Walking on sunshine: Are Asian countries being trapped by lower solar energy costs?

If Singapore’s solar power dreams don’t push through, its banks have some explaining to do.

Singapore is aggressively ramping up its solar energy capacity to 350MWp by 2020, but inadequate access to funding for solar generation companies might prove to be a significant roadblock for the city-state's renewable energy agenda. “The main challenge for solar financing in Singapore is the familiarity of some financial institutions to the solar PV renewable business model and that unfamiliarity tends to heighten the risk aversion and lessen competitive financing terms,” says Camillus Yang, vice president,corporate development and finance at Sunseap, a local clean energy provider.

Jacqueline Tao, energy analyst at the Energy Studies Institute (ESI), noted that solar PV SMEs typically face higher financing costs compared to conventional power generation players. For instance, larger energy players have a debt-to-equity ratio of50/50, much lower compared with 70/30 for solar PV SMEs. “Meanwhile, the cost of equity for traditional players is just 6%, while that for SMEs ranges from 9% to 15%. Banks also charge an interest rate of 4% for conventional players with a credit rating of Baa, but SMEs need to grapple with interest rates as high as 5.6%. Larger firms can also tap bond markets, which are offlimits to solar PV SMEs due to size restrictions,” she notes.

Matthew Peloso, CEO of solar energy generation company Sun Electric, says that they usually have to come equipped with a detailed explanation about their unique business model whenever they approach bankers for loans. “Our model requires explanation and understanding on the part of the financial institutions. In addition, there is a relatively low supply of capital toward new innovations which are riskier but offer higher returns,” he explained. Sun Electric's business model involves connecting rooftop owners with clean energy customers. Peloso added that the potentially higher cost for solar firms is partly balanced by good support from Singapore's various
public and private grants, as well as interest in supporting the development of technology, which can bridge a part of the initial funding gap. “Another point that can be made is in regard the asset size and cost to the financial institutions. Due to their fixed costs, institutions wish to fund large projects. Given that solar is new and growing, investments are in the low range of capital financings. This is a temporary situation,” he said.

Despite existing difficulties, Peloso noted that the industry is making progress when it comes to improving access to funding for solar SMEs. “A local bank has been working hard to provide us with a pretty cost effective package. However, as we are new it has taken time to analyse this. I cannot disclose full details but the facility would be pretty close to the cost of a conventional utility. We are making progress,” he said. Meanwhile, Sunseap's Yang shared that solar PV SMEs should explore new ways of clinching funding in order to lower costs. “For financing of solar in Singapore and the region, Sunseap is working towards a more sustainable financial ecosystem of asset-backed securitisation for completed projects or long term portfolio project financing coupled with the concept of a revolving credit facility for inconstruction projects. This ecosystem assists in lowering LCOE, allows capital recycling, and drives scalability for greater solar PV adoption into the region. We look forward to launching this soon in the second half of 2016,” he said.

Vietnam eyeing opportunity

Several countries across the Asia Pacific are also taking steps to improve solar energy capabilities. For instance, Vietnam is a nation with high solar power potential, especially in the central and southern parts of the country. The average solar energy intensity is 5 kWh/m2. The average sunshine at 150kcal/m2 in Vietnam is between 2,000 to 5,000 hours, leading to a theoretical potential of 43.9 billion TOE. “This is an advantage for Vietnam in its effort to develop a solar power industry, in the context of the increasing demand for electricity,” says Dr. Do Huu Hao, chairman, Vietnam Energy and Energy Efficiency Association.

Among noteworthy solar projects there include the 500kWp Rooftop Solar by ECC HCM in Ho Chi Minh City, the 2MWp Solar power plant by ECC HCM in Phu Yen Province, the 1MWp Solar Power by Thanh Thanh Cong Group also in Ho Chi Minh City, and the 300 MWp Solar Power by Thanh Thanh Cong Group in Binh Thuan Province. “The world's demand for energy is growing and set to increase by 56% between 2010 and 2040,” says Dr. Hao. “In this context, Vietnam also needs to find a new energy resource, and solar power is one of the best alternative energy that Vietnam has.”

According to the Decision NO. 2068/QD-TTg on the development strategy of Vietnam's renewable energy by 2030 and vision to 2050, Vietnam's solar power production will increase by 1.4 billion kWh in 2020; approximately 35.4 billion kWh in 2030 and 210 billion kWh in 2050. “This is a good chance for all local and international enterprises to invest in Vietnam now,” notes Dr. Hao.

