Renewable energy projects have blossomed across Asia. What has led to the recent boom? Vandana Chatlani reports

In the past several months, green energy projects have picked up pace dramatically across Asia. In July, Thailand-based energy company Global Power Synergy purchased a 25% stake in Taiwan’s 595MW Changfang and Xidao offshore wind farm from Danish fund management company Copenhagen Infrastructure Partners; and Bangkok-based Global Renewable Synergy Company acquired shares in Indian solar power company Avaada Energy.

In August, Abu Dhabi Future Energy Company and Pembangkitan Jawa Bali Investasi (a subsidiary of Indonesian national electricity utility PLN) financed a 145MW floating solar photovoltaic power project on the Cirata Reservoir in Indonesia – the largest photovoltaic installation in Southeast Asia.

These deals are a snapshot of the high level of activity in the renewables sector that has been keeping law firms busy. “Despite economic and other headwinds resulting from the covid-19 pandemic, investment in renewable energy in the Asia-Pacific has been remarkably resilient in the past 12 months,” says James McLaren, a Hong Kong-based energy and infrastructure partner at Linklaters.

“In fact, the pace of development and investment continues to outstrip other parts of the world, supported by rising populations, robust economic growth and the greenfield nature of the renewables market in the region, and underpinned by some relatively attractive government support initiatives.”

According to the Regional Energy Trends Report 2020 by the UN’s Economic and Social Commission for Asia and the Pacific (Escap) and the Asean Centre for Energy (ACE), energy demand in the Asean region will nearly triple by 2040, increasing to 922 metric tonnes compared to 375 metric tonnes in 2017. Much of this will be driven by urbanisation, industrialisation and economic development.

renewable energy

Both the Escap and ACE point out that while Asean policymakers have relied primarily on conventional sources of energy such as coal and natural gas in the past, the region is seeing a push for increased hydropower capacity, which continues to make up the largest share of installed renewable capacity (see graph below). The energy mix is now diversifying further, with solar and wind resources being used to generate power as the pace of hydropower installations slows down.

“When we first started handling energy projects in Asia a decade ago, hydro projects using river resources were an obvious way of capitalising on renewable energy and monetising it,” explains Jean-Louis Neves Mandelli, a partner in the project development and finance practice at Shearman & Sterling in Singapore.

“Hydropower is not intermittent – by and large it is electricity you can depend on year round. Now what we’re seeing is the growth of intermittent power such as wind and solar, driven mostly by governments wanting to promote these sources of energy.”

“The reality is that Asia has been catching up to a wave that started earlier in Europe and North America,” says Frederic Draps, a partner in the projects practice at Ashurst in Jakarta. “Part of the reason for this is precisely what drove the trend in Europe and North America. The conscientisation of the impact and depletion of fossil fuels.”

Draps notes that this move towards green energy has also been fuelled by societal pressures resulting from the lived experience of climate change consequences, such as air pollution. “In India, air pollution has really been a trigger, and the same can be said for China, Indonesia and other parts of Southeast Asia,” he says. “Some major urban centres have become almost unliveable.”

In September, Central Jakarta District Court ruled that President Joko Widodo and other senior government officials were guilty of environmental negligence due to their failure in addressing Jakarta’s severe air pollution. The ruling follows a citizen lawsuit that was launched two years ago by 32 residents. “It proves there is something going on besides international commitments to sustainable development goals,” says Draps.

RENEWABLE ENERGY INSTALLED CAPACITY IN ASEAN (2000-2019)

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Source: International Renewable Energy Agency

Times are changing

A deeper appreciation of the climate change crisis, the reality of fossil fuel depletion and grassroots activism have put increased pressure on governments to take concrete steps towards sustainability. Leaders across Asia have long recognised the importance of their pledges to lower emissions and work towards a net zero future.

“A number of jurisdictions have made commitments under the Paris Climate Accords adopted in 2015, and many have delivered their NDCs [nationally determined contributions] to reduce emissions,” says Irina Akentjeva, a partner at Herbert Smith Freehills in Singapore who specialises in energy and infrastructure transactions.

