-2014 Sensex target will go up under the Solar program to 28,000 (from 24,000) as we assume (JNNSM) of the previous government. a lower risk premium,” it says.

In a paper by the Ministry of India’s economy has been crippled Environment and Forests, “Energy with lack of subsidy rationalization Scenario and Vision 2020 in India,” leading to high fiscal deficits, resulting P. Garg wrote that renewable in high and sticky inflation. energy will have an estimated The research found that the succession total share of 15.9% by 2022. of scams has also led to policy paralysis, The paper states that the country has particularly in the natural resources a very large solar energy potential as sector. “This led to a sharp increase in there are about 300 clear sunny days stalled projects, as well as a decline in per year in most parts of the country. private corporate inflation. The double It adds that India’s wind power whammy of high inflation and falling program also shows promise as it investment led to a multi-year low in is the fastest growing renewable India’s economic growth rate,” it notes. energy program in the country.

Calling it a “saffron revolution,” Modi Structure reforms believes renewable energy will meet But while some celebrate the landslide India’s growing energy demand. Saffron, victory of Modi as a win for the he said, is a symbol of energy and power. energy sector, some are saying Modi, known as the “Development India still needs to address issues Man,” envisions India as a country that may take time to achieve. with more power, electrified cities, Adrian John, Managing Director and wealthier citizens under a at Precergy Ltd, says the sector faces sustainable development framework. problems such as grossly inadequate Experts further say the new transmission and infrastructure government’s reforms will certainly acquisition, strong public opposition to boost the economy of India which has large-scale projects, and government tariff for years suffered under a bureaucracy policy, among others. seen to increase from 12.6 quadrillion But in 2010 to 22.4 quadrillion Btu in 2040, according to the U.S. Energy Information Administration.

“India, however, has had problems expanding its coal production, and power companies have increasingly had to rely on the use of more expensive imported coal.

Regulatory hurdles that have delayed the startup of mining activities on government-leased coal blocks often are cited as a reason for the increasing inability of coal supply to keep up with rising demand,” according to its International Energy Outlook 2013 report.

Agrawal adds that the shortfall in gas production from the KrishnaGodavari Basin (KG-D6) has resulted in a number of gas projects lying idle for the past one to two years.

For him, a clear policy for gas pricing and promoting gas exploration by private participation could resolve the fuel supply and pricing issues.

Sources of electricity

Source: Ministry of Power

Coal imports to Asia by region, 2011 and 2040 (million short tons)

Source: U.S. Energy Information Administration

“Calling it a ‘saffron revolution,’ Modi believes renewable energy will meet India’s growing energy demand.“

“Some measures have already been taken by the previous government to address some of these problems, but improvements will likely be slow. So this of course begs the question of what Narendra Modi and his government can realistically do to address these entrenched issues during their five year term and potentially beyond?” he says.

Modi must find ways to encourage private and foreign investment, enforce structural reforms throughout the energy industry, and reduce bureaucracy.

John is also skeptical whether policy reforms implemented in 2013 can address the issues of land acquisition and the poor financial health of state electricity boards will have any real impact. “Certainly the populist reform to land acquisition undoubtedly makes power projects more expensive-impacting already shaky project economics-without really guaranteeing that the land acquisition process will speed up,” he says.

But while other reforms may take time, John believes addressing the issues of bureaucracy will be far more achievable within five years.

“Reducing the lengthy permitting processes for large-scale projects and possibly providing greater power to the government to push through key infrastructure projects in the face of public opposition, would certainly greatly improve the current situation,” he notes.

ASIAN POWER 17

COUNTRY REPORT 1: thailand

Solar energy development has been most active in Thailand

How the coup in Thailand is affecting the country’s power sector

Amid the coup, Thailand’s clean energy prospects remain promising . Analysts, however, suggest streamlining the permitting process and offering tariff incentives and tax holidays to encourage more investors.

F

ollowing political unrest that pummelled the market, Thailand is now looking to promote renewable energy as a key component of the new government’s ambitious economic roadmap.

The junta has recently laid out economic policies to be implemented in the medium to long term, highlighting the country’s need for energy stability and independence.

“Having been in the market in Thailand for the last 6 years, we see a very significant increase in interest in renewable energy. The power market has set targets that will increase the use of renewable energy in all sectors,” says Jan Graeff, Senior Vice President and Managing Director South East Asia & Australasia of the DPCleanTech Group. He notes that highest targets are in the biomass sector.

The International Energy Agency of Thailand reported last year that Thailand’s energy consumption is the second highest in Southeast Asia. The demand is expected to grow by 75% by 2035, with the annual energy import bill rising to a staggering $70 billion.

Tony Segadelli, Chief Engineer and 18 ASIAN POWER

“With the economy expected to grow at 3.5-4% per year until 2030, the Thai power sector would be growing at 5-6% per year“

Managing Director at Owl Energy Consultants, says Thailand’s peak power demand is approximately 27GW, with approximately 33GW of capacity installed. With the economy expected to grow at 3.5-4% per year 2030, the Thai power sector would be growing at 5-6% per year.

While the coup has had no significant impact on the power sector, Investment Analyst Chaipat Thanawattano of SCB Securities Co. says investors will keep an eye on the energy sector reform which would focus on the oil price structure.

“I believe the next move is to review the prolonged Power Development Plan, which could include more promotion for renewable power plants and coal-fired independent power producers,” he says.

Bank financing The U.S. Energy Information Administration (EIA) reported that Thailand imports over 60% of its total petroleum needs and 85% of its crude oil consumption, making Thailand dependent on global oil markets and volatile prices, undermining the security of supply.

Graeff says it is for exactly these

reasons that the government and big banks in Thailand are signalling interest in renewable energy projects. As well as structural and regulatory security, the choice of partners for renewable projects is a key factor in reducing risk, and those companies which have proven capabilities, references and guaranteed performance are important contributors to the long term economic viability of the industry,” he adds.

Dr. Ulrich Eder, Managing Director of Pugnatorius in Thailand, says his law firm advises international clients to use a financing structure called “free carried interest.”

“Such a feature has been globally developed mainly for mining projects which need a high capitalization of asset intensive transactions,” he says, explaining that under the free carried interest structure, the power project developer permanently keeps a share of 9% or 10 % and is not required to participate in financing future expansions.

“In other words, he benefits without any dilution as renumeration for his project development,” he explains. This means a power project developer with a low capitalization can successfully

COUNTRY REPORT 1: thailand manage high volume projects, although he agreed that there are legal and tax issues that have to be considered.

Exploring other sources What the government needs is a clear policy to promote renewable energy, especially in potentially lucrative sectors such as solar and wind power, according to experts.