Rapid development in China

China, too, is boosting its solar power capabilities. With newly installed 14 GW solar panels in the country, China easily became the largest solar panel market in 2015 as it grabbed a whopping 25% share of the world's total 55 GW additional solar panel installations. “This rapid expansion of investment into solar energy can be attributed to the generous incentive programs that the country offers, as well as the government's five-year plan to hit 100 gigawatt installations by 2020,” says Jake Liddle of Dezan Shira & Associates. Other studies, such as one conducted by Xinhua, forecast an even brighter outlook for the industry, with figures as large as 150 gigawatts by 2020 predicted. Revenue in China's solar power generation industry rose at an annual rate of 145.3% between 2010 and 2015, totaling US$2.6 billion. This amount was largely spurred by rising household demand for electricity, which has caused several cases of power supply shortages in the past and brought exceptional demand for solar power generation.

“Environmental consciousness and pollution problems have also contributed to the want to shift from a reliance on imported fossil fuels to renewable energies,” says Liddle. Under the twelfth five-year plan, the State Energy Administration made aims to increase solar power generation capacity from 860 megawatts to 21 gigawatts.

China's solar panel manufacturing industry has also been developing at a fast pace: from 2010 to 2015, the industry saw an annual growth rate of 2.4% with revenue totaling US$29.8 billion. Over the same period, Chinese solar cell output has been increasing by 21.3% per year, with an estimated output of 27.6 gigawatts in 2015. Corporate investment in solar installations is met with generous policies and incentives. In 2013, the Chinese government introduced new feed-in tariffs (FITs), deployed at both state and provincial levels to fuel the growth of distributed solar rooftop installations. The central government currently provides 20-year subsidies of US$0.06 per kilowatt-hour of output from solar rooftop projects. For surplus power, RMB 0.40 per kilowatt-hour is awarded from the state grid, for any surplus power they generate. “Two factors are combining to incentivize the Chinese government to strengthen the solar panel industry,” says Liddle. “Increasing awareness of environmental pollution, and concerns over power supply and generation.”

Realistic energy mix

Meanwhile, in the Philippines, Bienvenido S. Oplas, Jr., head of Minimal Government Thinkers and a SEANET Fellow, says solar power consumption in Asia remains very small. He says less than 0.05 TWh in 2015 for six of the 12 economies — Vietnam, Hong Kong, Malaysia, Philippines, Singapore and Thailand. “Thus, statements that many Asian economies have significantly embraced new renewables like solar, and their use of coal power is declining as they shift towards more solar and wind power – are preposterous,” says Oplas.

“The recent heightened interest in renewables is understandable. But let me say this: for now, renewables cost more than conventional power, which means higher power prices. There's a cost to protecting our environment — no such thing as free lunch.” He added that the Philippines is heading towards sufficient power capacity and majority of these power plants are coal.

In India, the country has been thinking of setting up solar parks to address blackouts. “The solar park concept is similar to an economic zone dedicated to the generation of power through solar energy and also to the manufacturing of solar energy components,” says Agostinho Miguel Garcia, chief of development and engineering at Sun Business Development Lda. A solar park will hold a number of solar power plants and manufacturing outfits, each developed by separate or the
same groups/promoters. The concept aims to accelerate the development of solar power generation projects, by providing developers an area that is well characterised, properly infrastructured, and where the risk of the projects can be minimised as well as facilitation of the permitting process.

As part of plans to end blackouts, India aims to set up solar parks with a combined capacity of 22 gigawatts. The Solar Energy Corporation of India (SECI) on behalf of Government of India and the Ministry of New and Renewable Energy handles the funds to be made available under the Scheme for development of Solar Parks and Ultra Mega Solar Power Projects. “The deployable technologies are PV with and without tracking, CPV, and CSP,” says Garcia. “The manufacturing hub can be for
any of the components of these technologies or for the whole assembly of products or systems – PV, CPV, and solar field of CSP technologies.”

