Asian Power (March-April 2016)

Issue No. 74

ISSUE 74 | DISPLAY TO 30 APRIL 2016 | www.asian-power.com | A Charlton Media Group publication

US$360P.A.

Duopoly DUOPOLY is not an

Asian Power

issue HK Electric Investments’ ceo Wan Chi-tin believes deregulation is not the right way for HK’s power market

+

How will Taiwan free itself from regulatory chains?

China fails to boost its nuke INSTALLATION capacity

Vietnam and India are blown away by their own ambitious wind energy targets

Meet us at:

Project delays bully Myanmar’s growth

MICA(P) 248/07/2011

Asian Power Magazine is proud to launch the definitive event for the power utility arena.

One Power Plant – Three World Records – Sincere Compliments!

The future starts with Fortuna.

A record-breaking project: the world’s most efficient combined cycle power plant Fortuna is an environmentally friendly and economical means of generating heat and power. It has even reached three world records. Not only does Fortuna outperform all previous bests with an electrical efficiency of approx. 61.5 % and an electrical output of 600 MWel. Thanks to its combined heat and power generation – which allows for a maximum district heating supply of 300 MWth – fuel efficiency increases to a staggering 85 %.

We wish the Stadtwerke Düsseldorf successful, safe operations.

siemens.com/fortuna

FROM THE EDITOR You and I both may not be feeling it, but Asia’s overall power demand is on a slowdown. In this issue, the Asian Power team found out that the region’s energy use is expanding slower than its average growth in the previous years. Will power industry players be affected? Find out in the next few pages.

Publisher & EDITOR-IN-CHIEF Tim Charlton production editor Karen Lou Mesina art director Bryan Barrameda

ADVERTISING CONTACT Rochelle Romero rochelle@charltonmediamail.com

ADMINISTRATION Accounts Department accounts@charltonmediamail.com Advertising advertising@charltonmediamail.com Editorial editorial@charltonmediamail.com

In our previous issue, we reported that Thailand is going all-out to be the region’s mega solar power hub. Now, we report that Chinese firms have made the biggest first steps into the attractive market as they focus on continuous expansion. Thankfully, the government has been supportive in accommodating investors. Unfortunately, the same promising future can’t be said for Myanmar. In our talks with analysts, it was revealed that the country’s ballooning power sector are being pricked by project delays, particularly for coal and hydropower. Will this potential powerhouse wither away in the face of threat?

In our country reports, it was revealed by industry experts that Taiwan’s energy market has been enchained in an environment of high-level regulation. Although the market is particularly protected, one question lingers in the back of the experts’ minds: Will Taiwan want to free itself from these regulatory chains?

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A similar chain is trapping the Philippines’ power industry as policy potholes pepper the market which frustrate analysts and investors over its potential. Like its neighbouring countries, Philippines is looking at shifting to renewable energy sources but this is simply taking too long to happen because capital outlay for fossil fuel plants are relatively cheaper than RE plants. How will the Philippines stop turning off investors from injecting assets into the country?

Start flipping the pages to find the answers. Enjoy the Asian Power!

Tim Charlton

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ASIAN POWER 1

CONTENT

12

ceo interview Nothing wrong with duopoly for CEO Wan

FIRST

22 Asian governments aggressively move to boost renewable energy usage

07 Korea eyes boosting RE investments

26 China remains unstoppable in power and utilities M&A despite

08 China failed to boost its nuke installation capacity

economic slowdown

10 Thai solar market ensnares Chinese firms

COUNTRY REPORT

OPINION

14 Will Taiwan free itself from regulatory chains?

30 JOHN GOSS: Working towards a clean energy future for China Myanmar: Risk allocation

Published Bi-monthly on the Second week of the Month by Charlton Media Group 101 Cecil St. #17-09 Tong Eng Building Singapore 069533

2 ASIAN POWER

16

sector report: wind Asian countries are scrambling to tame the wind to add to their fuel mix

ANALYSIS

06 Asia’s power demand could be slowing

32 ERIK KNIVE & ERIC HO: Hydropower project development in

22

analysis aSIA’S CLEAN COAL DREAMS ARE FEARED TO BURN DOWN TO ASHES

20 Philippines’ policy potholes frustrate analysts

For the latest news on Asian power and energy, visit the website

www.asian-power.com

News from asian-power.com Daily news from Asia most read

IPP

Thailand’s RATCH joins Chinese firms in $6b nuke power project Ratchaburi Electricity Generating Holding joined venture with CGN Power Corporation and Guangxi Investment Group Company on Fangchenggang Nuclear Power Project Phase II (Fangchenggang NPP Phase II), in China. It is valued around THB200b (or CNY40b). RATCH will inject capital of THB7.5 billion.

IPP

India eyes topping up coal-fired power with 24.5GW by 2017 India is dead set to boost its coal-fired power capacity by 24.5GW by the end of March 2017. According to a report by the country’s Central Electricity Authority, over 47.8GW of coal-fired power capacity has already been accounted for.

4 ASIAN POWER

POWER UTILITY

SkyPower inks deals for 200MW of solar projects in Telangana, India SkyPower announced the signing of four PPAs with Telangana to build and operate a total of 200MW AC of solar energy projects. Over the past several months, SkyPower has secured 400 MW AC of solar PV projects in the states of Madhya Pradesh and Telangana and a strong foundation for SkyPower to grow its presence across India.

IPP

Could China’s coal-fired power generation finally see a drop this year?

Slowing power demand in China will exacerbate the fall in coalfired electricity generation. The implementation of policies aimed at curbing coal consumption, such as the closure of coal mines and coal-fired power plants, are bearing fruit.

IPP

China’s 145.1GW installed wind capacity blows EU out of top spot According to the latest data released by the Global Wind Energy Council, the global industry installed 63,013 MW in 2015--an annual market growth of 22%. 30,500 MW of which are new installations in China. Total global capacity reached 432,419 MW at the end of 2015, representing cumulative growth of 17%.

POWER UTILITY

Here’s why Japan is pushing for its electricity liberalisation In just a few weeks from now, Japan will be experiencing a big paradigm shift in its electricity scheme. Come April, the country will be fully liberalising its electricity retail market and will be just one step away from unbundling its T&D sector.

ASIAN POWER 5

FIRST recognise that rising power tariffs continue to be a challenge for state governments; thus, addressing the remaining losses is largely expected through reducing technical and commercial losses over the next two to three years, and by reducing generation costs via improved availability of lowcost fuel,” she adds.

ASIA’S POWER DEMAND COULD BE SLOWING

Most Asians may not feel it as electricity-related issues in their countries vary largely, but the power demand in the region has actually been slowing. In fact, the slowdown is just enough to allow most power companies to recover capex and maintain adequate financial buffers on their business side.

According to the Southeast Asia Energy Outlook published by the International Energy Agency, Southeast Asia’s total primary energy demand alone grows by 80% in the New Policies Scenario, increasing from 594 Mtoe in 2013 to 1, 070 Mtoe in 2040. But do not get fooled by the big percentage.

In 2013, Southeast Asia accounted for about 4% of global primary energy demand, a share that is set to increase over IEA’s outlook period as the region’s energy use expands at 2.2% on average per year, a faster pace than the global average. “However it is important to note that this number is still slower than its 3.4% average growth from 2000 to 2013. This reflects a gradual slowdown in the economic and population growth rates, a shift towards less energyintensive economic growth, fuel switching away from traditional use of biomass and energy efficiency gains,” IEA says in the report.

China outlook Mic Kang, a Moody’s vice president, says that in China, thermal power generators will be affected by slower power demand and the regulators’ promotion of renewable and clean energy over thermal power. However, lower inputs costs and their financial headroom will mitigate the slowing demand. Matthew Rennie, power & utilities leader at EY stays upbeat in his China outlook. IPPs, especially in China, continue to witness strong growth in generation output. For example, Huaneng Power International, a large-cap thermal power IPP based in China, disclosed that the company’s total power generation within China amounted to 317.5b kWh, a 5% growth over the same period last year.

6 ASIAN POWER

Will distribution dilemma get resolved?

India holds high hopes for distribution reform

T india

he average Indian may hardly be noticing some slight improvements in the country’s power distribution despite numbers revealing that it indeed has become better. Overall power deficits have been significantly–not entirely–overcome in the past year, thanks partially to the 2012 power-sector reform plan for state distribution companies taking a hard bite last year.

The 2012 plan was apparently and generally not too successful as the government was gunning for a big change in distribution. With this, another reform was set in motion around November last year. Analysts reveal high hopes for the new plan as it is deemed to be better structured than its 2012 predecessor. However, Rachna Jain, analyst at Fitch Ratings, says that the take-up rate for the assistance package offered to state governments, and delivering on medium-term commitments on increasing efficiencies and further reducing losses at discoms by the state governments, will determine the success of the new measures.

“The debt-restructuring plan will substantially reduce discoms’ near-term debt burden, and more importantly, their high interest costs, which account for a large share of the discoms’ losses.

The federal government appears to

Kameswara Rao

Rachna Jain

Power deficit dilemma In the past year, India has suffered an energy and peak deficit of 3.6% and 4.7% respectively, down from 8.7% and 9% two years back. The industry expects deficits to recur as growth picks up and rural areas are connected.

For these reasons, capacity addition remains a priority for the government.

The National Electricity Plan 2012 targets a new capacity build of 80 GW for 2012-2017, of which 61 GW (72%) has been achieved.

According to Kameswara Rao, partner and energy, utilities & mining leader at PwC India, the distribution network connects about 200 million consumers with a total load of over 400 GW. It is served by 73 distribution companies, of which 17 are privately owned. “Several of the distribution utilities suffer large volumetric losses and are financially distressed. This raises a significant counterparty risk which is manifested in delayed payments to generators and other suppliers,” Rao further explains.

Jain also adds that to somehow solve India’s power deficit dilemma, the long-term success of the reformed programme relies heavily on reducing generation costs via improved availability of low-cost fuel. States opting for the package will have to agree on milestones on efficiency improvements and loss reduction.

Sheoli Pargal of World Bank further emphasises the importance of making sure the programme will succeed. The agenda for addressing distribution performance must now be a priority, she says.

Annual discom losses

Source: Discoms, Ministry of Power, Coal & Renewable Energy

FIRST The government also supported overseas renewable energy business for small and medium-sized enterprises with a budget of KRW10 billion.

Korea hopes to be among the top RE producers

Korea eyes boosting RE investments korea

I

t seems like Korea is dead set on improving the country’s energy utility and infrastructure as the Ministry of Trade, Industry and Energy announced that it would increase the investments of state-owned energy utility companies in the country’s utility sector to KRW 6.4 trillion early this year.

The move is aimed mainly at developing renewable energy sources, improving the efficiency of Korea’s power facilities, and improving the economy through the creation of new businesses for small and medium ventures. Looking back over ten years

ago, the South Korean government passed the Act on the Promotion of the Development, Use and Diffusion of New And Renewable Energy with the sole goal of becoming one of the five largest producers of new and renewable energy.

