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Renewable energy in Asean

Nadhilah Shani / Khmer Times Share:
Solar energy panels on top of an apartment building in Phnom Penh. There is an abundance of renewable energy in Cambodia. KT/Fabien Mouret

The current global energy landscape differs greatly from what it looked like a decade ago. The world is seen transitioning towards new and renewable energy (RE) in a quiet but fast pace, driven by various factors for the last ten years. This is due to a variety of reasons, including the arising concern over climate change which leads to a global commitment formulated in the Paris Agreement, the uncertainty of oil crisis as seemingly proven by the ‘Hubbert peak oil theory’, and the advancing technologies in RE.

RE is the current rising star globally, reflected by many countries’ moves towards adding the capacity of these technologies. In 2016, two-thirds of additional global power capacity or almost 165 GW were coming from RE. It is also predicted that solar and wind (on-shore and off-shore) will represent 80 percent of global RE capacity in the next five years.

This global investment boom in renewable energy is not driven only by the motive of reducing CO2 emission anymore, but also by the financial competitiveness of the RE market. In 2016, it was firstly observed that investment in renewables was more than double than that in fossil-fuels. Solar and wind absorbed the biggest portion of RE investment, reaching $114 billion and $112 billion respectively, which in total represents 90 percent of total global RE investment.

The term “banks will follow where the money goes”, rings true with renewables. While decades ago RE projects were struggling to compete for investments and needed to be supported with government incentives and policies, now RE projects are seen to be attractive, thanks to the learning curves of RE project implementation and reduced costs of RE equipment. In many regions in the world, RE generation costs even dropped to the level of conventional generation costs, or even lower. This is made possible by the application of an auction scheme; which significantly reduces the generation costs of RE projects if the economic scale of the project is higher. One extraordinary example comes from India in 2017, where in ten months wind prices dropped by 30 percent to $0.041 per kWh for 1 GW of wind power capacity which was successfully auctioned in the same year.

The rise of investment in RE is also due to the fact that financial institutions start to understand the risks and benefits in investing in RE projects. They see that the risks could be managed with proper project planning and a thorough design process. Financial institutions also see that RE projects are free from fluctuating fuel cost prices, as well as fuel supply and transport issues.

Following this trend in RE investment, the next question for Asean is why do we need to move fast enough to join this investment transition to RE? A reasonable answer is because Asean has a huge potential in RE, meaning a huge market for investment. The region is blessed with diverse RE resources such as solar (Asean’s potential is 3.6 to 5.3 kWh/m2/day) and wind (up to 6.5 m/s windspeed). With the huge population that needs energy access and RE potentials to tap, Asean could become a big player in the RE market if the region chooses the right path to harvest the investment. Asean has already committed to achieve 23 percent of RE mix in the energy supply by 2025, and to reach this goal it is predicted that Asean needs an additional investment of $214 billion for RE in the power sector. This means up to 2025, Asean needs an annual investment of $21.4 billion to generate electricity from RE.

However, this investment transition towards RE will happen only if Asean member states establish clear guidelines for RE investment in the region, not only by providing incentives but also cutting unnecessary red tapes. Some member states have risen up to the challenge by providing green-bonds (Malaysia), considering renewable energy certificates (the Philippines), and providing bank guarantees for small and medium enterprises to join in RE projects with big players.

It is also important to note that ASEAN needs to start to get hold of the whole chain of RE, from upstream to implementation. Manufacturing local RE equipment, training local RE installers, educating local financial institutions and ruling the right investment scheme are the needed steps to significantly enhance RE deployment in the region. By putting its hand in the whole chain of RE implementation, Asean could significantly reduce the local cost of electricity and even further play a big role in the global market. Some member states have also moved to implement this strategy, such as Malaysia and the Philippines, by building the capacity of local solar manufacturers, so they can cover the entire chain.

The next big question might be what are the main hindrances for ASEAN in joining this global RE investment bandwagon? Although the commitment is there to achieve regional RE targets in 2025, there is still a pressure for Asean member states to provide affordable energy to the people. While the global projection of coal use will be decreasing in the upcoming years, it is predicted that Asean will still strongly depend on coal in fulfilling its energy demand. The abundant local reserve of coal creates a dilemma since providing energy from coal is the least costly option compared to other sources, and for some member states it is important to prioritise on affordability in meeting their ambitious electrification targets.

However, a comprehensive comparison that takes into account externalities – such as impact to environment, pollution, and health – would show that RE plants could be operated in shorter amount of time than coal plants, are free from transporting and fuel supply issues, and suitable for decentralised generation, making them a more logical option to pursue.

Another foreseeable hindrance is the thought that the intermittent nature of RE is unmanageable. Utilities are anxious with RE grid integration since most human resources are still not familiar with the solutions to manage this intermittency issue. Looking at the other side of the coin, the reason for utilities reluctance to integrate RE resources may be the perceived threat of business competition from RE. The utility revenues coming from the consumers who buy the electricity from them might decrease with the deployment of RE, which means more distributed generation will take place and they could lose their customers.

Another possible reason for utilities reluctance to move towards RE is they are put in a difficult position by having to pay the feed-in-tariff through the long-term power purchase agreement (PPA), while at the same time having to generate revenue. Formulating a new business model for electricity trading is a possible solution to entice utilities to deploy RE. Governments should work hand-in-hand with all concerned parties including utilities to design the best mechanism for RE to benefit all stakeholders.

Asean member states who are still in the early phase of developing a renewable energy market like Cambodia could benefit from such cooperation. Since the RE market is still in development, Cambodia could learn the best practices of setting the PPA from more mature markets in the region, so the government could design a PPA for various resources of RE. Once a clear PPA is established, many RE projects are predicted to be implemented in Cambodia, considering its abundant resource of RE.

This brings another opportunity for Cambodia, since the country has huge potentials in wind and solar. The wind speed in Cambodia is 5 m/s on average and the solar irradiation potential is around 5 kWh/m2/day.

However, despite huge potentials in wind and solar, the country’s RE generation is still limited to hydropower (1.5 GW) until 2016. The first utility-scale solar plant of 10 MW which was put to operation in 2017 has marked Cambodia’s beginning in their efforts to develop other RE resources than hydropower. In order to accelerate this development, Cambodia needs to put a firm plan to invite more RE investment in the country.

The first step could be formulating a suitable regulatory framework for RE projects to attract investors. Many argue that if the regulatory framework is in place in Cambodia, the nation will automatically become an attractive ground for RE investment even without government incentives, since the current electricity price is relatively high, allowing project developers to naturally gain a margin in the Cambodian RE market. It is time that all Asean member states become players and not only spectators in the RE market, so they could reach their regional RE target of 23 percent share in the energy mix by 2025.

Nadhilah Shani is Technical Officer Policy Research and Analytics at the Asean Centre for Energy.

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