Concentrated zones of development may also serve as centres for the deployment of new technologies to be scaled up by setting up appropriate research and development facilities and may also provide targeted economic and employment opportunities, and growth for specific locales or regions. Garcia notes that a solar
park will apply any of the same principles as an SEZ. He says: “Generally speaking we will have one or more blocks of land will be designated and pre-permitted as a concentrated zone for solar development; individual solar plants will be constructed on the land in a clustered fashion; common transmission and infrastructure.” It will also have economies of scale, use of less expensive, domestically-manufactured components: structures, pressure vessels, turbines; manufacturing of components locally, and large-scale demand.

Challenges ahead

ADB president Takehiko Nakao said that in the past five years, exponential growth in solar energy deployment across Asia and the Pacific has been witnessed. At the end of 2015, solar energy capacity exceeded 75 gigawatt (GW), up from 1 GW in 2010 in the Asia and Pacific region including Australia, Japan, and New Zealand. And for the PRC, it held more than half of the region's capacity at the end of last year. “The cost of solar energy globally has fallen by about 70% since 2010,” says Nakao. “This enormous achievement is due to efficiency gains in energy conversion, economies of scale driven by government policies and subsidies, and financing from commercial banks and international financial institutions including ADB.”

He also notes that ADB has contributed significantly to the region's rapid solar energy growth. ADB's Asia Solar Energy Initiative was launched in May 2010 to strengthen our support to developing member countries.

For example, ADB has supported a large-scale solar park in Gujarat and Rajasthan in India and grid-connected solar Photovoltaic (PV) in Uzbekistan, Thailand, and the Solomon Islands. ADB has helped to pilot off-grid hybrid solar-wind systems in Nepal and solar PV in small island nations such as Tonga and Maldives. In addition, ADB has supported the PRC's first major concentrated solar energy plant. “Despite these achievements, we must not become complacent,” Nakao says. “In my view, there are three key challenges to expanding solar energy further and reaping its potential in Asia and the Pacific.” First, he notes, money matters. In Asia, more than 400 million people do not have access to any form of electricity. Bringing clean energy to them, including solar energy, will require substantial investments. Second, although the cost of solar energy has fallen significantly, it is still too expensive for many developing countries in Asia. “Third, given that solar energy is intermittent, electricity grid systems will need to be upgraded with new technologies to absorb the solar energy,” he says.

“This is particularly important in small power systems.” Nakao also notes that ADB is working with its developing member countries to address these challenges. First, ADB is scaling up its financial support for clean energy, he says. “Last September, I announced a doubling of ADB's climate financing from the current $3 billion to $6 billion per year by 2020,” he says. “Out of this $6 billion total, $4 billion is for mitigation including renewable energy and energy efficiency.” Clean energy investments including solar will be increased from the current $2 billion to $3 billion a year by 2020, he notes.

Second, Nakao says ADB expects the cost of solar energy to fall further as solar energy installations are scaled up and local manufacturing capacity is increased. “It is also important to pursue innovative business solutions to bring affordable solar energy to the poor,” he says. As an example, he says that in India, ADB has supported a private sector company to install solar panels at low-income households in rural areas. Energy from the solar panels will be delivered to households initially without any payment via the system of electricity credits, Nakao shares. 

Doing solar PV differently

Garcia from Sun Business Development adds that many of the PV industry players have already wished for opportunities that were faster, easier, and better defined than actually develop a PV project from zero, though some of the players have developed pretty neat skills doing exactly this. “I have already commented
on solar parks and their impact, which so far has been remarkable in PV and CSP. Another interesting way has been devised by the International Finance Corporation (IFC), part of the World Bank Group (WBG).

The programme is called Scaling Solar. IFC has developed a product that uses several separate products from the WBG as World Bank supports country governments with financing and advice, IFC leveraging the private sector and the Multilateral Investment Guarantee Agency (MIGA) providing a range of political risk insurance products to attract private capital into emerging markets,” he says.

The cost of solar photovoltaic technology has fallen more than 80% in the past six years. Still, many countries have struggled to develop utility-scale solar plants due to limited capacity to manage, structure, and negotiate private power concessions; small and distinct power markets can deter investors and small grids can only absorb small projects; power projects are not competitively tendered; individually negotiated contracts have high transaction costs and poor credit utility offtakers as well as political risks increase the cost of capital, driving up the tariff “This results in less attractive projects and in the end, and mostly shady deals are done that benefit only some while the value of PV is not obtained,” he adds.