According to Andre Boekhoudt, partner, tax, energy and natural resources, KPMG, this investment includes KRW22.4 trillion invested by the nation’s 30 largest industrial groups by 2013, KRW7 trillion of government contribution, and KRW10.6 trillion from other private sectors. “South Korea has already seen substantial

Andre Boekhoudt

financial investment in renewables in recent years, including KRW1.8 trillion (EUR1.3 billion, USD1.8 billion) from the government ,” Boekhoudt further explains. He adds that the government also supported overseas renewable energy business for small and mediumsized enterprises with a budget of KRW10 billion in 2015.

“The Renewable Portfolio Standard (RPS) requires 17 state-run and private power utilities, as of 2015, with a capacity in excess of 500 MW to generate three percent of the energy production from renewable sources in 2015. This percentage will be increased to 10% by 2024,” Boekhoudt says. With these numbers in mind, it is more than apparent that South Korea is bent on making the goal a reality. But the big question is: How will KEPCO be affected by the increase? Mic Kang, a Moody’s senior analyst, believes KEPCO will lead the government-initiated investment plan, given its near monopoly position in the country’s power utility sector.

Such a role would mean higher capex for the state-owned integrated power company. “The additional investment that KEPCO will undertake based on the government’s initiatives forms a part of its policy ,” he says.

Penetration rate of renewable energy in Korea

Source: Analysis of Experiences in Sustainable Development in Korea, Korea Energy Economics Institute (KEEI)

the chartist: Vietnam slapped with big threats amidst unstoppable energy demand surge Vietnam is poised to significantly transform its electrical power generation mix over the next two decades as it modernises the country’s agrarian economy to become a more industrialised nation. According to EIA, to accommodate greater industrial expansion and to support energy security goals, Vietnam is significantly increasing its total electricity generating capacity.

“As part of its capacity expansion, Vietnam plans to add substantial coal-fired capacity and also plans to build the first nuclear reactors in southeast Asia and the first offshore wind farm in Asia,” EIA explains.

However, according to ADB, Vietnam in its next stage of development will be faced with the challenges of coping with the rapid change in energy supply structure and maximising the use of domestic energy resources efficiently.

Planned power generation capacity mix in 2015, 2020, 2025, and 2030

Historical and expected electric generating capacity in Vietnam (2010-30)

Source: Asian Development Bank, based on the statistics of government of Vietnam. 2015. Revised Power Development Plan 2011-2020

Source: US Energy Information Administration, country assessment, Vietnam

ASIAN POWER 7

FIRST

Debunking renewables’ baseload myth

IPP WATCH

Singapore-based IPP Nexif Energy buys Viet hydro plant

I

f there’s one topic of debate that energy analysts can’t put to rest, it’s whether renewable power generation is suitable for baseload supply. Some say that there appears to be a misconception among the general public that renewable energy would be able to supply base load power.

According to Egor Simonov, ROSATOM regional representative in Southeast Asia, there is always a minimum level of the electricity need, regardless of any circumstance, which is called baseload. Baseload power is the amount of power required to meet minimum demands based on reasonable economic requirements.

Ruud Kempener, energy analyst at International Renewable Energy Agency (IRENA), stays firm that the critique that renewable options are unsuitable for baseload supply, therefore fossil power and nuclear power are needed, is misleading.

Baseload is a demand characteristic, not a supply technology characteristic, he explains.

In the future power system, the value of baseload will decrease, he says. “With higher shares of renewable power, particularly from variable source such as wind and solar, supply and demand will be matched in a much more concerted and flexible

Renewables can’t do a solo flight

way.”

Simonov, on the other hand, says that nuclear energy belongs to baseload power sources, while renewables can hardly be considered as baseload. In comparison to other generation types, nuclear energy has a very high capacity factor.

“The NPP design we offer on the market today has capacity factor around 90%. Wind farms today can demonstrate only up to ca. 40%, whilst solar farms even lower – about 20-25%,” Simonov says.

Simply speaking, he adds, the wind does not blow and the sun doesn’t shine all the time. For sure, these generation types are good at proving additional supply in peak period. “But you need to be backed by baseload capacities as a sound foundation of the national electricity supply.” Furthermore, he stresses that the renewable energy sources still represent the most expensive source of electric power.

Ruud Kempener

CGN Wind Energy plugs in first 6 turbines of wind farm

Egor Simonov

China failed to boost its nuke installation capacity Even the best falls down sometimes—as was the case with power giant China who has been planning to erect over a hundred nuclear reactors in the next decade, but was recently reported to have failed in boosting its actual nuke installation capacity.

According to Evan Li, analyst at HSBC, China has fallen behind its 12th FYP target to raise its nuclear installation capacity to 40GW by the end of 2015, with only 24.14GW installed as of 15 September. This is mainly attributed to the temporary suspension of inland nuclear project approvals. Following the Fukushima accident in 2011, only two projects in coastal areas have been approved: Tianwan phase II nuclear project, approved in December 2012 and Liaoning Hongyanhe No.5&6 units, approved in February 2015.

China remains undeterred as a spokesperson from the Institute for Energy Research said that China is building reactors quickly and cheaply— about 5 years per reactor and $2000 to $2500 per kW. By 2020, China should have 58 GW of nuclear capacity. By 2050, China’s nuclear power should exceed 350 GW , having spent over a trillion dollars in nuclear investment. In just ten years, China will likely exceed that of the US. 8 ASIAN POWER

Nexif Energy, a Southeast Asian IPP has taken controlling interest in the 30 megawatt (MW) Coc San hydro power project in Vietnam through the acquisition of a majority ownership of Viet Hydro Pte Ltd. This transaction marks the first project under the Nexif Energy platform formed in August 2015. Coc San is a run-of-the-river 30 MW hydro power project located in the Dum River Valley.

The first six wind turbines of the Demonstration Project of 150 MW Offshore Wind Farm in Rudong, Jiangsu, called the “Rudong Project” were successfully connected to the power grid on January 28. The farm’s annual generation is projected at 400m kWh. The project was developed and constructed independently

by CGN Power. The Rudong Offshore Wind Power Project of CGN plans to install 38 sets of 4 MW wind power generating units.

U-Thai Power Project Unit No.2 Power Plant opens

Source: Institute for Energy Research

Going online soon Evan Li, analyst at HSBC

Electric Power Development Co.’s (JPOWER) largest power plant in Thailand has started operations and has pushed its overseas capacity to approximately 7,500MW. UT2 is located in Thailand with the capacity of 800 MW. UT was developed by Gulf JP UT Company Limited, a subsidiary of J-POWER (investment ratio: 90%). GUT will sell all the electric power to the EGAT for a term of 25 years, according to the relevant Power Purchase Agreement.

FIRST

Thai solar market ensnares Chinese firms

u

thailand

nstoppably-expanding Chinese firms could not resist setting foot in Thailand’s tempting solar market. Thailand is making aggressive steps to be the region’s mega solar power hub and they are dead set on making this happen by 2036.

By end-2015, Thailand will have more solar power capacity than the rest of southeast Asia combined. In less than ten years, solar energy has gone from accounting for less than 2MW to about 1300MW in 2014.

This year, capacity is projected to increase to between 2500MW and 2800MW, which would mean an increase six times higher than the year before.

“Looking into the future, Thailand expects to increase its solar capacity to 6,000MW by 2036, which would account for 9% of total electricity generation and help provide electricity for 3 million households,” notes Fernando Vidaurri from Dezan Shira & Associates.

“The continuous interest of the Thai government to develop this industry and to provide subsidies presents investment opportunities in a sector that has barely been developed by its neighbors.”

Enter the Chinese firms Thailand has particularly piqued the interest of Chinese solar energy developers and manufacturers. Georgina Hayden, senior energy & infrastructure analyst at BMI Research, says that these firms have been looking to offset

the overcapacity in their domestic market and seeking out alternative growth opportunities.

“We expect those companies who are focussing heavily on expanding beyond their domestic market to outperform others with a smaller international footprint. We previously highlighted in our analysis that the Thai solar market is becoming increasingly attractive to Chinese solar companies,” Hayden says. Yingli Green Energy is among those who were lured in when it announced in January 2016 that it will establish a 300MW photovoltaic (PV) panel production plant in Rayong, Thailand in conjunction with Thai company, Demeter Corporation.

A spokesperson from Yingli says that Thailand boasts favorable geographical location whose products and markets could cover Southeast Asia, and its plentiful labor force provides continuous support for manufacturing factories. In addition, the government of Thailand encourages and supports the application of solar products as well as industrial investment, which brings a friendly environment for the solar companies’ development.

The spokesperson also adds that the government has been supportive in accommodating investors. “If a company gets a promotion license as a foreign company from the Board of Investment of Thailand, it will be granted tax benefits such as free enterprise income tax for the first eight years and half for the following five years, free tariffs or a reduction in

Myanmar’s ballooning power sector being pricked by project delays Investors have been itching to inject assets into Myanmar’s power sector and its growing pipeline, but project delays are threatening to dim the industry’s bright future.

Myanmar’s potential will not be fully realised given the ongoing challenges to project realisation, particularly for coal and hydropower projects. Georgina Hayden, senior commodities analyst, BMI Research, says, “The realisation of gas-fired power facilities has a stronger track record and we expect gas to gradually gain share in Myanmar’s power mix. Thai companies are becoming increasingly active in Myanmar’s power sector, as the government looks to secure electricity supply from neighbouring countries via imports.”

Kee-Yung Nam, principal economist at ADB, agrees that Myanmar has big power potential waiting to be unleashed despite delay threats. “Based on the 2010 levels of power infrastructure stock, demand will increase 1.9 times in 2020 and 7.8 times in 2030 under the low GDP growth scenario and 2.4 times in 2020 and 10.3 times in 2030 under the high GDP growth scenario.”

It is important for the country to develop innovative financing mechanisms and modalities to be able to fund these huge requirements, since Myanmar may not be able to mobilise domestic resources to fund these projects. “This is why private sector financing is very important. To attract private sector financing, these power projects need to be translated into financially viable and bankable projects. The government is responsible for ensuring that policies remain stable.”

10 ASIAN POWER

Thailand’s solar market is too irresistible

tariffs imposed on imported equipment and raw materials used for the exported goods” he says.

However, Dr. Sopitsuda Tongsopit from Energy Research Institute, Chulalongkorn University, warns that the current market for solar power in Thailand is non-competitive and can limit the role of the private sector. “The lack of competition in Thailand’s solar market has meant a high risk environment for investors and a lack of incentives for new entrepreneurs to initiate new business models for broader access,” she says.

Average electricity tariff in ASEAN countries

Source: BMI Key Projects Database

Project pipeline growing but delays ahead

Source: BMI Key Projects Database

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The inaugural Asian Power Utility Forum is happening from March to May 2016. The trailblazing event will gather over 200 power utility leaders across Southeast Asia to discuss pertinent issues and what’s hot in the energy and power utility scene. The event will take place in Manila on March 8, Kuala Lumpur on April 4, Jakarta on April 26, Singapore on May 10, and Bangkok on May 24.

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Wan Chi-tin

CEO HK Electric Investments Limited 12 ASIAN POWER

CEO INTERVIEW

Nothing wrong with duopoly for CEO Wan HK Electric’s CEO Wan Chi-tin believes that Hong Kong’s market structure is healthy and that deregulation is not the right way to go for its power market.

A

improve Hong Kong’s electricity generation fuel mix by increasing the share of natural gas in it. Our views have been widely supported by the public in the 2014 public consultation and were eventually adopted by the government.