“Solar power has a bright future in Thailand,” Segadelli says. He cautions, however, that the main barrier to solar projects is policy constraints, especially because there are no new solar power purchase agreements (PPAs) being issued. But the new solar tariff of THB6.16-6.96/kWh is sufficient to provide investment grade IRR, he adds.

Analysts say that streamlining the permitting process and offering tariff incentives and tax holidays will also encourage investors. Segadelli says that developers might want to take advantage of the next solar wave which will be small scale rooftop followed by the one tambon (village) 1 MW scheme, which could add up to 1GW of solar.

“However some of the guiding principles remain; especially acquisition of land for placing the panels is critical. The government needs to set policy in place to minimize the likelihood of speculators flipping PPAs and selection of competent EPC (Engineering, procurement and construction) contractors who join with experienced subcontractors,” he says.

The PFI Global Energy Report 2014, “Renewable Investment in SouthEast Asia,” states that in the region solar energy development has been most active in Thailand, with about 880MW installed as of March 2014.

What prompted this rapid development was primarily the adder scheme

introduced by the government in 2007, which offered an incremental adder of US$0.25/kWh, later reduced to US$0.20/kWh in 2010.

By 2013, the Thai government said it would replace its adder scheme with the conventional Feed-In Tariffs (FiT) scheme beginning in 2014. The scheme offered competitive rates, although it was not as lucrative as the adder scheme. It also offered and extended tenure of 10 to 25 years.

Thanawattano agrees that while solar power is the next big investment opportunity in Thailand, most of the current operators are still waiting for the next round of power purchase. When that would be remains unknown.

Local financing But at the same time PFI reported that local banks are actively involved in providing financing to large-scale solar farm developments by both local and foreign developers.

The 34.25MW solar farm in Nakhon Pathom undertaken by Kasikorn Bank and Bangkok Bank, are without multilateral supports. It added that traditional international projectfinance power houses such as SMBC, BTMU, StanChart, and Mizuho, along with upcoming players such as Maybank, CIMB, DBS, OCBC, are also all active in the region.

Apart from solar power, Thanawattano says investors are also studying the potential of wind power. “New technology of low-wind turbine could be positive for Thailand’s wind power generation,” assures Thanawattano.

Thailand, however, remains highly dependent on its neighbour Laos for hydropower. The government has agreed to purchase 7,000 MW of power from

Total energy consumption in Thailand, by type (2010)

Jan E Graeff

Tony Segadelli

Ulrich Eder

Laos by 2015.There is also clamour for clean coal technology. “The coalfired IPPs could be promoted through more education to the community with a greater emphasis on clean coal technology,” Thanawattano says.

“The coal energy would remain important given the abundant resource but the community’s aforementioned concern about environmental impact should be resolved.”

Segadelli says the natural gas supply in the Gulf of Thailand is depleting, with no clear direction for the next concession bidding.

Coal energy Coal energy does not look too promising because of rising community opposition due to environmental impact. “Coal in Thailand has very bad public sentiment, which is being made worse by the Electricity Generating Authority of Thailand or EGAT’s, decision to try to develop a coal plant in the pristine environment of Krabi,” Segadelli says.

Overall, Segadelli finds that Thai power projects are easier to finance than those in neighbouring countries.

“The Thai power sector has been proven over more than 20 years and the PPA documents have become standardized, therefore Thailand is seen as an easily bankable country.

It also results in much lower rates of return than other, less developed countries in ASEAN,” he says.

Lenders are also comfortable with the Thai regulatory regime and are in fact increasing their exposure in the Greater Mekong sub-region, which is expected to increase as Myanmar’s economy improves.

“The military has instigated a lot of the pro-growth policies developed by the previous government which has enabled Thailand to exit recession.

This will inevitably lead to higher power demand,” Segadelli says.

He also assures that while the military has not announced any plans for new elections, “it is imperative that the economy keeps growing, otherwise political instability will return.”

Renewable energy potential

Source: EIA International Energy Statistics

Source: Tongsopit and Greacen 2012; DEDE 2012c.

ASIAN POWER 19

20 ASIAN POWER

ASIAN POWER 21

sector report 1: China solar sector

China’s 14 GW solar installation target is far-fetched

Why China may fail to meet the 14GW solar installation target Visits to China solar companies caused Deutsche Bank analysts Eric Cheng and Michael Tong to conclude that the goal this year may be unreachable.

T

he industry has been discussing a likely increase in the installation quota of large-scale ground mounted solar farms. However, with major challenges on grid curtailment (e.g.

Gansu province) and the NEA unlikely to shift its policy stance away from encouraging distributed solar, we are unlikely to see the government increase its 6GW quota for ground-mounted solar farms in 2014 by shifting some of the 8GW quota away from distributed solar generation We acknowledge the market will likely trade the sector on the qoq demand growth momentum but believe China’s 2014 solar installation would be below the earlier expectation of 14GW (at c.1012GW, of which c.7-8GW in 2H14E).

Key takeaways from Gansu and Qinghai We visited the renewable energy infrastructure in Gansu and Qinghai. We also met government officials, industry experts and industry players during our trip to China. Overall, we do not see any urgency for the government to raise the 6GW quota for ground-mounted solar farms for 2014 and maintain our view that the installation of distributed solar generation would fall short of the 8GW quota.

22 ASIAN POWER

We do not see any urgency for the government to raise the 6GW quota for groundmounted solar farms for 2014.

Our total 10-12GW installation estimates have considered some project installations which would still be willing to take that risk and start construction ahead of approvals.

Grid curtailment issues would limit room for higher quota in 2014 China has set a 6GW quota for groundmounted solar installations in 2014. The quota for solar installation cannot be exceeded once set and projects that are not on the renewable energy approval list will not be eligible for receiving renewable subsidies.

Quotas for provinces such as Gansu, Qinghai, Xinjiang, Ningxia, Inner Mongolia, Shaanxi, and Hebei would only be valid if there is no serious grid curtailment.

Applications need to receive preliminary approval first, which requires consent to grid connection from the power grid, feasibility study, environmental assessment report, etc.

The most difficult part is obtaining the grid company’s consent on grid connection. Once the project gets preliminary approval, it can then apply for local NDRC approval and submit it to the NEA for filing. The NEA has the right to

exclude projects it deems inappropriate and only those projects that are included in the NEA’s (and Ministry of Finance’s) approval list will be eligible for renewable subsidies payment.

We believe the quota for groundmounted solar farms is unlikely to be increased in the near term, as: The grid curtailment issue for renewable energy in the western provinces is unlikely to be resolved in the near future and approving more quota will likely aggravate the situation.

For example, the grid curtailment ratio for wind power was quite serious in Gansu in 2013 (at c.20-21% according to the NEA).

