Investing in Renewables

Sindicatum Renewable Energy is a consultant for the Wayang Windu geothermal plant in West Java. (Photo: Sindicatum)

This article is republished with permission from the July 2016 newsletter  of the CFA Singapore.

Sindicatum Renewable Energy Company is a developer, owner and operator of clean energy projects in key markets that are short of electricity. It was founded in 2006 in the UK and relocated its HQ to Singapore 2 years later to tap into the huge opportunities of investing in renewable energy in Asia.

The Group currently operates about 20 renewable energy projects in China, India, Indonesia, Thailand and the Philippines, as well as the US. It focuses on bagasse (active agricultural waste), waste-to-energy and solar power.

At a Professional Development talk on 12 May, its Managing Director, Dr Jay Mariyappan, addressed CFA members about the huge investing potential offered by renewables.

“I believe renewable energy plants will be the main type of energy plants that will be built over the next 10 to 20 years. The development of Asia’s renewable energy sector is just beginning.”

– Dr. Jay Mariyappan
Managing Director
Sindicatum Renewable Energy

(Photo: Mabel Lee)

“Internationally, there are many drivers for the development of the renewable energy sector,” he said. Clean energy investment is expected to be boosted by developments in financial markets such as emissions trading and green bonds.

Emissions trading is a government-mandated, market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

World energy demand is expected to grow by 48% from 2012 to 2040. (Data: US Energy Information Administration)
China, which targets to derive 15% of its energy from non-fossil fuels by 2020, and 20% by 2025, is launching a nationwide carbon emissions trading scheme next year. It is working with the UK to develop a carbon cap-and-trade system that will be compatible with the European Union’s Emission Trading System, currently the world’s largest carbon market.

“China’s launch of its emissions trading and tax scheme will affect 4 billion people by next year. More of such schemes are likely to be developed in other parts of Asia and the rest of the world with global linkage,” he said.

Green bonds are a new financing method that have grown rapidly over the past few years. New issuance of green bonds is expected to amount to as much as US$80 billion this year, according to HSBC. And much of this is debt financing for clean energy.

More than 170 countries signed the Paris Agreement at a climate conference on 22 April 2016. The treaty outlined a global action plan to avoid dangerous climate change by limiting global warming to between 1.5°C and 2°C.

“We expect the Paris Agreement to come into force prior to 2020.

“The commitments that countries have made to reduce greenhouse gas emissions currently fall short of the treaty target.

“More pledges and commitments will be needed if the target is to be met, and this means financing has to be ramped up,” he said.

“In recent times, we have seen record low prices for the construction of renewable energy generation.”

– Dr. Jay Mariyappan
Managing Director
Sindicatum Renewable Energy

Investors in renewable energy projects have ranged from venture capitalists, private equity, infrastructure funds to pension funds, mezzanine debt financiers and senior debt financiers. These diverse players have different investment horizons, expected returns and risk appetites.

But they all have the following considerations: Is the electricity tariff at a fixed rate? Can we sell electricity on the spot market? What kind of risk would that entail? What is our cost of capital? What is our exit strategy?

The operational cost for a renewable energy project is much lower than for offshore and marine oil exploration because there is no need to pay for fuel.

On the other hand, the cost of capital investment is usually relatively high, ranging from US$1.5 million to US$4 million per megawatt-hour.

Other costs have varied according to region. In India, for example, where there are many local manufacturers of solar panel modules, solar power equipment does not need to be imported from China and is therefore cheaper. Public land is usually allocated via tender at a very low cost. Labour cost is also quite cheap there.

In Dubai, low tender prices for a solar power plant are possible because sovereign wealth funds may be financing the project at 5% to 6% a year, land is given free and the authorities take care of grid connection.

“The cost of grid connection can be significant. We had a few projects in Thailand where we had to build 15 km of grid lines and that had added significant cost,” said Dr Mariyappan.

Grid connection is a challenge in Asia because the public utility company usually owns the majority of power plants and it is used to connecting to large power plants (500 megawatts) rather than small ones (20 megawatts).

“The utility company is usually not keen to connect to a small power plant that supplies electricity only when the sun shines. Europe faced similar problems until strong government regulation overcame this,” he said.

Some countries, such as Thailand, India and the Philippines, overcame this problem by providing developers of renewable energy projects with a guarantee of grid connection.”