We have been increasing the share of natural gas in our generation fuel mix in recent years, with a target to increase the proportion of electricity we generate from natural gas to 50% in 2020. Moving towards the 2020 fuel mix target, we are now building a new combined cycle gas-fired unit and we have proposed building a second new unit for commissioning in 2022.

With its latest design, the new units’ generation efficiency will be well over existing gas-fired units, producing considerable savings in natural gas cost.

sian Power talks to Wan Chi-tin, CEO of HK Electric Investments Ltd. and the Managing Director of HK Electric since January 2013 . Wan is an inspiring power industry executive who has beaten challenges in different regulated and deregulated markets. He has held various top leadership positions in a number of companies including Powercor Australia Ltd., Citipower Pty Ltd. and Power Assets Holdings Ltd., among others.

Being one of the world’s oldest power companies, what are the strategic directives of HK Electric that led to the success over the years?

HK Electric has always stood for excellent power supply reliability while maintaining affordable tariff at levels lower than many world cities. Supply reliability has been maintained at above 99.999 percent, a record we have achieved consistently since 1997. For the seventh consecutive year, our customers experienced on average less than one minute of unplanned power interruption per year.

Tariff in Hong Kong has always been very affordable and we believe it will remain competitive in the future.

At the end of 2013 the company announced the freezing of tariff for five years from 2014 to end 2018, which is unprecedented in the world. We are a pioneer in developing automated distribution system and the first power company in Hong Kong to build cable tunnels to overcome Hong Kong’s hilly terrain.

We are committed to minimising the environmental impact of our operations. Besides increasing the share of natural gas in our generation fuel mix, we have also been improving our environmental performance by extensively adopting technologies like electrostatic precipitators, flue gas desulphurisation units and low NOx burners.

Fulfilling our environmental commitments, we have reduced the emissions of sulphur dioxide, NOx and respirable suspended particulates by 40 percent to 90 percent since 2008. HK Electric has been keen on promoting renewable energy, we are the first to develop commercial scale wind and photovoltaic systems in Hong Kong and our wind and photovoltaic systems are currently still the largest ones in Hong Kong. We have also proposed building an offshore wind farm with capacity of about 100MW. Now that the Paris Agreement has been reached by about 200 countries, and the government targets to reduce Hong Kong’s carbon intensity by 50-60% from the 2005 level by 2020, what efforts will HK Electric make to meet the target?

The HK government’s 2020 carbon intensity reduction target is Hong Kong’s most important climate change initiative. Achieving this target is extremely difficult, however despite this we have made considerable progress by reducing our per unit electricity sold carbon dioxide emission from 0.92kg/kWh in 2005 to 0.79kg/kWh in 2014. HK Electric believes that the key and most effective strategy for the power industry to help Hong Kong reduce its 2020 carbon intensity is to

There is nothing wrong with this market structure: Power networks are natural monopolies as recognized by economists and regulators.

It is considered that the power industry in Hong Kong is a duopoly, and there are voices suggesting opening up the electricity market for competition. Is this feasible? If not, why not?

In the sense that there are only two power companies in Hong Kong, one may argue that power market in Hong Kong is duopolistic. It should however be noted that there is nothing wrong with this market structure: power networks are natural monopolies as recognized by economists and regulators.

Policymakers must note that competition itself is not the ultimate goal. It is rather a possible but uncertain means to provide good electricity supply service.

Experiences from overseas markets introducing competition by deregulating the power industry showed that deregulation processes are complicated and protracted with many unexpected problems.

Competition may not deliver any tariff reduction, and choices may not entail customer satisfaction.

Particularly, in the Hong Kong context, the prerequisites for effective competition are not present as the market size is small, land is not available for new generation plants, and introducing power supply from Mainland China which may degrade the supply reliability is not favoured by the general public, demanding massive investment and is technically very difficult. Given these issues for competition and the proven performance of the SCA in delivering worldclass supply to Hong Kong customers, we believe that competition in the electricity market is not the right way for Hong Kong.

How do you see HK Electric’s business in the coming years? What are the challenges ahead and how will you manage them?

We expect a hard journey in the coming years but are confident that, with our efficient operations which deliver cost-effective and environmentally friendly electricity supply to our customers, we can achieve stable business growth.

Challenges ahead include possible changes on the future regulatory framework of electricity market in Hong Kong after the expiry of the current SCA in 2018, tightening environmental regulation and possible fuel price fluctuations which lead to tariff fluctuations.

ASIAN POWER 13

Country report 1: taiwan

Check dam in Taiwan: Is breaking free an option for highly regulated Taiwanese power market?

Will Taiwan free itself from regulatory chains?

Taiwan’s energy industry is revealed to be the product of an era that engages high-level regulation.

I

t may have made a name for itself in economic terms as it is slated to make a recovery in 2016, but Taiwan remains a notorious name in the regional power industry. Taiwan has very limited domestic energy resources and must rely on oil and coal imports to satisfy the majority of its energy demand.

According to Taiwanese official statistics, oil, coal, and natural gas made up 40%, 31%, and 17% of Taiwan’s total primary energy consumption in 2014, respectively, while the remainder was mostly nuclear (10%) and smaller amounts of various renewable energy sources. Total energy import dependence was about 98%, according to the Taiwanese government.

Analysis - Energy Sector Highlights

Source: U.S. Energy Information Administration 14 ASIAN POWER

As a result of the lack of interconnectedness with other regions, the island requires much higher generation reserve margins.

Its electricity supply system is also distinct. Power grids in many countries or regions are interconnected so that electricity costs can be lowered by reducing the need for generating capacity and by substituting expensive fuel for cheaper fuel, as well as by diversifying generation methods to minimise risks of supply and price volatilities. However, Taiwan’s insular geography means its power supply is isolated.

According to Ssu-Li Chang of National Taipei University, as a result of the lack of interconnectedness with other regions, the island requires much higher generation reserve margins than elsewhere in order to ensure reliability in the case of a transmission grid outage, to protect system safety, and to ensure continuous operation. “Furthermore, with a mandatory renewable electricity target of 8 percent by 2025, and with 50 percent of total renewables expected to come from wind power dependent on favorable weather conditions, there is likely to be more uncertainty in the operation of the power system,” she explains.

Taiwan’s supplies of primary energy are also highly concentrated on traditional fossil fuels, of which oil, natural gas and coal continue to be the dominant sources A paper entitled “Current Policy and Challenges of Energy Utilities in Taiwan”

by Ju-Yin Chen, associate professor, Department of Law, Hsuan Chuang

University, shows that by the market layout of power generation by Taiwan’s power industry, TaiPower accounts for 68%, the private power plants account for 16%, and the qualified cogeneration systems account for 16%.

“The private power plants and the cogeneration systems sell the power they produce to TaiPower, which then distributes the power to the end users.

Therefore, TaiPower monopolises the power transmission, distribution and sale in the middle and downstream.

Put simply, according to the current Electricity Act, the power industry in Taiwan is now composed of one stateowned integrated power company, several private power producers and self-use power generation equipment (including the cogeneration systems and the renewable energy generators),” she further says.

At present, the redundant power of the self-use power generation equipment and all the power produced by the cogeneration systems and private power plants are wholesaled to TaiPower for uniform distribution.

“From the layout of Taiwan’s power market currently, we can clearly see that TaiPower is the only integrated company in power generation, transmission and distribution, which is also responsible for supplying power to the users in Taiwan, Penghu, Kinmen and Matsu areas within

Country report 1: taiwan the Chung-Hua Institution for Economic Research. She adds that new energy technologies such as hydrogen fuel cells are “not really commercialised yet.”

Operating Taiwan nuaclear power reactors

Jonathan Cobb

Ju-Yin Chen

Source: World Nuclear Association

the coverage scope. In case of insufficient power, it opens the Independent Power Producers (IPP) to construct power plants, which sign a 25-year contract with TaiPower, agreeing to wholesale all the power to TaiPower,” Ju-Yin clarifies.

The consequence of its power scheme For the end users, they can’t choose to purchase power from a certain company.

Ju-Yin explains that on the whole, the energy industry is directly related to the national economic development.

Taiwan’s energy industry is particularly protected and has been managed by the government for a long time. In early times, it adopted the monopoly and state-owned operation method, so as to ensure the stable supply of various energy resources and to implement policies.

“However, it also resulted in corruption and inefficiency of the public enterprise.

Under the global trend of internalisation, liberalisation and privatisation, Taiwan’s energy industry is gradually stepping into the open status to some extent, but some cases and experiences of market competition failure still occur,” she expounds.

“As the strategies which government takes to regulate industries could be either direct control or a competition mechanism formed by the market, it is crucial for us to continue to observe Taiwan’s energy policy and see how it will develop in these conditions, to achieve the goal of maximum efficiency and consumer sovereignty.”

Can nuclear do the job?

Jonathan Cobb of the World Nuclear Association says that the solution to the energy market’s problems will need to make the best use of a wide range of generation and supply technologies, and that will include nuclear. “Nuclear

power has a very important role to play through supplying electricity that is low carbon and can be delivered securely and reliably.”

The government plan calls for generating some 15% of domestic power from renewable sources by 2030.

The target is to have in place 5,200 megawatts (MW) of installed wind power and 8,700 MW of installed solar photovoltaic (PV), as well as biomassfueled power plants and even geothermal, for a total of 17.25 gigawatts (GW) of renewable energy installed capacity.

Timothy Ferry from the AmCham Taipei says that for its part, the DPP’s 2025 Nuclear Free Homeland Initiative, the blueprint for the party’s energy policy, calls for generating 20% of Taiwan’s total power from renewable energies by a decade from now.

But can renewable technologies such as wind power and solar PV provide enough electricity to offset the loss of nuclear power, while also allowing Taiwan to meet its emissions reductions commitments?

Nuclear plants currently generate more than 38,000 GWh of electricity annually, making up 18% of Taiwan’s total power supply.

The scale of the challenge is enormous.

Researchers at the Industrial Economics and Knowledge Center (IEK) under the Industrial Technology Research Institute (ITRI) estimate that to generate enough power to replace nuclear energy, Taiwan would need to install 55 GW of solar PV, requiring some 700 square kilometers of land.

“It’s quite difficult to replace nuclear power in the really short run, because we aren’t ready in terms of the whole infrastructure, and also the capacity of renewable energy is quite low right now,” says Wen Lih-chyi, director and research fellow at the Center for Green Economy at

Timothy Ferry

Overcoming the challenges for real Ju-Yin says that Taiwan’s energy industry is the product of era that engages high-level regulation, and so far the laws seldom think to reform the regulation system from the perspective of the consumer who is involved in the economic activities.

“The central power supply regulation model, as well as the top-to-bottom demand and supply model of energy has changed, whether it is for the petroleum, liquefied gas, natural gas or electricity industries. In the future, demand side management of energy saving and energy use will surely grant more rights to the consumers,” she argues.

Benjamin Fox, a former energy analyst intern at the US Department of Energy in Beijing, also writes that the environmentrelated challenges that Taiwan faces related to energy use and CO2 emissions are as serious or perhaps even more so than those of the U.S. Taiwan continues to rely on a higher proportion of fossil fuel than the U.S. As a result, it lacks any semblance of energy security and ranks amongst the world‘s highest per capita CO2 emitters.

