Solar investments in Southeast Asia are booming
Owing to its geographic location, annual global horizontal irradiation (GHI) levels – a crucial measure of the solar energy hitting a solar panel – is remarkably high in many parts of Southeast Asia. Indeed, total solar power potential is estimated at 41 terawatt-hours (TWh). That’s equivalent to about 14% percent of all electric energy used by the UK in 2020, according to Statista. (1)
Further, it’s grown blisteringly fast, and demand is rising. Solar power capacity in Southeast Asia more than doubled between 2019 and 2020, increasing from 10.4 GW to 22.9 GW, and more is needed. (2) As a key part of decarbonization efforts, demand for renewable power is growing rapidly, particularly in the important manufacturing industry. Manufacturing alone will require 27 GW of new solar installations, across the region, over the next five years. (3)
Even so, some types of solar power are beset with more hurdles to success than others, and investors need to know the difference.
As the adoption of renewable energy accelerates in the region, commercial and industrial (C&I) solar appears to us to be the best positioned, versus utility scale solar projects. We explain what C&I is, as well as why it differs in terms of technology improvements, economics and financing, and deal structuring options.
Industry characteristics of solar power: utility-scale solar vs C&I solar
Much of the added solar power capacity in Southeast Asia has come from utility-scale, grid-connected solar power projects. However, these large utility-scale solar projects face several difficulties. Securing land rights is one, with the projects often competing with agricultural land, impacting food security.
Project financing in these markets is also challenging. Power purchase agreements, or “PPAs”, are the contracts exchanged between a power supplier and a buyer or user of the power. While long term PPAs with a public utility can offer renewable energy investors greater certainty of revenue than if reliant on fluctuating power prices in the merchant power market, they have their downsides.
In short, so-called “template PPAs” with public utilities can carry lopsided risk. Investors and financiers can take on more uncertainty. For example, if there is a force-majeure and the solar power plant is not operating, the loss is borne entirely by asset owner, and no relief is given by the government-owned utility. Many state-owned utilities in the region are also not creditworthy. Counterparty risk in long-term investments is crucial, so ensuring that the buyer of power is “bankable” – i.e. can meet its financial obligations for the full term of 10-20 years – is crucial.
The primary defining characteristic of utility-scale solar projects is that they are tied to national grids and sell the power they generate directly into the electricity grid. Utility-scale solar are often described as being “in front of the meter”. On the other hand, distributed generation systems such as C&I solar, are described as “behind the meter”. A C&I system is paired with the energy load of a customer and supplies that customer directly without the grid in between.
The economics of utility-scale solar projects are mainly derived from a tariff, often backed by a government through what’s called a feed-in-tariff (FIT)(4). They may also use a tariff based on an auction process or other incentives.
C&I solar – control, speed, simplicity
Unlike utility-scale solar, C&I solar developers can provide access to the solar energy market through different business models. We outline a couple of these below.
CAPEX model or outright purchase – Under this business model customers own a solar system utilising their own capital, and directly benefit from the energy saving from the solar energy generated.
Opex model – Under this model there are broadly two variations:
- Solar leasing provides C&I customers the use of the solar energy system in exchange for an agreed monthly fee or with an agreed solar tariff. This is a lower electricity tariff than the grid tariff, depending on the leasing agreement offered by the third-party. Solar leasing customer examples could include shopping malls, universities, medical centres or hotels.
This model gives the customer better flexibility than a capex model, as there is little to zero upfront cost to install a solar system at their building. Lease agreements are usually around 15 years. At the end of lease agreement period, the ownership of the solar system will be transferred back to the lessor. In some cases, lessees (the C&I customer) may have to purchase the solar system at the end of the agreed time frame at a subsidized rate, renew the lease or have the system removed.
- Corporate renewable PPA refers to a contract between a corporate buyer and a renewable power producer to purchase electricity at a pre-agreed price and duration. The solar power plant – located offsite – utilises existing transmission infrastructure of public utilities. This is arranged under an “open access” system by paying a fee or “wheeling charge” to the utilities for using their assets.
The corporate PPA market for renewable procurement is largely dominated by firms that have set ambitious decarbonisation targets in the region. These are large energy users, particularly RE 100 companies who have signed PPAs with offsite projects for their ambitious 100 percent renewable targets to be feasible. RE100 is a group of influential companies globally that have committed to 100 percent renewable electricity use by 2050.
The economics of C&I solar are derived from (i) energy volume savings i.e. displacement of grid power with solar power; (ii) peak “shavings” by way of eliminating short-term demand spikes, and so avoiding demand charges where the customer pays demand charges for “peak demand”; and (iii) where the regulatory environment allows net metering, exporting surplus power to the grid. (5)
Fact check: Why C&I solar edges out large utility-scale solar
C&I solar: compelling growth and resilience through uncertainty
The Covid-19 pandemic caused global supply chain constraints, pushing up costs and posing challenges to the power sector as a whole. Solar power was no exception. Among the biggest headwinds for solar has been a tripling of steel prices, a key component in the solar panel mounting systems, and polysilicon, the raw material used in solar panels.
We expect the hikes in polysilicon prices are likely to start easing towards the end of 2022 and that will be accompanied by further improvements in solar cell efficiency. Together, these two factors, along with an expected easing of freight and shipping delays in 2023, could lead to overall solar price declines by 2024.
An increase of solar panel production and deployment holds tremendous potential as corporate policy and environmental, social, and governance (ESG) concerns drive higher demand for renewable energy sources. IHS Markit estimates that solar module production could be raised by an additional 25 percent over the next 12 months. (6)
However, C&I projects were also comparatively resilient through the pandemic and are structurally less vulnerable to cyclicality and cost inputs. A prominent example is Vietnam where there was an ongoing FIT that was very attractive, and the industry rushed to add a whopping 11 GW rooftop PVs during the pandemic in 2020, according to data released by IRENA. (7)
Shipping and materials costs for C&I solar projects account for a lower percentage of the overall project cost than that of other energy projects, including utility solar projects. If shipping and equipment costs creep up, it’s less likely to financially ‘make-or-break’ a C&I project when compared to other energy projects.
Further, while investment in large energy projects can face headwinds during periods of major disruption, opportunities for “bite-sized” renewable energy developments – like lower-megawatt C&I solar – can proliferate. Finally, as industries strive to bring down cost of production due to rising inflation, and soaring energy costs, C&I solar provides a pathway for industries to save on the cost of electricity consumption.
A clean and reliable energy future
It is clear that as the economy in southeast Asia reopens, we should see a recovery in solar demand. The question of how quickly, and which energy sources will generate the quickest response, remains to be seen. Even so, C&I solar is emerging as a resilient option for the build out of a clean and reliable energy future.
EXTENDED TOUGHT PIECE
For more in-depth information on this topic, please read our extended thought piece “Southeast Asia witnesses solar boom in grid connected utility scale solar – what is next?” here.
(1) The analysis by National Renewable Energy Laboratory (NREL), operated by Alliance for Sustainable Energy, LLC, for the U.S. Department of Energy (DOE)
(2) Data released by the International Renewable Energy Agency (IRENA)
(3) IHS Markit analyst
(4) A feed-in tariff, or FiT, is a policy mechanism that compensates solar customers at a fixed rate per kilowatt hour (either on gross or net generation) and is guaranteed for a long period.
(5) Demand charges can be a significant part of a monthly utility bill for large customers with spiky load profile such as businesses, manufacturing and industrial operations, educational institutions and faith-based organizations.
(6) “Executive Briefings: Oil and Gas Global Energy: The crunch of 2021—a crisis of surplus capacity” -IHS report
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