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24 April, 2017
There is an increasing anti-coal, anti-carbon sentiment in the global market for new electricity generating capacity. At the same time, there is acute demand for increased generating capacity in Asia, cheap thermal coal remains at its most available in some years and budgetary pressures on emerging Asian economies have been exacerbated by lower commodity prices and the slow growth in the Chinese and global economies. This creates a tension between the economic realities of Asia’s need to develop affordable new generating capacity and the anti-coal sentiment building globally.
A recent World Bank report finds that global investments in renewable energy were higher in 2015 than during the past five years.1 EY also reported a record US$329 billion of new investments in 2015, with 36 GW of solar and 31.5 GW of wind capacity added in Asia Pacific alone2 (while the global figures for 2016 are expected to be lower due, in part, to a drop in offshore wind financing in Europe and lower electricity demand globally).
However, growth in renewable energy is not necessarily at the expense of coal in the still power-hungry Asian market.
Fossil fuels continue to account for a significant proportion of the fuel mix in much of Asia. A number of countries in Asia, both developed (such as Japan) and developing (such as Indonesia), have announced plans to construct greenfield coal-fired power plants in the coming years.
This article considers the key drivers for renewable energy growth in Asia and the reasons why such growth does not yet spell the imminent demise of coal-fired power generation in the region.
What are the key drivers for renewable energy growth in Asia?
Political pressure and global agreements
At the climate conference held in Paris in December 2015 (COP21), 195 countries adopted a legally binding climate deal that is due to come into force in 2020 (the Paris Agreement). Pursuant to the Paris Agreement, governments agreed a long-term goal of keeping the increase in global temperature to well below 2°C and to meet every five years to set more ambitious targets. Before and during COP21, individual governments submitted national climate action plans setting out their plans for achieving the long-term goal. A rapid string of ratifications near the end of 2016 (including, in Asia Pacific, ratification by Malaysia, Pakistan and Australia) brought the Paris Agreement into force on 4 November 2016. This was followed by the next annual climate change talks, COP 22, on 17 to 18 November 2016, which made headway in setting out a plan to achieve the Paris Agreement goals, with the unveiling of the “Marrakesh Partnership for Global Climate Action” (MAP).
Aside from creating a new legal impetus for governments to take action to reduce emissions (governments will have to report to each other and the public on their progress), the Paris Agreement generated a huge amount of interest and a strengthened “moral” impetus for governments to take action to reduce emissions. It also created heightened media interest in the successes and failures of governments in their efforts to reduce emissions and saw renewed protests from environmentalists and the public against high emission projects such as coal-fired power plants. A key part of many countries’ pledges to reduce emissions, including those from Asia as discussed below, is to increase the proportion of electricity generated from low-emission plants, marking a policy shift towards increasing renewable energy generation.
The recent election in the US has clearly caused some to question the continued level of support that the Paris Agreement will enjoy but initial reaction indicates that, at least outside of the US, governments are still committed to fulfilling their pledges to reduce emissions.
Reducing cost of renewable energy development
In their 2015 joint report on the projected costs of generating electricity, the International Energy Agency (IEA) and the Nuclear Energy Agency highlight3 that while at the high-end of the spectrum, the projected levelised cost of electricity (LCOE) in 2020 for renewable energy remains significantly above that for base load (being coal-fired, gas-fired and nuclear) technologies, at the low-end of the spectrum of renewable technologies, the projected LCOE in 2020 is in line with (or in some cases below) base load technologies. The report also highlights that while onshore wind remains the lowest cost renewable technology, solar PV has seen significant reductions in cost since the IEA’s previous study was published in 2010. The year of 2016 saw record tariffs achieved, with solar PV bids as low as US$0.0242/kWh in Abu Dhabi and US$0.021/kWh in Chile,4 while onshore wind came in at just US$0.028/kWh in Morocco.5 The long-accepted cost obstacle to the adoption of renewable technologies can therefore be seen to be on the wane, particularly in the case of solar PV and onshore wind, making renewable energy a more viable option for countries that previously would have disregarded it for cost reasons alone.
Funding
In November 2015, prior to COP21, the OECD member nations party to the Arrangement on Officially Supported Export Credits (the Arrangement), agreed to a new sector understanding governing the export credit financing of coal-fired power plants (the New Rules). The New Rules aim to help achieve lower emissions targets by discouraging the financing of certain coal-fired power projects. The New Rules were scheduled to come into force in January 2017.