“Due to its small population and murky political status, Taiwan is often overlooked in the realm of global affairs. But a rash of similarities with the U.S. in terms of economic, demographic, and political structure warrant its consideration in the field of sustainable energy policy,” he says.

In spite of these, Taiwan has passed multiple progressive policies that address energy efficiency, renewable energy installation, and the promotion of its domestic clean technology industry. The modest success of Taiwan‘s sustainable energy policy demonstrates the importance of setting short-term and mid-term goals, even if they initially generate suboptimal outcomes.

Trend and structure of primary energy supply (by Energy Form)

Source: Taiwan’s Energy Conundrum, May 2012

ASIAN POWER 15

sector report: wind

Is there enough time for Asia to chase the wind?

Vietnam and India are blown away by their own ambitious wind energy targets Both have huge untapped wind power potential but investments are lacking and grid infrastructure is limited.

D

uring the international climate summit in December 2015, governments agreed to a long-term goal of limiting the increase in global average temperatures to well below 2°C of pre-industrial levels by undertaking rapid reductions in the global emission of greenhouse gases, brought about by voracious consumption and dependence on fossil fuels.

In Asia, countries like Taiwan, China, India, Vietnam and the Philippines have taken up the job of increasing the share of renewable energy, including wind power, to their respective countries’ fuel mix.

Taiwan bats for increased capacity For an island country like Taiwan, harnessing the power of the wind is an option of high priority. Taiwan is highly dependent on imported energy (97-99%) to sustain the power supply of the country. Nuclear power was one of the solutions to be pursued to resolve the high dependency of the country to fossil-fuelled power, but the government has been under public pressure to adjust the energy policy after the Fukushima incident, Flanders Investment and Trade says.

On the other hand, the attractive potential of offshore wind has given Taiwan a good opportunity to increase the portion of renewable energy in power supply and also to develop the local supply chain by growing it along with ongoing offshore wind farm developments.

“With over six months of northeastern winds every year, that sweep across the central and western coasts, averaging four metres per second, or a force 3 wind on the Beaufort Scale that is strong enough to extend flags, Taiwan has inherent advantages for wind power development,” Flanders says.

Research by the Industrial Technology Research Institute in Taiwan demonstrates how such gentle breezes, which sweep around 2,000 square kilometres of the island, most of which 16 ASIAN POWER

Nuclear power was one of the solutions to be pursued to resolve the high dependency of the country to fossil-fuelled power.

occur across the northern alpine region, western coast and archipelagos off the western coast, are able to generate power.

Taipower and InfraVest GmbH are the major developers, both of which use imported wind turbines, Flanders says. Taiwan built the first onshore wind farm in the offshore Penghu island early in 2001. According to the Taiwanese Bureau of Energy, by the end of 2012, Taiwan has 314 onshore wind turbines situated mainly along the western coastline and in outlying Penghu County. The total installed capacity of these land-based turbines is 621 MW, which accounts for 16.6% of all renewable energy. The Bureau plans to build a total of 450 units onshore to reach a total capacity of 1,200 MW by 2020.

While wind energy shows a lot of promise in Taiwan, the government still has to conduct the necessary due diligence before ramping up its investment in wind farms.

“Details of environmental impact assessments are yet to be completed. The impacts on migrating birds and ocean mammals, impacts on local fisheries, navigation and harbour development need to be researched beforehand. Otherwise the environmental issues will hinder progress, especially when environmental groups are leery of offshore wind turbine construction that impacts marine environments,” Flanders says.

Taiwan also lacks suitable subsea construction capability. Local builders do not have large pile driving vessels, 500-ton-plus crane vessels and offshore platforms, making work at 12-metre and deeper depths underwater impossible without foreign support.

“The government is urged to provide financial incentives for Taiwanese companies to strengthen offshore construction capabilities and to purchase needed equipment,” Flanders says. Large corporations such as China Steel Corp., Taiwan Shipbuilding Corp., China Steel and Machinery Corp. are actively working with foreign firms to develop such capability.

Bank financing and financial backing from large enterprises

sector report: wind Renewables targets in the PDP VII

Technology improvement in wind turbine generators

Source: Decision No. 1208/QD-TTg dated 21 July 2011

Source: Technology Roadmap- Wind Energy (2013 Edition), IEA; The Economics of Wind Energy, EWEA (2009)

are vital to Taiwanese wind turbine builders, especially off shore projects, which are short of precise pre-construction risk assessment and hence are exposed to potentially huge losses during construction. “Without such financing and investment, potential operators will be discouraged to support progress,” Flanders says.

China doubles down on clean energy As China makes the bold move of turning away from conventional sources of energy, wind power is leading the charge in the transition away from fossil fuels. “Wind is blowing away the competition on price, performance and reliability, and we’re seeing new markets open up across Africa, Asia and Latin America which will become the market leaders of the next decade,” says Steve Sawyer, secretary general of the Global Wind Energy Council.

Sawyer says 2015 was a big year for the big markets - China, the US, Germany and Brazil, all of which set new records. “But there is a lot of activity in new markets around the world and I think in 2016 we’ll see a broader distribution,” he says.

Wind power led new capacity additions in both Europe and the United States, and new turbine configurations have dramatically increased the areas where wind power is the competitive option, he adds. The global wind power industry installed 63,013 MW in 2015, representing annual market growth of 22%. Of these installations, 30,500 MW are new to China.

As a result of its extraordinary annual market, China has edged past the European Union in terms of total installed capacity, with 145.1 GW compared with the EU’s 141.6 GW, Sawyer says. “The Chinese Government’s drive for clean energy, supported by continuous policy improvement, is motivated by the need to reduce dependence on coal which is the main source of the choking smog strangling China’s major cities, as well as growing concern over climate change,” he says.

India’s huge untapped potential The renewable energy sector in India has made remarkable progress, growing from 3.3% (2002) of the total generation capacity to 13.4% (2015). Production rose from 0.4% to 5.6% in this period, with wind providing the biggest share along with small hydro, solar, biomass and waste to energy, and other sources.

The wind power sector has undergone a major shift in India, from tax-credit driven investment to mainstream independent power producers, says Kameswara Rao, partner and leader in Energy, Utilities and Mining at PwC India. “This has led to the setting up of large wind farms that deploy the latest technology and practices—larger MW class wind turbines, inclusive operations and maintenance practices for plant life, use of logistics tools for construction and maintenance, and seamless

Matthew Rennie

Kameswara Rao

The costs of new wind projects in India and China are materially lower than, say, in Europe. This reflects lower production and labour costs, as well as competition between a large number of locally focused manufacturing and construction companies.

grid integration,” Rao says.

Moreover, he says the industry has gained from improvements in drivetrain technology, tower structure and use of advanced power electronics, which add to overall cost effectiveness.

“Turbine costs declined in late 1990s, but have since risen. This is due to a variety of factors such as greater turbine dimensions and higher material costs. However, with design technology maturing and production stabilising, costs have started to decline from 2010,” he says. Rao says further gains are expected from the use of lightweight materials such as carbon-fibre reinforced plastic, better aerodynamic profiles, on-site manufacturing, segmented blades, and variable diameter rotors can reduce costs and increase the capacity factor.

Wind project growth In India, in the last two decades, the hub height and rotor diameter of wind projects have increased fourfold, and the average wind turbine generator (WTG) rating has increased almost tenfold. “This enhances the energy generated per turbine, thus reducing the overall levelised cost of electricity. Still, the top-end rotor and hub heights installed for WTGs in India are 20-30% lower than the global standards, and have scope for improvement,” Rao says.

India has about 80 GW of untapped wind power as of March 31, 2015, says Anila Gode, analyst at Credit Analysis & Research Limited (CARE Ratings). “The factors favourable for development of wind power plants in India include incentives from government in the form of generation-based incentives and accelerated depreciation, relatively cost competitive modes of power generation, low gestation periods for setting up of the projects and introduction of floor/cap pricing mechanisms for trading of Renewable Energy Certificates,” she says.

Furthermore, Gode says that an expected increase in the cost of conventional energy, sources such as thermal, due to their limited use of fossil fuels, would provide stimulus to the cost competitive renewable energy sources.

“Considering the factors favouring the independent power producers in this segment, coupled with the projects in pipeline, the wind-based capacity additions going forward, are expected to grow between 2000 MW to 2500 MW during FY16 - FY17 as against 2312 MW of capacity addition during FY15,” she says.

Gode adds that it is expected that the wind-based IPPs would continue to prefer to sell their power to state distribution companies by entering into purchase power agreements, for this assures stable cash flows to the projects and provides opportunities to avail themselves of the benefits of open access and banking facilities.

India has a coastline of 7517 km, offering a huge potential for offshore wind energy as well. India has wind potential of around 102.77 GW out of which the total installed capacity as on March 31, 2015 was 23.44 GW, she says. India’s wind energy installed ASIAN POWER 17

sector report: wind capacity was majorly spread across eight states; Rajasthan, Gujarat, Madhya Pradesh, Maharashtra, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. The total installed capacity of renewable power projects as on March 31, 2015 aggregates to 35.77 GW (excluding 41.27 GW of large hydro projects) against the total potential capacity of 249.19 GW. India has wind potential of around 102.77 GW out of which the total installed capacity as on March 31, 2015 was 23.44 GW with an untapped potential of about 77%.

“A major part of capacity addition and exploitation of wind potential in the future is expected from private sector projects.

Huge untapped potential in wind power is attributed to lower plant load factor in comparison to fossil fuel, nuclear and hydropower plants,” she says. In addition, due to the limitation of grid infrastructure, it has been found that the amount of energy produced from wind farms could not be effectively transmitted to consumers, causing wastage of energy. “And also, the financing structure of wind power projects in India is still bound in uncertainty. Due to aforementioned issues,although the untapped potential is huge, the extent to which the same can fructify still remains uncertain,” Gode says.

Investments in wind energy projects are slowed down by insufficient finance to cover the comparatively high costs, of which 15-17% arises from transport expenses.

Vietnam takes steps to attract more investments Located in the monsoon climate zone, and shaped by its over 3,000-km long coastline, Vietnam is bestowed with large wind energy potential. Meteorological as well as measurement data shows that the average wind speed per year ranges from 5.5 m/s to 7.3 m/s: favourable conditions for wind energy development.

The technical potential for wind power development in Vietnam is estimated to be around 27 GW, covering a land area of 2,681 square kms (AWS Truepower - 2011). However, only 52 MW of wind power has been put into operation up until now.

It is expected that by 2030, renewable energy will account for 6% of the national electricity output. Currently, the country’s electricity supply is largely based on thermal power (34%) and hydropower (43%). Hence, the Vietnamese government wants to strengthen the development of renewable energy to offset the use of fossil fuels, the German Wind Energy Association (GWEA) said.

“In order to secure energy supply and, at the same time, reduce energy related greenhouse gas emissions, the Vietnamese government has set itself ambitious targets for renewable energy development,” says Peter Cattelaens, wind energy technical adviser at the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ). According to the National Power Development Plan, Vietnam aims to increase its renewable energy share in power production from 3.5% in 2010 to 4.5% in 2020 and 6% in 2030. This will bring the total wind power The following graph illustrates the wind capacity additions during FY13-FY15 across 7 states:

Source: MNRE

18 ASIAN POWER

capacity from the current negligible level to around 1,000 MW by 2020 and around 6,200 MW by 2030.