The government’s policy objective is to push for more distributed solargeneration; shifting some quota to groundamounted solar farms would deliver an inconsistent signal to the market.

A quota shift to ground-mounted solar from distributed solar would require more government subsidies (Rmb0.42/ kWh subsidy for distributed solar from the renewable energy fund, vs. Rmb0.50.6/kWh for solar farms, plus higher utilization hours for solar farms).

True, grid infrastructure is improving, but is unlikely to change significantly before late 2015. For example, the +/-800kV DC line (7.5-8.0GW of transmission capacity), which will connect Jiuquan in Gansu with Zhuzhou in Henan, only got its preliminary approval in late 2013 and is unlikely to commence operation before end-2015 at the earliest.

Investment appetite We also see less enthusiasm for some solar farm investors to invest in the western provinces now than in 2013, due to the following factors: There is near-term uncertainty in cash flow generation on rising grid curtailment in some areas (e.g. Jinchang and Jiuquan in Gansu province), and disruption of electricity dispatch due to “grid maintenance” (e.g. Geermu in Qinghai province).

It is relatively more difficult getting consent from the grid company due to grid congestion (one of the key conditions of obtaining preliminary approvals).

It is relatively more difficult to get low-cost financing (especially for some private investors whose interest cost can be above 7%), and greater working capital requirements due to delays in subsidies payment (can be three months or longer) and delays in on-grid tariff settlement (as the grid company would only settle the payment after official grid connection, which may take 6-12 months after project completion).

Large state-owned IPPs seem to prefer

sector report 1: China solar sector investment in wind farms (vs solar farms and distributed solar power) in the term, as they believe: Wind farm makes more commercial sense, as it relies less on government subsidies (feed-in-tariff for wind farms is Rmb0.51-0.61/kWh, vs Rmb0.9-1.0/kWh for solar farms).

The business model for distributed solar is still not very favourable (e.g. it is difficult to locate suitable roof-tops and secure good customers with strong credit to enter into long-term power purchase agreements).

It is difficult for local power demand growth to keep pace with renewable capacity growth.

Renewable energy capacity and the situation in Gansu and Qinghai According to the NEA, China’s grid connected capacity for solar increased by 12,118MW in 2013, with Gansu province up the most (by 3,842MW) while Qinghai province was up 963MW. For Gansu province, the total gridconnected capacity for solar and wind accounted for 32% of total installed capacity as at end-2013 (up from 24% at end 2012).

For Qinghai province, the total gridconnected capacity for solar and wind accounted for 19-20% of total installed capacity as at end 2013 (up from less than 15% at end-2012).

Utilization hours for solar farms can reach 1,800 hours in some areas in Qinghai and the estimated average utilization hour during the 25-year period would be around 1,600 hours after taking degradation into account.

However, the actual situation can be different (e.g. utilization for wind is still under grid constraint), with the dispatch of renewable energy at the expense of conventional coal-fired power generation.

Utilization of wind power in Gansu and Qinghai were still below 2,000 hours, at 1,806 hours and 1,753 hours respectively in 2013.

Utilization of coal-fired power plants in Gansu and Qinghai were down 54 hours and 73 hours, to 1,270 hours and 1,706 hours in 1Q14, despite lower utilisation of hydro power during the same period (coal- and hydro-power used to compleChina’s large - scale solar farm additions (2013)

Source: Deutsche Bank, National Energy Administration

ment each other).

The construction of ultra high-voltage transmission lines is one of the solutions to address the grid curtailment issues Currently, there are two 750kV AC transmission lines supporting the power transmission outside Gansu province (c.7.5GW of transmission capacity).

Such capacity also supports electricity transmission from Xinjiang province, but it is not sufficient to accommodate the substantial increase in Gansu province.

The grid company is planning another transmission line (+/-800kV DC), which will connect Jiuquan in Gansu with Zhuzhou in Henan and has received preliminary approval in late 2013.

The transmission line can add another 7.5-8.0GW of transmission capacity outside the province before end-2015 at the earliest.

Local power demand Another way to address the grid curtailment issue is to rely on the increase in local power demand (e.g. higher electricity consumption by industrial users).

However, it is difficult for local power demand growth to keep pace with renewable capacity growth, unless the local government introduces significantly more energy-intensive industries into the province (this could increase the problem

of pollution, though).

As for reference, the installed power capacity for solar and wind in Gansu reached 11-12GW by end-2013, which is comparable to the maximum power demand in Gansu, likely to be c.14-15GW. However, after including hydro, the total renewable energy capacity of 18-19GW is c.30% above the maximum power demand in the province.

Installed power capacity The installed power capacity for solar and wind in Qinghai was 3.34GW by end-2013. However, the renewable energy capacity of over 14GW after including hydro is c.55-60% above the maximum power demand of c.9GW in the province The installed power capacity for solar and wind in Gansu reached 11- 12GW by end-2013, which is comparable to the maximum power demand in Gansu, likely to be c.14-15GW. However, after including hydro, the total renewable energy capacity of 18-19GW is c.30% above the maximum power demand in the province.

The installed power capacity for solar and wind in Qinghai was 3.34GW by end-2013. However, the renewable energy capacity of over 14GW after including hydro is c.55-60% above the maximum power demand of c.9GW in the province.

China’s cumulative solar farm capacity (2013)

Source: Deutsche Bank, National Energy Administration

ASIAN POWER 23

COUNTRY REPORT 2: korea

Korea aims to increase investment in renewable energy

Turning wind into value: South Korea moves to tap huge wind power potential With a new policy, the country gears up for an influx of clean energy investments. By 2022, the total wind energy share in its total energy mix is projected to reach 46.8%.

S

outh Korea takes the spotlight yet again, and it’s not because of K-pop.

This East Asian country is the next investment hot spot as it is poised to be among the top wind energy producers in the world.

With worldwide demand for energy growing, markets are looking to renewable sources, paying special attention to wind power. “The wind’s cost competitiveness is its greatest advantage in the market place,” said the Global Wind Energy Council (GWEC), an international trade association for the wind power industry, in its 2013 report.

The council says that in countries like China, the support for wind as a main pillar of its energy strategy has led to the continued growth in the market. China has installed about five times as much wind power as Germany. The group estimated that market growth over the next five years will be concentrated in Asia, Latin America, and Africa, “where the ‘easy’ growth from a rapid increase in demand and strong economic growth will come from.”

Mostly driven by China, GWEC said Asia is likely to overtake Europe as the region with the most deployed wind capacity by the end of 2014. For the sixth 24 ASIAN POWER

“For the sixth year in a row in 2013, Asia was the world’s largest regional market for wind.”

year in a row in 2013, Asia was the world’s largest regional market for wind. “Wind power generation is likely to continue to develop rapidly in South Korea, due to increasing technology maturity and its economic feasibility,” according to research firm EOS Intelligence.