Broadly speaking, the New Rules limit the ability of export credit agencies (ECAs) from nations that are party to the Arrangement to offer finance to support their country’s exporters investing in, or supplying parts for, certain less efficient coal-fired power plants. It will apply to ECAs from Australia, Canada, the European Union, South Korea, Japan, New Zealand, Norway, the United States and Switzerland. Under the New Rules, if a coal-fired power project utilises:
- ultra-supercritical technology, it will remain eligible for export credit support subject to a maximum 12-year repayment term;
- supercritical technology, it will be eligible for export credit support subject to a maximum ten-year repayment term, but only if:
- it qualifies as a medium (300 MW to 500 MW) or small-sized (<300 MW) project; and
- is located in a country:
a.) that is eligible for International Development Association resources;
b.) where the national electrification rate is reported in the IEA World Energy Outlook Electricity Access database at 90 per cent or below; or
c.) that is otherwise located in a geographically isolated area where less carbon-intensive alternatives are not viable; and
- subcritical technology, it will be eligible for limited export credit support subject to a maximum ten-year repayment term only if:
- it qualifies as a small-sized project; and
- the project is located in a country that is eligible for International Development Association resources or is otherwise located in a geographically isolated area where less carbon-intensive alternatives are not viable.
All projects that are eligible for official support may be afforded an additional two years on their repayment terms if they are considered to be “project finance transactions” based on criteria set out in the Arrangement.
Although it is difficult to determine exactly how many planned projects will be shelved, or will switch to a more efficient technology, as a result of the New Rules, the impact of implementing the New Rules on the global pipeline of coal-fired power projects will undoubtedly be substantial. While it is only partly useful to compare the technology of projects from a different time period, the OECD estimates that over two-thirds of the coal-fired power projects receiving official export credit support from participating countries between 2003 and 2013 would not have been eligible for such support under the New Rules.6
Notwithstanding that the New Rules only apply to ECAs from participating countries, it is not unreasonable to expect that the New Rules could form an “acceptable” basis or benchmark of criteria that will be applied by other institutions, including multilateral agencies such as the AIIB, ECAs from non-participating countries and also commercial banks, development financial institutions and other stakeholders.
Indeed, a number of financial institutions have already announced that they will no longer be funding development of new coal projects with some exceptions for “clean” coal and/ or new plants in developing countries, showing some parallels with the exceptions under the Arrangement. Multilateral agencies and development banks have also markedly reduced their support for coal-fired plants, with one report citing a reduction in multilateral and development bank financing for coal-fired power plants at US$1.5 billion between 2011 and 2014 compared with US$12.2 billion in the previous four-year period.7 The Asian Development Bank will now only support coal projects if they use high-efficiency and low-emissions technologies and the World Bank will now only support coal projects in “rare” circumstances (for example, where there is a lack of feasible alternatives to coal or a lack of financing for crucial coal power projects). In its Energy Sector Strategy discussion draft published in January 2017 as part of the second stage of a consultation exercise that began last year, AIIB has stated that it will focus on supporting and accelerating the region’s transition toward a low-carbon mix and as part of this only intends to support coal-fired plants that replace less efficient capacity or are essential to the reliability of the system or if no viable or affordable alternative exists, particularly in low income countries. This policy statement appears to be consistent with the OECD’s New Rules, although with perhaps more ground for subjective interpretation of the policy as currently stated.
As many financial institutions shift away from supporting the development of new coal-fired plants, they have also pledged to provide increased funding for new renewable energy plants, increasing the sources of funding for renewable energy developers and accelerating the growth of the industry.
Government targets and incentives under regulatory frameworks
Many governments in the Asian region have now adopted targets to increase the proportion of electricity generation produced from renewable energy sources. On a regional level, the 2016 ASEAN Plan of Action for Energy Cooperation included a target of 23 per cent renewable energy generation by 2025.
These targets are typically accompanied by a package of incentives to drive the necessary increase in renewable energy development, often including tax benefits and preferable tariffs. We consider the renewable energy aspirations of just a few countries in the region:
Thailand
Thailand is seeking to achieve a target of 22 GW of new renewable energy capacity by 2036 and its Alternative Energy Development Plan sets a target of 25 per cent energy consumption from renewable energy by 2021, including development of an additional 2 GW of solar, 363 MW of biomass and 1.2 GW of wind energy. Thailand initially incentivised renewable development with an “adder” tariff, introduced in 2006, that would add a premium to the wholesale electricity price. In 2015 this was replaced with a feed-in tariff (FiT) plus premium programme that focuses on supporting small projects up to 10 MW and, exceptionally for solar PV projects, up to 50 MW. In order to bring prices down for consumers, the government intends to introduce competitive bidding for all technologies other than solar PV.