“As a result, there has been a focus across Asia by regulators in prioritising renewable power as part of the energy mix. We’ve seen ambitious plans announced by a number of jurisdictions such as Indonesia, Malaysia and Singapore.”

renewable energyIn March, Malaysia’s electricity utility company, Tenaga Nasional, and Singapore-based solar company Sunseap announced plans for a joint venture as part of a two-year trial to import 100MW of electricity from Malaysia to Singapore.

In July, Bangko Sentral ng Pilipinas (BSP) raised USD550 million in green bond investments to promote green financing in the Philippines. And in September, Thai state-owned oil giant PTT committed to investing billions of dollars in the next decade to promote electric vehicles and develop other green technology.

Meanwhile, Singapore implemented the first carbon pricing scheme in Southeast Asia on 1 January 2019. The carbon tax encourages companies to reduce their emissions and allows them the flexibility to take action where it makes the most economic sense, according to the National Climate Change Secretariat.

The carbon tax is applied uniformly to all sectors including energy-intensive and trade-exposed sectors, without exemption, in a bid to maintain a transparent, fair and consistent price signal across the economy. The carbon tax rate is set at SGD5 (USD3.70) per tonne of greenhouse gas emissions from 2019 to 2023, and applies to direct emissions from facilities emitting 25 kilotonnes of carbon dioxide or more per year.

Alfred Ng, a partner in the projects practice at Ashurst in Singapore, says the trend of investors and financiers moving away from conventional thermal energy projects has been real and intensifying in the past few years. “This has now gone beyond being a ‘pure ESG’ issue,” says Ng. “The demand for power generated from renewables has made the economics for investments in renewable assets much more attractive.

“While it is true that many international institutions – including certain large developers and many commercial banks, export credit agencies and development finance institutions – will no longer invest in ‘dirty energy’ such as coal-fired power for fundamentally political or ‘policy’ reasons. There are also increasingly economic reasons, as the demand environment has become a sort of self-fulfilling prophecy,” says Ng. “The pool of investors in ‘dirty energy’ certainly is a fraction of what it used to be 10 years ago, and although not all thermal energy needs to be ‘dirty’, of course, the increased appetite for renewables is undeniable.”

So-called “polluter” companies are also pivoting away from conventional energy and exploring ways to diversify their portfolios, or at least draw up policies to reduce their carbon footprint and halt coal investments. Thai oil major PTG Energy has invested in waste-to-energy projects and is looking at solar energy and electric vehicle charging facility projects. Adani Green Energy, part of India’s mining and energy conglomerate, Adani Group, is developing a renewable portfolio of 25GW by 2025, which includes wind, solar and hybrid power projects. And China’s oil and gas major, CNOOC, has announced plans to invest in solar and wind farm projects totalling at least 5,000MW by 2025 as part of its decarbonisation goals.

“It is good business now for companies such as BP and Shell to say they have a transition plan to move towards a green business model,” says Calvin Ho, a partner at Herbert Smith Freehills in Beijing, who specialises in energy, natural resources and transportation.

Ho is seeing these commitments trickle down beyond companies in the energy sector. “IKEA in China made commitments to be green, following their parent company, and that resulted in them investing in wind and solar farms to offset their stores,” says Ho. “Walmart in the US is doing exactly the same. All of their factories and their suppliers in China now get audited for greenhouse gas emissions, otherwise they don’t get the Walmart contract. You are really seeing green energy initiatives emerging throughout the economy in different ways.”

renewable energyWhen the stars align

Regulatory policy and climate change conscientiousness have also propelled interest from private capital into renewable energy. The level of private capital being channelled into energy platforms is unprecedented, says Sidharth Bhasin, a corporate and private equity partner at Latham & Watkins in Singapore.

The establishment in South and Southeast Asia of large funds, such as Ontario Teachers’ Pension Plan, CDPQ and OMERS, which are now prioritising clean energy investments, has resulted in billions of dollars of capital that is now looking at ways to be deployed.

Last November, Ontario Teachers, together with a subsidiary of sovereign wealth fund Abu Dhabi Investment Authority, signed a deal to invest USD1.25 billion in Equis Development, which develops, constructs and operates primary and hybrid renewable energy and biomass generation, power grid distribution and transmission, and waste infrastructure assets in Australia, Japan and South Korea. In August, OMERS Infrastructure purchased a 19.4% stake in Indian renewable energy developer Azure Power.