In South Korea, the total wind energy share is projected to reach 46.8% in the renewable energy mix by 2022. The country’s huge energy consumption and heavy dependence on natural gas and coal has prompted the government to seriously rethink its options.

The challenge South Korea’s electricity demand has increased by an average of 5% annually over the past decade, with demand expected to grow 3.7% annually through 2020, primarily driven by industrial use, Korea Power Exchange Manager Ho Hyern Youn says. Figures in 2012 show fossil fuels accounted for 70% of total generation, 29% from nuclear power, and nearly 2% from renewable sources. But in the Korean government’s proposed 6th long-term power plan (2013-2027), Ho Hyern Youn said the share of renewable will exceed that of liquefied natural gas by installed capacity in 2027. Coal will be

28.5%, nuclear will be 22.8%, renewable energy will be 20.3%, and LNG will be 19.8%.

As among the top 10 energy consumers in the world, South Korea is also among the largest energy importers globally.

According to Global Trade Atlas, South Korea is highly dependent on the Middle East with over 87% of South Korea’s 2013 crude oil imports sourced from that region. Korea’s energy imports have risen to 95%-97% of fossil fuels used for domestic power generation, bringing the energy bill in excess of $125 billion.

For cost efficiency and energy independence, then Korean president Lee Myung-bak in 2008 committed to increase investment in renewable energy. In 2012, South Korea adopted an ambitious set of targets for clean energy generation, with a government target share of 10% in renewable resources for power production by 2022, by focusing on wind and tidal generation.

South Korea is also promoting the use of renewable energy to reduce its carbon dioxide emissions by 30% in 2020. EOS reported over 45% of renewable energy in 2022 will be generated by wind power, with a goal of developing 23GW of wind generation installed capacity by 2030.

COUNTRY REPORT 2: korea “With clear indication that wind power harvesting is key to Korea’s ambitious renewable energy plans, it seems natural that the government, together with the country’s leading industrial groups, is keen on developing the wind energy space into a long-term business opportunity,” the group says.

This energy market is so appealing that many Korean shipbuilding and heavy industry companies are already adding components used in the wind power industry in their product portfolio, according to EOS. The potential What makes Korea ideal for wind power is its mountainous terrain and long coastal lines. With the new set of targets, French power and transport engineering company Alstom says location is key.

“A major issue hindering the growth of wind energy would lie in the availability and suitability of a location. The shortage of usable land is a key reason why Korea is developing the world’s largest offshore wind farm,” says Alexis De Beaumont, Vice President of the Europe, Middle East Africa and Asia Pacific Region Wind Business of Alstom Power.

He says the “increasing demand for renewable power, along with the government’s R&D funding to support technology innovation, is a positive move to support the growth of renewable power as an energy source in Korea. As a key player in offshore wind, we continue to focus our efforts in technological advancements and operational effectiveness to reduce the cost of implementation as much as possible. These efforts will help improve economics of projects and contribute to the sustainability of the offshore wind industry.”

Other challenges, de Beaumont says, lies in the current environmental regulations in place, along with the complicated approval process for the setting up of wind farms in mountainous areas. “Perhaps the authorities can relook at the policies in place and allow the expansion of existing wind farms.”

South Korea is developing the world’s largest offshore wind farm with a capacity of 2.5 GW, which is expected to be operational in 2019.

The challenging terrain, Ho Hyern Youn says, is the reason why the majority of the wind resource is located in the mountainous eastern region and offshore.

Along with nuclear power, significant investments in offshore wind farms and other renewable sources are set to expand over the next decade.

GWEC says the Korean government had put forward a strategy for offshore wind development with a target of 2.5 GW by 2019. The location and the intermittent nature of the wind are the most important factors to consider when

harnessing wind energy.

Another factor that could impede the sector’s growth is the high capital expenditure from the extensive subsidies from the government.“In the long run, these subsidies could affect the welfare of the country. Harnessing wind power should be done at a sustainable level and subsidies could become a barrier,” De Beaumont says.

“Wind power installed capacity in Korea has comparatively been slowly increased in the past 10 years mainly due to lack of the project viability under the feed-in tariff scheme, and partly due to the lack of public acceptance. However the businessmen have recognized that the wind energy business will be viable and attractive to invest in the future,” Ho Hyern Youn says.

One of the major wind projects involves Alstom, which was awarded a contract

by GS Engineering & Construction, an engineering and construction services company in Korea, to provide wind turbines for Gimnyeong wind farm in Jeju Island. De Beaumont says Alstom’s Haliade (150-6MW) is the latest innovation for offshore wind turbines.

With its 150 metre diameter rotor, this turbine is more efficient, with a yield 15% better than existing offshore turbines.

“An advanced design with innovative technology, reliability and efficiency, the Haliade 150-6MW is the edge for harnessing offshore wind energy,” he claims.

Once it’s operational by the end of 2014, the project will have a production capacity of 30MW. Sustainable energy mix EOS reports that in recent years, the government has granted renewable energy technologies a 5% tax credit. It has also provided subsidies to local authorities of up to 60% for renewable facilities installation, and granted local authorities

Alexis de Beaumont

Ho Hyern Youn

low interest loans (5.5%-7.5%) for renewable energy development projects.

Overall, the government has a staggering $2.6 billion in subsidies and loans to the sector. In the overall renewable energy generation mix, wind power is projected to be the lion’s share with 46% by 2022, overtaking solar and waste-based energy generation. And while nuclear power in South Korea is seen to expand over the next decade, its declining popularity among the public may just provide a needed boost to the wind sector.

“Concerns over the safety of nuclear power generation have been raised since the Fukushima disaster in 2011, and the matter has been compounded with the difficulty of finding sites for the construction of atomic power stations.

Under the circumstances, the working group is considering that the nuclearfriendly policy cannot hold any longer,” Ho Hyern Youn says.

South Korea, he says, has the highest density of nuclear reactors in the world and its 23 reactors make up 26% of the power mix. “Renewable energy faces stiff opposition from conventional power sector players and utilities as the zero marginal cost of solar and wind is upsetting the old and established business models,” GWEC notes.

Generation mix outlook by year

Sources: Enerone; Renewable Energy Focus; Korean Ministry of Environment

ASIAN POWER 25

feature: PHILIPPINE ENERGY POLICY

The Philippines requires 1000MW of new generating capacity every year

Why the Philippines shuns energy subsidies The government argues that other countries in Asia should follow suit if they seek a sustainable framework.

T

he Philippines has recently become of interest to many investors as it is only now that the country is behaving as an Asian economy. That is the argument of Constellation Energy Corp chairman Jose P. Leviste Jr., who adds that the Philippines is a good area for energy investments simply because the supply is not enough to meet the demand amid a glowing economy.