Thailand also encourages renewable energy investment through tax and other fiscal incentives as set out in its “Investment Policy for Sustainable Development Campaign for Renewable Energy Projects”. Thailand’s renewable energy focus has led to a healthy solar market, with solar capacity increasing from less than 2 MW to 2800 MW in less than ten years.8 The solar market is expected to grow further to 6,000 MW by 2036 as the country begins to scale¬up the size of its projects.
China
President Xi Jinping announced plans at COP21 to ensure China’s carbon emissions would peak by 2030. Around the same time, in December 2015, official news agency Xinhua quoted the State Council as saying that it planned a major shutdown and upgrade of coal-fired power plants. In January 2017, the deputy head of the National Energy Administration, Li Yangzhe, announced that China intends to invest Rmb2.5 trillion (US$359.8 billion) in the development of renewable energy resources as part of the 2016¬2020 five-year plan for the energy sector.9 While China remains dependent on coal, the plan envisages the share of non-fossil fuels will rise to more than 15 per cent and the share of natural gas should reach ten per cent by 2020, covering 68 per cent of expected energy consumption growth to 2020. China has a FiT scheme in place for biomass, wind, solar and hydropower with particularly favourable tariffs for solar. China’s Renewable Energy Law also offers various other fiscal incentives, including tax benefits and preferential loans. Following the successful operation of seven pilot schemes, China is also on track to launch its national unified carbon market in 2017, which will give fresh impetus to low-carbon generation in the country. Real progress has been seen in China as a result of these policies, with China taking over Germany’s mantle in 2016 by having the world’s largest solar generating capacity, totalling 43,000 MW. An additional 15,000 MW was installed in 2015. However, now that the solar market is established, the Chinese government is reportedly considering cuts of as much as 20-30 per cent to its current solar tariff which may slow down greenfield investment.
Indonesia
In June 2016 Indonesia released a new Electricity Supply Business Plan with a target to increase the proportion of electricity produced from renewable energy sources from six per cent in 2015 to 28 per cent by 2025. Of the 80.5 GW of planned new generating capacity, Indonesia’s renewables focus will be on 14.5 GW of new hydro (large-scale, micro and pump storage) and 6.1 GW of geothermal. Less than 2 GW (2.4 per cent) is expected to come from solar, wind, biomass, tidal or any other forms of renewable energy. FiTs have been offered for electricity generated by biomass, municipal solid waste and landfill gas across different regions of Indonesia since 2012. A regulatory tariff (which varies depending on project size and geographic location) for solar projects was introduced in July 2016, and a similar tariff mechanism is expected for wind projects in early 2017. The Indonesian renewable energy programme has been slower to take off than other countries such as Thailand. Reports say that investment in new and renewable energy in Indonesia amounted to US$870 million in the first half of 2016, 63.5 per cent of the total target of US$1.37 billion. The biggest portion of that investment, US$560 million, was invested into geothermal energy.10 At the same time, the Energy Supply Business Plan forecasts 34.8 GW of new coal-fired generation capacity, or 43.2 per cent of the total new capacity. Overall energy growth will continue in Indonesia. While supportive of renewable energy investment, the tariff regimes have left the state-owned electricity generation, transmission and distribution monopoly (which currently relies on government subsidies to survive a substantial gap between revenues achievable under regulated tariffs and the cost of generation) with the uncomfortable, if not unlikely, option of going further into the red to support offtake renewable energy projects. A new regulation issued by the Ministry of Energy and Mineral Resources in February 201711 seems aimed at reversing this outcome. Tariffs for the purchase of power from a number of renewable energy sources will now be capped at the lower of: (i) 85-100 per cent of the average cost of generation in the relevant local area where the power plant is located; and (ii) 100 per cent of the average national cost of generation.
On 5 January 2017, Cabinet Secretary Pramono Anung reaffirmed the Indonesian government’s commitment to its ambitious 35,000 MW energy target for 2019 (despite some internal scepticism from the national power utility PLN and the Energy and Mineral Resources Ministry that this target may not be achievable).12
Chart: Not the end for coal in Indonesia: Indonesia’s proposed energy mix in 2025 as set out in Indonesia’s Energy Supply Business Plan 2016–2025 (issued June 2016)
Please click on the chart to enlarge.