However, regulatory and market barriers limit the industry to scale up to its full potential.

“Besides the low feed-in tariff that needs to be adjusted, some other challenges are missing finance, low data reliability, the lack of a systematic and consistent database, a deficiency in qualified human resources and technical infrastructure, as well as an inadequate supply of auxiliary equipment and services,” he says.

In addition, complex procedures to undertake investments make it difficult for foreign investors to tap into the market. Local institutional stakeholders are unclear about procedures, leading to subjective interpretation and application of national regulations at the province level, he says.

At present, investments in wind energy projects are slowed down by insufficient finance to cover the comparatively high costs, of which 15-17% arises from transport expenses. Local banks still lack necessary knowledge; foreign banks often refrain from financing due to prevailing investment uncertainty regarding particularly the purchase price. The Vietnamese government has recognised that the tariff paid for electricity generated by onshore is not sufficient to cover for the costs and has announced a change to the tariff, WEA adds.

Cattelaens says that the current remuneration scheme of wind energy in Vietnam includes a feed-in tariff of 7.8 USc/kWh, with the power purchase agreement duration of 20 years. “The feed-in tariff is currently under revision to become more favourable for the commercial development of the sector. In addition, there are other supplementary instruments, such as an import tax exemption, land incentives, a corporate income tax reduction, incentivising the development of the sector,” he says.

Philippines moves toward a more diverse energy mix The Philippines is making a concerted push to build up its renewable energy sector with the goal of cutting its heavy dependence on fossil fuels for electricity generation, says Christopher Thieme, director of the private sector operations department at the Asian Development Bank (ADB).

The country’s untapped renewable energy resources are estimated at about 250,000 megawatts (MW) and the Department of Energy is targeting about 2,870 MW of additional installed capacity from these sources by 2030. “The wind farm will provide a shot in the arm to the government’s push to diversify its energy sources and reduce harmful greenhouse gas emissions,” Thieme says.

ADB has signed a financing assignment agreement of up to $20 million with EDC Burgos Wind Power Corporation (EBWPC), Eksport Kredit Fonden, and a syndicate of international commercial banks to support development of the largest wind farm in the Philippines. Other lenders include a syndicate of local commercial banks who have provided local currency debt.

“This Burgos wind farm is a major contributor to the government’s drive to scale up renewable energy use and to reduce its reliance on coal and petroleum for power generation. The operation of this farm will avoid the production of over 200,000 tons of carbon dioxide equivalent emissions a year, making it a sustainable energy source for the country,” he says.

The 150 MW Burgos wind farm, which is situated in the northern province of Ilocos Norte on the main island of Luzon, was completed in November 2014 and is owned and operated by the EBWPC. The special purpose company is controlled by Energy Development Corporation, a publicly listed firm which is the largest geothermal energy producer in the Philippines and the largest integrated steam and geothermal energy producer in the world today. Renewable energy projects in the Philippines, and the contribution the farm will make to the government’s drive to diversify its fuel mix and to meet rising power demand without the use of fossil fuel generation plants,” Thieme says.

Country report 2: philippines

Investors and players are being turned off

Philippine policy potholes frustrate analysts

The country boasts of commitment to expanding its renewable industries, but a big catch lurks behind the attraction.

F

ollowing the steps of its neighbouring countries, the Philippines is setting its eyes on shifting to renewable energy sources and slowly shedding its dependence on coal, oil, and gas for its energy needs. The country’s market, in theory, is a bright spot for investors along with Thailand and Indonesia, but its attractiveness is marred by policy loopholes that counter its big potential.

Recent project announcements attest to the Philippines’ investment appeal including the 92.5MW module shipment from Chinese manufacturer, JA Solar Holdings. This represents JA Solar’s first entry into the Philippine renewables market and is representative of analysts’

The government seems to be committed to expanding the domestic renewables industry and has implemented a number of policies to encourage investment.

Philippines: ASEAN renewables bright-spot

f= BMI forecast Source: EIA, BMI 20 ASIAN POWER

views that Chinese solar manufacturers will increasingly turn to rapidly expanding Asian renewables markets in order to offset some of the overcapacity in their domestic market. Renewables developer, Conergy, also announced in October 2015 that it is developing over 200MW of solar capacity across the Philippines.

“We have previously noted in our analysis that the ongoing power supply issues in the Philippines will gradually improve over the coming years as a robust power project pipeline is commissioned. Although the project pipeline is dominated by coal, the pipeline for renewable energy is also strengthening, on the back of the strong regulatory environment in place to attract renewables developers into the market,” says Georgina Hayden, senior energy & infrastructure analyst, BMI Research.

Tony Segadelli, managing director of consultancy firm, OWL Group, agrees that the government is very supportive of investments, particularly from the highest levels of government where it is recognised that lack of progress in the power sector can be an impediment to international investment in other sectors. EPIRA (“Electric Power Industry Reform Act (EPIRA) of 2001”) brings a high level of transparency to the power market, which is to be encouraged. “In 2015 there was a push to repeal EPIRA

as it was perceived to be responsible for high power prices at times of low supply.

Fortunately the government resisted this move and while there has been some ‘tinkering’ with the rules, they remain largely intact,” he adds.

Market deregulation takes bite The deregulated market offers some benefits to investors in terms of access to the market, although this is offset by the complexity of permitting and the large number of approvals required to be able to proceed with projects at a local level.

The government has recently announced tightening of emissions standards for coal plants, which bring these in line with international standards, Segadelli says.

The government seems to be committed to expanding the domestic renewables industry and has implemented a number of policies to encourage investment. These include tax incentives, duty free imports of equipment, a feed-in tariff programme (FIT), net metering and utility quotas amongst other regulations. Furthermore, Hayden says, the Philippines has some of the highest electricity tariffs in the southeast Asia region, which allow for attractive returns for prospective developers.

Emmanuel P. Bonoan, vice chairman and COO at KPMG R. G. Manabat & Co., says that because of strong economic

Country report 2: philippines

Flor Tarriela

Emmanuel Bonoan

Is the country’s investment climate getting better?

fundamentals, the investment climate in the Philippines has significantly improved in the last few years. The economy, as measured by the Gross Domestic Product, grew by 6.1% in 2014 and 5.8% in 2015, one of the highest growth rates in the ASEAN region. The country has also consistently improved its rankings in key global competitiveness surveys.

The Philippines gained five places in the World Economic Forum’s 2015-2016 Global Competitiveness Index to reach 47th place out of 140 countries. The Philippines also improved its ranking by six places in the Heritage Foundation’s 2016 Index of Economic Freedom, to reach 70th place out of 186 countries.

“A better investment climate can be achieved with improving government institutions, investment in critical infrastructure, relaxing foreign ownership restrictions, and rationalising tax laws,” he says.

Here’s the catch These scenarios seem pretty decent and enticing for investors, but Roberto S. Verzola, executive director, Center for Renewable Electricity Strategies (CREST), thinks otherwise. The Philippine Energy Plan’s 2012-2030 “business-as-usual” scenario expects peak demand to increase to 23,158 MW by 2030. To cover the peak demand plus the required reserve margin, a capacity of at least 25,788 MW must be ready by that year.

Flor Tarriela, Chairman of PNB and a FINEX Trustee adds that historically, demand has outpaced supply. There is currently a tight demand-supply balance.

The Philippines is subdivided into the Luzon, Visayas and Mindanao power grids, each with a distinct power supply to support the regional demand. The Luzon and the Visayas grids are interconnected; any excess in one grid can be exported to

cover any power deficiency in the other.

The Mindanao grid however, remains isolated and stands alone.

“Power supply should be able to cover (i) peak demand and (ii) reserve requirements. Peak demand represents the highest power requirement registered during the peak hours in between 11 a.m. and 2 p.m. and typically at the highest during the summer months. Reserve requirements are stand-by power in the event of unexpected forced shutdown of key power plant facilities,” Tarriela says.

Bonoan also points out that the country has been targeting to shift to renewable energy but the shift is taking too long to happen. This is because capital outlay for fossil fuel plants, such as coal and diesel are relatively cheaper (on a per MW basis) than RE plants.

Fuel costs have also decreased in the past few years, which makes thermal power plants more competitive. Another challenge is that incentives in the form of FIT remains limited due to the government establishing “targets” (which the industry has interpreted as “caps”) on the generation capacity that will be awarded FIT rates.

RE projects that are in excess of the approved FIT capacity would have to be sold through the WESM, and thus subject to volatility in electricity market prices. Other challenges include the slow and lengthy process involving feasibility studies, bidding, permits, environmental clearance, and approvals for projects located in indigenous peoples’ areas, among others.

The big hurdle Segadelli comments that red tape is a concern for all industry participants and is recognised as a source of frustration to developers. Unfortunately, due to the regulatory and governance

Tony Segadelli

Georgina Hayden

framework, there are multiple layers of vested interests, and the public accepts corruption as almost a foregone conclusion. “Breaking this cycle is extremely difficult, particularly where any challenge to the system can be tied up in the courts for years.

A strong government may be able to develop central coordination, but this will continue to be problematic. For a consulting firm the biggest challenge will be the slowdown in the market as developers and investors adopt a ‘wait and see’ strategy until the new government policy is developed.

It is likely that it will take several months before there is clarity on this Segadelli adds.

Verzola asserts, “If we scaled down the demand using energy efficiency measures and covered the scaled-down demand with renewables only, then peak demand will have risen more slowly than usual and the renewables-only additions will have sufficed until 2030 to cover the peak demand plus reserve requirements with 670MW to spare, based purely on existing government plans in 2012.”

“Sadly,” he adds, “the Philippine government went instead on a construction binge of 23 coal plants that is scheduled to go on until at least 2020, squandering a golden opportunity for the country to show the world how to make an early energy transition to renewable electricity.”

Tarriela also explains that demandsupply outlooks are vital as generally, one of the main concerns of investors and banks financing power projects is the market risk that there will be an abundant supply of electricity such that a power plant will not be able to get guaranteed buyers of electricity produced whereby the power plant might have to resort to sell at the open market at a price below break-even.

“It is important to recognize that the Philippines is not a wealthy country, and power development has been focused on least-cost solutions ,” Segadelli concludes.

Illustrative graph showing dispatch of coal and oilfired power plants in Luzon

Source: BMI Research

ASIAN POWER 21

analysis 1: RENEWABLES

Will Asian countries go all out in using renewable energy ever?

Asian governments aggressively move to boost renewable energy usage

More regulations and incentives are being unleashed by policy-making bodies in hopes of spurring RE generation.

G

overnments across the Asia Pacific region are continuing the push for greater renewable energy contributions to domestic electricity demand. While the deal flow has been lower than expected over the last six months, there have been positive signs in several countries that local developers are very active at the approval level. International developers are increasingly taking advantage of the many government and market incentives for renewable energy investment and investing alongside locals.

Policy directions and incentives for renewable energy continue to strengthen across the region and there are increasingly positive indications from government and private developers.

The biggest mover of the last few months has been Japan.

Despite some initial regulatory uncertainty following the election of a new conservative government, and mixed messages about Japan’s nuclear future, several large scale plans have been announced by both domestic and foreign investors. Fukushima Prefecture is set to become a renewable energy hub, with a number of large solar projects and the largest offshore wind farm in the world planned for its coastline. Goldman Sachs has committed JPY50 billion (US$487 million) for renewables projects in Japan generally.