“It’s an exciting sector but you should have a lot of patience because it takes time to push through projects here,” he says. One of the challenges is that the Philippines has the highest electricity rates in Asia.

Energy subsidies During the Power and Electricity World 2014 convention in June in Pasay City, Gloria Victoria Yap-Taruc, Commissioner at the Energy Regulatory Commission (ERC), said the country’s high dependence on imported sources of energy makes it vulnerable to price shocks in the international markets. She reports that as of 2011, imported oil and coal plants comprised 49% of the energy mix.

“Fuel for these plants is paid at full international market prices while domestic gas plants, which comprise approximately 18% of the energy mix, are supplied indigenous natural gas at prices which are pegged to international prices,” she says.

26 ASIAN POWER

“The country needs around 1,000 MW of new generating capacity every year between now and 2030 and that it intends to ensure that most of that new supply will come from renewable sources.”

The Philippines today has 14 coal plants, which make up only about 35 percent of total power generation capacity for the country. The high costs are also because of the restructuring of the electric power industry in 2001 that removed cross-subsidies, Yap-Taruc says.

Other countries in the region are offering subsidies and special rates to manufacturers and exporters, resulting in lower power rates. Some foreign investors say that the high cost of electricity is the biggest hindrance in investing in the country.

ERC has reported that foreign direct investments in 2013 were pegged at only $2.7 billion. While Thailand posted $16.1 billion, Malaysia had $11.7 billion, and Indonesia hit a record of $28 billion.

“The problem in the power sector lies on how to finance power projects,” says Pedro H. Maniego Jr., chairman of the National Renewable Energy Board.

But the International Energy Consultants has commended the Philippines’ power supply tariffs for being reflective of the actual costs, saying other Asian countries should follow suit if they seek a sustainable framework.

Yap-Taruc says countries like Thailand, Indonesia, Malaysia, Korea, and Taiwan provide government subsidies to reduce their average tariffs in the form of government-imposed tariff, fuel cost caps, and direct government subsidies for utility

losses, including forex losses. “In fact, other Southeast Asian governments are now experiencing a drain in their fiscal resources. They are impressed at how we managed to make our electricity reflective of the true cost of generation. They are also considering providing a lifeline rate to their marginalized end-users similar to what we are doing,” she says.

Potential for renewable energy The ERC sayscosts will improve and demands will be met by diversifying the country’s energy mix. The current mix is composed of coal, oil-based, natural gas, geothermal, hydro, wind, and solar.

“The Philippines’ prospects are bright for renewable sources of energy. Harnessing indigenous renewable energy resources will mitigate our dependence on costly energy imports,” Yap-Taruc says.

By ERC’s estimates, the country needs around 1,000 MW of new generating capacity every year between now and 2030, and that it intends to ensure that most of that new supply will come from renewable sources.

The Philippines is the 2nd largest producer of geothermal power in the world. The targeted additional capacity for geothermal is expected to reach 1,495 MW by 2030, 5,394 MW for hydropower and 350 MW for solar also in 2030, and 276.7 MW for biomass energy in 2015, according to the ERC.

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POST-EVENT FEATURE: VENTYX in manila

Forum attendees discuss the issues facing the Philippines’ renewable energy sector

Renewables face financing and cost headwinds in the Philippines

The biggest barrier to quickly deploying more renewable energy, especially solar, remains cost.

S

ome of the Philippines’ leading power generators shared their views on renewable energy at the Asian Power Energy Insights luncheon held in association with Ventyx. The event was held at the EDSA Shangri-La on May 27.

The Philippines market is still a market struggling with generating enough power during peak periods, especially during the summer months. Meanwhile, in the provinces and rural islands that make up much of the Philippines, the remoteness makes it difficult to not only establish a grid but also to get fuel in.

All of this means that the Philippines has the highest cost of electricity to consumers in Asia, even more expensive than Japan. The major part of this high cost is due to both the cost of transporting fuel throughout 7,000 plus islands in the Philippines and the fact that few are connected to the grid. Yet, there are some bright spots for renewable in the country.

Thirty percent of power generated in the Philippines is through renewables, and the country is the world’s largest generator of geothermal energy as a percentage of total power generation.

Perhaps the biggest barrier to quickly deploying more renewable energy, especially solar, remains to be the high investment cost. There is no shortage of 28 ASIAN POWER

“It can take up to 180 separate permits in all from a myriad of different government organisations before work can begin on a power plant.”

capital for investments, however, subsidies (used to recover the investments) for missionary electrification is limited. This means that solar plants would have to be cost-effective with other types of generation, and currently it is not. Edwin Zaldivar, engineer manager, Peninsula Electric Cooperative, said the primary reason is cost of renewables. “It’s more expensive to operate. Vendors have offered us to invest in a solar plant for $100m for 7.5MW solar power, and return is 15 years.” And, that’s not all.

Solar installations Many of the areas that would be ideal for small solar installations have a peak demand for electricity at night when there is no solar energy, and current battery storage technology is not cost-effective.

The National Power Corporation (Napocor) is responsible for many of the small utilities that service remote villages and locations. The plant capacities of the 301 NAPOCOR - SPUG (Small Power Utilities Group) plants range from 50 kW to 7.2 MW. Godofredo B. Magpoc, Jr., corporate staff officer B, Office of the President, Napocor, said typically these small plants are powered by diesel generators, which makes them expensive given the cost of

importing and then trucking or shipping fuel to the point of generation. But, even for Napocor solar won’t become a really viable option until the cost of battery technology is able to store solar energy from day to use at night. The discussion included talk of some vendors promising that cost-effective battery storage solutions for small-scale solar will be available in around three years, and it’s therefore likely that the Philippines will employ a lot of that technology when it’s commercially viable.

Another challenge to rolling out new plants is permitting. It can take up to 180 separate permits in all from a myriad of different government organisations before work can begin on a power plant.

Many planned plants, such as a hydro plant serving Tarlac province, which was approved by President Estrada over a decade ago, are still held up pending more permits.

Godofredo D. Lumboy, board president, Tarlac II Electric Cooperative Inc. noted that if the hydro scheme were approved it would provide enough electricity for the province, but that lobbying of the president continues. Access to financing also remains a major hurdle for utility companies, regardless of whether it’s for a renewable or geothermal source.

POST-EVENT FEATURE: VENTYX in manila “Usual contracts sought by financial/banking institutions will only be available after the developer has expensed for the project.”

