Asian Power (July - August 2018)

ISSUE 88 | DISPLAY TO 31 AUGUST 2018 | www.asian-power.com | A Charlton Media Group publication

US$360P.A.

SEmbCORP’S INtEGRAtED ENERGy StRAtEGy

GROUP PREsIDENT & CEO NEIL MCGREGOR TAPs INTO GAs, RENEWAbLEs, & RETAIL.

mAlAySIA’S mASSIVE bIOmASS POtENtIAl INVEStORS’ INSAtIAblE CRAVING FOR RENEwAblES CHINA DROPS A bOmbSHEll: A SHIFt IN SOlAR POlICy wHy INDONESIA’S ENERGy RulES ARE StuCK IN tHE DOlDRumS

FROM THE EDITOR In Asian Power’s July-August issue, we explore why investors in Indonesia’s booming power sector are hit by growing pains from the country’s erratic regulatory framework. In just a year, national power generation targets have been slashed from 75GW to 56GW. Companies are also hit with investment paralysis over four recently introduced memos. Find out what else has been eating away market players’ interest on page 14.

Publisher & EDITOR-IN-CHIEF Tim Charlton production editor Danielle Mae Isaac Graphic Artist Elizabeth Indoy

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Most of the Himalayas’ hydropower potential remains untapped as the sector faces roadblocks to proposed projects in the region. Large-scale dams financed by China are stuck in the doldrums, highlighting its struggle to change the tides of investment. A $2.5b considered to be Nepal’s largest hydropower project is stuck between project lapses and friction between heavyweight power players like India and China. Read about what else is plaguing in the hydropower sector on page 22.

The issue also features an interview with the CEO of multinational utilities developer Sembcorp Power, prior to the company’s much-awaited listing in India.

Find out what CEO Neil McGregor revealed in the interview at page 13.

Start flipping the pages and enjoy!

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ASIAN POWER 1

CONTENTs

INterview 12 CEO Sembcorp cements presence in India

FIRST

14

COUNTRY REPORT Indonesia’s energy regulatory environment is still stuck in the doldrums

22

secTOR REPORT Geopolitics and social risks complicate Asia’s large hydropower aspirations

ANALYSIS

06 Asia’s investor belly craves renewables

18 Japanese financiers slowly drop coal funding

07 Biomass could fulfill power demand

24 Karnataka leads India’s renewables race

08 Thailand raises renewables bar 10 Japan relies on gas in nuclear downbeat

OPINION 28 Powering ahead: Taiwan’s renewable energy plan in focus 30 One Belt, One Road – An opportunity for regional cooperation 32 LNG imports create impressive business growth in China

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

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

www.asian-power.com

REFRESHING LIFE WITH GREEN ENERGY China Resources Power Holdings Co.,Ltd. (CR Power) was founded in August 2001. The Company is among the most efficient and profitable integrated energy companies in China. It also acts as a flagship company listed in Hong Kong for China Resources Holdings Co.,Ltd.(CRC),which is a Fortune 500 company.

Its business primarily covers thermal power, wind power, hydropower, photovoltaic power generation and distributed energy.

CR Power was listed on the Main Board of the Hong Kong Stock Exchange on November 12,2003 (stock code: 0836.HK). In March 2004, CR Power was added to the Hang Seng Composite Industry Index (Utilities) and the Hang Seng China-Affiliated Corporations Index.

In May 2005, CR Power was included into the Morgan Stanley Capital International (MSCI) China Index. On June 8, 2009, the Company formally became one of the constituent stocks of the Hang Seng Index (Blue-chip stock).

As at the end of 2017, CR Power’s total assets amounted to HK$220.972 billion and its attributable operational generation capacity amounted to approximately 41,620 MW. It covers 28 provinces, municipalities and autonomous regions.

For the eleventh consecutive year, CR Power was named in the Platt’s Top 250 Global Energy Companies and listed in Forbes Global 2,000, ranking 71st and 775th respectively.

Since its establishment, CR Power has been a strategy-driven enterprise, and saw a fast and solid development in the past decade due to its clear strategy and efficient execution.

In the next five years, CR Power is going to focus on green energy development, greatly enhance the mix of clean energy, develop highquality thermal power, optimize coal assets, and actively tap into the electricity retail business.

CR Power is also searching for opportunities in overseas energy markets and cultivating new profit growth opportunities by extending its value chain.

CR Power looks forward to working with stakeholders hand-in-hand and implementing the responsibility, as well as pursuing of “Refreshing Life with Green Energy”, so as to establish CR Power as an excellent and sustainable international energy company.

Website: www.cr-power.com

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

Why Indonesia is popping the champagne on less headwinds for renewables

POWER UTILITY

Collapsed hydroelectric dam in Laos leaves several dead A hydroelectric dam in Laos collapsed after a part of an auxilliary dam got swept away by massive flooding. Official accounts said over 30 people are confirmed dead, whilst “hundreds” are still missing. The Xepian-Xe Nam Noy released large amounts of water that swept away houses, flooded villages and made more than 6,600 people homeless.

Regulation

India puts 25% duty on solar cell imports from China and Malaysia India’s Ministry of Finance has enforced a 25% safeguard duty on solar cell imports from China and Malaysia upon recommendations from the Directorate General of Trade Remedies. The duty will be applied at the three rates and get phased down in three years.

4 ASIAN POWER

Power utility

TEPCO targets 7 GW of renewable energy capacity in Japan and overseas TEPCO plans to develop between 6 GW and 7 GW of new renewable energy capacity both in Japan and overseas The group plans to focus on offshore wind power (2 GW of which to be built in Japan, including floating wind projects, and 2 GW overseas) and on hydropower operations in Japan and South East Asia. Currently, renewables account for only 15% of its output.

regulation

Indonesia requires biodiesel use Indonesian president Joko Widodo sought the immediate implementation of the mandatory use of biodiesel in order to boost foreign exchange earnings. The government had also previously asked the transportation industry to use fuel blended with 20% palm-based biofuel, or B20.

Project

Alinta Energy eyes 1,000 MW of renewable projects Australian energy retailer and generator Alinta Energy has called for expressions of interest for 1,000 MW of renewable projects with sizes over 50 MW. The company is looking for opportunities where an offtake partner is required or where equity opportunities exist. It has around 3,000 MW of owned and contracted capacity in its generation portfolio already.

Project

Kepco dropped as preferred bidder for UK nuclear project sale Toshiba has decided that Kepco was no longer the preferred bidder for the acquisition of a 100% stake in the British nuclear project company NuGen, due to excessive operating expenses. Kepco was selected as the preferred bidder in December 2017.

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CONNECT

FIRST projects were 41% and 71% higher than those in India, respectively.

Hydropower accounts for half of Asian renewable capacity and has the world’s largest conventional hydropower capacity at 465GW, but growth has slowed due to the lack of economically feasible sites and rising environmental and social concerns. China dominates the sector with almost a 70% capacity share in Asia, thanks to aggressive large scale development starting in the 1990s.

x funds for wind farms SOUTHEAST ASIA ASIA

2022 wind capacity to hit Wood 12.1GW Dr Bikal Kumar Pokharel, Mackenzie

W

ind power was once the darling of many governments across the Asia-Pacific region, but increasing price competitiveness in the sector is leading policymakers to reconsider the level of financial support for wind farm projects. Make Consultancy revealed that the trend towards auctions has pushed wind prices even lower than thermal prices in several markets and has led to declining support from governments.

Despite this, wind power development is expected to hit new highs on the back of demand from India, Australia, and Taiwan. The report, which tracked wind power growth in the region excluding China, showed that annual capacity in the region is expected to reach a peak of 12.1GW by 2022, with more than 96GW of new capacity to be added in APEC over the next 10 years.

In India, the dawn of large-scale auctions has enabled wind prices to drop by more than half in just under a year. Whilst wind development in the country will achieve record years of newly added capacity, grid limitations could easily curtail growth prospects.

As for Australia, political uncertainty over the replacement of the national renewable energy target will hinder growth potential, and growth will be driven by state-level initiatives. ”With political infighting in Australia between the ruling Liberal Coalition government and opposition Labor Party over the final design of the proposed NEG scheme, growth is currently driven by statelevel initiatives,” the consultancy firm added.

Japan drives wind development Meanwhile in Japan, policy support for wind power development is increasing. The central government is formalising new rules to support more offshore wind development, reducing the process time for EIAs and reforming the market to allow more choices for consumers.

Offshore wind development is enabling Taiwan to become a major wind power market.

However, the market remains an outlier as almost all its wind power growth is reliant on offshore wind. Further auctions will cater to long-term growth post-2025 as a domestic offshore wind supply chain emerges that can support future offshore projects in other markets in the subregion. In the rest of the region, the increasing price competitiveness of wind power is leading policymakers to reconsider the level of financial support for wind power. “This has resulted in support levels for wind power starting to decline as the trend towards auctions is pushing wind prices even lower than thermal prices in several markets,” Make Consultancy said.

6 ASIAN POWER

Can renewables investments deflect risks?

Investors’ insatiable craving for renewables

A ASIA

sia remains the world’s largest market for renewable power generation despite rising investment risks. A report by Fitch Ratings revealed that Asia has over 919 GW of capacity as of end-2017 fuelled by a rapid 13% CAGR during 2013-2017. This is well above the global average of 9%. Asia’s hydro, wind, and solar capacity grew at a CAGR of 4%, 19%, and 58%, above the global CAGR of 3%, 14%, and 30%.

China and India have led the growth in the region’s renewables sector due to their rising consumer demand and supportive government policies.

China has been the largest renewable power developer in the world over the past eight years thanks to successful hydropower development, rich wind and solar resources, and a competitive industry for upstream renewable equipment manufacturing.

India followed with a 12% renewable capacity share in Asia thanks to its solar and wind-generation costs being some of the world’s lowest, due to excellent resources endowment, and low costs of land, installation, operating, and maintenance. The benchmark levelised costs of electricity (LCOEs) for Indian onshore wind and photovoltaics system (PV) stood at $39/MWh and $41/ MWh, lower than $68/MWh for the local coal-fired generation. The global LCOE for onshore wind and solar PV

Asia has over 919 GW of capacity as of end-2017 fuelled by a 13% CAGR in 2013-2017.

Wind and solar are also attractive Wind power is the second-largest renewable power source in Asia, but its capacity of 204GW in 2017 is significantly less than half that of hydropower. It had grown rapidly at a CAGR of 24% in 2010-2017, but the annual capacity addition had slowed to around 20GW in 2017. However, it is likely to rebound as China has introduced policies to address curtailment issues since 2H2016.

Solar power has enjoyed the strongest growth in global solar power capacity share to 54% in 2017 from 25% in 2013, due to a rapid decline in equipment costs. However, it remains one of the most expensive power sources, and only the projects in India are the exception.

Growth in solar is likely to moderate, in light of China’s efforts to curb industry overheating and measures to reduce the subsidy burden since mid2018. China’s solar capacity expansion will slow down sharply in 2018 due to the government’s recent announcement to halt the allocation of installation quotas for new utility-scale projects until further notice and to lower the FiT

by CNY0.05/kWh. Asian governments have made renewable development a key policy target as they face rising power demand as well as social and environmental concerns. “These trends, together with improving grid readiness, will support the continued growth of renewables’ share in Asia’s energy mix, although coal will stay as the dominant energy source in the next five to 10 years,” Fitch said.

Asia still has high reliance on coal

Source: IRENA (2018), Renewable capacity statistics 2018, IRENA, Abu Dhabi, Fitch

FIRST Biomass could be a key contributor to the target of having 30% of power sourced from renewables.

Electricity generation in Malaysia rose by 4.7% in 10 years

Malaysia taps biomass potential

A

MALAYSIA

nalysts from BMI Research forecast that Malaysia will take advantage of waste and byproducts from its substantial agricultural and forestry industry to generate biomass-fired power over the coming years. Its report said the Malaysian government will likely tap into rice, sugar, and palm oil production, as well as into forestry activities and municipal waste as a source of feedstock for the growing biomass sector.

Already, Tenaga Nasional Berhad (TNB) has formed joint ventures at the local level with the aim to develop biomass facilities. The electric utility has inked joint ventures with agribusiness multinationals such as Sime Darby, Felda, and World Wide Holdings.