While there has been some reluctance by grid providers to connect renewable-sourced energy to the grid, there continues to be strong interest from international developers for renewable energy projects generally. China remains dominant in the renewables sector globally, with only the United States’ renewables industry and Germany’s solar industry at a similar level. China accounted for about one-quarter of global renewables expenditure in 2012 (US$64.1 billion) as the Chinese Government looks for a secure, diversified and clean energy mix to power the largest urbanisation in human history.

22 ASIAN POWER

The South Korean Government has tried to encourage private investors to take the lead, while Singapore has continued to focus on research and development in the renewables space.

Other movers over the past six months include Vietnam, Thailand, the Philippines, Malaysia and Indonesia. Vietnam has furthered its hydropower credentials with the opening of the 2.4GW Son La plant in December 2012. The deal flow for renewable energy projects in southeast Asia, particularly for solar projects in Thailand, the Philippines and Malaysia, as well as geothermal projects in Indonesia, has also improved this calendar year.

Other developments In contrast, some countries in the Asia Pacific have been less active over the past six months. The Australian renewable energy industry has been in a state of flux, despite a record 13.14% of generation from renewable energy sources in 2012. The election of a new conservative government in September 2013 promised to have a large impact on climate change and renewable energy regulation. India has been relying on new wind and solar to meet ambitious renewables targets in its recently released Five Year Plan, however it has faced delays in projects of late.

Mongolia has not shown signs of broadening its energy boom to renewables, despite the tenth wind turbine being erected at its Salkhit wind farm. While delays in the award of the CHP5 IPP coal fired project has concerned some in the power industry, the Mongolian Government has begun to send the right signals to international investors over the last few months generally.

The South Korean Government has tried to encourage private investors to take the lead, while Singapore has continued to focus on research and development in the renewables space.

Trends of progression The progression of development for domestic renewable energy industries is at very different stages across the Asia Pacific region.

Government incentives and current energy patterns reflect three

analysis 1: RENEWABLES dominant trends:: the continued dominance of fossil fuels in the energy mix; projections of strong future growth in electricity demand correlated with continued strong economic growth, requiring increased investments in generation capacity and transmission and distribution infrastructure; and governments seeking to promote renewable energy development and adopting comparable incentives to drive the level of investment required to meet renewable energy targets.

The main exception to these trends is New Zealand, which already sources more than 75% of its electricity needs from renewable energy mostly through hydropower and geothermal energy. New Zealand’s renewable energy target is to have 90% of electricity needs met by renewable energy by 2025. By comparison, ‘20% by 2020’ is the standard renewable energy target for most Asia Pacific countries, with renewables generally generating less than 15% of electricity in most countries.

While New Zealand is not amongst the group of populous and developing Asian countries with pressing energy security needs, its renewables industry is a global leader, particularly in the research and use of geothermal energy, which currently contributes nearly 14% of national electricity use.

Renewables: the big picture Governments of both developed and developing countries in the region have a host of reasons to use renewable energy to satisfy growing energy needs. In the short term, attracting investment in renewable energy projects presents challenges due to competition from cheaper fossil fuel-sourced energy and high start-up costs for projects that can be located far from population centres. International developers have hesitated in recent times as some countries’ regulatory environments have not provided the perception of a long term commitment to renewable energy that is needed to guarantee returns on investment.

There have been some recent examples worldwide of governments reducing or removing feed-in tariffs which are perceived to be too out of sync with conventional power costs, which may become a politically sensitive issue if consumer electricity prices increase. Despite these impediments, renewable energy targets, feed-in tariffs, renewable energy laws, national plans promoting more renewable energy and policy papers predicting energy transformations, are the norm across the region. Developing countries see energy security and other long term benefits in investment in grid-connected and standalone renewable energy systems. This is true for large projects, such as China’s mega-dams on the Yangtze and Jinsha Rivers and Vietnam’s Son La project, and also for small-scale projects such as stand-alone systems in East Timor, which are seen as an answer to rural electrification and a requirement for raising Growth in electricity generation by fuel, 2011-2035

Source: World Energy Outlook 2015 - Southeast Asia, IEA

Japan does not have a national emissions trading scheme, but does have regional schemes in Tokyo and Saitama.

living standards generally. Renewable energy is often seen as the answer to climate change and accordingly the debates over these issues become intertwined. But the benefits of renewable energy go far beyond reduced carbon emissions and climate change mitigation.

Renewable energy also has the potential to curb immediate air and ground pollution concerns, produce self-sufficient energy supplies that are not susceptible to geopolitical volatilities and provide the platform to lift further millions of people into Asia’s booming middle class. As prices for renewable energy continue to come down (one need only look at China’s production line of PV cells and wind turbines to see why), and if government targets are fulfilled, renewables will overtake fossil fuels as the dominant source of electricity across the Asia Pacific in the coming decades. Renewable Energy in the Asia Pacific seeks to capture this sentiment and provide potential and current investors with a broad-based but objective understanding of the push within the Asia Pacific for more renewable energy.

Japan renewables industry overview Japan currently sources approximately 9% of its energy from renewable sources, with hydropower the largest source of renewable energy. In 2010, a target of 20% renewable energy contribution was announced, however this target is not a central driver of renewable energy investment like in other jurisdictions.

There was a significant push to develop renewable energy in Japan in order to boost energy self-sufficiency and to move away from nuclear power in the wake of the 2011 disasters.

Although there was initial uncertainty in the renewables industry following the election of the pro-nuclear LDP in 2012, Japan has re-emerged as one of the most promising renewables markets in the Asia Pacific, particularly for solar energy. Japan does not have a national emissions trading scheme, but does have regional schemes in Tokyo and Saitama. With the Under the Cool Earth 50 initiative launched in 2007, the Government has committed to reduce emissions by 50% on current levels by 2050. Later policies, like the Fukuda Vision, set even more ambitious carbon reduction targets. Perhaps the most notable feature of Japan’s renewables industry is its feed-in tariff regime.

The political instability of successive Japanese Governments is seen by some commentators as a deterrent to renewables investment. Indeed, the industry is in minor state of regulatory flux with the new LDP Government yet to make significant announcements on the country’s energy future. Nonetheless, this has not deterred domestic and international developers investing in major projects in recent months.

Nuclear energy remains unpopular with the Japanese public, with support for renewable energy options continuing despite the likelihood of electricity price rises if renewable energy options were developed more aggressively. Regional utilities have retained the right of refusal for renewable energy generators. This has been a particular problem for wind producers with utilities often refusing to accept wind power on the grounds that it might destabilise the grid. Softbank Corp’s plans for three solar farms in Hokkaido were also turned down by a regional grid provider.

Hokkaido Electric Power Co emphasised that there was a limit to how many large solar farms that could be incorporated into the grid.

Japan’s feed in tariff regime The Act on Purchase of Renewable Energy Sourced Electricity

by Electric Utilities, which became effective on 1 July 2012, establishes a feed-in tariff regime for renewable energy. The tariffs are the Government’s chief incentive for renewables investment. The law introduces a feed-in tariff regime for renewable energy whereby energy operators are generally obligated to purchase set amounts of solar, wind, geothermal, hydropower and biomass energy at set rates; shortens the ASIAN POWER 23

analysis 1: RENEWABLES amount of time required to assess the environmental impact of building and running wind farms; deregulates the process of setting up small hydropower plants; exempts solar power stations from regulations under the Factory Location Act; allows for geothermal power development in national parks for firms that drill wells outside the parks; and gives power generation companies control over the substance of Power Purchase Agreements. Electric utilities cannot refuse requests by power generation companies to enter into agreements to supply power from renewable energy sources unless there is a risk of unjust harm to the interests of the electric utility.

In order to receive the benefit of the feed-in tariff, a supplier must first obtain accreditation from METI for the facility generating renewable electricity.

While there are particular requirements for each kind of renewable resource, the following criteria apply to all the facility must have a system in place that enables it to maintain its expected capacity during the anticipated term of the agreement with the electric utility operator that will purchase the electricity; the facility must have a proper mechanism to accurately measure the amount of the renewable electricity supplied; the functions and operations of the facility must be specifically identified and reported to METI; and the installation and operating costs of the facility must be recorded accurately and filed with METI. After a supplier has received accreditation, it may then apply to enter into an agreement with an electric utility operator. The terms of the agreement are determined by METI. Despite a 10% drop in solar rates, the 2013 revision of feed-in tariff rates by METI still provide some of the most generous feedin tariff rates in the world. In 2012, the tariffs resulted in US$16.3 billion of renewable energy investment, which was an increase of 75% on the year prior.

Foreign investment/ownership Japan External Trade Organisation (Jetro) is a body that encourages foreign direct investment in Japan. Jetro assists foreign investors through arranging tours of regions and introductions to Japanese business persons.

There are no restrictions on foreign investment for participation in the feed-in tariff regime. In fact, foreign investment is

Will Singapore’s solar venture be successful?

24 ASIAN POWER

Comparison of coal-fired electricity generation by technology and average efficiency

Source: World Energy Outlook 2015 - Southeast Asia, IEA

welcomed by the government to help increase the country’s renewable electricity base.

The Fukushima Prefecture is now set to become a renewable energy hub. Aided by generous national government subsidies, construction is about to commence on a number of projects that are a part of the prefecture’s goal to become 100% energy selfsufficient by 2040.

Singapore’s electricity industry overview Singapore is heavily dependent on fossil fuels for electricity generation. Four offshore pipelines supplied by Malaysia and Indonesia satisfy Singapore’s natural gas demand and demonstrate the country’s reliance on imported fossil fuels to meet domestic energy needs.

99.9% of Singapore is serviced by a single grid. The interagency Energy Policy Group has outlined five principles for Singapore’s energy sector to promote competition to keep energy affordable; diversify energy supplies to guard against supply disruptions, price increases and other threats; improve energy efficiency .

Solar energy is regarded as the most feasible source of renewable energy for the city-state of Singapore. The National Environment Agency has encouraged renewable energy development through programs like the Innovation for Environmental Sustainability Fund. The fund allows access to public infrastructure for testing of renewables technologies.

For instance, the fund helped install a 14.5kW grid-connected solar system at a school in Singapore. The Government has provided initial funding of S$350 million (approx. US$277.6 million) for clean energy programs in Singapore (with an emphasis on solar energy) under the Sustainable Development Blueprint.

Solar PV and biofuels are seen as the best opportunities for Singaporean renewable energy development. Hydropower and geothermal generation opportunities are limited due to Singapore’s confined land mass, while wave, tidal and ocean thermal energy are limited because of Singapore’s busy shipping lanes.

The Inter-Ministerial Committee on Sustainable Development launched the Sustainable Singapore Blueprint, which sets out strategies for sustainable growth. This complements the newly created Energy Efficient Programme Office to encourage an “energy efficient Singapore”.

The Ministry of Environment and Water Resources deals with climate change issues like energy efficiency, whilst the Ministry of Trade and Industry is responsible for drafting and implementing energy market policy. From “Renewable Energy in the Asia Pacific: A Legal Overview, 3rd Edition“ by DLA Piper

analysis 2: china m&A

Is China ready to let go of coal-fired power

China remains unstoppable in power and utilities M&A despite economic slowdown

Aggressive M&A activity is predicted to push through in 2016 and focus is likely to shift more towards renewables.