Tim Charlton and Ventyx representatives with all the participants

Yaj Malik, Regional Vice President, South Asia, Ventyx

Min Kyu Choi, Country Manager - Philippines, ABB

One problem is that, generally, utilities won’t commit to buy power until the plant is completed and certified, but project financiers won’t agree to finance a plant unless it has a guaranteed customer. Such a chicken-and-egg situation means that often it’s the local banks with investments in power generators who are able to bear the risk internally and finance the plant internally.

Financing issues Janssen Dela Cruz, AVP business development at Global Business Power Corporation (GBPC), a power generation company, said, it is a challenge for RE projects to secure favourable financing because the FIT contract only gets awarded after 90% electro-mechanical completion.

This means the usual contracts sought by financial/banking institutions will only be available after the developer has expensed for the project and if they made it for the FIT allocation window.

Dela Cruz also noted that GBPC manages this challenge through strategic partnerships with premier organizations with very good track records. This gives financial institutions more confidence to support its projects.

Ventyx regional vice president for South Asia Yaj Malik said one thing utilities could do to reduce capital expenditure is to move to more of a preventive maintenance strategy in order to make the most out of every dollar. “If you lower the running cost of your business, you can release capital from running your business to growing your business.”

Targets for the introduction of renewable energies in the Philippines

Tim Charlton moderates the discussion

Janssen De La Cruz, AVP Business Bevelopment, Global Business Power Source: Asia Biomass Office

Primary energy supplies in the Philippines

NAPOCOR representatives Renante Calago and Godofredo Magpoc

Tim Charlton with Tarlac II Electric Cooperative representatives

Source: Asia Biomass Office ASIAN POWER 29

POST-EVENT FEATURE: VENTYX in malaysia

Tim Charlton with the roundtable attendees

Malaysia adopts a cautious approach to Smart Grid as energy exports set agenda Malaysia has just embarked on an asset-based regulatory regime, but there is still no approval for smart grid.

M

alaysia is adopting a step-bystep approach to smart grid implementation and is still looking for the right funding model, according to participants at the Asian Power/Ventyx briefing held in Kuala Lumpur on May 29. Representatives of one of Malaysia’s regulators for electricity, the Energy Commission, were present to give their thoughts on smart grid, as well as two grid operators, TNB and SEB. Abdul Razib Dawood, head of market operation at the Energy Commission of Malaysia, noted that the regulator’s role is to both advise the ministry on policy as well as act as regulator. “We issue licenses to Tenaga TNB as well as the independent power producers (IPPs), and we conduct the open bidding of procurement for power plants, and we regulate electrical safety. We will soon regulate on piped gas as there will be third-party access to the pipeline, and soon there will be a regas terminal near Johor,” said Mr Dawood.

For renewable energy in Malaysia the quota is set by SEDA (Sustainable Energy Development Authority) whilst the license is given by the Energy Commission.

“Every consumer in Malaysia pays 1.6 percent of their bill to pay for the feed-in tariff for renewables such as biomass, rooftop solar and biogas. In Sabah soon 30 ASIAN POWER

“Every consumer in Malaysia pays 1.6 percent of their bill to pay for the feed-in tariff for renewables such as biomass, rooftop solar and biogas.”

we will have the first geothermal plant in Malaysia, which will also come in under the feed in tariff mechanism,” said Mr. Dawood.

Ventyx executive vice president Ray Kasten said that for many years in the US capex was not being approved within transmission until it got dangerously close to upsetting the grid, and the same thing happened in distribution. “Now there are major capital expenditures going on where we have to catch up for years of neglect. What is the situation in Malaysia?” asked Mr. Kasten.

Investments in infrastructure According to Mr Dawood, Malaysia has just embarked on an asset-based regulatory regime, and TNB just got approval to spend from 2014 to 2017, but there is still no approval for smart grid. “We have approval for the wires and infrastructure, but there is no smart grid investment,” noted Mr Dawood.

Indeed investment in infrastructure remains a key issue in Asia. ABB Regional Manager for Power Systems Johan de Villiers noted that across ASEAN, governments need to spend around 5 percent of GDP but are currently spending 1.5 percent with electricity in the best shape, but there is a massive need for investment.

In Malaysia there is a big issue around retiring old plants and adding new capacity in a market where demand is growing 3-4 percent a year. Mr Dawood noted that Malaysia is retiring the first generation plant in 2015 in Malaysia at the 3000 MW size, and it is being replaced with 5000MW of coal.

“So, every year going forward we have 1,000 MW of plants being added, and we have a 3- to 4-percent demand increase annually, so we have to replace the retiring plants. This is why we are looking at smart grid. Our oldest asset is 30 to 40 years old, but our 500 Kv network is relatively young as it was commissioned around 1997.”

A key issue for smart grid implementation in Malaysia is funding. Smart grid budgets can only be made where savings can be shown to result out of a smart grid implementation. This is similar to the Australian model but different from the US model where fiscal spending stimulus kick started smart grid investments.

Mr. Kasten noted that if you just put in a smart meter there is not a lot of cost benefit, but if you can shave some points off spinning reserves or do distribution system optimisation there are benefits.

“Managing the network and balancing the network, that’s how you can justify the investment. A smaller utility in the Midwest

POST-EVENT FEATURE: VENTYX in malaysia of America did an investment in smart grid, and they shaved 80 MW off peak hours and they have 700,000 customers, so that made a lot of savings that the commission allowed them to reinvest,” said Mr Kasten.

Evaluating smart grid deployment In Malaysia there are currently no plans for the government to kick start smart grids with a direct fiscal investment, but nevertheless TNB is looking at how smart grid could be funded through capex reductions. Mr Dawood said, “as long as TNB can spend on smart grid without raising the budget we are happy, as we are not passing the cost on to consumers through the tariff.

“We are looking at the peak shaving benefit, and in Malaysia this is a particular issue when the fuel is heavily subsidised.

Usually the peaking plants use gas. So, say you save A RM 1bn subsidy, so perhaps that saving can go into the smart grid project,” he added.

TNB is currently evaluating smart grid deployment through a pilot project in Malacca where 1,000 customers are connected up to a smart grid. The

“One big difference in Malaysia is the effect of subsidies and how enterprises use electricity, whereas in Australia everything is marketpriced.”

purpose is to see how the data seen in the field compares to models from overseas countries so that they can better model a business case for wider smart grid deployment. Loo Kok Seng, coordinator of the TNB smart grid steering committee, said the pilot project was sponsored by the government electricity supply industry fund from the metering end to the communication technology and to the data management system and integration to the back end.

“So the aim of the pilot is to enable us to understand and learn the challenges. The technology is not a major issue. However for the next 10 years at each phase what should be our plan and priority and we are looking at the business case for the next few years. We will use the results of the trial as an input to the model together with the data and experiences in other countries to establish a robust business case,” said Mr Loo. He adds that one difference in Malaysia is the effect of some degree of subsidies in energy price on the consumption pattern of consumers as compared to some developed countries like the US, Europe, Australia, and New Zealand.