“Under the 11th Malaysia Plan for development, the biomass sector is identified as a key contributor to the target of sourcing 30% of power from renewable energy (including hydropower) within the next eight years.

We note that TNB has formed joint ventures at the local level with the aim to develop biomass facilities in Jengka in Pahang State, Layang-Layang in Johor State and Bagan Datuk in Perak State with Sime Darby as well as two other facilities in Puchong and Jeram in Selangor with World Wide Holdings,” BMI Research said.

This increased interest in biomass has been brought about by the rise of renewables in the country. “As a result, the project pipeline, notably for biomass

and solar projects, is strengthening accordingly. The government’s commitment to the domestic renewables sector has strengthened of late, and a number of regulations have been put in place to encourage investment into the sector, including feed-in tariffs, tax incentives and, more recently, renewable energy auctions.” the firm added.

This comes on the back of the growth of the country’s electricity capacity and generation driven by increases in consumption. Electricity generation increased by an average of 4.7% between 2010-2017, BMI Research’s estimates showed. Between 2018 and 2022, annual average growth rates in electricity generation could hit 4.5%. Robust growth is expected over the next five years, but it will be driven by coal and gas-fired power plants.

Malaysia is also one of the Asian countries expected to dominate the biomass sector in the coming decade.

It goes with China, India, Japan, and Thailand, which could represent 55% of global capacity additions in the next 10 years and grow Asia’s share of total biomass capacity globally from 33% to 39% from 2017 to 2027.

Malaysia - Power project pipeline by technology share of total

Source: BMI Key Projects Database

the chartist: what’s JAPAN’S the SOLAR impact INDUSTRY of China’s IS DIMMER bombshell WITH JUST solar 20GW policy PROJECTED shift? TO COME ONLINE Under Japan’as new solarheavyweight power sector solar will expand PV policy, at China robust can rates nowthrough add onlytoaround 2020 as 30aGW large of x Widening subsidy shortfall calls for capacity capacity backlog in of2018, projects Wood supported Mackenzie by feedsaid. “The slower in tariffs pace come of capacity online. After builds 2020, is likely BMIto reduce Research curtailment said thatand the improve transition cash to aflows with reverse faster auctions subsidy system payment willclearance. slow growth, ” as the Bearish Japanese sentiment government has turned looksthe to regulate stock market capacity into additions the epicentre in order ofto the reduce policy’subsidy s impact. costs and Share support prices grid of major stability. listed solar PV companies “We expect plummeted Japan toby register aroundrobust 15% in solar two days capacity following growth thethrough announcement. to 2020 as a result ofDespite the implementation the turmoil, the of aunexpectedly substantial tough pipeline policy of projects does have that itsbenefit merits.from Firstly, a the generous government feed-in can tariff easesupport the growing scheme. fiscal burden Our forecast of renewable is that out energy of asubsidies.

50GW backlog Competitive of such projects, auctions onlycan 20GW alsowill accelerate actually technological come online, as innovation most willfor nothigher be able module to efficiency take advantage at lower ofcost. the FiT In fact, subsidies the latest amid ‘top-runner’ stringent government auctions have requirements seen bids moving and Source: Wood BMI Research Mackenzie much delays closer in development, to local coal” BMI on-grid Research tariffs.added.

Auctioned power prices support achieving x grid parity by 2020 constraints

Source: BMI Sources: Wood Research Mackenzie

ASIAN POWER 7

FIRST

Thailand raises renewables bar

Thailand’s total renewable electricity generating capacity, 2000-2016

hydro IN HOT WATER Laos

T

Thailand

hailand’s revised Power Development Plan (PDP) would target a larger market share for renewables from 10% to 30% in the next 15 years. Current targets look to increase renewables’ share to 20% by 2035, with 35% to be sourced from gas, 30% from coal, 20% from neighbours, and 5% from nuclear.

According to Oxford Business Group, the new PDP aims to push the development of very small power producers (VSPPs) – which have a generation capacity of less than 1 MW – though a wide range of initiatives.

Plans include the deployment of PV rooftop power and the use of blockchain technology to enable generators and consumers to buy and sell surplus electricity.

When the PDP was released in 2014, VSPPs accounted for 5.4% of Thailand’s generation capacity, compared to 35% from independent power producers, 12% from small power producers, 41.2% from the Electricity Generating Authority of Thailand (EGAT), and 6.4% from imports. The new VSPPs targets could help the energy sector address imbalances in the existing power infrastructure network and better meet the specific needs of underresourced regions, said Preeyanart Soontornwata, president of domestic plant WATCH

Source: Based on IRENA’s statistics database, at http://resourceirena.irena.org/ gateway/dashboard/?topic=4&subTopic=16.

energy producer B.Grimm Power.

With a maximum installed capacity of around 42 GW and peak load estimated at 29 GW, Thailand currently has an excess capacity above the 15% buffer generally seen as a minimum requirement. However, in spite of this margin, power shortages remain a significant issue in some parts of the country.

Although the government is keen to cast a wider net in the search for energy providers, many of the VSPPs it wants to encourage may not meet the costing criteria to sell power to the state, Oxford Business Group said.

The Federation of Thai Industries (FTI) warned that a government proposal to buy electricity from private renewable energy producers at a price equal to or below grid parity could freeze small operators out of the market, at a time when they are being encouraged to expand. They say many small producers would struggle to meet the current wholesale price, after factoring in input costs.

Laos will build a Pak Lay 770MW plant

With a maximum installed capacity of around 42 GW, Thailand currently has an excess capacity above the 15% minimum requirement.

Silk Road Fund buys 24% of Dubai plant

Sonnedix builds 41.6MW solar plant

3M opens 2,400 MWh solar farm

CHINA

JAPAN

Singapore

China’s Silk Road Fund will acquire a 24% equity stake in a 700MW solar farm located in Dubai, United Arab Emirates.

The project marks the fourth phase of the Mohamed bin Rashid Solar Park, the largest single-site concentrated solar power plant in the world. It is jointly invested in and developed by the Silk Road Fund, the Dubai Electricity and Water Authority (DEWA), and ACWA Power.

Developers expect the project to deliver electricity all day at a levelised tariff of $7.30 cents per kWh.

Sonnedix Japan is set to begin the construction of a 41.6MW solar photovoltaic plant located near Sano, Tochigi Prefecture, Japan.

The 41.6MW Sano plant will become the group’s third largest in country when it becomes operational, which is projected to happen in 2020. Sonnedix currently has more than 160MW of capacity in construction.

When completed, the solar plant will generate approximately 45,000 MWh of clean electricity per annum, equivalent to the amount consumed by approximately 15,000 households.

Global science company 3M opened one of Singapore’s largest solar farms which can generate an average of 2,400 MWh of electricity annually.

The 14,000 sqm solar farm, powered by 6,605 solar panels and 55 inverters, sits atop 3M’s major manufacturing plant in Tuas.

It can power more than 500 fourbedroom flats.

The solar farm will reduce carbon dioxide emissions by 1,139 metric tons a year and is part of 3M’s efforts to increase the share of renewable energy to 25% of its total electricity use by 2025.

8 ASIAN POWER

Laos announced its plans to build a fourth major dam on the Mekong mainstream, just four months after Pak Beng dam’s feasibility was questioned in February over a delayed power deal with Thailand. Laos notified the Mekong River Commission (MRC) in June that it intends to build a 770MW hydropower plant at Pak Lay in Xayaburi Province, where it has already constructed another highly contentious dam on the Mekong’s main tributary.

Laos is increasingly relying on the capitalintensive electricity and construction sectors to drive economic growth as its mining industry continues to underperform, BMI Research noted.

“However, we note that such a rampant and unilateral development by Laos could jeopardise foreign relations with its neighbours and stir social unrest domestically,” it said.

The government is prioritising hydropower expansion to become a major regional exporter of electricity. It already exports power to Thailand, Cambodia, Vietnam, Myanmar, and China.

Will MRC stop Laos’ hydropower growth?

It also has a sizeable project pipeline of hydropower facilities that could expand from 4.4GW in 2016 to slightly less than 11.0GW by the end of our forecast period in 2027. This represents growth of around 150%, the highest in any hydropower sector globally.

The Lao National Mekong Committee Secretariat submitted the details of the planned project earlier to the MRC Secretariat for review.

The four countries of the MRC have six months to review Laos’ proposal, but they have no authority to stop the dam from being built.

Construction work is expected to start in 2022 and the facility is due to be operational in 2029.

BMI Research said Laos risks having key patrons Thailand and Vietnam to opt for alternative energy sources to discourage the country’s further expansion. This could burden Laos with unrepayable debt if projects were to be cancelled midway, it added. This could also damage relations between Laos and its immediate neighbours, given the country’s landlocked nature and reliance on trade with Vietnam and Thailand.

Thirdly, the Pak Lay dam could displace more than 1,000 families from 20 villages in Xayaburi province and could be a source of dissent for the government. “With poor transparency and accountability in public procurement, there is a high chance that people are not compensated or relocated appropriately. According to RFA, local officials have said that ‘most people are not happy with this dam project’,” BMI Research said.

FIRST

Japan relies on gas in nuclear downbeat japan

Japan - Power generation by source

Source: EIA, BMI.

B

MI Research predicts that 40% of Japan’s total power generation in the next decade will rely on natural gas. This is despite the Japanese government’s goal of reducing its reliance on natural gas to just 27% by 2027 as well as cutting high retail electricity prices for consumers. The research firm hinges this assessment on the expected slow restart of several nuclear reactors in Japan.

“Our view is largely predicated on our continued downbeat outlook for the restart of a number of nuclear reactors in Japan,” it says. It also cites the expected limited growth in coalfired power generation, with Japan aiming for a 2030 goal of reducing coal reliance to 26%.

“We forecast coal power output to stagnate, as new builds face increasing opposition on environmental grounds, and Japanese carbon emission reduction efforts intensify. In fact, Japan’s 2030 goal is to rely on coal for 26% of power generation, we currently forecast 28% by 2027 with no growth in coal power generation,” explains the research firm.

Although BMI Research forecasts “little room for growth in hydropower and non-hydropower renewable energy,” it expects that Japan will likely turn to renewable energy in order to “diversify away from its excessive reliance on imported natural gas and coal.”

Some progress has been noted in Japan’s nuclear power sector, in particular the four

x China’s windy dreams

nuclear reactors that have been successfully restarted at the Genkai and Ohi nuclear power plants. This takes the tally of online nuclear reactors in Japan to eight. However, these will not be sufficient enough to significantly boost the growth of the sector.

“We expect nuclear power to grow its share in the power mix from almost 4% over 2017 to more than 5% over 2018. As reactors under maintenance again supply power to the grid, and the full output from Genkai and Ohi is factored in for 2019, we expect the nuclear share to grow to 7% over 2019,” says the research firm.

Hurdles on nuclear restarts BMI Research says this number will likely stay the same until 2017, largely because of uncertainty on when the other nuclear reactors will be restarted. Key concerns such as stringent security requirements, active seismic faults, legal battles, volcano eruption concerns, as well as local government officials and even the courts siding with the nuclear power opposition remain stumbling blocks to nuclear restarts.

“Our downbeat nuclear restarts outlook is also predicated on the risks facing nuclear reactors that are currently online. The Ohi facility has faced a string of requests for court injunctions, which represents a risk to its future operations.

We note that Ohi neighbours the Takahama facility, which over 2016/17 had to suspend operations due to a court injunction,” it explains.

“The Genkai and Sendai facilities, on the other hand, are close to powerful volcanoes, with Ikata 3 having been suspended by the Hiroshima High Court due to concerns over its ability to withstand large-scale eruptions from Mt Aso,” it adds. “We forecast nuclear power to only make up 7% of total power generation by 2027, relative to a government target of 20-22% by 2030,” concludes BMI Research.

xxx CHINA

Grid-connected capacity to hit 400GW xxx

China’s wind talked powerto market is expected to reach a Asian Power YTL Power International cumulative grid-connected of more Berhad’s CEO Tan Sri Franciscapacity Yeoh about the than 400GW by largest the endprojects. of 2027, with an average company’s annual capacity addition of more than 20GW between 2018the andcompany’s 2027, Makemost Consultancy Tell us about stellar said.