Philippines
The Philippines’ National Renewable Energy Program set a target to grow the country’s renewable energy capacity from 26 per cent (including hydropower and geothermal) to 35 per cent of the total generating capacity by 2030, and achieve grid parity for wind power with the additional commissioning 2.3 GW.13 In order to achieve this target, the country adopted a feed-in tariff programme enabling renewable energy developers to sell electricity to the grid at a premium over 20 years as set by the Energy Regulatory Commission. In addition, as with Thailand, renewable energy developers also benefit from a further package of financial incentives including tax benefits under the Renewable Energy Act of 2008. The Act also provides for priority connections to the grid for renewable energy and the right for consumers to source their electricity from renewable energy plants. The Philippines may need to take even more ambitious steps in the next decade, having signed on at COP 22 in 2016 as a climate vulnerable nation to aim for 100 per cent renewable energy between 2030 to 2050. However, messages from President Duterte’s new government have been mixed, and the Philippines is yet to ratify the Paris Agreement.
Japan
In response to the Fukushima nuclear disaster, Japan adopted a renewable energy FiT regime in 2012 offering some of the most favourable tariffs in the world and that generated a significant level of interest in the market. The scheme is widely considered to be successful; Japan saw some US$36.2 billion of investment in renewable energy in 2015, similar to the figure in 2016, and the total share of renewables in Japan’s energy mix increased from 4 per cent to 6 per cent.
However, the FiT for PV solar projects has been slowly wound back, and amendments to the scheme that are now coming into effect this year will see the FiT for large-scale PV solar projects replaced by a reverse auction system in order to address high costs and delays in the actual development of projects after initial certification. While this may drive prices down and dampen some interest, the FiT for other renewable resources including geothermal and offshore wind remains favourable.
Myanmar
Myanmar has set a target for renewable energy to make up nine per cent of its generated electricity by 2030. However, its renewable energy framework remains underdeveloped when compared with other countries in the region. There is no renewable energy law and there are no specific incentives. This is not necessarily surprising given that improving the transmission infrastructure is the key priority for the government. As a result, renewable energy projects have remained on a small, localised scale, with stand-alone PV solar used to bring electricity to remote rural areas and only small wind farms currently in operation.
Vietnam
Vietnam’s renewable energy laws remain patchy and decentralised. There are relatively clear regulations for wind, hydro, biomass and waste to energy, but less clarity for solar, wave and geothermal. However, investment is expected to grow, and in May last year the government unveiled its new Renewable Energy Development Strategy, setting a target of increasing renewable power generation to seven per cent of total generation in 2020 and ten per cent in 2030 (from less than one per cent, excluding hydro, in 2014). The “Revised Master Plan – Development of National Power Sector VII” released by the government of Vietnam in March 2016 aims to meet those renewable energy goals. Nevertheless, it is worth noting that the Revised Master Plan still indicates an increasing reliance on fossil fuel generation, with 53 per cent of power generation in 2030 (equivalent to 55.3 GW) targeted to be coal-fired power (up from 34 per cent, or 13.1 GW in 2016) and another 17 per cent of power generation in 2030 to be gas-fired.
Energy security
A number of countries in Asia are reliant on imported fuel sources to operate their generating facilities. Governments are increasingly keen to consider alternative forms of power generation in order to mitigate the risk of over-reliance on such imports by accelerating the growth of renewable generating capacity. The concern is that over-reliance might create acute issues in the face of any sudden geo-political events or declining domestic fuel sources.
Why this is not the end of the story for coal
Asia is expected to become the largest energy-consuming region in the world. Even with the slowdown in growth in China, Asia remains an electricity-hungry region. Developing countries, in particular, need to add significant levels of capacity in order to deliver electricity to those in their populations who still lack access and to keep pace with the demands of rapid industrialisation and urbanisation. As a result, positive renewables targets and increases in investment in new renewable generation are only half the story. New coal plants continue to be planned in both developed markets, such as Japan and the developing markets of Southeast Asia. Even though China is the world leader in renewable energy in terms of generating capacity, coal remains its main source of power. There are a number of key drivers that keep coal-fired power generation as an essential part of the region’s future energy mix:
Coal is cheap, abundant and efficient: the low price of coal, which seems likely to continue for some time, allows for low electricity prices to be passed onto the voting public. Coal is also abundant and (especially if wider environmental costs are ignored) a very efficient means of producing energy.
Improving technology for coal-fired plants: while many coal-fired plants, particularly in developing countries, operate far below their design efficiencies, supercritical and ultra-supercritical technology can achieve higher efficiencies and significant emission reductions. Although capital costs are higher, these technologies remove some of the barriers to the continued use of coal, especially given that the use of ultra-supercritical technology might help avoid some of the funding restrictions placed on financial institutions, export credit agencies and multilaterals.
