The rising demand for clean energy solutions backed by supportive government policies is driving the growth of renewable energy in Southeast Asia and opening opportunities for long-term investors keen on the energy transition theme in emerging markets, said experts.
Driven also by the need for energy security in view of the Ukraine war’s impact on oil and gas supply chains, the shift towards alternative clean energy sources is seen most significantly in Vietnam, Indonesia, and the Philippines, they said.
“We believe we have reached an inflection point where the demand for sustainable energy solutions and supportive government policies are coming together to meet growing needs across Asia generally,” Michael De Guzman, managing director of infrastructure at KKR, told AsianInvestor.
He singled out Vietnam — which has rolled out a master plan with regulations and incentives aimed at achieving a target of 23% share of renewable energy in the power generation mix by 2030 — for its significant growth potential.
Incentives such as preferential tax rate, land rental exemption, and attractive feed-in tariffs for the developers have attracted some investors to take a direct stake in specific renewable projects while others prefer indirect exposure through diversified infrastructure funds.
In April, KKR — which has deployed about $4 billion globally into renewable assets since 2011 — launched Aster Renewable Energy, a new platform to develop, build, and operate solar, wind, and energy storage projects in Taiwan and Vietnam, with a view to expanding to other Asian markets.
Last October, KKR invested $171 million in Philippine-based First Gen — a major clean energy producer — to up its stake in the company to about 20% as part of its renewables-focused infrastructure strategy for Asia.
The Philippines has embarked on an aggressive energy transition plan by setting a target of 35% share of renewable energy — such as biomass, solar, wind, geothermal, and ocean energy — in the power generation mix by 2030, and aims to increase it to 50% by 2040.
Even local shipping and casino magnate Enrique Razon has entered the fray with his company Prime Infrastructure Holdings unveiling its plan last week to build one of the world’s largest solar farms in the Philippines. The project, which aims to generate between 2,500 MW to 3,500 MW of electricity, is estimated to cost at least $3 billion according to Forbes, quoting industry sources.
Meanwhile, Indonesia has set its sights on achieving a renewable energy mix of 23% by 2025 and 31% by 2050 through investments in geothermal, hydropower, tidal, and solar energy projects. The state sovereign fund Indonesia Investment Authority (INA) has partnered up with state-owned energy company Pertamina to study possible funding for pipeline projects numbering over 300 in the upstream, downstream, and renewable energy sector.
The ongoing energy transitions in these highly populated, rapidly growing Asean economies are expected to present massive opportunities for institutional investors, said De Guzman.
“We are seeing attractive supply-demand dynamics within infrastructure, which continues to mature as an asset class,” he said, adding that the size and volume of investment opportunities have increased in both the private and public sectors.
STAYING ON COURSE
Despite the current disruptions to global fuel supply, Southeast Asian nations — mostly oil importers — have not strayed from the course to pursue sustainable energy sources, Ulrik Fugmann, co-head, environmental strategies group at BNP Paribas Asset Management, told AsianInvestor.
“While Southeast Asia has traditionally been fossil-fuel dependent, we are seeing a number of big power-slash-oil and gas companies starting to shift into renewables and seeking ways to lower their carbon footprint,” he said, adding that the declining cost of solar and wind energy was another driver behind the rapid adoption of renewables in the region.
While most of the funding for renewable projects in the region up till now has been made possible through foreign direct investments (FDI) and bank financing, institutional investors can expect more opportunities to open up in the public market as the main developers and owners spin off their renewable energy divisions.
“As developers and financial investors look to build up and recapitalise portfolios of Vietnamese renewable assets, we anticipate increasing opportunities for institutional investors to get more direct exposure to the market,” said Jonathan Bowden, partner in the M&A and PE practice and head of Vietnam country practice group at White & Case.
RISKS AND RETURNS
As in all real asset investing, investors in renewable projects must be prepared to conduct stringent due diligence on land title deeds, manage the bureaucracy in obtaining construction permits, and familiarise themselves with currency conversion and repatriation laws.
“Real asset investing in renewables could also be challenged as interest rates are going up and project economics and spreads are getting tighter with very little margin for error,” said BNP’s Ulrik, adding that there are other risks related to materials, technology, power prices, and local subsidies that can be mitigated through hedging.
Despite the risks, he believed that the returns from real asset investing in comparable projects in emerging markets are typically better than in developed markets.