China’s annual grid-connected capacity from power projects to date and where they are 2018 to 2020 will be impacted by the curtailment located. and the transition a feed-inthe tariff (FiT) an At present, we arefrom constructing first oil to shale auction mechanism, but average annual capacity mine mouth power plant with a capacity of 2 x additions from utilising 2021 tothe 2027 will increase once 235 MW (net) circulating fluidised the mechanism is established. bedauction boilers (CFB) technology in the Hashemite “Offshore wind and Kingdom of Jordan.

Theonshore project repowering is located at markets willGuhdran increase rapidly, annual Attarat um which iswhilst 110 km southeast onshore wind growth remains flat,” the of Amman.

Atcapacity a total investment of US$2.1b, it is firm added.private “Annual grid-connected capacity will the largest sector project in Jordan to date surpass installedto capacity in 2018 and willannual largely and is expected meet 15% of Jordan’s stay aheaddemand. of it through thePower rest ofCompany the outlook.” electricity Attarat An average installed capacityhas of entered 23GW (APCO) which annual is the project company is expected in 10 years, whilst the grid gap (PPA) into a 30-year Power Purchase Agreement between installed and grid-connected capacity with the Jordanian national utility and single could to the less sale thanof11GW by the end of buyer,decrease NEPCO for the entire electric 2027.

Cumulative installedoutput. capacityThe is expected capacity and net electrical other to exceed the are China’s winddeveloping power target 210GW project we currently is inofCirebon and eventually 415GW inThe 2027.

Regency, West reach Java, Indonesia.

2 x 660 MW “Wind developers, state(net) coal-fired power especially plant will provincial utilise state-ofowned and private enterprises, are looking for the-art ultra-supercritical technology.

The project opportunities in the distributed market,” company, PT Tanjung Jati Powerwind Company has the firm said. executed a Power Purchase Agreement (PPA) This raise distributed wind 2015. projects’ with PTcould PLN (Persero) in December We capacity additions to 1GWfor by new 2019,opportunities but this are always on the lookout is to have a meaningful impact as the in unlikely generation whether it is bidding for existing capacity single projects small. assets orof investing in new is projects.

China is on its way to be the world’s largest biomass producer by 2019 by 2020, it aims to double this to 30GW by 2030.

BMI Research predicts China’s biomass growth will outperform these targets. It cites several initiatives launched by the National Energy Bureau of China (NEA) that aims to replace coal with biomass production.

“We expect China to outperform these targets, and reach its near-term target by 2019, with total capacity in 2020 amounting to 17GW. This ties into the government’s 13th five-year plan, where the biomass is envisioned to generate heat and electricity that is equivalent to 58 million tonnes of coal by 2020,” the research firm says.

The NEA also released its ‘Guiding Principles on the Implementation of Renewable Projects during China doubles growth targets the 13th Five Year Plan Period’ in July 2017, where Whilst Brazil’s biomass growth is expected to multiple initiatives such as directly replacing coal remain robust, it is expected to move at much with agricultural waste in combined heat and slower rate than the Asian giant because the market is much more saturated. Moreover, China’s electricity generation were outlined.

“This ties into our view that by 2027, the size biomass ambitions are just beginning, packed with increasing growth targets in the next few years until of the sector will have increased to 25.5GW,” BMI 2030. From a target of 15GW of capacity installed Research said.

China is expected to overtake Brazil as the largest biomass market in the world in 2019. BMI Research says China is leveraging residue from food harvest and forestry-derived biomass feedstock to add more than 12GW of biomass capacity in 2017-2027.

“These include residues left from the food harvest, with straw and stalks from maize, rice, cotton and wheat being of particular potential in central and north-eastern parts of the country,” explains BMI Research. “Whereas, forestry derived biomass feedstock will have greater potential in southern and central parts of China where such industry is more prominent.”

10 ASIAN POWER

China to displace Brazil as top market

Source: EIA, BMI.

Biomass capacity by market, MW

Source: National Sources /BMI

Developing markets offer a steeper growth trajectory, whilst markets in the Organisation for Economic Cooperation and Development (OECD) offer quality assets and cashflows.

Neil McGregor Group President and CEO Sembcorp Industries

CEO INTERVIEW

Sembcorp’s bid to be an integrated energy player President and CEO Neil McGregor shares his plans to make his Indian business public, push for divestments worth S$500m over the next two years, and invest in renewables to cut carbon emission intensity by 25%.

S

embcorp Industries is growing to become an integrated energy player after it has extended its hand into the utilities sector over 20 years ago. Now it seeks to deepen its presence in four key markets, namely, Singapore and Southeast Asia, China, India, and the UK. It also wants to explore the renewables space in Australia. Group president and CEO Neil McGregor shares his outlook on India’s energy sector, his observations on power-related business in developed and developing markets, and his plans to lead the company towards renewables.

As Sembcorp’s CEO, what are your key priorities for the group?

Improving our performance is my first priority. Disciplined capital allocation will be key. We need to build a sound, high-performing portfolio that is attuned to economic trends. In particular, we are reshaping our utilities business for long-term success in a changing market. We will focus on active and systematic capital recycling, to help unlock value to support our growth. We will also reposition our presence across certain developing and developed markets.

Secondly, Sembcorp will step up its commitment to sustainability, to manage risks better and prepare itself for the future. This will also put us in a better position to capture opportunities amidst the rise of the low-carbon and circular economies. Thirdly, we will build a dynamic organisation that better supports our growth underpinned by strong governance.

We have restructured our organisation to create a flexible and scalable operating model, and are actively building new capabilities for the future.

How has the energy sector changed in the last few years? What do you see as some of the challenges and opportunities these changes have brought about?

Dramatic changes are taking place in the energy sector, particularly in the power industry. Increasing concern about greenhouse gases and rising global temperatures has created increased momentum for policy change, not only in developed markets but also in developing ones. Lower-carbon or nonemitting energy sources, such as gas and renewables, have increased in relevance and account for much of the growth in new capacity worldwide.

In addition, deregulation and decentralisation are reducing barriers to entry and leading to greater competition. The merchant and retail market has come into greater prominence. Efficiency and flexibility have become more critical than ever. Technological innovation is disrupting every stage of the value chain, from generation and asset management, to retail, transmission and delivery. At the same time, technology and digitalisation has also brought about significant opportunities to improve performance, through lowering costs, enhancing operations, growing in new niches, and enabling cost-competitive and high-quality delivery to the market.

How are you repositioning your utilities business to succeed in this new environment?

We will look to grow through three business lines: Gas & Power; Renewables & Environment; and Merchant & Retail. These business lines will better position our utilities business to innovate and meet the challenges of a changing global energy landscape, with increasing decarbonisation, decentralisation, digitalisation and demand disruption. It will also allow us to capitalise on market positions we already have – both our strong foothold in high-growth developing markets, as well as our experience in developed markets.

Finally, we will look to reposition our portfolio across certain developing and developed markets. Developing markets offer a steeper growth trajectory, whilst markets in the Organisation for Economic Co-operation and Development (OECD) offer quality assets and cashflows.

Can you tell us more about how you plan to maximise value and ensure that growth is sustainable?

We will maximise value and sustain our growth through what we call the Sembcorp O4 Model, where we act as asset and solution originators, owners and operators, and also as optimisers of both assets and capital. The proposed initial public offering of our India energy assets which we have recently announced is a perfect illustration of creating sustainable value this way. In addition, we are targeting divestments with estimated cash proceeds of up to S$500m over the next two years.

Against the background of your upcoming IPO for your energy business in India, what is your view on the India market? How will it feature in your plans for the future?

India is and will continue to be a key market for us. Since we entered India’s power market in 2010, we have built up a balanced portfolio of both thermal and renewable assets in the country, with a combined capacity of over 4,300MW. This comprises a thermal power complex with 2,640MW of supercritical coal-fired capacity in Andhra Pradesh, as well as a renewable energy business with over 1,700MW of solar and wind power capacity across seven states, as at February 2018.

In February 2018, we brought together all our thermal and renewable energy assets under a single entity, creating an independent energy company representing one of the largest foreign investments in India’s power sector today. This company, Sembcorp Energy India Limited, will be well-positioned to help meet the country’s growing need for sustainable, reliable power.

With the proposed initial public offering of Sembcorp Energy India Limited, the aim is to create a sustainable growth platform for our India utilities business, and bring on local and retail investors to support its future growth. In recent years, India has seen a power surplus leading to lower spot prices and short-term tariffs. However, according to a recent market study published by CRISIL in February 2018, power demand in India is expected to increase and the country is projected to move into a 5% power deficit by the Indian fiscal year 2022.

Similarly, the country’s current peak power surplus is expected to reverse by the Indian fiscal year 2020. Against this background, we believe that our public offering is timely, and that Sembcorp Energy India Limited will be poised to ride favourable industry conditions for growth.

Sustainability features prominently in your new strategy. Talk us through why this is a focus area.

Our world is moving towards a low-carbon economy. By 2040, renewables are expected to make up around 35% of the global energy mix. We are targeting to double our current renewable capacity to approximately 4,000MW by 2022. At the same time, we target to cut our carbon emission intensity by close to 25% by 2022, in line with the 2°C scenario.

Our new Renewables & Environment business line will look to grow our renewable energy, water and wastewater, as well as waste-to-resource businesses. We will also invest in research & development to be at the forefront of providing new cutting-edge energy solutions.

ASIAN POWER 13

Country report: Indonesia

Can Indonesia keep its players’ interests amidst constant rule changes?

Why Indonesia’s energy regulatory environment is still stuck in the doldrums Moving goalposts, unrealistic targets, and constantly changing policies continue to plague sector.

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ith the 35GW new installations target for 2019 off the calendar, the Indonesian government has been hard-pressed coming up with a working strategy to bring in more private investment and light up some 30 million residents in underserved areas of the archipelago. With a new target of 2024, the question remains: is any target realistic amidst the country’s policy woes?

In March 2018, the government issued a 2018-2027 Electricity Supply Business Plan or Rencana Usaha Penyediaan Tenaga Listrik (RUPTL), aimed at achieving an electrification ratio of 100% within six years. From a target of 75GW new power generation by 2026 in the 2017 RUPTL, the 2018 RUPTL has revised this down to 56GW by 2027. Amongst many reasons, Perusahaan Listrik Negara decreased the planned capacity generation based on the decrease in the expected average demand growth rate from 8.3% in the 2017 RUPTL to 6.9% in the 2018 RUPTL. Twenty-four out of 25 investors surveyed by PwC believe that the previous 2017-2026 RUPTL did not quite fit the bill to address the country’s energy challenges, and most of them believe that uncertainties in the energy industry’s regulatory regime are blocking what could be valuable new large-scale power generation.

PwC reported that a vast majority of its respondents to the Indonesia Power Industry Survey think that there are three major regulations that have had a negative impact on future investors: risk allocation in Power Purchase Agreements (PPAs), restrictions on share transfers, and IPP tariffs. Whilst the government responded by later revoking and amending some of the problematic regulations with the introduction of the 2018 RUPTL, investors think that it is the sheer number of the 14 ASIAN POWER

From a target of 75GW new power generation by 2026 in the 2017 RUPTL, the 2018 RUPTL has revised this down to 56GW by 2027.

regulations issued last year that still raise concern.

Uncertainty is not a new player in the country’s energy regulatory regime, as analysts have consistently observed that the government seems at a loss on the right path to take. Brett Mattes, director, Numada, said that there has not been any clear strategy or overarching framework for the government’s policy decisions in the energy sector and that their assumptions of economic and demand growth may have misled the sector in many ways.

The 2017 RUPTL reformed the tariff regimes by benchmarking tariffs to the PLN average electricity generation cost or Biaya Pokok Pembangkitan (BPP) on a region-by-region basis. According to PwC, this new tariff-setting regime may not be in line with the government’s plan to increase renewables in the energy mix from 12% last year to 25% in 2025. PwC reported that the implied new tariffs are generally significantly lower than previous regulations. Thus, impacting the economic viability in the regions.

Redeeming the plan “The regulatory uncertainty caused by these regulations is likely harming the perception of the investment environment in Indonesia and the government’s ability to develop muchneeded electricity infrastructure to support the country’s economic growth. It is imperative that the government discuss draft regulations with the relevant stakeholders in a transparent manner before implementation to avoid damage to investor confidence and unworkable regulations,” PwC added.

