By Iain Wilson, Bloomberg New Energy Finance editor. This article first appeared on the Bloomberg Terminal.
Corporate buying of renewables is helping Southeast Asia transition to a new energy future — and it’s a trend poised to gain momentum.
“This is maybe the hottest market at the moment,” Edgare Kerkwijk, managing director of the SUSI Asia Energy Transition Fund, said in an interview. “Wind, solar and hydro are very lumpy in this part of the world (in terms of project availability). Corporate energy is a very steady flow of projects.”
To underscore the corporate market’s potential in Asia, Redmond-based Microsoft Corp. on March 1, 2018, signed its first clean energy deal in the region, agreeing to buy solar power from the Sunseap Group in Singapore.
Microsoft will buy all the electricity generated from a 60-megawatt solar project that will span hundreds of rooftops.
Expect more such deals. According to the latest research from Bloomberg New Energy Finance, companies currently committed to the RE100 initiative will need to procure an estimated 172 terawatt-hours of additional clean energy generation by 2030.
“Some of the countries in this region have been very slow in adapting to more renewables and the corporates aren’t waiting,” Kerkwijk said “They’re doing it themselves.”
The SUSI Asia Energy Transition Fund is a $250 million infrastructure fund announced in July 2017 by SUSI Partners AG, a Swiss-based investment company focused on renewable energy, and the South Pole Group. The fund is SUSI’s first focused on Southeast Asia.Kerkwijk spoke to BNEF about the fund’s design, investment opportunities, and the drivers behind thespread of renewables in the region.
Q: Can you update on the fund’s progress? How big is it at the moment?
A: Since the announcement, we have been working hard on expanding the pipeline and developing a number of concrete investment opportunities. As we have the ability to use funding from SUSI’s existing funds, we expect to announce a first transaction in the coming 1-2 months. With regards to fundraising, we expect a first close in the later part of the second quarter. A number of investors have started due diligence and there is good interest.After the OECD-focused SUSI Energy Storage Fund, this is the second fund for SUSI Partners outside Europe. Our formal fundraising started earlier this year. We expect first closing to be around $100 million at a minimum and then a final closing within 12 months of that. We believe that South Asia is the last frontier in renewables. It’s the last battleground against coal. A lot needs to be done for these governments to start acting and doing something on renewables.
Q: Who invests in the fund?
A: Among the interested investors for the fund are several European and Asian DFIs (development finance institutions), institutional investors from Europe and Australia and a number of family offices.
It’s a receptive audience and that’s one of the reasons we’re targeting Southeast Asia. It’s still lagging behind the rest of the world and even other emerging markets with the penetration of renewables. There’s still a lot of potential out there that needs to be exploited and more money needs to be put in place.
Q: What kind of returns are you hoping to achieve?
A: We are looking to achieve lower double digit gross returns (in local currency). At this moment, the traditional renewables show the best returns. Further, we expect an enormous decline in capex for storage. The first project we do might not give us a very high return but it will set us in the market. The same applies to energy efficiency.
That’s a market that’s also set to grow.
Q: The initial design of the fund was a life of 10 years targeting a project portfolio of 10-15 renewable energy projects and 10-15 energy efficiency projects. Is this still the design?
A: This is still the design of the portfolio. In addition to traditional renewables and energy efficiency, we also focus on energy storage which is a globally fast-growing sector with high growth potential in the APAC region. We have a lot of experience in energy storage and efficiency as SUSI Partners established the first funds in this space in Europe, back in 2012 and 2016, respectively.
In terms of storage, we see smaller-scale projects of a few hundred kilowatts here. That’s not interesting for us as a single project but as a portfolio of a single client, that could be interesting. Backup power in South Asia is very much an issue. A lot of the backup power is diesel generation. With the sustainability drive, especially of the MNCs — they’re looking at whether they can replace some of those diesel generation sets with batteries.
Q: Would you consider increasing the fund’s size?
A: Not for the moment. The $250 million is all equity and we are allowed to have up to 75 percent leverage for our projects. This will bring the total investment size to over $500 million which is a sufficient target for us.
Q: What are some of the target technologies for the fund? Where do you intend to invest? Do you favor one technology over another?
A: The main technologies that we focus on are the so-called traditional renewable energy technologies: wind, solar (ground mount and rooftop) and hydro. We see most deal flow in these three sectors. We are less keen on biomass and waste-to-energy projects due to problems with feedstock. Governments are very keen in South Asia to get more biomass to the grid but for the developer and for the investor it’s a very difficult business case.
With regards to storage and efficiency, we have to drive the initiation of those projects. In this part of the world, the governments are very focused on adding more power to the grids because demand is growing rapidly but they’re also starting to look at how the energy intensity of their industries can be reduced. In places like Singapore or other urban areas where buildings are equipped with older chillers, we see the potential to replace that equipment. Energy efficiency projects like these will generate return for the fund through the energy savings they enable.
Q: What geographies are most interesting to you in Southeast Asia?
A: We have divided the region into two categories. Among the so-called Tier 1 countries for our fund are Indonesia, Philippines, Thailand and Vietnam, while Tier 2 countries include Laos, Myanmar, Cambodia and Malaysia. We have a small allocation for countries outside the focus region (i.e. Bangladesh and Sri Lanka).
Q: What are some of the challenges when investing in renewable energy projects and energy efficiency projects in Southeast Asia?
A: One of the key challenges is the regulatory regime. In many of our focus countries, the penetration of renewables is still very low and governments continue to favor traditional power such as coal and gas. However, we expect a significant shift in policy making and the international community will demand these countries to become ‘clean and green’. The AETF has been established to play a part in this regional energy transition from fossil fuels to renewables. Other challenges are the relative weak grids in this part of the world, which governments are keen on upgrading for better resilience.
Q: Can you mention any specific projects in Southeast Asia you are invested in or are interested in investing in?
A: The SAETF is not yet invested in a project. A key focus for investments is the corporate energy market and we are discussing potential investments in a number of companies active in this market in the region. This would include portfolios of solar rooftop projects.
Some of the corporates in South Asia are really driving the sustainability agenda. Some of the countries in this region have been very slow in adapting to more renewables and the corporates aren’t waiting. They’re doing it themselves. In many countries, except the Philippines, you can’t connect to the grid so many of the corporate energy projects here are still relatively small.
This is maybe the hottest market at the moment. Wind, solar and hydro are very lumpy in this part of the world (in terms of project flow). Corporate energy is a very steady flow of projects. You’re talking about gigawatts. If you assign me to get 100 megawatts of renewables in this part of the world in a short period of time, you go for rooftops.
Q: Do you anticipate finding suitable projects becoming more difficult as more countries withdraw policy support such as feed-in tariffs in favor of auctions? What happens when projects are built without subsidy?
A: We have seen a dramatic shift in the past twelve months as in many countries renewable technologies are now at grid parity. In most regional countries, wind, solar and hydro can compete with other forms of power generation. We expect this to have a positive impact as energy regulators are becoming less adverse toward renewables as they see that we can compete with conventional power sources.
The first renewable energy projects have been initiated because of carbon credits. We then saw a movement to subsidies and feed-in tariffs. We’re now talking about grid parity because wind and solar and hydro are very cost competitive. It’s the third revolution in renewables in South Asia.
Q: Any plans to invest in Japan?
A: The AETF is focused on Southeast Asia. However, SUSI Partners is looking to establish a global renewable energy fund in 2018 which may include Japan as a focus.