T

he power and utilities (P&U) sector in the Asia-Pacific is fast becoming the world’s most exciting, with massive activity in China, reforms in many markets, electrification agendas and a focus on renewables driving a surge in mergers and acquisitions (M&A) during 2015.

Q4 2015 highlights include Chinese outbound activity’s continual rise. Dealmaking in China contributed US$51.7b or 69% to the total regional deal value.

As the Chinese economy slows, larger utilities acquired smaller utilities to increase their customer base and bring operational synergies. Renewable energy transactions are gaining momentum as well. Q4 2015 hosted renewable energy deals are worth US$19.1b, a six-year high.

While much of the activity was in China, renewables targets across the region encouraged M&A. In particular, India’s ambitious renewable energy targets, rising demand and favorable regulatory environment are attracting foreign investors.

Energy reforms and unbundling is also a highlight including India’s UDAY (Ujwal DISCOM Assurance Yojana) scheme, as well as other power sector reforms, are increasing the attractiveness of this market to investors. Reforms are 26 ASIAN POWER

Altogether, Chinese state-owned utilities acquired overseas assets worth US$5.6b, primarily in Asia-Pacific countries.

also progressing in Pakistan, creating investment opportunities through privatizations and smart meter rollouts.

One of the biggest deals of the year (US$7.4b) was the sale of Australian government T&D asset TransGrid to a consortium of international buyers.

These trends are fuelling a significant expansion of the region’s regulated transmission and distribution (T&D) sector with China and India expected to see the world’s biggest network expansions to 2020. In most Asia-Pacific countries, the T&D segment is regulated with fixed returns, thus ensuring stable cash flows and limited competition. Until recently, Australia was the only country in the region where privatization offered major acquisition opportunities but this looks set to soon change as energy reforms gather pace in India and China.

Currently, T&D companies in the region are trading at a P/E multiple of 14.6x of FY2 EPS, implying a 22% premium on historical averages. Utilities in China and Australia have commanded particularly high premiums, reflecting the perceived quality of these assets.

There is little doubt that, given enough time, the valuations of T&D assets, as well as generation assets, will be impacted by the growing penetration

of disruptive technologies such as solar rooftop and battery. Already, energy efficiency measures and demand response programs are reducing electricity demand. For example, annual energy consumption in Australia’s eastern states fell by 7% between 2009 and 2014, despite the Australian economy growing by 13%.

Many in the industry believe that 2016 will be a critical year that reveals more about the timing and degree of impact of these disruptive technologies on valuations.

Historical average trading Power generators and IPPs, currently trading at a discount of 15% on historical averages, have continued to attract low valuations due to stagnant demand growth in China, plateaued electricity sales in Japan, falling wholesale power prices in India and surplus capacity in several economies.

Conditions will remain tough in 2016, as solar parity puts pressure on power prices. In India, the recently launched UDAY scheme, if successful in improving the financial performance of distribution companies, may help these companies free up their balance sheets, allowing generators to see increased offtake of electricity and faster payment. This

analysis 2: china m&a positive impact of operating leverage could increase generation valuations.

Dealmaking in China dominated much of Q4 and 2015 as a whole, contributing US$51.7b or 69% to the total regional deal value for the year. As the Chinese economy slows, many larger utilities were prompted to buy smaller utilities to increase their customer base and bring operational synergies. While activity in the first half of 2015 focused on consolidation in the conventional generation and water and waste segments, the latter half of the year witnessed a shift toward building renewable asset portfolios — over US$20b worth of transactions took place in the Chinese renewable energy sector in 2015. China Yangtze Power’s US$12.5b acquisition of Jiangsu Sanxia Jinshajiang Chuanyun Hydroelectric Power from China Three Gorges Corporation, Sichuan Energy Investment Group and Yunnan Energy Investment Group, remained the largest deal in the region during the year. The largest outbound deal was China General Nuclear Power’s acquisition of Malaysiabased Edra Global Energy Berhad for US$2.3b. Altogether, Chinese stateowned utilities acquired overseas assets worth US$5.6b, primarily in Asia-Pacific countries.

RE transactions gain momentum Q4 2015 hosted renewable energy deals worth US$19.1b, a six-year high. While Chinese domestic activity dominated this segment, India’s ambitious renewable energy targets, rising demand and favorable regulatory environment are also attracting foreign investors, such as Abu Dhabi Investment Authority and GIC Private Limited, a Singapore-based sovereign wealth fund. A number of clean energy businesses in India, such as ReNew Power Ventures and Welspun Renewables, have been challenged by debt and are now exiting at relatively higher valuations to repay loans.

Energy reforms and unbundling In addition to its UDAY (Ujwal DISCOM Assurance Yojana) scheme aimed at improving the financial situation of stateowned distribution companies (discoms), India implemented other power sector reforms in 2015 focused on clean energy, better regulation of discoms and faster rollout of investments.

The Indian energy industry generally views UDAY as a positive development and already around 15 states have joined with the government to implement the scheme, opening up investment opportunities in smart metering, energy efficiency, and modernization of grid infrastructure. Reforms are also progressing in Pakistan where investment

opportunities are being created through privatizations and plans to roll out smart meters in major cities and industrial and commercial areas. In Australia, it was the US$7.4b privatization of stateowned electricity network TransGrid that contributed most of that country’s deal value in Q4.

M&A reaches new high despite economic slowdown in China It was a strong year for the Asia-Pacific with deal value reaching US$74.1b — double 2014’s total and a new seven-year high. Activity was dominated by China, despite a slowdown in the country’s economic growth. China contributed the biggest deal of the quarter and the year — Yangtze Power Company’s (CYPC) US$12.5b acquisition of hydropower assets from its parent company, China Three Gorges.

The transaction highlights the prominence of renewable energy deals in China’s Q4 activity where hydro and other clean energy assets worth US$15.6b changed hands. We expect these assets to remain attractive and demand higher premiums as Chinese utilities seek to meet the targets and mandates of the Paris Climate Change accord. However, a disconnect between the efforts of provincial authorities to meet energy needs and stimulate economic growth, and China’s overall energy requirements means that more coal-fired plants have been approved and will come online.

Throughout the region, corporate deal value hit a six-year high (US$27b), with much M&A taking place within domestic markets.

Financial investors, particularly those based in Australia, China and Singapore, made their presence felt in Q4, doing deals worth more than five times their contribution in the previous quarter.

Many of these deals involved regulated grids and renewable energy assets, with the biggest of these being the US$7.4b acquisition of Australia’s TransGrid by a consortium of domestic and global fund managers and private equity investors.

Another notable corporate deal was the acquisition by the Australia-based Infrastructure fund of Colonial First State Global Asset Management of New Zealand gas transmission and distribution assets for US$853m, a premium of more than 10 times the enterprise value.

Generation-related deals reflected the downward trend on these assets’ valuations, primarily driven by stagnant demand growth in China, and rising renewables capacity putting pressure on power prices. In the past six years, average valuations have plummeted to 56% of their original value. As the emphasis on clean energy continues,

Throughout the region, corporate deal value hit a six-year high (US$27b), with much M&A taking place within domestic markets.

we expect this trend to continue. One of the more notable deals within the generation segment during Q4 was the sale of Australia’s largest coal-fired power station, 1,320 MW Vales Point, for just AUD$1m (approximately US$720,000) in November 2015. Renewable assets, supported by clean energy mandates, continue to attract interest from investors, who pumped US$19.1b into this segment in Q4, primarily in China and India. Strong government support for renewables across the region makes this market particularly attractive to foreign players whose interest is pushing up valuations. I In some other notable deals in October 2015, GE Energy Financial Services acquired an undisclosed equity stake in Welspun Renewables Energy while Abu Dhabi Investment Authority (ADIA) and Goldman Sachs invested US$265m in Repower, and GIC Private Limited acquired a majority stake in Greenko for US$251m.

In 2016, we expect continued strong interest in Indian renewables from both domestic and foreign investors keen to add contracted assets to their portfolio.

Integrated and diversified utilities in Japan have traditionally been highly valued because of their stable, low-risk profile within a monopolistic market. But as energy reforms unbundle utilities and open retail competition from April 2016, these assets face almost certain downward pressure on valuations.

The size of this decline in valuations will depend upon how much time utilities will have to strengthen their balance sheets before they are completely exposed to the competitive market.

Watch as these companies seek new value growth through convergence with telcos. For example, in December 2015, Osaka Gas entered into an agreement with NTT DOCOMO to sell bundled electric and telco services to homes from April 2016. From “Power transactions and trends: 2015 review and 2016 outlook,” EY

Coal maintaining primacy in Asia’s Power Mix

Source: Power transactions and trends: 2015 review and 2016 outlook,”EY

ASIAN POWER 27

analysis 3: CLEAN COAL

Clean coal ambition is becoming blurry

Asia’s clean coal dreams are feared to burn down to ashes as coal reliance grows

Countries are torn between pleasing the world with cleaner tech and supplying energy in the cheapest way possible.

R

hetoric surrounding the development and deployment of ‘clean coal’ technology in Asia has increased, as the region continues to ramp-up coal-fired power capacity, amid growing international concern about rising carbon emissions. Despite the growing optimism, we believe that the implementation of ‘clean coal’ technology will register only limited progress over the next decade, due to high costs and limited commercial viability.

There is increasing pressure on the Asia region to curb its heavy reliance on coal consumption in the power sector - particularly in the aftermath of the

Countries in the region continue to ramp-up their domestic coal-fired power capacity.

Average price/earnings(P/E)trading multiples for select T&D utilities

Source: Bloomberg, EY analysis 28 ASIAN POWER

UN Climate Change Conference 2015 agreement (UN COP21). Although we have seen some strong commitment to coal reduction from China, countries across the region continue to view coal as a fundamental fuel for the power sector, given its widespread availability and affordability. BMI forecasts the benchmark for Asian prices (Newcastle coal) to trade in the USD40-60/tonne range out to 2020, compared to USD140/ tonne in 2011 and USD78.0/tonne over 2012-2015; as such, we expect coal to maintain its dominance in Asia’s power mix over the coming decade, accounting for 51% of the total in 2025.

No way but up?

In line with this forecast, countries in the region continue to ramp-up their domestic coal-fired power capacity. Other than the two largest coal power markets in Asia (China and India), Vietnam, Pakistan, Indonesia, Philippines and South Korea are all notable examples of countries that are building up extensive coal capacity, with all having a coal-fired power project pipeline of more than 9 gigawatts (GW) according to our Key Projects Database (KPD).

In light of these dynamics and the growing international pressure to

reduce carbon emissions, we have seen an uptick in rhetoric surrounding the development and deployment of ‘clean coal’ technology in Asia over the last year, including subcritical/ultrasupercritical plants, coal gasification and carbon capture, utilisation, and storage (CCUS) technology. For example, in August 2015, an agreement between the US Department of Energy (DOE) and China’s National Energy Administration (NEA) to jointly develop ‘clean coal’ technologies for commercial use was announced. Despite the growing rhetoric, we believe that the implementation of ‘clean coal’ technology will register only limited progress over the next decade, due to its high costs and limited commercial viability at present.

Coal combustion systems with supercritical and ultra-supercritical technology achieve higher efficiency rates when compared to conventional coal combustion plants, as they operate at higher temperatures and pressures.