With the RUPTL in place, the next ten years—demand forecasts, future expansion plans, electricity production forecasts, fuel requirements, projects to develop—has already been

Country report: indonesia Actual vs. target capacity installation for 2012-2017

Source: 2012-2017 Performance Report of Ministry of Energy and Mineral Resources

outlined for PLN. The RUPTL also details the procurement process for independent power producers (IPPs), making it a significant document for all investors in the country’s power sector. However, respondents to PwC’s survey on the 2017 RUPTL are concerned that the document does not provide a clear vision for future planning.

One respondent said that the government needs to dispense with the smoke and mirrors and make the data transparent for investors. PwC’s interviews showed that the RUPTL lacks sufficient clarity on several matters: geographically inaccurate planned transmission and distribution routes; the supply is not in line with actual proposed developments; no long-term strategy and policy of the government; and inaccurate project CODs. The 2018-2027 RUPTL, meanwhile, shows that the government is moving the goalposts again, with the 35GW completion slated for 2024-2025, as opposed to the 2024 target in the 2017 RUPTL. Only 20GW of new capacity is now planned for the original target year of 2019. Furthermore, the estimated total demand in 2026 has been pared down by 15.7%, as compared to the 2017 RUPTL. According to PwC, PLN and IPP investors are now expected to construct only 56 GW of generating capacity by 2027, a significant reduction compared to the proposed 78 GW in the 2017 RUPTL. This is a major change in assumptions over a 12-month period. PwC added that 56 GW is still an ambitious target to achieve, especially given historical average capacity expansion of about 3 GW/year.

Persistent policy and regulatory woes The Indonesia Renewable Society (METI) commented that the RUPTL should be based on Indonesia’s National Energy Plan (RUEN), as its current form is not consistent with it. METI also raised the concern that in most cases, the RUPTL does not sufficiently prioritise the use of renewable energy.

“In addition, PLN’s Gross Domestic Product growth forecast used in the 2018 RUPTL remains optimistic. It is above the International Monetary Fund’s forecast of 5.3% (versus an average of 5.9% in the 2018 RUPTL until 2022). Overly optimistic assumptions could result in both investments in unnecessary capacity and underutilisation of assets. A recent Institute for Energy Economics and Financial Analysis (IEEFA) report demonstrated how the 2017 RUPTL had the potential to force PLN into paying $16.2b for idle capacity,” PwC reported.

Garibaldi Thohir, president director, Adaro Energy, highlighted that consistent policies and better coordination amongst government agencies is needed to reduce pervasive uncertainty and provide more visibility for investors. Thohir added that it would also be beneficial to have a policy on tariffs that support the utility sector and energy suppliers as well as the improvement of transmission and distribution grids.

According to PwC, the problem may be in the issuance of

Regulatory uncertainty tops the list as the most important barrier to making large-scale investments as deemed by 94% of survey respondents.

regulations, and not in their lack, but in the drastic amendments and revocations that catch market players off-guard. Analysts reported that this constant tinkering with regulations negatively impacts investment appetite, as investors in long-term capitalintensive industries demand certainty from the government.

“Regulatory uncertainty is seen as the main barrier to investment (and is a risk that consistently comes top of the list when we survey or speak with power companies or developers/ investors worldwide). This is consistent with Indonesia, where regulatory uncertainty tops the list as the most important barrier to making large-scale investments as deemed by 94% of survey respondents. The sheer number of regulations implemented, amended, and revoked are seen to cause uncertainty,” PwC said.

Furthermore, the only regulations with more than 30% of respondents with a positive view were MoEMR Regulation No. 49/2017, MoEMR Regulation No. 50/2017, and MoEMR Regulation No. 48/2017, all revisions of earlier highly-criticised regulations issued in 2017.

For instance, MoEMR Regulation No. 10/2017 introduced Build-Own-Operate-Transfer (BOOT) for geothermal and hydro projects, (2) shifted Force Majeure (FM) risk to developers, (3) implemented stricter penalties and incentives, and (4) restricted transfer of ownership rights of the project before the COD (although share transfer to an affiliate in which more than 90% of shares are held by the Sponsor is allowed).

Power sector players disliked MoEMR Regulation No. 10/2017 for the re-allocation of risks and potentially making new projects unbankable. When the regulation was amended with MoEMR Regulation No. 49/2017, investors welcomed the change as the amendment mitigated the issue of Government FM risk. Moreover, MoEMR Regulation No. 10/2018 undid provisions regarding Government FM and Changes in Laws and Regulations FM in the previous regulation. Thus, addressing investor and lender concerns on unfair risk allocation to project developers in these areas.

“Some local respondents believe that whilst Indonesia may follow cycles of ‘ups and downs’ with regards to regulation, the Government is a more sympathetic and flexible longterm partner in power investment than governments in some neighbouring countries. This highlights the importance of international investors having the right local partners to mitigate risks,” PwC reported.

Furthermore, unlike other countries in the region, the Indonesian government continues to focus on large-scale renewable energy projects. According to a 2018 report by the United Nations Development Programme, this specific fixation by the government comes at the expense of small to medium scale and decentralised renewable energy development. Analysts at UNDP said that the time and resources spent in compliance then become too high for small to medium scale investors.

“In order to encourage private investment in small to medium scale renewable energy development for rural electrification, it is proposed that the Government through the Ministry of Energy and Mineral Resources explores the introduction of ‘lighthanded’ regulation. This is particularly to simplify the process of issuing business permits and retail tariff approval for smaller renewable energy-based power utility operators. In the Asian region, light-handed regulation has been adopted in Bangladesh, Sri Lanka, Cambodia, Nepal, and India and has triggered participation of private investment in rural electrification,” analysts at UNDP said.

Investors also point out the fact that PLN remains to be a towering figure in the Indonesian energy market. PwC reported that it is important for regulators to consider the interests of all players in the market in order to create a more level playing field.

Respondents to PwC’s survey argued that the market structure is broken, noting how PLN serves as both a regulator and a market participant. As high as seven in ten respondents to the PwC ASIAN POWER 15

Country report: Indonesia PLN as “marching in the opposite direction”.

The Institute for Energy Economics and Financial Analysis (IEEFA) said that Indonesia is an outlier and on the brink of committing to a coal power lock-in without having demonstrated that its policymakers have a good understanding of the current trends.

“Reliable policy includes increasing predictability in the procurement process currently it is not unheard of for tender timelines and technical specifications/commercial structure of a project to be changed midway. Renewable energy tariffs that incentivise investment would also help increase electrification.

Respondents believe that the government should set tariffs consistent with the risk involved (rather than benchmarking to PLN’s average electricity generation cost),” PwC analysts said.

Progress of 35 GW programme as of April 2018

Source: detik.com

survey expressed concern about the lack of standard bankable PPAs with appropriate risk allocation.

METI considers the number as surprisingly low, as a majority of their members cannot secure funding for new renewables projects under the new PPAs. PwC said that the main bankability issues in PPAs follow from (1) MoEMR Regulation No. 48/2017 on the transfer of ownership rights and (2) MoEMR Regulation No. 10/2017 (amended by MoEMR Regulation No. 49/2017 and MoEMR Regulation No. 10/2018) on Natural FM and risk allocation to project developers.

Eyes on PLN More than nine in 10 respondents feel that there be should a fair risk allocation in PPAs, which PwC thinks is a likely response to MoEMR Regulation No. 10/2017 (as amended by MoEMR Regulation No. 49/2017 and MoEMR Regulation No. 10/2018).

According to PwC, MoEMR Regulation No. 10/2017 allocated certain Changes in Law and Regulations FM, Government FM and Natural FM risks to Sponsors, rather than to PLN. Nevertheless, the provisions relating to Government FM were amended under MoEMR Regulation No. 49/2017 whilst Changes in Law and Regulations were amended under MoEMR Regulation No. 10/2018, however, the risks relating to Natural Disaster FM remain with Sponsors. PwC said that this remains a source of concern to banks.

“Clear legal guidelines for existing mechanisms would avoid the necessity for risky decision-making by regional leaders or PLN officers. Today we are in a state of paralysis because nobody dares to approve anything that is not clearly regulated – and hardly anything is clearly regulated,” said one of the respondents to the PwC survey.

According to investors, PLN has always been in a difficult position in the face of conflicting objectives. The governmentowned electricity utility is pressured to maintain or improve profitability whilst minimising the government subsidy, to keep power prices low, to maximise renewables development, and to increase the electrification ratio. PwC reported that sustainability and environmental impact do not seem to be priorities for PLN, raising concern from the international community.

Faced with the energy trilemma of security of supply, affordability, and sustainability, PwC’s survey respondents view affordability as the top priority by 2023, in contrast to last year’s survey where they responded with view sustainability/clean power as the main priority in the next five years (although the importance of security of supply and sustainability/clean power are catching up).

Decreasing energy generation costs from renewable sources as well as the advancement in storage technologies are reducing the tradeoff between affordability and sustainability in the future.

PwC said that whilst India and China’s generation mixes are being reshaped by the push for renewables, respondents view 16 ASIAN POWER

More than nine in 10 respondents feel that there should a fair risk allocation in PPAs.

Whither coal, oil, and gas?

Coal remains an immovable figure in Indonesia’s energy mix, even amidst calls to prioritise the development of renewables in Indonesia’s energy sector. PwC analysts note that in 2017, coal accounted for 57.2% of Indonesia’s power generation fuel mix, with coal mining making up 2.3% of the total Indonesian economy. In fact, the 2018 RUPTL showed that coal-fired power plants account for 37% of the increase in installed capacity by 2027, compared to the 32% in the 2017 RUPTL. Meanwhile, despite being major players in the energy industry, oil and gas production has continued to fall from peak levels, contributing less and less to the industry. The Oxford Business Group reported that as of two years ago, the sector contributed only 3% to state revenues, down from 14% in 2014 and 25% in 2006. As oil and gas are still critical components of the country’s economic growth, the government has also made significant changes to the regulatory structure of these sub-sectors, aimed at boosting electricity capacity and electrification ratios whilst reducing fuel imports.

In addition to stimulating private investment in electricity generation, these regulations are also hoped to be able to stem the tide of declining oil and gas production by tapping into new domestic reserves that could address growing consumption. PLN has set a target to significantly reduce the use of oil in Indonesia’s energy generation from 5.8% in 2017 to 0.4% by 2023.

James Ooi, partner, The Lantau Group, said that small-scale LNG is particularly relevant in Indonesia, because of the policy focus and the resource benefit for its development. Andi Asmir, vice president, Government Relations, Energi Nusantara Merah Putih, said the government and LNG firms in Indonesia have been considering alternative solutions over traditional methods, but a common framework is one of the biggest challenges for new strategies such as integrating the LNG terminal and the powerplant with the power and direct supply to industry.

Analysts at The Oxford Business Group reported that Indonesia’s oil and gas sector sits at a crossroads, as oil and gas producers mull investment in new prospects in technically challenging areas without cost-recovery guarantees under the industry’s gross-split system.

According to them, the government has no choice but to allow oil and gas production under expiring contracts or risk further cuts to domestic production.

“Pertamina is likely to take on some of these expiring contracts, although it lacks the capacity to accommodate them all and will need to continue share operational responsibility with experienced IOCs, particularly in some of the more technically challenging blocks. Following the unsuccessful tendering of 15 conventional and non-conventional blocks by the government from May to September 2017, much will depend on whether the government can ease concerns from the private sector about the new gross-split PSC scheme. Doing so will help ensure Indonesia can be successful in reversing the decline in upstream exploration activity,” they added.

Analysis 1: japan’s coal investments

Japan will see fewer coal plants soon as financiers withdraw funds from projects

Japanese financiers slowly drop coal funding Fewer projects are in the pipeline as companies curb under pressure from governments and investors with deep pockets.

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riven by ever-growing global carbon and pollution concerns, Japan is facing increasing pressure against both its domestic reliance on coal-fired power and its strategy of pushing its subsidised coal-fired power technology onto developing countries. The use of coal at home and abroad has historically been championed by Japan’s Ministry of Economy, Trade and Industry (METI). However, challenges to METI’s prevailing views are beginning to emerge.

