Renewable energy infrastructure poses one of the largest investments and development opportunities in Asia in the next 10 years. Solar and wind power have already proved their effectiveness in the region while also future-proofing the energy supply in Asia. In coming years, there will be significant opportunities in both developing and developed economies for green energy, says Macquarie’s Ivan Varughese, Head of Asia-Pacific, Green Investment Group.
Asia’s renewables markets
“When it comes to renewables, Asia breaks into three groups,” Varughese explains. “Firstly, China and India with their massive populations and equally large renewables’ targets account for the largest share of forecasted new capacity across the region,” he says.
“The second group is developed economies such as Japan, Korea and Taiwan that are transitioning established electricity networks from fossil fuels to renewables. What this group has in common – which has attracted the attention of international developers including Macquarie – are supportive policy regimes, clear regulatory frameworks and a stable investment environment.”
The third group consists of “high growth South-East Asian economies that will turn to renewables to meet the growing demand for electricity. This group is where significant foreign capital would be needed.”
Countries such as Indonesia, Malaysia and the Philippines all fit into this category, with Vietnam potentially offering the greatest immediate opportunities.
The size of Asia’s opportunity
The OECD forecasts Vietnam’s economy will grow 6.5 per cent over the next five years. Growing industrial capacity coupled with a growing consumer class demands electricity – and lots of it. According to Electricity Vietnam, the country must triple its installed capacity by 2030 from around 50GW to 130GW2 . The 80GW gap that will need to be developed over the next decade is roughly twice the size of Australia’s entire electricity generation capacity and will cost around $US150 billion to build.
Vietnam has made a considerable commitment to renewable energy, planning for 15 – 20 per cent of new electricity generation to be renewable by 2030. This plan would correspond to an additional 35GW of wind, solar and storage to be installed between 2020 and 20303.
“To date, energy supply in Vietnam has been dominated by thermal sources, such as domestic coal, gas and hydro but expanding the country’s thermal energy supply will be challenging to say the least,” says Neil Arora, Head of Macquarie’s Infrastructure & Energy Group in Asia.
“To address the growing energy demand, renewables would help Vietnam to achieve sustainable energy development. The expected large influx of intermittent renewables in a power grid will also create opportunity for flexible and dispatchable resources like energy storage.”
Transitioning to a low-carbon future
In the developed East Asian economies, the size of the potential is similarly vast. To date, Macquarie is currently developing c. 9GW of renewable energy capacity across Asia. Most of the developments come from developed markets such as Taiwan, Korea and Japan, partnering with world-class developers such as JERA, Total and EnBW.
In South Korea, the South Korean Ministry of Trade, Industry and Energy recently announced it would target 30-35 per cent of its entire energy network to be renewables-powered by 2040 – up from just eight per cent today4. Given that South Korea’s national energy grid has a total generation capacity of around 120GW, even a conservative estimate suggests fulfilling the government’s aim requires new renewables generation of around 30GW over the next two decades. The government also says it will target 12GW of offshore wind by 2030 under its ambitious RE3020 plan.
The Green Investment Group recently signed agreements with global energy company Total to develop 2.3GW of offshore wind projects in Korea, consisting of five projects over three sites. These floating wind farms aim to harness wind energy off the coast of Korea and in deeper water.
Arora believes that much of the infrastructure that will be developed to deliver Korea’s infrastructure will be similarly innovative.
“We’re likely to see hydrogen and fuel cells being used to support dispatchable load and generation across the network,” he explains. “There is also likely to be significant greening of the supply chain as companies adopt initiatives such as RE100 and commit to 100 per cent renewable power. Ultimately, corporate renewable power purchase agreements (PPAs) will take hold, where electricity buyers commit to purchasing their energy in long-term contracts from renewable providers rather than those using fossil fuels.”
The challenges ahead
Despite being optimistic about the renewable future in Asia’s emerging markets, Varughese points out that there are a couple of potential challenges investors must also consider.
First, many of the forecasts on the region’s economic growth were made pre-COVID-19. Even though many Asian economies have been hit hard by the pandemic, including those who have so far been effective in controlling the spread of the virus, rely heavily on exporting to the rest of the world. If the global economy does not recover, the outlook for these economies will not be quite as positive.
A second risk to consider is the current legal and regulatory framework within some Asian emerging economies. Foreign investors need to be confident that there is a stable policy and investment framework within these economics to support projects and secure financing.
Finally, Varughese says that those economies with stable institutions and favourable policies, will still face similar resilience issues that we have seen in Australia. To enable the transition to a high-renewable generation future, government policies and grid operators will need to include flexible assets, such as energy storage, in their integrated resource planning.
“Infrastructure investment, including renewables infrastructure, should be a conservative investment,” Varughese concludes. “Asia’s emerging markets present big opportunities, and it is only a matter of time before we see the level of renewable investment activity that we have observed in developed markets like Japan, Korea and Taiwan spread to some of their South East Asian neighbours.”
The article has been authored by Neil Arora, Head of Infrastructure & Energy Group, Macquarie Capital Asia and Ivan Varughese, Head of Asia-Pacific, Green Investment Group. It has been sourced from Macquarie and can be accessed by clicking here