A lack of grid infrastructure and government planning is putting the brakes on renewable energy deployment in Southeast Asia, says Wong Kim Yin, group president and CEO at Sembcorp Industries U96 .
The bottleneck extends to financing these large-scale projects, adds Wong at the Asia Infrastructure Forum 2024 on June 5. “Everybody is very familiar with financing wind farms, solar farms and even batteries but I don’t hear as much [about] financing for grid infrastructure. Without grid infrastructure, you just can’t deploy renewables. We are encountering that in Vietnam, Indonesia [and] I’m sure it’s happening in the Philippines and many other countries.”
Speaking on a panel alongside representatives from Bain & Company, ICBC, Meridiam and DBS Bank D05 , Wong appeals to financiers to fund grid infrastructure. “The opportunities are tremendous. There is massive demand; there is a massive amount of resources to be tapped… Leveraging interconnections will solve a very big pain point.”
From the banker’s perspective, Lim Wee Seng, group head of energy, renewables and infrastructure at DBS’s institutional banking group, sees three shifts in the business.
Firstly, he sees a shift from green goals to transition targets. Lim adds: “People are slowly realising that it’s not zero to one, it’s zero to 0.4; and as 2030 is nearer now, many are discovering that [targets] have been set, [but] we’ve seen some beginning to encounter challenges. Green is important but increasingly, I see the focus on transition, on the hard-toabate [sectors], on transportation, steel and also aviation.”
Secondly, he sees a shift towards renewables from the asset level to portfolio-wide moves. “For the lack of a better word, it used to be too small to matter. A solar farm with all of 50 megawatts wouldn’t upset the grid.”
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Many countries have reached the stage where real estate owners have injected substantial renewable energy capacities, enough to cause “challenges”, he adds.
These players are also becoming more sophisticated. Lim says: “They don’t just want a typical solar farm; they want batteries, et cetera. The sophistication of the market is a welcome thing… Increasingly, people are saying: ‘Hey, we’ve got to think integrated, we’ve got to think portfolio.’ As a result, there are a lot of requirements for equity.”
Finally, he notes a shift from electrons to molecules. “We’re seeing more talk around carbon capture; we’re seeing more talk around hydrogen and ammonia, although that one is a challenging debate. We have started to finance CCGTs [combined cycle gas turbines] in Singapore that are hydrogen-ready.”
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The Singapore government has “very helpfully” come up with a transition taxonomy that outlines a staged transition from natural gas to green hydrogen via CCGT, says Lim of the Singapore-Asia Taxonomy for Sustainable Finance, launched by the Monetary Authority of Singapore (MAS) at the COP28 Singapore Pavilion in December 2023.
The Singapore-Asia Taxonomy sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across eight focus sectors. It is the world’s first taxonomy to pioneer the concept of a “transition” category, as MAS cites a need to properly contextualise “transition” for Asia and prevent greenwashing risks for financiers.
India, Australia ahead
An enabling regulatory framework not only encourages private sector investment but it also protects it, says Lim. “It underwrites and assures policy certainty; that’s quite key.”
Sustainable finance has largely gone towards the OECD markets, he adds. “Very little comes here [to Southeast Asia] because of a lack of investible or bankable projects. Getting that framework right is not something that money can do, but the regulators and policymakers really need to look at this.”
India and Australia have succeeded in attracting private sector fund flow, says Lim. “India has been really charging ahead in terms of its renewable rollout. But one particular bit that we were looking at recently is them enabling what we call direct-to-consumer sale of electricity.”
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According to Lim, Vietnam is also studying a similar scheme, also known as direct power purchase agreements. “This direct-to-consumer is quite clever. A simple fix that they did was they relaxed grid charges for interstate transmission.”
This encourages investments as the grid can serve commercial and industrial customers across states at a lower cost.
Most solutions are “not rocket science”, adds Lim. “Sometimes innovation and infrastructure don’t always go together. Actually, there’s a lot of rinse-and-repeat models that work, because these are long-term investments and they are usually multi-decades [long].”
Sembcorp CEO Wong Kim Yin (second from right); Lim Wee Seng, group head of energy, renewables and infrastructure at the DBS’s institutional banking group (extreme right); and panellists at the Asia Infrastructure Forum 2024 on June 5
‘Don’t reinvent the wheel’
Lim thinks it is unfortunate that many grids in the region are not yet private. “We’re seeing a lot more deal flow around long-duration storage, batteries and hydrogen. We think that that’s the next wave that’s coming that policymakers need to prepare for in order to stabilise the grid.”
Investments are likely to continue flowing into India and Australia, says Lim. “If the enabling regulatory framework is there, if the grid is enabled to take variable renewable energy with a storage to stabilise, et cetera; I honestly believe, from the two countries as cited, the money will flow; the investments would go there.”
Last month, DBS announced it would lend an undisclosed amount towards an IDR3.4 trillion ($286 million) blended finance project to supply fresh water to three Indonesian cities. DBS served as financial adviser to Indonesian water company Karian Water Services, and the project also involved the Asian Development Bank, the International Finance Corporation and the Export-Import Bank of Korea.
That project “took a long time”, says Lim, because the stakeholders were keen to establish a template “that we can use again”. “The Ministry of Public Works in Indonesia, which oversees water, was equally aligned in that respect to say: ‘Hey, with all the pain, blood and sweat we spent on this thing, let’s make sure it’s not just one water treatment plant; we can rinse and repeat this.’”
Hence, Lim believes there is a lot of potential for coordination here. “Quite a bit of Southeast Asia has successfully financed bankable bigscale projects before.”
Don’t reinvent the wheel, says Lim of financing such projects. “It’s there; pick them up. That’s the real way to go, I believe. Renewables have become more challenging in that they are also relatively smaller. If I’m an investor, I don’t just want return on equity; I want return on effort. Now, if there’s not that big pipeline of projects that’s going to excite me to put in that hard work, I will go somewhere else.”
‘Lesser of evils’
Suppose you put yourself in the shoes of a minister of a developing country where a good part of your population is still not getting a reliable energy source. How do you begin to think about balancing that with sustainability? Sembcorp’s Wong rounded up the panel discussion with a reality check on energy security, affordability and sustainability. “Weighing heavily on the mind of a policymaker would be that of [energy] availability and security, ahead of sustainability. Let’s be frank about this; let’s be pragmatic.”
This is most apparent in recent calls to retire relatively new coal-fired power plants (CFPPs) in the region. “I think a lot of people won’t like what I’m going to say,” adds Wong. “But when we tell people to shut down their coal plants in Indonesia, Malaysia and the Philippines; where is the alternative?”
The infrastructure for wind, solar generation and battery storage are not yet ready to pick up the demand for power from these growing countries, says Wong, whose listed group owns a global renewable energy portfolio with a 15-gigawatt gross capacity. “The costs, I’m not so sure, are at parity [with coal power].”
MAS is running two pilots in the Philippines to retire CFPPs early and replace them with renewable energy. This would generate “transition credits”, which would then be sold to compensate plant owners. Instead of shunning CFPPs, a transition to natural gas may be a viable stopgap solution.
“It’s the lesser of evils,” says Wong. “How much renewables are you going to provide in order to replace or substitute the increasing demand [for energy]?”
Wong hopes the conversation around renewables can be mindful of “developing Asia” and its current constraints. “It’s a very important point to confront, rather than just talking ourselves into a frenzy, feeling very good about this green and that green… Let’s be pragmatic about it; let’s not be totally purist.”
Photos: Infrastructure Asia