In 2017, growing recognition of Japan’s need to cut carbon emissions led to the national environment minister asking METI to reconsider plans for a new domestic coal-fired power plant. The plant is part of larger plans in Japan to build a new generation of domestic coal-fired plants, although some of the proposals in question have stalled in the face of declining Japanese electricity demand.

An energy task force set up to advise the foreign ministry stated in February 2018 that Japan’s current energy policies are damaging the nation’s global competitiveness. “It is obvious that Japan is lagging,” the task force concluded, placing the foreign ministry firmly at odds with METI. Both the foreign and environment ministries have committed to sourcing 100% renewable energy for their own electricity needs.

These trends have arisen as Japan’s major competitors in the overseas coal-fired power construction industry have moved forward with new policies. South Korea will rely less on coalfired power going forward whilst scaling up its renewable energy ambition and the International Energy Agency (IEA) projects that South Korea’s coal imports could almost halve by 2040.

China, whilst continuing to build coal-fired power plants overseas, is clearly also angling for preeminence in the global new energy sector. China’s growing dominance in solar technology, electric vehicles (EVs), and batteries could come at Japan’s expense.

Japan has seen criticism of its pro-coal policies from within its 18 ASIAN POWER

An energy task force set up to advise the foreign ministry stated in February 2018 that Japan’s current energy policies are damaging the nation’s global competitiveness.

own government, specifically from its environment and foreign ministers, and from its financial sector, too, where assessments against coal are increasingly being made by its banks and insurance companies. This has coincided with international investors turning their backs in growing numbers on coal. The trend, as it continues, will make it more difficult and more expensive for Japanese conglomerates to find financing for coal-fired projects, especially if policy changes require the Export Credit Agencies (ECA) to reduce lending for coal.

It seems likely, too, that the influential Organisation for Economic Co-operation and Development’s (OECD) export credit group will make further efforts toward aligning export credit policies with climate change targets. That said, unless Japan’s policy of public financial support for coal doesn’t change, the country will face growing pressure and criticism globally of the sort that was brought to bear in the run-up to the June 2018 G7 summit. Investor and financier support for the coal industry is draining away at an increasingly rapid rate.

In the lead-up to the June 2018 G7 summit, a group of major international investors with a cumulative $26t of assets under management called for a phase-out of coal-fired power. This is a significant development that shows where investment in global power capacity is going. Four of the G7 nations are already members of the Powering Past Coal Alliance— amongst G7 countries, only Japan, the US and Germany are not.

Global investors brush off coal Amundi, Europe’s largest asset manager with $1.6t under management, has stated that global investment has reached a clear “tipping point” with regard to climate change as major investors increasingly take the issue seriously in their decisionmaking. Amundi has created low-carbon indexes that are outperforming the market as a whole. Major investors, including the Japanese Government Pension Investment Fund, are moving

Analysis 1: japan’s coal investments The price premium for solar generation over coal in asia has slumped

Source: Bloomberg New Energy Finance

their portfolios into such indexes.

This year has already seen a number of financial institutions distance themselves from the coal industry and add their names to the already significant and growing list of banks, insurers, and investors that have ceased supporting coal. AXA’s announced in December 2017 its decision to divest from companies planning more than 3 GW of new coal plants, Generali announced in February 2018 its divestment from companies planning new coal facilities. SCOR as well as other French insurers committed to divest or no longer invest in companies on the Coal Plant Developers List and Global Coal Exit Lists.

May 2018 saw insurance giant Allianz announce that it will immediately stop insuring individual coal-fired power stations and coal mines and cease any coal insurance by 2040. It will also bar all companies planning to build more than 500 MW of new coal-fired generation capacity from its investment portfolio. In June 2018, reinsurance major Hannover Re’s announcement that it would divest from companies that derive more than 25% of their revenue from coal put close to half of the world’s reinsurers at a remove from coal.

The following month, another reinsurance giant, Swiss Re, announced that it would stop insuring or reinsuring companies that have more than 30% exposure to thermal coal Europe’s largest bank, HSBC, announced in April 2018 that it would stop funding new coalfired power plants following similar recent moves by other European banks such as ING, Credit Agricole, Deutsche and BNP Paribas.137 HSBC made an exception by considering finance for plants in Bangladesh, Indonesia and Vietnam, but those exceptions are on the table for only five years.

Significantly, Japanese banks are also now indicating a change in their outlook toward coal—and the largest ones are coming under increasing opposition-campaign pressure as they are amongst the biggest funders of coal globally.

Sumitomo Mitsui Financial Group has indicated that it may rethink its stance toward coal, a move almost certain to be followed eventually by major Japanese coal financiers Mizuho Financial Group and Mitsubishi UFJ Financial Group. In June 2018, Mizuho released a statement that recognized the need for action to tackle climate change and noted global concern about the role coal-fired power plays in carbon emissions.

Japanese insurance assets get shielded from coal The week before Sumitomo Mitsui’s acknowledgement, in May 2018, Japan’s second-largest insurer, Dai-ichi Life Insurance, announced it would no longer provide financing for overseas coal-fired power projects. This announcement was the first time a Japanese financial institution committed to restricting coal finance. It was not the last. Nippon Life Insurance, Japan’s largest insurer, announced in July 2018 that it will cease financing all coal-fired power stations in Japan and overseas.

Some of Japan’s trading houses have also begun to recognize

The number of coal projects in the development pipeline has dropped to 35.

the risks associated with coal. Mitsubishi Corp. has moved to sell its stake in Australian thermal coal mines. Mitsui and Co. stated in 2017 that, due to environmental concerns, it had no plans to invest in new thermal coal mines. Sojitz Corp. is also planning to reduce its exposure to thermal coal.

With names like Allianz and Dai-Ichi joining the likes of Zurich and Axa, about 10% of all insurance assets have already been shielded from coal. That figure could double by the end of 2018. The initial effect will leave coal-fired power plants and coal mines seeking coverage from a smaller pool of insurers, and at a higher price. With an increasing number of banks also refusing to finance coal, reaching financial close on any coalfired power plants will get progressively more difficult. At a recent coal industry conference, the deputy CEO of Indonesian independent power producer PT Adaro Power acknowledged that obtaining finance for coal-fired power plants was growing more problematic.

Japan lags G7 in abandoning coal Whilst four of the G7 members have joined the Powering Past Coal Alliance, Japan has been lagging and indeed is the outlier with its intention to build a new generation of coal-fired power plants. Since 2012, 50 new coal-fired power plants have been proposed in Japan.

However, an increasing number of these proposals have been taken off the table and the number of projects in the development pipeline has dropped to 35. With Japan’s electricity demand in decline, renewables continuing to be rolled out, and the government determined to restart nuclear power plants, that number looks set to decline further.

Most recently, Sumitomo has announced that its proposed Sendai-Takamatsu power plant will be switched to run on biomass instead of coal, and J-Power has scrapped a plan to replace ageing power plants with 1,200MW of new coal-fired power generation. This follows a decision by utility Kansai Electric Power in 2017 to scrap plans to convert its 1,200MW Ako power station from oil to coal. Also in 2017, the Japanese environment minister urged Chubu Electric Power to reconsider its plans to build a new coal-fired power plant over concerns that Japan will struggle to meet its commitment emissions reduction targets. Public and private finance in Japan is already moving into renewable energy, and more such activity is likely. Several years of strong domestic investment in solar PV—amounting to $20-30b per year—have given Japanese technology firms and investors important expertise in the renewables sector.

From 2013-2015, Japan was the second-largest installer of solar PV right behind China. Japanese companies are now taking this expertise overseas. Softbank is seeking to develop 20GW of solar projects in India, a nation previously dependent on coal-fired power but whose fast-paced energy transition will see future capacity expansion dominated by renewable energy. Japanese

Amundi’s Low-carbon MSCI Tracking Fund performance vs, MSCI performance

Source: Bloomberg ASIAN POWER 19

Analysis 1: japan’s coal investments become world leaders in renewable energy and the nation’s clean energy champions.

Such companies include leading lithium-ion battery maker Panasonic, which, in partnership with Tesla, manufactures at the Gigafactory in the US state of Nevada. The company is planning to double automotive revenues by 2022 and is scaling up its battery-manufacturing capacity globally.

Japanese banks and insurance firms are investing in wind projects overseas

technology companies have also recently become active in Vietnam’s growing solar market.

In 2017, JERA—the joint venture between Tokyo Electric Power Corp. and Chubu Electric Power Corp—acquired a 10% stake in leading Indian renewables company ReNew Power for $200. In a smaller but still significant move, Mitsui and Co. acquired SunEdison’s commercial and industrial rooftop solar division. Japan’s financial institutions have also placed significant emphasis on renewables projects overseas. Banks especially have been attracted to renewable energy infrastructure investments abroad based on their strong annuity yields backed by long-term PPAs from mostly highly-rated utilities.

Mitsubishi UFJ Financial Group (MUFJ) and Sumitomo Mitsui Financial Group have been amongst the largest lead arrangers globally for clean energy asset financing in recent years.

These two banks have moved into the offshore wind in Europe and are now moving into the growing Taiwan market. This experience places these banks in a strong position to support the developing Japanese domestic offshore wind industry.

Japan’s FIs chase renewables markets overseas The Japanese ECAs have also begun to make a transition to renewable energy by funding new energy projects overseas that utilise Japanese technology and expertise. As well as providing funding for the 250MW wind farm in Egypt, JBIC and NEXI have also supported Japanese technology in an Indonesian geothermal project along with major Japanese banks.

Financial close on the 90MW Rantau Dedap project was reached in March 2018. The main proponent of the project is a consortium that includes Engie, PT Supreme Energy, Tohoku Electric Power Corp and Marubeni.

JICA has also been active in the renewables space via its Leading Asia Private Infrastructure Fund (LEAP). This fund provided $390m of debt funding for ReNew Power at the same time that JERA obtained a 10% stake in the Indian renewables developer. LEAP also provided a $109m loan to the 80MW Muara Laboh geothermal project in West Sumatra, a project being developed by Sumitomo, Engie, and Supreme Energy assisted by credit guarantees from NEXI. JBIC is also part of the financing consortium.

In addition, JICA has agreed to provide soft loans worth $70.4m through the state-owned infrastructure financing firm PT Indonesia Infrastructure Finance to develop renewable power projects. JICA has also financed the 50MW Tsetsii Wind Farm in Mongolia, part-owned by SoftBank, and a 200MW solar PV installation in Jordan.

As international pressure on Japanese ECA financing for coal-fired power intensifies, their support for renewable energy projects, backing Japan’s world-leading technology, appears to be increasingly available. As a global technology leader, Japan is home to a number of companies that have the potential to 20 ASIAN POWER

Japanese trading houses are also involved in Taiwan’s burgeoning offshore wind market.

Renewables leaders rising from Japan In addition to its reported intention to invest up to $100b in Indian solar capacity, SoftBank is intending to pursue a highly ambitious project in Saudi Arabia involving the construction of 200GW of solar power capacity. This continues SoftBank’s global energy leadership, which also involves plans for a northeast Asia “supergrid” involving Japan, South Korea, China, Mongolia and Russia. MHI Vestas, a joint venture between Mitsubishi Heavy Industries and Danish wind turbine manufacturer Vestas, was launched in 2014 and is a leading global provider of offshore wind turbines.

With turbines installed across the world’s leading offshore wind markets around Europe, the joint venture is in an ideal position to benefit from the developing Asian wind markets of Taiwan and Japan, potentially followed by South Korea and India. A number of Japan’s major trading houses, including Marubeni, have been expanding into the rapidly developing overseas offshore wind power markets for years, moves that will allow them to gain further expertise that will help them develop Japanese offshore wind power developments that are now on the horizon. Mitsubishi and its project partners are expected to begin construction of a 950MW offshore wind project in the UK in 2018. Sumitomo is reportedly close to acquiring a stake in European offshore wind developments from Engie, adding to its European offshore wind holdings.

Japanese trading houses are also involved in Taiwan’s burgeoning offshore wind market. In May 2018, Mitsui and Co. acquired a 20% stake in Taiwanese offshore wind developer Yushan Energy. This will allow the company to benefit from Taiwan’s ambitious drive into the offshore wind as the nation turns away from nuclear power and coal and toward renewables.