“Also in the US, a significant smart grid driver is the demand response program and online energy monitoring/management, but this is something relatively new in Malaysia,” said Mr Loo. Plans for energy exports Meanwhile Chen Shiun, head of R&D at Sarawak Energy, the utility company in the state of Sarawak, Malaysia, said its plans to start energy exports to nearby Indonesia were a catalyst for a smarter grid.

“Our assets are mid-life so we are in the process of expansion due to industrialisation, and we are looking at how to adopt smart grids as we expand. We are looking at expanding our special protection system to cover all kinds of contingencies.

We are exporting 230 MW to Indonesia by next year so what happens if we lose that link? We also plan to leapfrog one generation of distribution automation and go straight to smart grid,” said Mr Chen.

In relation to the company’s plans to export power to neighboring countries, Sarawak is also exploring to add another 3,000MW of hydropower by 2025, which will be used primarily to drive the development of the energy intensive industries.

Pn Huzairin Bt Mohd Radzi, Senior Manager (Sustainability & Green), Planning Division, TNB

Abdul Razib Dawood, Head of Market Operation, Energy Commission of Malaysia

Dr Chen Shiun, General Manager, Research & Development, Sarawak Energy

Loo Kok Seng, Coordinator, Smart Grid Steering Committee, TNB

ASIAN POWER 31

sector report 2: DiSTRIBUTION in india

Of all impaired loans at public-sector banks, 20% are discom exposures

See how troubled power distribution companies are threatening Indian banks One in five impaired loans at public banks are distribution company (discom) exposures.

T

he poor financial health of State Electricity Board Distribution Companies (discoms) in India is one of the key factors weighing on the asset quality of the country’s banks. So far, these problems have almost exclusively affected public-sector banks, which have significant direct exposure to this component of the electricity supply chain.

Of all impaired loans at public-sector banks, 20% are discom exposures, with the proportion ranging as high as 50% at some of the most exposed banks. In contrast, private-sector banks have almost no direct discom exposure.

Government measures taken over the last two years have provided temporary relief to the exposed banks. However, we believe that the structural issues have not been fully addressed and that unless more fundamental reforms are undertaken, discoms will continue to pose a threat to the banks. Worse, if the poor financial profile of discoms is not addressed, it could increase the risk of defaults by other borrowers in the electricity supply chain, especially power-generating companies which are also creditors of the discoms.

Bank exposure to discoms Public-sector banks have both direct and indirect credit exposure to discoms.

32 ASIAN POWER

“If the poor financial profile of discoms is not addressed, it could increase the risk of defaults by other borrowers”

Private-sector banks have almost no direct exposure, but they are exposed indirectly if problems with discoms affect the credit quality of other borrowers in the electricity supply chain.

For rated public-sector banks, loans to discoms as a proportion of total loans range from 1% at SBI, to 14% at CBI as of the end of 2013. While loans to discoms are a relatively small portion of overall loans, they are a much larger share of many public-sector banks’ impaired loans, with impaired loans to discoms comprising more than 10% of total impaired loans at all public-sector banks except for SBI and reaching levels as high as 46% at OBC and 48% at CBI. Loans to discoms account for a material proportion of public-sector banks’ impaired loans because some discom loans were restructured over the past two years after the implementation of the FRP. Restructuring as part of the FRP involved an extension of the loan duration and a reduction in interest rates, thereby presumably causing net present value losses for the exposed bank. These restructured loans are typically classified by the banks as standard performing restructured loans, and not as non-performing loans.

Private-sector banks have minimal direct lending to discoms, but they do

lend to other parts of the power sector, in particular to power-generation companies, and are thus indirectly exposed to any further deterioration in the financial health of discoms.

Unlike public-sector banks, which in many cases effectively had no choice but to provide credit to discoms given government ownership and its role in their management, India’s private-sector banks have mostly avoided directly lending to discoms given their weak finances. Nevertheless, they have continued lending to other parts of the power sector, which has been one of the fastest-growing loan segments for Indian banks since 2009.

Between 2009 and 2013, the compound annual growth rate (CAGR) of total system loans to the power sector was 30%, compared with 20% growth in loans to industry and 18% overall system loan growth). The rapid growth reflects both loans to power-generation companies setting up new capacity (provided by both public- and private-sector banks) as well as working-capital loans to the discoms to bridge their cash-flow needs (provided almost entirely by public-sector banks).

Poor finances The fundamental problem with discoms’ finances has been uneconomical pricing

sector report 2: DISTRIBUTION in india of power sold at the end-user level–the unit cost of supply has been consistently higher than the end-user unit pricing. In essence, discoms on average lose money on every kilowatt-hour of power they provide to users even after the government subsidies they receive are taken into account.

Almost all of the discoms are wholly owned by the government and their pricing decisions historically have been strongly influenced by the ruling parties’ political priorities. A common feature of elections in the recent past has been parties promising free or cheap power to some customers and/or caps on power prices as part of their election platforms.

Historically, the under-pricing of power relative to its economic cost has reflected a perception among the political parties that allowing electricity prices to increase could later become a liability.

Discoms also suffer from significant operational deficiencies, both in technical terms and in collections, in part driven by underinvestment in back-end support systems. The level of aggregate technical and commercial (AT&C) losses relative to energy input has remained above 25% in recent years.

On the technical front, transmission and distribution (T&D) losses are high, reflecting issues such as low metering efficiency and theft of power. Even when the discoms accurately bill the end user for power consumed, their ability to collect is poor in many cases. In an effort to reduce the losses to discoms from such problems, the Government launched the Accelerated Power Development & Reform Programme (APDRP) in 2001, and further modified the scheme in 2008. These schemes led to a reduction in AT&C losses, albeit from very high levels, in the early part of the last decade. But over the last few years, the reduction in AT&C losses has been marginal.

Reflecting inefficient collections, discoms’ aggregate level of receivables has remained well in excess of the regulatory target of 60 days.

A key impediment for lenders in gauging the extent of financial problems at discoms has been the fact that they have been consistently late in filing audited financial statements. One of the key aims of the FRP was to reduce discoms’ tardiness in filing. However, despite some improvements, it can still take discoms as long as 12 months to release their results after the end of their reporting year.

2012 reforms In 2012, the government of India approved a financial restructuring package (FRP) aimed at turning around discoms and restoring their long-term viability.

Discoms in seven states with some of

the largest losses agreed to adopt the measures, which transferred half of their short-term liabilities to state governments and guaranteed the other half, in return for various actions to be taken by the discoms to improve future operational performance.

