Andreas Balzer, Business Times 13 Nov 07;
Asian governments need to do more to offer favourable environment for foreign investors
WITH oil prices about to hit three figures per barrel, governments and corporations around the world are paying close attention to alternative energy sources to tackle the looming global energy crisis.
Renewable energy, which utilises natural resources such as sunlight, wind and water, is finally being considered as a viable option - not just from an environmental perspective, but from one of sound economics.
For example, apart from its sustainable nature, one of the other attractions of the renewable energy sector lies in its potential to create many jobs and spur economic development because it harnesses under-utilised domestic resources.
The market size for the three fastest-growing renewable technologies - wind, solar and fuel cells - is predicted to grow to US$92 billion in 2013 (compared to US$12.9 billion worldwide in 2003).
The investment opportunity is undeniable, and there is an unprecedented interest in the sector as it has all the makings of a boom industry.
A recent report by research group New Energy Finance has found that on a global basis, demand outstrips supply for clean energy deals.
Renewable energy investments rose considerably in all regions in 2006, although the 26 per cent growth rate in the Asia & Oceania region noticeably lagged behind the United States and EMEA (Europe, the Middle East and Africa), which saw rises of 83 per cent and 67 per cent respectively.
Across Asia, governments have ramped up their investments in renewable energy. China alone plans to invest US$265 billion in renewable energy by 2020 to wean itself off coal, as it wrestles with the legacy of decades of promoting growth at any cost. It now aims to produce approximately 10 per cent of its power using renewable sources by 2010.
Other developed markets such as Japan have installed more than 100,000 residential solar photovoltaic (PV) systems by investing more than US$800 million, making the country the current leader in global solar PV production and installations.
The South Korean government has also pledged more than US$500 million through 2010 for the development of fuel cells.
This public sector spending has laid the foundation for private sector companies to participate in the industry. For example, my firm Conergy,
Germany's largest solar-power company, and its subsidiary EPURON, which specialises in financing and developing renewable energy projects in the US and EMEA, has since established its Asia-Pacific headquarters in Singapore.
Despite an increase in government initiatives, investors are still shying away from this region.
A major roadblock, like elsewhere in the world, is the monopoly that utility boards have over electricity production and distribution. They have a disincentive to engage with the private sector to find innovative solutions in the renewable energy sector, particularly in photovoltaics, because of technological lock-in.
This would result in them having to revamp electricity markets which are designed for centralised power plants.
Another big challenge facing financial institutions and investors in Asia is their lack of familiarity with renewable energy. As such, they tend to overestimate the risk. Higher amounts of financing are required for renewable energy investments for the same capacity of fossil fuel investments.
Depending on the circumstances, capital markets may then demand a premium in lending rates because more capital is being risked up front than in conventional energy projects.
In addition, renewable energy currently offers a weaker return on investment compared to fossil fuels, which are highly subsidised.
The World Bank and International Energy Agency put global annual subsidies for fossil fuels in the range of US$100 billion to US$200 billion (the world spends around US$1 trillion annually on purchase of fossil fuels). Although subsidies are also being granted to the renewable energy sector, they are no way close to those for fossil fuels.
While all of the above are challenges faced in other regions as well, one of the key issues in Asia is the skills and competence level of labour working on renewable energy projects.
Investors have been discouraged by the lack of adequate scientific, technical, and manufacturing skills required for renewable energy production coupled with a lack of reliable installation, maintenance and inspection services. The project development skill-set has unfortunately lapsed into a vicious cycle.
A lack of mature projects translates into lower investor confidence, but without investment, it is hard to improve on skills, so the uncertainty in projects continues to grow.
Finally, the political volatility faced by some countries in the region might have also an impact on the investors' risk management portfolio.
In the light of these issues, a lot of the onus falls on governments to provide the framework needed to make renewable energy a rational economic choice. The pressure is definitely on Asia to grow responsibly. Governments in the region need to do more to provide a favourable environment for foreign investors and international financial institutions.
A strong legal framework, independent from power producers could mitigate many of the above issues, especially the monopoly enjoyed by utility boards. The financial sector can also help by facilitating access to credit.
The fact that governments are adopting aggressive targets to increase their use of renewable energy has spurred large-scale projects across the region.
For example, EPURON recently announced plans to build a US$1.8 billion wind project in New South Wales in response to the Australian government's call for 15 per cent of the country's energy to be derived from low-polluting sources by 2020.
The development, the largest wind project in Australia, will comprise as many as 500 turbines with a capacity of 1,000 megawatts, producing enough electricity for 400,000 homes.
A confluence of factors is compelling nations and companies to seek out renewable energy solutions: the never-ending voracious appetite for energy, rising costs of fossil fuels, increasing awareness of environmental consequences and growing international security threats posed by dependence upon energy supplies from politically volatile regions.
Regardless of the challenges, the key point remains that the renewable energy sector has all the makings of a boom industry. The increasing influx of private and corporate capital demonstrates how rapidly renewable energy has moved from niche to mainstream investment option.
Although renewable energy is not going to supplant fossil fuels in the near future, it will soon become an important factor in the energy production portfolio for countries in Asia and investors need to be proactive so that the funds are channelled in the right stream. Asia is certainly poised at the brink of widespread growth in renewable energy.
The writer is the managing director of EPURON, a company of the Conergy Group