Mitsubishi Corp. is also working on offshore wind development in Taiwan, and Mitsui has recently entered into a joint venture with major Chinese solar manufacturer GCLPoly to invest in new-energy and infrastructure projects.

With global investors moving away from coal at an evergreater pace, risks are growing for companies that maintain their presence in the coal-fired power sector. These include the risk of significant financial losses from these operations as well as the risk that a company’s reputation amongst investors deteriorates.

From “Marubeni’s Coal Problem: A Japanese Multinational’s Power Business Is at Risk” by Simon Nicholas, energy finance analyst, Institute for Energy Economics and Financial Analysis

Taiwan’s energy transition has begun

Source: Karnataka Renewable Energy Development, Company Websites.

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sector report: HYDROPOWER

Ananta Bhadra Lamichhane from flickr

Geopolitics and social risks complicate Asia’s large hydropower aspirations Two hotbeds for large hydropower development, the Himalayas and Mekong River, depict its potential and limitations.

W

hen the development for Nepal’s two keystone large hydro power projects were plunged in uncertainty over the past year as the country’s government cancelled the $2.5b Budhi Gandaki hydropower project and renegotiating the $1.8b West Seti project, it served to illustrate the geopolitical and social challenges such mega projects are facing in Asia.

Analysts reckon Asian countries in the Himalayas and Southeast Asia stand to benefit tremendously from large hydro power projects from an energy supply

The hydropower dams are a major part of Nepal’s 10-year plan to develop 10 GW of power.

Fastest growing regions by new installed capacity, 2017

Source: International Hydropower Association

22 ASIAN POWER

standpoint, but large hydro projects have been complicated by changes in political regimes, inter-regional power plays, and social opposition due to their potential impact on the environment and local communities.

Snags in Nepal projects In the case of Nepal, its energy cooperation with China has recently hit a snag after the previous government terminated a licence awarded to China’s Gezhouba Group in late 2017 to build a 1.2GW hydropower plant, which would have been the country’s largest, due to supposed lapses in the awarding process.

Meanwhile, the current government is set to hold final talks with China Three Gorges Corporation to determine the fate of a proposed 750 MW hydropower plant, Investment Board Nepal spokesperson Uttam Bhakta Wagle told the Kathmandu Post in early August. Earlier reports suggested the latter deal had been cancelled, which Beijing denied.

“The hydropower dams are a major part of Nepal’s 10-year plan to develop 10 GW of power. Nepali officials have long hoped to secure investment from China to exploit its rich hydropower resources

and ease the country’s chronic energy shortages,” said Abhaya Raj Joshi from the London-based non-profit Chinadialogue in late June. “These are the country’s largest reservoir dams and its biggest foreign investments. Both projects were awarded to Chinese government-backed companies, but the licence for Budhi Gandaki was scrapped and the one for West Seti is in limbo.”

Nepal, a country with large, untapped hydropower potential, has received considerable investment in the sector from Beijing as part of China’s regional cooperation and trade-linking Belt and Road Initiative (BRI). China has made the most progress in hydropower development amongst the Himalayan nations, driven by the country’s insufficient fossil fuel reserves, push for energy independence and environmental concerns, noted Nilanjan Ghosh, senior fellow and head of economics at ORF. Joshi argued that Chinese investment is crucial for Nepal, citing how most of the country’s hydropower projects built in the past few decades were of the smaller run-of-the-river type whose generation capacity peaks during the monsoon then weakens in the dry season. “This is why

sector report: HYDROPOWER social and environmental risks feature prominently as the key challenges to wider adoption of large hydropower projects as opposed to smaller hydropower projects that have been largely embraced in the region so far.

Hydropower generation in Southeast Asia, 2000–2015

Uttam Bhakta Wagle

Source: IRENA, 2017f

the government wants to build mega reservoir-type projects, like West Seti.

China and India seem to be the only countries interested in building mega dams in the region, but they are also facing tough resistance from local activists and communities whose lands will be submerged by large reservoirs.”

Nepal’s former ambassador to Beijing Tanka Karki has said that China is the best option for Nepal, arguing that neighbouring India does not have the resources to build mega projects whilst Europe and the US are not in a position to invest in big projects. Still, in May, Indian Prime Minister Narendra Modi visited Kathmandu for the groundbreaking of a 900 MW hydropower project to be built by state-run Indian firm Satluj Jal Vidyut Nigam (SJVN) Limited, representing India’s single-biggest foreign investment project in Nepal.

This jostling for influence in Nepal could weigh on hydropower development in the Himalayan nation. The contest for influence between China and India is rapidly intensifying in South Asia, said Aditya Valiathan Pillai, program officer at The Asia Foundation, and one of the authors of its report electricity trade and hydropower development in Asia.

“India’s objectives for electricity trade in the BBIN (Bangladesh, Bhutan, India, Nepal) sub-region are shaped by China’s recent overtures to neighbors in South Asia; Indian policy on regional electricity trade serves the purpose of ring-fencing Chinese influence in the energy sectors of South Asian neighbors by imposing conditions on access to India’s vast demand base,” he said.

Private players’ challenges Ghosh flagged serious concerns with private players exiting the hydropower sector, especially in India. “The crucial problem is sheer lack of understanding of the economics of hydropower in the Himalayas,” he said. “One needs to understand the tough terrain, the fluvial

Tanka Karki

geomorphology, the unique nature of the Himalayan rivers, and the vulnerable Himalayan ecosystem, before any hydropower project is taken up.”

Much of the problems related to hydropower development in the region stems from the lack of a “holistic understanding” of the economics of hydropower, including insufficient consideration for broader social and ecological forces, according to Ghosh.

Developers have reported delays in environmental and forest clearances that have generated apprehensions.

“Project execution on the tough terrain of the Himalayan rivers often makes it difficult for developers to build the plants.

What adds up to the transaction costs are illegal constructions in the floodplains, the eviction of people living there and their resettlement, as well as rehabilitation projects,” he said. “In situations where the resettlement and rehabilitation are not proper, social conflicts occur which result in escalating social costs” such as those seen in the Subansiri low dam over the Brahmaputra, and the Tehri dam in Uttarakhand.

Ghosh also reckoned developers operating in the Himalayas that use the traditional cost-benefit analysis also often fail to consider factors related to global warming and climate change that could impact the viability of projects.

“Despite the growing attention to assess the vulnerability of freshwater to global change, basin-wide assessments on the impacts of climate and land use change on freshwater availability remains quite limited,” he said.

“Embarking on any large hydropower project in the Hindu Kush Himalayan region is currently fraught with a range of technical and non-technical challenges, mainly due to the threat to socio-economic resources, biodiversity and potential downstream threats and impacts, including impacts of seismic activities,” added Ghosh.

Meanwhile, in Southeast Asia,

Social risks in Southeast Asia He noted that in Laos, nearly all electricity is derived from hydro, and the government plans to develop an additional 24GW of capacity in the coming years, with an eye for export.

Meanwhile, in Myanmar, despite the strong need for additional power as the national electrification rate hovers around 35%, there has been hesitation to proceed with large hydropower projects due to significant public and civil society opposition.

IRENA cited the successful deployment of micro-hydropower plants in Indonesia that have birthed new businesses in egg hatchery, rice milling, coffee grinding and bread making. Whilst in rural Myanmar, improved and mechanised irrigation powered by a micro-hydro project bolstered the quality of farmers’ yields and profits.

“Small hydropower has thrived in Southeast Asia, meeting localised energy needs and contributing to the development of a local industry in some countries. Small hydro projects have reduced environmental and social impacts compared to non-run of river projects, shorter and simpler development, less-intense finance and construction phases than larger projects, and are being deployed in both on- and off-grid configurations,” said Nagpal.

In terms of capacity, Vietnam, the Philippines, Thailand, Indonesia and Malaysia are pulling ahead in Southeast Asia. “In the region, a clear distinction is made between large and small hydropower,” said Nagpal, but pointed out that the threshold for defining small hydro varies across countries. In Indonesia, it could be up to 10 MW, but is higher at up to 15 MW in Laos and Thailand, and could reach up to 30 MW in Vietnam.

East Asia and Pacific capacity by country

Source: International Hydropower Association ASIAN POWER 23

Analysis 2: INDIA’s renewables leader

Karnataka has the world’s second largest solar park, Shakti Sthala

Karnataka leads India’s renewables race The Indian state amped up its renewables game amidst threats from its reliance on thermal power.

T

he Indian state of Karnataka, home of the country’s Silicon Valley, has some thermal coal troubles up its sleeve. Its domestic coal comes from Western Coal Fields Limited (Maharashtra), Mahanadi Coal Fields (Odisha), Singareni Coal Mines (Telangana) and Pakri Barwadih (Jharkhand), mines located 700 to 1,200 kilometres distance from the power plants, introducing severe rail logistics issues and potential additional transportation-related costs for the state’s thermal generation.

Karnataka’s three largest coal-fired power facilities, totalling 5GW of capacity are owned by Karnataka Power Corporation Limited (KPCL), the state-owned generation company.

Karnataka does not have any in-state coal production. It is dependent on coal delivered via railways from mines outside the state and on imported seaborne coal.

Analysts have indicated that relying on distant, out-of-state coal supplies raises the possibility of supply shortages. It was reported in November 2017 that all three of KPCL’s plants were facing severe coal shortages; with less than half of the daily coal tonnage required for operation.

Almost the entirety of Karnataka’s thermal capacity is composed of coal-fired generation, with only a small amount of diesel capacity. The only thermal project added in 2017-2018 was Unit 3 at the Kudgi Super Thermal Power Project, which brought an additional 800MW of generating capacity online (about 400MW of existing coal capacity was taken offline for repairs during the year).

There has been a drastic slowdown in new capacity construction in the country’s troubled thermal power generation sector, particularly where reliant on expensive imported coal and gas. Karnataka had to act fast as it has 47 IT special economic zones (SEZs), three software technology parks and dedicated IT investment regions. Favourable policies designed by Karnataka have encouraged industries to set up their research and development (R&D) centres in the state.

24 ASIAN POWER

Karnataka has 5GW of solar capacity and 4.7GW of wind capacity.

The State Load Dispatch Centre (SLDC) said in November 2017 that Karnataka had resorted to hydropower to avoid thermal power outages. Hydropower stations in India normally operate at their maximum capacity only during the monsoon.

In addition, Karnataka’s 880MW of nuclear capacity operated at an unusually high capacity factor of 98%, about 15% higher than the programmed capacity factor of 83% for 2017-2018.

Moreover, the state had to import about 7TWh of electricity from interstate in 2017-2018 to meet its total requirement of 67TWh for the year 2017-2018.

These factors indicate that other power sources were needed to cover for the shortcomings and inefficiencies of the state’s coal sector, which posted an economically unviable capacity factor of just 35% during the year. Karnataka’s electricity generation mix, whilst statistically relatively balanced, is far too heavily weighted toward fossil fuels because of its reliance on poor performing and expensive non-minemouth coal-fired thermal generation for almost 50% of its electricity needs.

On the upside, renewables account for 46% of the state’s installed generation capacity (although just 27% of the generation). Hydropower at 13% and nuclear power at 3% make up the balance of the capacity mix as of March 2018.

Karnataka overtook Tamil Nadu to become India’s number one state for renewable energy capacity in 2017-2018. Karnataka had been building its wind energy capacity steadily over the past 10 years, but it moved ahead of Tamil Nadu due to a rapid scaling up of solar capacity in 2017-2018, when it installed more than 4GW of new photovoltaic generation.

Currently, the state has 5GW of solar capacity and 4.7GW of wind capacity. The remainder of its renewable portfolio (2.6GW) includes small hydro, biomass, plus heat and power cogeneration.

In August 2014, the Karnataka Electricity Regulatory Commission (KERC) adopted an order exempting solar power

Analysis 2: INDIA’s renewables leader in May 2018.

India Renewable and Thermal Power Capacity Additions (MW)

Source: Central Electricity Authority of India (CEA), MNRE India, IEEFA estimates.

generators from “wheeling charges, banking charges, and cross subsidy surcharges” for projects commissioned between April 2013 and March 2018 selling power directly to consumers. This open access model allows large consumers access to the central transmission and distribution (T&D) network to buy power from suppliers other than their local distribution companies.

