Posted by Macquarie Asset Management
June 9, 2016
Surging demand for electricity, relatively fast build times and long term pricing agreements make renewable energy projects particularly attractive for investors looking to capitalise on South East Asian growth opportunities.
In the Philippines particularly, robust and innovative government policy has been specifically designed to encourage a race between providers to build maximum solar and wind capacity.
“What we are seeing is the cost of solar panels and wind turbines coming down. The government has capitalised on this trend by setting the price for new renewable energy higher than market price,” says Frank Kwok, Macquarie Infrastructure and Real Assets Executive Director. This is an effective and sustainable tariff regime, known as a Feed-in-Tariff or FiT, he says.
While that may look like a government subsidy, the innovative component to the regulation is that the additional tariff is passed onto end users as a line item in their monthly electricity bill, funding what is known as the FiT Allowance or FiT-All.
This provides renewable energy suppliers with a tariff for 20 years at a fixed rate for the first 500MW of solar and 200MW of wind, and will be set at lower rates for subsequent supply. By reducing the FiT over time, the pricing structure allows end users to benefit from future technical developments that will lower costs.
Critically, rather than allocating the FiT to an organisation before an asset is built, the government only pays out when the renewable electricity is actually connected to the grid, encouraging fast build times.
Robust and innovative government policy has been specifically designed to create a race between providers to build maximum solar and wind capacity.
“This was a clear policy statement from the government that allowed the private sector to say, well, they’re serious about this, so let’s invest,” Kwok says.
“Despite the FiT, empirical data shows the policy has been positive to the overall cost of power. As there has been a large increase in the generation of power at such a fast pace, it has replaced more expensive and environmentally damaging capacity out of the system.”
In just two years, producers have already exceeded 700MW in renewable capacity. That doesn’t mean investors and the governments aren’t also looking to boost gas and coal capacity, Kwok says, with coal still the cheapest option for electricity.
But rapid population growth and surging demand favours renewable assets given the difference in time it takes to bring solar or wind farms online, compared to new coal and gas infrastructure.
“At the end of the day, renewable energy in every country is subject to regulatory change,” Kwok says of the policy guaranteeing the FiT price for 20 years. The role of Macquarie, he says, is to investigate how robust and stable that regulatory framework really is, to ensure minimal risk to any investment in renewables.
Most importantly, the Philippines is still not fully electrified and suffers from regular power outages in metropolitan areas. It means that while some developed countries are encouraging renewables as a social policy, the Philippines is encouraging renewable development out of necessity.
“Yes it’s good for the environment, but they’re doing this because there is a genuine need for more power quickly,” he says, “something that is reassuring for the future of investment.”
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