On financial and regulatory support for renewable energy projects in Asia
What obstacles must be overcome for Asia to meet its long-term energy needs through renewables?
ALLARD NOOY: In Asia, 45% of all projects – and even more in the infrastructure space and, more importantly to us, in the renewable energy space – are either marginally bankable or not bankable at all. This is due, in part, to the lengthy process of securing required permits and licences. Land acquisition is a challenging process across Asia. Another issue is grid connectivity. The amount of effort required for all the different aspects of the process means it can take years to achieve a bankable solution.
Nevertheless, regulatory regimes in a number of Asian countries are improving. For instance, there are clearer regulations and legislation surrounding private sector investment in what would previously have been referred to as a public infrastructure asset, with fewer restrictions on private sector ownership.
How can low-income economies in the region balance the need to attract private investment in energy with the desire to provide their citizens with affordable tariffs?
NOOY: In the energy sector in a lot of countries, the ability-to-pay principle does not exist; tariffs are co-subsidised. Typically, there exists an agreement between a ring-fenced power plant and either a ministry or a subset of state-owned enterprises, and the power plant then sells to distributors. This is essentially the case across the whole region, although a few countries have made great improvements on tariff settings.
For example, in Myanmar an owner of a seven-room villa on the outskirts of Yangon pays the same tariff for their energy consumption as a resident of a basic property in a low-income area. This is an issue that governments need to be aware of; in my view, it is not fair practice. I would recommend implementing a user-pays principle based on an increasing block tariff. There are a number of countries, including China, which have implemented such tariff structures and, as a result, made energy more affordable.
One potential problem with such measures is that either the tariff for industrial companies or the subsidy must increase. To resolve this, some countries have introduced a wholesale tariff combined with a wheeling charge for transmission and distribution. This can prevent an increase in subsidy requirements and tariffs can be re-evaluated regularly.
What can be done at the policy level to channel more domestic savings towards productive, long-term infrastructure investment?
NOOY: There is still a tendency in a number of countries in Asia to either store savings in cash or at home, or to invest in gold. This is partly due to the collapse of local banks as a result of non-performing loans or mergers with other banks, which have happened frequently enough to cause mistrust in the banking system. Government guarantees could support the local banking system, which might promote a return to saving money in bank accounts and thus strengthen banks’ balance sheets, providing sufficient credit to lend to infrastructure projects.
The Coc San hydropower plant in Vietnam, from which we recently exited, is one example of this. The primary reason why it became a distressed asset in 2012 was that, in conjunction with the banking crisis in Vietnam, the original developer had not secured all the funding. Local lenders did not want to extend credit to the project. As part of the resolution, we conducted an environmental impact assessment in accordance with the standards of the International Finance Corporation, and retendered the engineering, procurement and construction contract in line with international compliance standards. We then went to the debt market and achieved 50% of the total funding, using relatively long-term, limited recourse project finance. We then refinanced once the project was further de-risked and ready to reach commercial operation.
Focusing on capital market instruments and the sustainability ethos, what is the potential of green bonds in addressing the financing gap for infrastructure in Asia?
NOOY: There are two main reasons why green bonds could address the financing gap. First, although green financing is not new, it receives considerable attention from commercial lenders and legislatures. This will further encourage the financing of sustainable energy projects. The second reason is that bonds in general are becoming a more viable financial instrument, particularly to refinance existing projects.
For example, GuarantCo secured two unique deals involving local currency bonds. One was raised in Philippine pesos to refinance some existing loans, while the other was raised in Indian rupees. Both bond issues were oversubscribed by note-holders – particularly those from Europe – who essentially want to show that they are investing in green projects in emerging and frontier markets in Asia.