The sun shines in Karnataka It is clear the commission’s intent was to catalyse the development of the solar PV sector by encouraging third-party open access and captive power transactions apart from the traditional route of energy sales via local distribution utilities. It is also clear that the order, coupled with ongoing price declines, has had a positive impact in Karnataka, which is now the number one state in India for installed solar capacity.

Karnataka installed a record 3.9GW of solar in 2017-2018, about 40% of the total installed nationwide. Karnataka also adopted a plan in 2014 designed to accelerate solar’s expansion throughout the state, using fiscal incentives, support for solar parks, grid-tied canal projects, and linkages with other renewable projects.

Pavagada Solar Park (Shakti Sthala) Built under India’s solar park scheme, the 2GW Pavagada solar park is the second largest industrial solar park currently under construction in the world. The project, also called Shakti Sthala, is spread across 13,000 acres in Karnataka’s Tumkur district. Land for the solar park is being leased for Rs21,000/acre annually, which translates to around $300.

The facility is being developed by the Karnataka Solar Power Development Corporation Ltd (KSPDCL), a joint venture between Karnataka Renewable Energy Development Ltd (KREDL) and the Solar Energy Corp of India (SECI). KSPDCL acquired all the land and the required approvals and then awarded contracts for the solar power capacity, a simplified “plug and play” model. This facility illustrates how quickly renewable energy infrastructure can be planned, financed, and built when a suitable energy policy framework is in place.

As of January 2018, 600MW was already operational (priced back in 2016 at Rs4.79/kWh, or $73/MWh). An additional 550MW was successfully tendered in March 2018 at prices of Rs2.91-2.93/kWh ($42/MWh) — 39% lower than the first tender just two years earlier.64 This section should be operational by the year 2019.

Leading Indian domestic renewable energy developers to win this round were Renew Power (300MW), Avaada Energy (150MW) and Azure Energy (100MW). In May 2018, SB Energy, the joint venture of Japan’s SoftBank, Taiwan’s Foxconn, and Bharti Airtel won 200MW of the solar park at an even lower tariff of Rs2.82/kWh, taking the total tendered capacity of the solar park up to 1,250MW. The remaining 650MW was tendered

Karnataka installed a record 3.9GW of solar in 2017 to 2018, about 40% of the total power installed nationwide.

India’s first solar and wind hybrid project New Delhi-based Hero Future Energie commissioned India’s first solar-wind hybrid power generation facility in April 2018.

The plant, in Karnataka’s Raichur district, includes a 28MW solar plant and a co-located 50MW wind farm.

The facility will provide captive power to a group of private companies based in Karnataka. Tariffs for this project were decided through negotiations since there were no existing government regulations. However, in May 2018, the Ministry of New & Renewable Energy (MNRE) released its National Wind Solar Hybrid Policy.

The policy’s goal is to provide a framework for linking India’s existing wind and solar power plants using existing grid capacity and land. This should reduce grid connection capital expenditures, save time and cut land acquisition costs previously needed for new transmission infrastructure. With the likely addition of battery storage, it could be a potential source for round-the-clock electricity supply.

India’s draft energy plan from 2016 included a 10GW target for hybrid capacity by 2022. The final plan does not include a specific but 10GW should be achievable, especially in the context of MNRE’s updated renewables target of 227GW by 2022.

For the state of Karnataka, with its troubled thermal sector, investing in hybrid generation coupled with some small-scale firming battery storage is an option that is domestic, cheaper, and reliable. These two options, open access and hybrid generation, go hand-in-hand for Karnataka, giving it a path forward to boost its use of clean renewable energy.

CleanMax Solar has been India’s number one rooftop solar developer over the last three years, installing more than 100MW of solar capacity serving corporate sector. The developer owns and operates utility-scale solar farms in both states of Tamil Nadu and Karnataka.

Of India’s ambitious 100 GW solar target for 2022, 40% was originally expected to come from rooftop solar installations. Todate, the lack of policy support, the heavily subsidised retail price of residential electricity and lack of accessible incentives has held back the market, making it unlikely that it will reach the 40 GW target by 2022. Despite the difficulties, 1 GW of rooftop solar projects were installed in the country in 2017/18, pushing the total installed rooftop capacity to 2.4 GW The policies that enabled Karnataka to become the leading renewable energy state, however, have come under fire recently.

For starters, the electricity commission voted in May 2018 to repeal its zero wheeling charge order, which irked some solar power developers.

More concerning was the imposition of retrospective wheeling charges, which would increase developers’ cost by Rs1.19/kWh ($0.017/kWh). The same order also said renewable energy

Karnataka Electricity Sector Expansion by 2027/28

Source: IEEFA estimates.

ASIAN POWER 25

Analysis 2: INDIA’s renewables leader Karnataka Electricity Sector Composition 2027/28

Source: IEEFA estimates.

developers now would have to pay for any ‘line losses’ due to their inability to provide the power they had promised, a provision they did not previously have to meet.

The Karnataka High Court has issued an interim stay on KERC’s order in response to petitions filed by renewable developers, asking KERC to provide a written response to developers’ submissions. The recent order will not only disturb developers’ finances but also hamper investor confidence.

Clouds over Karnataka Investors and developers might become wary of concessional policies and incorporate such a financial risk in their pricing going forward. Policy clarity and certainty have been key in Karnataka’s renewable energy development and it is important that it remain so to provide stable grounds for continued development. In March 2018, India’s Central Electricity Regulatory Authority (CERC) issued an order waiving interstate transmission charges and losses for all solar and wind power projects commissioned by March 31, 2022. The problem is lack of interstate transmission could well prevent developers from taking advantage of this opportunity.

India’s newest electricity sector blueprint, the National Electricity Plan (NEP) 2018 retains the ambitious core target of 275GW renewables by 2027 from the plan’s 2016 draft. It also includes a timeline for starting to deal with the country’s mostpolluting coal-fired power plants, which should ease concerns about the lack of visible progress to date by the Ministry of Power in terms of the deferral of tighter air pollution regulations.

Included in the country’s 175GW of renewable energy target is a plan to establish green energy corridors across India that will enable the transmission of clean energy generated in renewablerich states to those lacking significant solar and wind capacity.

There has been substantial tendering activity in 2018 for wind and solar projects connected to the interstate transmission system (ISTS), but developers have become increasingly worried about the lack of transmission network capacity and needed regulations regarding the granting of ISTS connectivity. To date, roughly 7GW of solar power auctions have been delayed as a result of requests from the Solar Power Developers Association (SPDA) to MNRE. India’s director general of trade remedies (DGTR) recommended in July 2018 the imposition of a 25% duty on solar cells, assembled into modules or not, imported into India from China and Malaysia in the first year, followed by a gradual reduction to 20% in the first six months of that second year and then to 15% in the latter half of the second year. This will likely raise the capital cost of Indian solar projects in the near term by 10-15%, likely offsetting the expected decline in imported module prices over the coming year.

Karnataka is one of India’s leading states for wind power generation as well, adding capacity consistently over the past 10 26 ASIAN POWER

Karnataka must add a minimum of 4GW of new wind capacity in the coming decade to be able to meet all its electricity needs.

years. The state added more than 800MW of capacity in each of the last two years, and now has a total of 4.6GW of wind power online. The state’s draft renewable energy policy for 2016-2022 envisaged installing 6GW of nonsolar renewable energy by 2021 to 2022.

This goal was set in an attempt to overachieve its MNREestablished renewable purchase obligation (RPOs) by more than 20%. Of that 6GW total, about 4.4GW is planned to be from wind power.

Given its strong installation results in the last two years, last June, Karnataka regulatory commission barred the state’s distribution companies from signing any new wind energy PPAs until further notice. The distribution companies already had signed enough PPAs to meet the state’s RPO, KERC said, and buying more wind capacity would have further weakened the state’s already troubled thermal power sector well on its way to meeting this goal.

Wind emerges as top renewable source Karnataka must add a minimum of 4GW of new wind capacity in the coming decade to be able to meet all its electricity needs via in-state generation. According to the rating agency CRISIL, wind power tariffs of Rs2.9-3.0/kWh would provide a sustainable 12-14% internal return on equity in 2018/19.

CERC’s decision to waive interstate transmission charges presents an opportunity for Karnataka to reduce offtake risk by exporting electricity to states that lack the wind potential to fulfil their non-solar renewable purchase obligations. MNRE also recently set a national target of 30GW of offshore wind power capacity by 2030 with an initial target of 5GW by 2022.

Preliminary studies have reviewed offshore wind capacity in coastal regions of Gujarat and Tamil Nadu. The extended target of 30GW comes from the response received by Indian and international developers during the 1GW auctions in Gujarat and Tamil Nadu, the first ever for Indian offshore wind.

The long-term target would improve industry confidence to invest in the offshore wind sector. Karnataka with its 320 km coastline should proactively look for offshore wind generation opportunities for development next decade once cost reductions make this a competitive alternative.The model of procuring power via competitive bidding, technology improvements, and innovative long-term financing options have all been successful in bringing down wind power tariffs in India and globally.

Similar deflationary gains should be expected in Karnataka’s wind power sector. Whilst the national RPO serves as a driver, Karnataka should aim for more capacity than its 4GW compliance target, with the objective of building sustainable electricity export revenues. From “Karnataka’s Electricity Sector Transformation: India’s Leading Renewable Energy State” by Kashish Shah, research associate, Institute for Energy Economics and Financial Analysis

Karnataka’s Leading Wind Power Developers

Source: Karnataka Renewable Energy Development, Company Websites.

OPINION

BREE MIECHEL

Powering ahead: Taiwan’s renewable energy plan in focus Partner at Reed Smith

T

aiwan is seeking a dramatic energy transformation targeting 20% of its energy mix to come from renewable energy sources by 2025 (approximately 27GW of capacity). This is the crux of a draft bill under review by Taiwanese legislative authorities and is already backed by attractive feed in tariffs (FITs) and a supportive regulatory framework. These conditions are attracting interest from foreign investors to the exclusion of more challenging Asian power markets.

Taiwan’s offshore wind market grabbed headlines this year, first with the government’s award of a reported aggregate capacity of 3,836MW for the development of ten separate wind farms off Taiwan’s coast in April and again just recently with the award of a further 1,664MW capacity via competitive auction. The scale of the sector and competitive tariffs achieved via auction suggest Taiwan now joins the ranks of established offshore wind markets elsewhere in the world, and all in the context of an already booming solar PV industry. It appears Taiwan’s Ministry of Economic Affairs (MOEA) 2025 renewable targets (that envisage 20GW capacity coming from solar PV and 5.5GW from offshore wind) could well be achieved.

Foreign investment framework Whilst the overall ban on Chinese investment in the energy sector still applies, promoting inbound foreign direct investment (FDI) has been an important policy objective of Taiwanese authorities in order to encourage investment in the renewable energy sector. Taiwan has pursued various measures to attract FDI from both foreign companies and Taiwanese firms operating overseas. Whilst the Taiwanese government limits foreign ownership in certain industries for security and other reasons, foreign investment in the renewable energy generation is not restricted. Taiwan also ranks favourably on Transparency International’s (TI) Corruption Perceptions Index, and the World Bank’s “Ease of Doing Business” Report compared with other markets in the region.

The Investment Commission (IC) screens applications for FDI, mergers, and acquisitions in a relatively routine manner. For a straightforward FDI in a non-restricted industry, approval can be granted as soon as two weeks following submission of an application (although foreign investors typically allow 1-2 months to provide time for document preparation and responding to supplementary requests from the IC).

Whether an investor is domestic or foreign, they must separately apply for the right to develop and operate a renewable energy facility through the electricity industry regulatory authority – the Bureau of Energy (BOE) currently performs this function as the MOEA’s in-charge agent. As part of the application, investors will need to provide a prospectus (including financial plan), evidence of the necessary land rights, environmental impact assessment and permits/certificates obtained from relevant authorities.

A site visit will typically be required and comments will be sought from relevant regulatory bodies and committees on the application.