According to World Coal Association, a 1% improvement in efficiency of a conventional coal combustion plant results in a 2-3% reduction in carbon dioxide emissions. From “Clean Coal: No Silver Bullet For Asia’s Emissions Woes,“ BMI Research

ASIAN POWER 29

OPINION

JOHN GOSS

Working towards a clean energy future for China

john.goss@aod.com.hk

D

ealing with future environmental challenges will be a challenge for the Chinese government together with the country’s industries and businesses. The government will is to create an efficient and strong alternative energy industry in order to deal with the environmental headwinds that they will be facing.

It was during 2015 that the Chinese Government submitted a document to the Secretariat of the United Nations Framework Convention on Climate Change. This document stated that China is committed to reducing its carbon dioxide emissions per GDP by some 60 to 65 % by 2030 - when compared with the carbon dioxide levels during 2005.

Achieving these environmentally friendly targets will require China to have added new power generation installed capacity of 100 million kW of nuclear power, 150 million kW of hydroelectric power, 300 million kW of solar power together with 400 million kW of wind generated power between 2016 and 2030, says a study from the Energy

Research Institute of the National Development and Reform Commission (NDRC).

A recent report in the China Daily newspaper said that the country’s consumption of non-fossil fuels will account for approximately 20% of China’s primary energy usage by 2030. Thermal coal is already starting to buy new cleaner and greener energy across the country. This transition in energy consumption is due to the 13th Five Year Plan (2016-20).

It is well known that the higher cost of clean and green energy is the most significant obstacle in the way of China’s cleaner and greener energy industries and the associated businesses. Subsidies from the government are therefore critical in encouraging enterprises to actively engage in the green energy industry, says the Energy Research Institute of the NDRC. Coal-fired power generation accounted for 75.2% of the China’s total power generation in 2014, according to the National Energy Administration (NEI). During the same period, non-fossil-fuelled power generation in China, which includes wind

AKIRA TOKUHIRO Humans, machines, and outcomes

O

n the occasion of the Fukushima Daiichi nuclear power plant accident, at a bookrelease event organised by a well-educated, secluded community in the Santa Ynez Valley, California, I came upon those three words in my article title during a book-signing. Throughout the human history of tool-making and energy use, catapulted by currency-based commerce, and the human use of “tools and energy” becoming ever more sophisticated, we have determined the outcome of the human condition. Allow me to elaborate further on this theme.

At the end of 2015 and onward to 2016, a future unfolds as a result of newsworthy outcomes, most as a result of human “invention”. Take for example, the starkly contrasting recent events and outcomes in Paris. First, the well-planned, coordinated attack in Paris by ISIL (claimed) supporters/members was testimony to occurrences of the unexpected, though possible in these troubled times.

These adversarial activists/militants made full 30 ASIAN POWER

use of human inventions – weapons, computer hardware and software (via social networking), and via human-machine interaction, changed the life outcome of many of its victims. Hardware and software provided a quick means to access and disseminate information to those who valued its radicalised content. Simply put, weapons are the machines that humans use.

Paris also hosted the recent COP21 Conference where, during protracted negotiations, 196 nations signed an agreement to limit global carbon emissions. This is in the hope of limiting the rise in global temperatures by less than 2.0°C, deemed perilous to civilisations. Further, the accord contains an ‘intent’ to make the global economy ‘carbon neutral’ by year 2100.

However, the accord outcome, an umbrella agreement of many sovereign interests, appears “toothless”. It is voluntary and non-binding. In retrospect, we might humorously note that ‘day one’ of climate change began with the human ability

power, hydroelectric power, nuclear power and solar power, accounted for only 24.8% of the total generated capacity.

Power generation figures In 2014, the total figure for power generation in China was 5.4 trillion kW. This total figure was a rise of 0.17% from the previous year. Coal-fired power generation stood at 4.2 trillion kW, which was a rise of 0.17% from the same period in 2013. What is significant is the fact that China’s hydroelectric power contributed the most, or 24.61% to the growth.

The deputy director of the New and Renewable Energy Department of the NEA, Shi Lisha was quoted as saying that the supply side reform is the key to overall power generation reform. Currently, a lot of the power being generated by new energy is not being integrated with the national grid. Another negative point is that operations of the new energy companies currently rely heavily upon government subsidies. There are some pilot programs running which are experimenting with the integration of new energy with the power grid. An example of this is SPIC Mengdong Energy Group Co Ltd., based in Inner Mongolia, who are currently operating China’s first regional grid to successfully integrate both coal and wind energy resources.

The Chinese Government has recently reported that it is suspending approvals for new coal mines for three years. This significant step will serve to eliminate coal stockpiles and increase new energy consumption and so increase generation needs.

This decision was made during December 2014. to start fire – converting identified materials (fuel) to energy and light.

The after effect Many eons later, the natural concentration of effluents in our biosphere is now skewed as a result of accelerated anthropogenic use of fossil fuels to drive an industrialised, profit-driven global economy.

The outcome is a complex socio-economictechnological challenge on a global scale, which is to counter and mitigate the disputed negative impacts of global warming. We note that the accord itself , abstracted as it is, is the common acceptance of agreement between stakeholders.

The Institute of Defense Studies and Analyses also noted the COP21 as being ‘toothless’ since it is voluntary, and profitability appears to preside over binding commitments. In fact, to maintain a profitable sovereign economy is seemingly an unsurmountable global driving force. Thus, promoting coal-based external development while promoting renewable energy internally, presents a contradiction in terms.

Undeniably, multi-nationals and stakeholder nations have campaigned to maintain the status quo via a diplomacy of self-interest. In other words, we continue to decrease the complex, interconnected dynamics of fossil fuel-based socio-industrial economies of scales to simple profitability arguments. From a bird’s eye view, this does not seem wise.

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Superb project management Designing and building power plants to provide superior performance over the entire lifecycle is what we do. On average, our general project managers possess some 22 years of experience in the power generation industry. With their unique expertiswe, they bring an unmatched dimension of quality and security to your investment – including time schedules, project management as well as health and safety standards you can rely on.

All reasons that have earned us a reputation as your most trusted partner delivering cutting-edge integrated solutions at highest quality.

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OPINION

ERIK KNIVE & ERIC HO

Hydropower project development in Myanmar: Risk allocation

A

specific objective mentioned in Myanmar’s New Electricity Law 2014 is the intent to “increase foreign… investments in electricity-related work” and provision is made for the issuance and revocation of licenses to foreign investors.

Currently, none of the three credit rating agencies rates Myanmar, however it will soon get its first credit rating. In August 2015, the Government of the Union of Myanmar appointed Citibank and Standard Chartered Bank as its Sovereign Credit Ratings Advisors, who will act as a bridge between the Government and the ratings agencies, Standard & Poor’s, Fitch Ratings, and Moody’s.

A credible credit rating will improve the country’s borrowing costs, enhance Myanmar’s capital-raising strategies and increase investors’ confidence. The energy-rich country with a population of about 60 million is among the poorest in the world and its initial rating is expected to be well below the investment-grade status assigned to developing economies.

Inspiteofthat,whatelsecanMyanmardotoattract foreign investment in the power sector? Myanmar

has successfully conducted an international bid and awarded a 225 MW Myingyan gas-fired power project, albeit with some delays. The project has a 22-year power purchase agreement (PPA), with the Ministry of Electric Power guaranteeing the offtaker’s obligations under the PPA, and funded through a mix of limited recourse project financing and equity. The rules in hydropower are different from those of thermal, coal, and gas-fired plants, with each presenting its own risks and benefits.

Though power generation projects by their nature are more likely to attract private sector investment in the development of new assets, hydropower plants have dams as the generators and yet, large dams entail so many risks that private developers would require a great deal of incentive to invest in them.

Market, volume, and price risks; Public.

These risks’ allocation is normally done through Power Purchase Agreements (PPAs), which are a formofofftakeagreementcommonlyusedinpower projects in single-buyer developing economies.

These PPAs specify a fixed power purchase price or

William I.Y. Byun Looking at the impact of the Paris Agreement to Asia

W

hile that question hung over the last days of World War II, on December 2015 the world media definitely projected a cheerful resolution for the recent climate change negotiations there that “no”, the ballyhooed Paris Agreement inked there should provide a new pathway to avoid such fate.

While the multitudes of various politicians were all in good cheer though, one could not help but be a wee bit skeptical. The Agreement was indeed breezy on specifics and as the skeptics noted in particular – just like the doomed Kyoto Protocol there was lacking an enforcement and compliance mechanism. Was that perhaps then, a too familiar “been there-done that” scenario being replayed?

Rewind a decade or so and we can recall the Kyoto Protocol as a groundbreaking first major concerted global effort to counter climate change via attempting to incorporate private sector-style mechanisms such as tradable emissions credits.

The edifice was rather formidable-looking as 32 ASIAN POWER

the attempt was in fact one to establish, from the ground up, an entire market sector in itself complete with national review committees, a UN review committee, technical review bodies, various third-party auditors and certifiers, as well as the ecosystem of market traders, investors, lawyers, accountants, etc. etc., seemingly ad nauseum.

Looking at the results Yet – the results were politely mixed, with such ambitious ecosystem establishment being in practice, sideswiped by two major external economic shocks. The first was the collapse of the former Soviet Bloc and the resulting severe contraction of those economies. The second was the global downturn of 2008 which hit just when negotiations on extending Kyoto were at a critical juncture and nations worried about domestic jobs and economies, put the additional burdens from the Kyoto framework on a back burner and by and large, the climate change debate mostly disappeared

the method of arriving at it through fixed variables.

A PPA, being an offtake agreement, obliges the offtaker who is usually a government utility, to purchase all or a predefined quantity of the project output, which would provide international lenders the protection that the borrower will be able to service their debt.

Site selection; Public and private.

While the private investor would risk their own funds in conducting feasibility studies, they would also require a high degree of support from the government to ensure that these several millions of dollars invested are in the interest of the country.

Construction risk; Private.

The cost of completion will be fundamental to the financial viability of the project as the financial assumptions and ratios are all dependent on the assumed cost of construction of the project. The construction of a large-scale hydropower project entails a hosts of risks such as contractual, design, raw material, equipment, damage to properties, performance, and delay amongst others. from the radars and media screens for the duration of the downturn.

As we saw before, last time the CER program under the Kyoto Protocol reshaped energy markets across Asia.

Everything from kickstarting renewables programs from the biomass and VSPP program boom in Thailand to the explosion of hundreds of MW of wind farms across Inner Mongolia and massive new investment interest in cleantech manufacturing in China directly impacted.

Mass public and policymaker focus on shifting energy sources development resulted too, ranging from the setup of national emissions programs impacting all power companies in Korea and China, to investor reassessments on Indonesian listed coal producers to even new support for nuclear as being climate friendly. In corporate boardrooms across Asia, gencos, utilities and industry participants were challenged by investors and policymakers alike to set forth their strategic management responses to such challenges too - or saw their share prices punished.

However, while the Kyoto system took over a decade to get agreed to in place - the Paris system looks like its timeframe is already much more accelerated to just a year thus far. With the renewed climate change focus having proceeded so swiftly this time, the power sector in Asia in particular needs to be ready to position itself “now” for that resurgence of focus from the public, governments, and investors.

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