“For these funds it makes sense, because it aligns with their policies to invest in clean energy, and for companies it means access to longer-term capital that they would not otherwise have,” says Bhasin. “We are in an environment where the stars have aligned in terms of policies and objectives, both at the government level and the corporate level. Renewables in particular are having a fantastic period because you have an incentive on both sides of the table to push the agenda.”

Investors are also willing to accept a slightly lower return on investment because the investment itself helps them with their net zero emission reduction targets. Projects must make economic sense, but they are no longer the sole determining factor for many investors.

“It is becoming an exercise of balancing not just your financial budget but also your carbon budget, and looking at your investment in a holistic way,” says Akentjeva, of Herbert Smith Freehills. “Sometimes more carbon-intensive projects with better potential return are passed up in favour of renewable projects because of the overall contribution to the investor’s energy transition story.”

renewable energyTeething issues

Although investor appetite for renewable energy continues to be strong, there remains a degree of wariness around certain projects because of issues such as bankability, curtailment and unclear policy regimes.

Vietnam has made great strides in addressing climate change. The country’s new Law on Environmental Protection, which will take effect on 1 January 2022, replaces the 2014 law and significantly modernises the first law on environmental protection, which came into play in 1993. In February, Vietnam published its latest power development plan (PDP), which focuses on expanding renewable sources. Under the draft PDP 8, Vietnam plans to increase solar capacity to 18.6GW and wind capacity to 18GW by 2030.

The government has pledged that renewables will account for 32% of total installed capacity by 2030, according to Southeast Asia’s Green Economy 2021 Report, put together by Bain & Company, Microsoft and Temasek. In June, the Asian Development Bank signed a USD116 million green loan for three wind farms in Vietnam.

However, despite its progress, Vietnam has had trouble addressing certain risk allocation issues, including curtailment risks, under its power purchase agreements (PPAs) for some time. Thanh Hai Nguyen, a special counsel at Baker McKenzie in Hanoi who has expertise in power, energy and infrastructure, believes the country still has new opportunities for enhancing the contractual framework to clarify and improve these issues to attract continued investments. Nguyen says Vietnam can compare and learn from other Asean markets in terms of allocating risks under PPA templates.

For example, Nguyen says Indonesia offers a clearer provision and a formula to determine compensation upon termination of a PPA. At present, he says, Vietnam provides that compensation may include actual and direct loss incurred by the seller, and direct benefits to which the seller would have been entitled if there was no default. The seller bears the burden of proof resulting in uncertainties as to actual components of the payment that Vietnam Electricity (EVN) will provide in the event of a PPA being terminated.

Curtailment, which occurs when electrical grids are unable to take up the full capacity of power generated by renewable energy sources, is another issue. Vietnam has had issues with grid overload, especially in cases where new power projects have been developed in a short amount of time.

Nguyen says while deemed commissioning or deemed dispatch is available under Indonesian PPAs subject to a certain grace period, Vietnam allows EVN not to purchase electricity under certain circumstances listed (which are broadly worded) without allowing deemed energy in certain events beyond the seller’s reasonable control where EVN is unable to off-take the electricity produced.

India, too, has encountered curtailment issues and teething problems with regard to feed-in tariffs (FiTs), the execution timeframe for projects, and the delayed signing of PPAs. Slowly, these are being ironed out and addressed. In August, the Appellate Tribunal for Electricity ordered state-owned distribution company Tamil Nadu Electricity Regulatory Commission to pay 75% of the total curtailed power to renewable energy companies, in addition to 9% interest between March 2017 and October 2020. The case, filed by the National Solar Energy Federation of India, is a huge boost for renewable energy companies and sets a precedent for curtailment payments in the future.

India also moved away from FiTs towards competitive bidding for renewable energy projects to provide financial certainty and alleviate the time pressure on developers to complete a project.

“Earlier the FiT regime was dependent on the RPO [renewable purchase obligation] requirement of a particular state under its policy,” says Anoop Khatry, the group general counsel of Pune-based wind turbine manufacturer Suzlon Group. “On 1 April each year, each state would have a new PPA requirement, and it would fix the tariffs accordingly. These would be valid for one year. If any project had not been commissioned by 31 March, the tariff at which it was originated would change in the next financial year.”