Renewable energy regulatory framework The Renewable Energy Development Act (REDA) was promulgated in 2009 with major reforms to the Electricity Act (the Act) implemented in 2017. These two pieces of legislation have allowed for the liberalisation of the green energy market in Taiwan and broken Taipower Corporation’s electricity supply monopoly. Significantly, REDA safeguards the connection of a renewable energy installation to the grid and the purchase of electricity generated by that installation. REDA further mandates how the tariff payable will be determined – via either a FIT or based on avoided cost. The pricing level and use of FITs will decline over time as FITs are structured to 28 ASIAN POWER

Taiwan’s renewable energy capacity targets for 2025

Spurce: Reed Smith

induce early investors.

In addition to the FITs that apply across renewables technologies, an additional 6% subsidy will apply for high-efficiency solar components and a 3% subsidy will apply for consumers who install solar PV systems on their own rooftops. This is in line with the newly released Green Energy Roofs project to encourage the public to be generators of electricity. Each of the ten offshore wind farms awarded grid connection capacity in April will benefit from the 5.8498 (NT/kWh) FIT. However, the FIT will not apply to the 1,664 MW of offshore wind projects just awarded, with the tariff having been determined via competitive auction. The tariffs to apply to the winning projects range from 2.2245 (NT/kWh) to 2.5481(NT/kWh) and demonstrate the savings that sufficient programmatic scale can deliver.

Challenges As with all jurisdictions – emerging or developed - there will be challenges.

A number of the offshore wind projects in Taiwan have faced opposition from environmental lobbyists. Environmental impact assessments must be carried out, and the impact on migrating birds and ocean mammals, local fishery, navigation and harbour development researched for offshore wind projects. An Environmental Protection Administration (EPA) ad hoc committee reportedly rejected French energy developer Eolfi’s floating wind farm project offshore from Taoyuan notwithstanding three developer proposed changes to the project scope and a 75% reduction in the development area.

Land scarcity for solar development is another issue in Taiwan. Taiwan’s total area is around 35,000 km2 with two thirds of land consumed by steep mountains that limit significant development. Obtaining approval for ground mounted projects can be difficult due to the red tape and the inadequate coordination among the various government agencies involved, including the BOE, EPA, and Council of Agriculture. For renewable energy production on land already being used for agricultural purposes, no more than 40% of the agricultural plot can be covered by solar panels and the land must continue to be used for agricultural purposes in accordance with the original agricultural business plan submitted to the authority. Despite the challenges however, the solar sector is booming - roof top and ground mounted and the government is releasing approximately 2400 hectares of subsided plots unsuitable for agriculture for the development of energy generation facilities. This commentary submission was co-written with Natalie Lau (Reed Smith), Lucia Yiou and Mindy Huang (LCS & Partners).

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OPINION

Dan Perera

One Belt, One Road – An opportunity for regional cooperation Partner at Reed Smith

C

hina’s reported trillion-dollar One Belt, One Road (OBOR) initiative is something we have all heard a great deal of, over several years now.

With certain projects already having been completed, and as others get underway or proceed towards completion, we consider the likely impact of the OBOR initiative on regional cooperation within Asia and the ASEAN region, and the potential diversification of trade routes for traditional energy sources. OBOR presents a tremendous opportunity for fostering regulatory, economic and legal cooperation amongst ASEAN states and beyond.

A natural consequence of the scope and reach of the OBOR initiative is a much-needed increase in cross-Asian cooperation and regulatory harmonisation. Whilst this already exists to a degree within ASEAN, it is apparent that a greater degree of regulatory, economic, and legal cooperation will be necessary in order to realise the full potential of OBOR. Many Asian countries have, to this point, acted largely or entirely autonomously in determining regulatory, economic and legal policy, without significant consideration of broader Asia-wide cooperation or harmonisation. OBOR has the potential to change that – or, at the very least, to demonstrate the potential benefits of greater cooperation.

Regional cooperation China views OBOR as a series of strategic projects which will together create a new “Silk Road”, opening up trade routes across Asia through a vast network of road, rail, and port infrastructure. A project of the scale of OBOR requires at the very least bilateral negotiation amongst participating states, which brings with it a greater degree of regulatory cooperation.

Indeed, one of the first indicators of such increased cross-Asian cooperation we have seen, in respect of OBOR projects, has been the vast numbers of Chinese workers who have been brought in to work on the construction of new infrastructure – even into countries where labour costs are equally low, or lower. Increased cooperation in respect of the movement of workers is likely to be an indicator of bigger things to come.

Beyond labour, the movement of goods and energy are the key goals of the OBOR initiative. The new infrastructure which is being constructed presently will facilitate that movement greatly – but with that must come greater regulatory cooperation to facilitate this movement. Some of the countries which are beneficiaries of the OBOR initiative are known to be difficult places to conduct business. Regulation is not uncommonly greatly bureaucratic, archaic, or worse. OBOR has the potential to change that, and quickly, although this change will need to be embraced by other participating states.

Over recent years, we have seen particular countries – not least China – imposing import restrictions on certain energy products such as low net calorific value thermal coal which, previously, had been a key energy source within those countries. As China battles with its domestic pollution concerns, and looks to cleaner sources of energy and a greater emphasis on renewables to fuel its nation, new coal-fired power stations financed by China are being constructed along the OBOR corridors.

Coupling the new road and rail infrastructure with the construction of a number of new deep-water ports, strategically dotted across the South Asian coastline in particular, assists with achieving one of the ultimate goals of opening up entirely new and untapped trade routes. These trade routes present opportunities for the project host nations and for China, creating new markets for Chinese domestic production, as well as facilitating imports. However, the new deep-sea ports also present opportunities for international producers and traders of energy sources within the physical seaborne market. Nations participating in OBOR projects should be seeking 30 ASIAN POWER

China is now the world’s largest non-hydro renewable consumer

Source: Moody’s Investors Service, BP Statistical Review 2018

to leverage the global seaborne markets, and to open up other sources of revenue to assist them with the repayment of the Chinese loans which funded the projects.

WWroducers of energy sources such as thermal coal have valued the certainty and simplicity of shipping product to large, recognised markets which have demonstrated stability and generally low performance risk.

China has been the major beneficiary of that conservativism, over many years now.

New trade routes But with China seeking to diversify its own domestic energy production and move towards cleaner sources of power, the question arises as to where all of that excess production of lower grade thermal coal may be placed. Whilst India has benefitted from the resulting price adjustments in thermal coal markets, so as to permit the purchase better product at lower prices, it too, like China, is becoming increasingly sensitive to the pollution implications of relying on “dirty coal” as a key energy source.

As such, relatively untapped markets such as Pakistan and Bangladesh become of increasing interest to producers and traders, seeking out new markets for lower quality product. The construction of deep sea ports and power stations in such countries as part of the OBOR initiative is no coincidence. However, there must be other changes too, to attract the seaborne trade in significantly increased volumes. In order to reap the benefits which OBOR projects may bring, Asian countries – ASEAN and beyond - must look to achieve greater regional regulatory harmonisation and cooperation. Stable and harmonious regulations across OBOR nations will give major producers and traders the confidence they require to commit to new and untested trade routes, without fear of unexpected and unappealing outcomes.

It would, for example, open the door to confidence in shipping part cargoes to multiple discharge ports. Regulatory harmonisation should stretch to coastal nations undertaking a review of their existing maritime laws and utilising international standards when implementing new port regulations. There can be little less appealing to a producer or trader than the thought of having a vessel under their control arrested in Pakistan or Bangladesh. Utilising OBOR as an opportunity to coordinate in such spheres and to develop harmonised regulatory, economic and legal frameworks in the furtherance of international trade is an opportunity which beneficiaries of projects should not pass up.

OPINION

JOHN GOSS

LNG imports create impressive business growth in China

T

he recent introduction of liquefied natural gas (LNG) into China’s diverse energy mix has already started to alter the country’s extremely large energy market’s traditional operating patterns. Recent industry reports have said that the country’s energy supply organisations are hurrying to satisfy China’s energy hungry industries, public utilities, and the population’s ever increasing demands for this much cleaner fuel.

It seems that the country’s voracious appetite for the cleaner fuel across China as a whole is being driven by a nationwide clean energy policy that now encourages the extensive utilisation of the cleaner LNG gas. The cleaner LNG is now being used for domestic heating and cooking instead of the traditional burning of all types of cheap, low grade coal.

A unit of China Offshore Oil Corp, CNOOC Gas and Power Group imported more than 20.46 million tons of LNG during 2017. This large volume of LNG imports accounts for 54.7 percent of China’s total imports.

CNOOC reports that it currently has nine LNG terminals in China. These terminals are mostly situated on the east-coast.

The significant shift towards LNG by the Chinese government is primarily aimed at combating the nation’s very serious air pollution in a number of regions around the vast country’s large urban and industrial areas. Industry forecasts have estimated that the nation’s future demands for LNG will virtually double to something like 68 million metric tons per year by 2023.

It has been widely reported that the Chinese LNG energy company is the third largest importer of LNG worldwide. CNOOC has recently reported that it is currently planning to establish more terminals for LNG in the country’s Fujian, Jiangsu and Zhejiang provinces. Plus, the company is enlarging its current terminal in Tianjin, which will increase its receiving capacity of LNG. The Chinese energy company has recently reported that it will be enlarging its LNG supplier network with the aim of increasing and diversifying its overseas LNG resources in addition to its current supplier in Australia. It seems that CNOOC is not the only Chinese energy company that is developing its LNG business. I am impressed at the foresight of China’s energy companies.

Two other large Chinese energy companies have announced that they are also speeding up their LNG business plans. The world’s largest refiner China Petroleum and Chemical Corp, or Sinopec has recently announced that the company’s recently built Tianjin LNG facility, which features an LNG receiving terminal, docks and pipelines together with associated facilities had recently started commercial operations during April, 2018.

Another major Chinese energy company, China National Petroleum Corp (CNPC) which is the country’s largest oil and gas producer, is also eyeing the range of LNG opportunities ahead. The energy company is gearing up for the future LNG supply opportunities that will be available in China’s future LNG markets across most of the country.

The nation’s state-owned companies are well-known for their resistance to grant any form of third-party access to both of their existing and planned and future terminals. It seems that some independent buyers of LNG are building their own LNG importing facilities already. One thing is for sure and that is: when China decides to do something for the nation’s modernisation and benefit – the project is done well and no expense is spared in achieving the final outcome.

Many of Indonesia’s existing oil and gas blocks are now beginning to suffer ageing. The result of this ageing is that the country’s oil and gas reserves are found in ever-increasingly remote and more technically challenging regions and areas of the country. A consequence of this syndrome is that Indonesia’s oil and gas exploration and production sectors have been experiencing 32 ASIAN POWER

ssss john.goss@aod.com.hk

LNG to maintain edge over pipeline gas imports

Source: National Sources, Bloomberg, BMI

declining international investments during recent years.

However, China’s PetroChina International Companies in Indonesia, which is a division of the State-Owned China National Petroleum Corp; the largest oil producer and distributor in the country makes some positive moves towards investing into this market.

Tapping into Indonesia’s LNG reserves Whilst there are many International Companies in Indonesia who are declining to invest into the country due to the current market conditions, such as the current low commodity prices, PetroChina International Companies has vowed to carry on investing into and expanding its energy related business into the archipelago.

The Chinese energy major has been reported to be using its own enhanced oil-recovery techniques that enable the energy company to take up a larger proportion of the oil sector in the energy-rich nation. The President of the company, Gong Bencai, has been quoted in the ‘China Daily’ newspaper as saying that whilst keeping up with production in Jabung – the company’s largest block – it has been looking for newer and larger energy projects within Indonesia for its expansion plans.

“We have been actively looking for newer and bigger projects in the country for expansion this year, in addition to keeping up production in the company’s largest block in the country, which the company has been working on for the past 15 years,” said Gong.

PetroChina entered into the Indonesian energy markets during 2009. This move was one of the Chinese energy company’s earliest international energy ventures, during 2002. This move was due to its acquisition of the Devon Energy Company.

It was at that time that the Indonesian Government expressed their hopes that CNPC would bid for its new gas blocks and would enhance the company’s investments into the country. It was hoped that the Chinese oil extraction technologies and know-how would serve to further tap into the potential of the country’s oil and gas blocks.

Gong is quoted as saying, “There had been progress and principles to make conditions better for oil and gas investors in recent years, including the gross-split scheme, which taxes are waived during the exploration phase for operators until profits reach its pre-specified levels.” He said that, “All these conditions allow companies more power in decision making and act quickly so they will operate faster”.

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