Consistency of supply: because renewable energy plants (particularly wind and solar) are generally intermittent output systems, coal is more attractive for base load electricity generation. Storage technology, which mitigates the disadvantages of intermittent power supply by storing excess power and releasing it when there is a production shortage, is developing at a fast rate but further advancement is required to allow cost-effective solutions. Some countries have managed, at least momentarily, to run their entire electricity network exclusively on renewable energy; in May 2016 Portugal covered its entire electricity consumption by solar, wind and hydro power in a 107-hour run and Germany announced that clean energy had powered almost all of its electricity needs on Sunday 15 May 2016.14
However, storage remains expensive and greater investment in this technology is needed. In the meantime, a heavy reliance on coal-fired (together with gas-fired) plants to meet base load requirement is likely to continue.
Grid connections and transmission infrastructure: in a number of jurisdictions in Asia, a lack of transmission infrastructure and grid connections is limiting renewable development. For example, it is estimated that only half of
Thailand’s renewable generation sites are connected to the grid. Putting transmission infrastructure in place can be a costly exercise for renewables where, except perhaps for biomass generation, the site of the generating facility is dictated by nature and not the location of consumer demand.
Scale: while the Middle East has seen large-scale solar PV projects in recent years, much of Asia (excluding China and India) has not yet seen large-scale renewable energy projects to match the generating capacity of coal or gas. Until renewable energy projects reach sufficient scale, fossil fuels are likely to remain the most viable energy source to meet the lion’s share of the demands of industrialisation.
Conclusion
While Asia is, consistently with global trends, shifting towards renewable energy and policies to increase renewable energy’s share of the energy mix, Asia is likely to continue to rely substantially on coal-fired plants for the near future.
The reason for this twin-track approach is primarily the need to utilise multiple generating sources in order to meet the vast energy needs of a region that includes a number of developing and industrialising countries, coupled with an abundance of efficient and cheap coal.
Gas has also attracted a lot of interest in Asia in recent years and should not be forgotten in the debate over finding the optimal fuel-mix for countries in the region. Gas prices are currently low and this is incentivising various countries to utilise more gas for power generation. Transportation of gas can be more challenging than coal, especially where there needs to be transport across the sea, but there is increasing development of medium to small-scale LNG transportation and regasification infrastructure in various parts of Asia. This infrastructure can be expensive, though, and the benefits in terms of emissions reductions when compared with coal may be marginal.
Overall, we expect coal to remain an important part of Asia’s energy future in the region, even while renewable energy capacity continues to grow as a proportion of the whole. However, as the cost of renewable energy drops and storage technology improves, and global anti-coal sentiment and political pressure increases, the shift to renewable generating capacity will continue to ramp up in the longer term.
Notes
1. World Bank finds cash moving to renewables”, 14 June 2016.
2. “Renewable Energy Country Attractiveness Index 2016”, EY, 23 February 2016
3. “Projected Costs of Generating Electricity”, International Energy Agency and Nuclear Energy Agency, 2015 Edition.
4. https://www.pv-magazine.com/2016/08/17/renewables-sweep-chiles-electricity-market-and-set-historic-low-prices_100025801/
5. https://www.worldenergy.org/wp-content/uploads/2016/09/Variable-Renewables-Integration-in-Electricity-Systems-2016-How-to-get-it-right-_-Full-Report-1.pdf
6. http://www.oecd.org/newsroom/statement-from-participants-to-the-arrangement-on-officially-supported-export-credits.htm
7. “Coal or no coal: A balancing act for MDBs”, www.devex.com, 18 January 2016.
8. “Renewable energy and investment in ASEAN”, ASEAN Briefing, Dezan Shira & Associates, 4 November 2015.
9. “China to invest billions into renewable energy by 2020”, IJ Global, 6 January 2017.
10. http://www.thejakartapost.com/news/2016/08/18/rp-14-quadrillion-investment-needed-clean-electricity.html
11. Ministerial Decree of the Minister of Energy and Mineral Resources number 12/2017.
12. “Government maintains 35,000 megawatt electricity target”, Antara News, 5 January 2017.
13. https://www.doe.gov.ph/national-renewable-energy-program
14. http://www.bloomberg.com/news/articles/2016-05-16/germany-just-got-almost-all-of-its-power-from-renewable-energy
For further information, please contact:
Andrew Digges, Partner, Ashurst
andrew.digges@ashurst.com