In some instances, power distribution companies, also known as discoms, have challenged a tariff rate that had been agreed. “We’ve seen some tension in the Indian solar sector, particularly where the state is re-examining their tariff regimes, which can create uncertainty for investors, albeit we expect these issues to be resolved eventually,” says Bhasin.

The FiT regime worked according to a 12-month project cycle, which many developers considered too short for execution. As Khatry explains, orders were not necessarily booked by April and could be signed as late as September. However, that would give a developer only six months to install and commission a project, which created a huge burden of pressure. “The competitive regime works on a 24-month project cycle,” says Khatry, “with 18 months for the project execution and deployment, and six months for financial closure. This timeframe has been better received.”

Investors have also been heartened by the Solar Energy Corporation of India’s (SECI) requirements for PPAs being signed upfront. Under the FiT regime, each state followed its own policy for the signing of PPAs. In certain states, PPAs would be signed with the project owner only at the commissioning stage. “What happens if the project falls through?” asks Khatry. “The investment has already been exposed. Under the SECI, a PPA is signed upfront, which is one of the greatest advantages and reduces regulatory risk.”

Governments and regulators must consider bankability and financing issues when proposing regulatory reforms, says Akentjeva. “It has become slightly less prevalent as more private capital has come in and there is less reliance on bank financing,” she says. “But even private capital has to feel comfortable that the underlying PPAs and project document policies will offer long-term stability and plenty of incentives to decarbonise.”

Evolving regulations

For many investors, legal support in relation to renewable projects is crucial because of regulatory change and upheavals. Ho says Chinese investors looking at renewable opportunities across Asia tend to worry about foreign ownership restrictions and competition law provisions.

“The economy in China is largely held by state-owned enterprises, who want to understand the foreign direct investment regime in other jurisdictions and whether those regimes are likely to change,” says Ho. “They want to ring-fence their investments and properly assess the risks of potential rule changes that could prevent them from exiting in five years, or selling to another Chinese investor. You’re seeing that not just in Southeast Asia, but across the world.”

Neves Mandelli, from Shearman & Sterling, has worked on a number of renewable deals in Pakistan since 2010, including the country’s first wind, hydro and solar projects. He says Pakistan has maintained a consistent investment structure over the years, with fewer changes compared to other jurisdictions across Asia. While this offers a degree of comfort and predictability, investors have to contend with macro-level issues such as the rupee being pegged to the US dollar.

“The rate has gone from around 100 rupees to the dollar to around 300 rupees to the dollar, which means the cost of electricity has risen sharply,” says Mandelli. “We are currently supporting clients on managing these changes to the tariff, to alleviate the pressure on consumers. Dollar indexation issues have involved the development banks, the World Bank and the IMF to get the right balance on how to restructure.”

Draps, from Ashurst, says the advice on renewables often falls into two categories. The first relates to market entry requirements for clients who are new to renewable energy and drawn to the sector as a result of its growth prospects. Investors want to know the risks of investing in a particular jurisdiction in renewables, the regulatory overlays and the touchpoint with regulators. The second relates to those already in the market, where advice covers negotiation and project documentation, followed by updates on possible regulatory changes that may impact their investments.

“In Indonesia, there has been a presidential regulation that is supposed to completely reform and reset the tariff and tendering scheme in relation to renewables, which is really badly needed,” says Draps. “The regime is what sets the tone, creates certainty and drives the sector forward. For example, there is 10 times more installed rooftop solar generation capacity in Singapore than in Indonesia, even though Singapore has such a small land mass. Thailand has 400 times more solar installed capacity than Indonesia. All of that is regulation-driven.”

Indonesia’s regulations have been in the making for the past two years, and it continues to lag behind some of its neighbours. However, Draps points out that Indonesia, like other lower-income countries, may also be slower in the renewables game because the government has had to shift its focus to address the covid pandemic. “That has had a real impact on progress,” he says.

Bhasin also notes that clients request handholding and regulatory reassurance once they begin operating a renewable asset. At this point, there may be detailed discussions around how tariffs are structured, whether it is a take or pay arrangement, and the risks associated with the off-taker. “In Asia, the off-taker tends to be the government or a government agency,” says Bhasin, “so the question is often: ‘Are we going to get some support from the government if the local off-taker doesn’t pay out?’”

