Interview with Milo Sjardin, Head of Analysis – Asia, Bloomberg New Energy Finance
What are the main/current challenges in the industry?
Challenges differ by region, but there are a few high level ones that are relevant globally. First, policy uncertainty remains a fundamental challenge that many energy investors and developers are faced with. Political decisions regarding renewable energy generally take a long time and once taken they are subject to frequent changes. This is particularly an issue that is holding back the development of emerging markets such as those in Southeast Asia.
Second, the manufacturing oversupply in the clean energy industry is continuing and will only ease somewhat during the course of 2013. The situation does seem to be on the mend as inventories are declining and prices are slowly stabilizing. However, manufacturer margins remain depressed and there are therefore still doubts regarding the sustainability of some companies. Although this may be a key challenge for manufacturers, it is positive for project developers as they are able to get cheaper equipment and can therefore develop more economically attractive projects.
Do you see any specific challenges in Asia?
From an Asian perspective, one important issue facing the industry right now is finding out which business model is best to accelerate the deployment of clean energy across the region.
The rapid decline in equipment costs (solar modules are now sold at $0.82/W with discount prices of $0.55/W being mentioned) has opened up the opportunity for more sophisticated business models that do not necessarily have to rely on government incentives. There will be a lot of trial and error over the next few years to find the best business and financing models, but eventually the most successful approaches will emerge and it will accelerate clean energy deployment across the region.
Another important issue is awareness. Many companies and governments across the region are not yet fully aware of the significant cost reductions and technology advances that have taken place in the industry. They still believe clean energy is expensive, thereby ignoring the fact that there are good investments for new renewable capacity especially with government incentives in place. The technologies are also still considered ‘high risk’ as it is argued that there has been little development and therefore not enough reliable long term performance data to analyze.
Although this may be true in specific regions, wind and solar have consistently been deployed for over ten years and currently have a total globally installed base of 289 GW and 102 GW respectively. In addition, the cash flows of renewable projects – if built and managed well – could have better predictability than for example gas capacity, due to the high volatility of natural gas prices.
One other challenge prevalent across Asia is the monopolistic nature of vertically integrated utilities that are also often state"owned. Generally these institutions are more familiar with building and operating large conventional power generation plants and view renewables as too small, expensive, variable and potentially threatening their business model. As a result, governments have a major challenge convincing them of the merits of a dedicated renewable policy and get their full participation. Allowing smaller, dynamic, new entrants into a market is generally a faster way to get an industry to grow quickly; this can be achieved by debundling electricity markets or at the very least ensuring equal access to the power grid for smaller generators.
In the end it really comes down to policymakers, they can make or break the market with their decisions. On a positive note, the cost declines that have taken place mean that it will be less about providing renewables with incentives and more about creating the right boundary conditions to let the private sector grow the market on the basis of economic viability.
What’s your vision for the industry looking forward?
The transformation of the energy sector is already well underway and will continue because of the increased economic competitiveness of clean energy sources. The challenges mentioned above may delay the impact that renewable energy will have, but policy incentives will gradually become less necessary and awareness will increase with more projects on the ground.
The biggest game changer will come from solar PV, which can be deployed rapidly and has started to become competitive with retail electricity prices in many areas in the world. In addition, moving the power sector from the large centralized power plant model to distributed electricity generation – most of which will be solar PV – will reduce the requirement for large transmission grid upgrades, though it will inevitably lead to other challenges. This transition will create significant opportunities for companies and investors across the value chain.
The industry was valued at $269 billion last year, down from $302 billion in 2011. This year it’s likely to bounce back to close to 2011 values, with Asia continuing to grow and investments in the U.S. and Europe recovering somewhat from last year. This is already close to the same investments for conventional coal, gas and oil generation and will in the near future likely exceed those. Asia was the largest region for clean energy investments in 2012 and will maintain the lead for the foreseeable future.
Where do you think Asia is heading in particular?
Asia consists largely of emerging markets with strong increases in electricity demand and therefore a high requirement for whatever electricity capacity it can put in place quickly. At the same time there is high demand for transmission and distribution upgrades. This puts renewable capacity in a favorable light as it can be deployed quickly, in small increments and close to the point of electricity demand. The main barrier has traditionally been cost. However, with the declines in equipment prices for both solar and wind, renewables are now already or close to competitiveness with conventional power generation. Our global average figures for the levelized cost of electricity (LCOE) are $68/MWh for natural gas, $80/MWh for coal, $81/MWh for onshore wind, and $123"135/MWh for solar PV. Hence, wind can already compete with coal for power production and solar has the advantage that it can also compete with retail electricity prices so it does not need to get as cheap as conventional fuels to be viable. In addition, once built renewables do not experience the volatility in input costs that coal and gas are faced with.
On the manufacturing side, Asia will remain by far the most important region for clean energy. In 2012, Asia-Pacific was responsible for around 60"70% of wind manufacturing capacity, and 80"90% of PV cell and module capacity. Trade disputes around local content rules and government support will continue, but are unlikely to change the dynamics significantly. Local content rules are challenging to uphold before the WTO as evidenced by the case against Ontario and additional tariffs on solar imports such as those in the U.S. have mainly led to alternative routes of supply.
Almost 80% of power generation investments in Europe up to 2030 will go to renewables. Asia may not have reached that stage yet, but renewables are becoming increasingly important as part of the mainstream power sector and this will have major implications for utility companies, grid operators, regulators as well as entrepreneurs who will market new products and services.