As of June 2014, progress has been mixed. On the positive side, debt restructuring has been completed by discoms in four of the seven states that adopted the FRP. The other three are in the process of being restructured. Furthermore, almost all discoms–including those in states that did not adopt the FRP–have implemented some level of tariff hikes over the past two years . However, despite these increases in tariffs, there is still a significant gap between the cost of sales and realized prices in most states.

One of the reasons why the gap between cost and selling price persists is that the tariffs approved by some of the state electricity regulatory commissions are based on calculations that disallow expenses such as AT&C losses above a certain threshold. Tariff increases have also come with conditions related to operational efficiency requirements that the utilities have often been unable to meet. These situations illustrate that the discoms’ financial viability will improve if they implement significant operational improvements.

Regulating discoms Political consensus on allowing discoms to price power based on commercial considerations is still lacking. Moreover, the fact that oversight for the discoms are the domain of state governments makes it difficult for the central government to take steps to reform discoms. Admittedly, however, key reforms that have happened in the past decade have been a result of central government, rather than state government initiatives, such as the unbundling of state electricity boards into generation, transmission and distribution companies, the establishment of the State Regulatory Commissions, and the partial reduction in AT&C losses. This suggests that a new central government, committed to addressing the root problems of the industry in a timely manner, could successfully address the structural issues faced by the sector.

In the seven states where discoms have restructured or are restructuring their debt under the FRP, bank loans to discoms have effectively become direct exposures to the respective state governments instead of exposures to the discoms. As the financial profiles of the state governments are better than the respective discoms, restructuring has enhanced the credit quality of these exposures.

Restructured loans in these states are

“Discoms suffer from significant operational deficiencies, both in technical terms and in collections”

unlikely to slip into the NPL category, primarily on account of the explicit state government support. If we exclude restructured discom loans from impaired loans, the banks that would have the largest declines in the impaired loans, and hence have received the largest benefit to asset quality, are CBI, OBC, Canara, and UBI. Although the reforms have lowered the risks for public-sector banks that lent directly to discoms in states that adopted the FRP, if structural issues surrounding discoms remain unresolved, there is a risk that over time the credit quality of other parts of the power supply chain will be negatively affected.

In contrast to power generation, which India opened up for private-sector participation, power distribution remains largely run by the public sector through discoms. Hence, the ability of generation companies to sell their power at prices that are economically viable ultimately depends on the discoms’ ability to pay the generation companies.

We note that plant load factor, a measure of utilization at thermal power plants, declined in the year ended March 2014, a period in which discoms also implemented involuntary power cuts to end speculation by users that the discoms’ weak finances were impeding their ability to buy available power. Lower-than-budgeted plant load factors have a direct bearing on the financial profiles of the affected power-generation plants. By Srikanth Vadlamani, Moody’s Investors Service

Share of power loans in total industry loans and total system loans

Source: RBI, Moody’s

Impaired loans, including and excluding restructed DISCOM loans (Dec 2013)

Source: Company reports, company data ASIAN POWER 33

OPINION

JOHN GOSS

Why China seeks more overseas energy resources john.goss@ceejay.com.hk

W

ith the country’s rapidly developing need for energy growing swiftly during recent years to support its rapid economic growth, Chinese energy companies are seeking out more energy resources overseas. Recently, we have seen these energy companies search activities moving towards those countries and regions that have a more stable political and investment environment with fewer inherent risks.

The Chinese energy majors have continued to step up their energy cooperation’s with the neighboring countries in Central Asia in both the oil and natural gas sectors. In fact, the largest energy venture in Kazakhstan in which a Chinese energy major is involved is operated by The China National Petroleum Corp (CNPC), which is the largest oil and gas developer in China. Recent reports have said that the project’s daily output of crude is an impressive 50,000 barrels.

During the recent visit to Central Asia by the Chinese President, Xi Jingping, it was reported that China has announced a range of deals with Kazakhstan worth some $ 30 billion. The country has proven energy reserves of 6.87 billion, according to the Annual Development Report on World Energy 2013 by the Chinese Academy of Social Science.

Record highs for CNPC’s overseas output China National Petroleum Corp reports that its overseas output of oil and gas was over 100 million metric tons for the first time ever during 2013. This output figure was achieved as the energy company continues to boost its international presence. CNPC’s total overseas output figure for 2013 was 123 million tons, which represents a total rise of 18.1 percent year-on-year. The equity share of that total figure was 59.2 million tons.

The Chairman of CNPD, Zhou Jiping said that 2013 was a special year which held many challenges. Amid falling international oil prices and with many of CNPC’s counterparts suffering falling profits, his company achieved an increase in both revenue and profits. He concluded by saying that the CNPC’s total domestic and overseas output of oil and gas reached 300 million tons, which is a record high figure. It seems that the Chinese energy company’s overseas business continued to be its main driver behind the significant increase in CNPC’s oil and gas output in recent years.

Shenhua Energy joins a US shale gas project The world’s largest coal producer, Shenhua Energy reports that it is about to join with a US based energy company, Energy Corp of America in the development of a shale gas project, which is located in the US State of Pennsylvania.

A recent statement from Shenhua said that it is planning to invest $90 million in order to set-up a subsidiary for this new US based shale gas project. The project is expected to be producing something like 13 billion cubic meters of the gas during its first 30 years of operation.

Shenhua has recently secured a shale gas project in China’s Hunan Province at the beginning of 2014. The company has said. In a recent statement, that it is planning to expand its domestic shale-gas business in south western China’s Guizhou Province.

It would seem that Shenhua has never been involved in any for34 ASIAN POWER

eign shale gas projects before. Also, there have not been any reports of other Chinese coal firms being involved in the overseas shale gas business to-date. Shenhua has been encouraged by the number of newly developed technologies that have been utilized in the US recently, such as: hydraulic fracturing and horizontal drilling. Also, Shenhua has noted that the unconventional gas production in the US has been rising continually since 2007.

CNOOC licensed to explore for oil in the Arctic The largest offshore developer in China, China National Offshore Oil Company (CNOOC) is now the first Chinese company to be licensed to search for oil in the Arctic. This development marks a landmark for the country’s overseas energy exploration.

CNOOC is the first Chinese company to receive a license to search for energy resources in the Arctic. This ‘Arctic exploration’ license is a landmark for China’s global energy exploration activities.

In other moves in its search for foreign energy supplies, the Chinese energy major has partnered with Iceland’s Eykon Energy in a joint application for a license to explore in the Arctic waters for oil and gas resources.

The Chinese energy giant has begun to speed up its search for foreign energy supplies. Recently, CNOOC has partnered with Iceland’s Eykon Energy in an application for a license to explore oil and gas resources in Arctic waters since last June. These are but a few of the many reports about China’s current forays into the global energy industry.

Chinese companies seek fewer risks

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