Investors who have already taken the plunge must plan ahead and create a forecast of their overall project cycle. They must consider what happens not only at the initial stage, but at the end, when their projects need to be decommissioned and repurposed, advises Akentjeva. “In the same vein, regulators need to be alive to that issue,” she says. “A lot of lessons can be learned from experiences with oil and gas decommissioning across Asia. It would be wise to use those lessons to inform policy, investment decisions and future approaches to renewable projects.”

renewable energyReality and adaptability

As governments draw up plans to sponsor, incentivise and regulate cleaner energy, investors should remain alert. Increasing low-carbon initiatives and net zero targets are encouraging but, as Ho points out, these are long-term goals that will continue to take shape in the next 20-30 years.

“Everything from the economics of these projects to the hard ESG regulations, such as decommissioning, is changing and will continue to change even further,” says Ho. “Most jurisdictions in Asia won’t have specific decommissioning regimes for wind and solar projects, and definitely not the offshore ones, which will be expensive and difficult to decommission. Investors have to be adaptable to change.”

While Asia strives towards its renewable energy goals, it must balance the energy needs of its diverse economies and populations. China, India, Indonesia and Vietnam depend heavily on coal, and while renewable options such as solar or wind power offer cleaner alternatives, their production is climate dependant and intermittent.

“LNG and gas, while still polluting, or at best not greenhouse gas-free, will still play a big part in Asia, there’s no doubt about that,” says Ho. “Even Vietnam, which has invested so much in renewable energy, is already putting out national development plans for LNG imports. The Philippines is doing the same.”

Under Vietnam’s draft PDP 8, the government has proposed the addition of 19GW of coal-fired power until 2030, which will take the total coal capacity to about 41GW. “It is a large amount of coal-fired generation, and could account for about 28.4 to 31.4% of total installed capacity of the entire nation’s energy mix,” says Nguyen.

Most of these plants are not new, but rather projects carried forward from PDP 7. However, because coal plants are being prioritised in some instances, certain gas and renewable projects have been delayed until after 2030. “This situation is drawing concern from certain players, particularly those from the private sector who are keener on renewable energy,” says Nguyen.

“A number of areas proposed in the PDP8 draft will have significant implications for various ongoing projects, especially during this energy transition period in Vietnam. While there are public sector concerns regarding energy security and cross-region power transmissions, continued reliance on coal is a point of concern for the private sector, given their significant interests in gas-to-power projects, renewable energy, grid transmission investments and so on.”

Other challenges and constraints include grid capacity across nations in Asia. In some countries, there has been an integration of large-scale intermittent renewables, but there are concerns about how that impacts the grid, which is usually state-owned. Many developers focus purely on generating energy and leave it to the state to figure out how to manage excess power.

“Energy producers will pump energy into the grid, which creates a high risk of overpowering the grid,” says Mandelli, of Shearman & Sterling. “There are ways around this, the obvious one being more grid investment. But in some countries, the grid is still being developed. There are alternatives such as using battery storage for excess energy, which can be generated in peak times. That is something we are currently working on. Storage is clearly becoming a bigger source of interest.”

Offshore renewable energy will also present new options for investors. In India, the focus has largely been on onshore projects, however Suzlon’s GC, Khatry, says India’s rich coastlines can be leveraged to create substantial clean energy.

“India hasn’t yet taken this step because of geopolitical issues and security ramifications with Pakistan, Sri Lanka and Bangladesh on its doorstep,” he says. “The government has been conservative about expanding in that area, but it doesn’t mean they never will.”

renewable energyThe National Institute of Wind Energy has submitted a white paper on wind turbine technology R&D for 2020 to 2030, which looks at expansion in both the onshore and offshore wind market to serve India’s demand, notes Khatry. The law permits wind energy development up to 12 nautical miles off the coast of India, which is within Indian territorial waters, and beyond this limit up to 200 nautical miles, which is the exclusive economic zone where under international law India has the right to construct wind farm installations.

“We understand that the government has set a target of 5GW of offshore capacity by 2022 and a further 30GW by 2030,” says Khatry.

Despite the shifting regulatory landscape, investors appear enthusiastic and optimistic about the gains of renewable energy, both in monetary and climatic terms. With governments, companies, activists and consumers thinking green, the time is ripe for clean energy.

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