Regulations In Asia: Recipe For Success?
The Asian renewable energy sector grew remarkably in 2012 due to a number of factors, with government policies playing a pivotal role in developing the sector. In particular, we believe that the Chinese renewable energy miracle can be attributed mainly to strong government incentives, and that these incentives are likely to continue in the medium-term. We have also made some key observations regarding the effectiveness of various policy tools used in Asia, as well as how governments in the region are keeping electricity prices affordable given the higher costs of renewables.
The Asian renewable energy sector has showed significant signs of growth over the course of 2012, and we forecast that non-hydropower renewable generation in the region (excluding Japan) is set to grow by 30% from 2011. While there are a large number of factors that have affected growth, we believe that government policies in the region have been a key catalyst for the sector.
|Asia Tops In Terms Of Growth|
|Non-Hydropower Renewables Generation By Region, TWh|
There have been many significant regulatory developments in the region in 2012, and while China remains the clear leader in terms of setting new and supportive regulations, several other Asian neighbours have come up with interesting and innovative regulations to support growth in the sector.
Here are some of the targets, policies, and regulatory tools that the various governments in Asia are using to support growth in renewable energy.
|Source: BMI, Government Websites.|
|Renewable Energy Targets||√||√||√||√||√||√||√||√|
|Renewable Portfolio Requirements||√||√||√||√||√||√|
|Renewable Energy Credits||√||√|
|Free Grid Connections||√|
|Corporate Tax Incentives||√||√||√||√||√||Proposed|
|Import Tax Exemptions||Proposed||√||√||Proposed|
China: Policies Rebalancing For Domestic Demand
The renewable energy sector in China has grown remarkably over the course of the decade, accounting for nearly 75% of 2012 non-hydropower generation growth projection. Data from the EIA and the World Bank show that the country had no installed wind or solar capacity in 1999, yet today, China ranks top in terms of installed wind capacity, and among the top ten for solar capacity.
We acknowledge that many factors contributed to this growth, including strong electricity consumption growth and a shortage of conventional hydrocarbon resources. That said, we believe that the Chinese government has played a pivotal role in unlocking this growth.
China has some of the most aggressive and insightful renewable energy policies, and the country shows no signs of letting up (see our online service, October 29 2012, ' Chinese Solar Regulations: All Guns Blazing'). Though the government has many motivations for developing the sector, we believe that one of the most important reasons for its continued support is employment and economic benefit. China is home to nearly half of the world's renewable energy equipment manufacturers, but a combination of slowing global demand, overcapacity and protectionist measures have hurt exports and left many manufacturers in dire straits. Thus, many policies introduced by the government over 2012 have been to boost domestic demand (see ' Government Policies Still Driving Growth', October 22 2012). For instance, the government announced a renewable portfolio requirement (RPS) of 5-15% for utilities in September 2012. Prior to this, the government scaled up solar energy capacity targets again despite raising them once at end-2011.
At present, we believe that the Chinese government will maintain or roll out new initiatives that support renewable energy over the short- to medium-term in order to help equipment manufacturers survive market contractions and consolidations. In fact, Chinese solar panel manufacturer, JinkoSolar, announced that it would receive up to US$1bn in funds over five years from the China Development Bank on December 07 2012.
|Strong Growth In Non-Hydropower Renewables|
|China - Generating Capacity By Type, GW (LHS); Non-Hydropower Renewables Capacity, % of total capacity (RHS)|
Regional Trends: Key Observations
We have noticed several key trends in terms of the effectiveness and longevity of the various policies being used by governments in Asia:
Feed-In Tariffs (FiTs) - FiTs in Asia are generally lower than those in developed nations as the costs of renewable energy has greatly decreased over the past decade, and most governments in Asia have only recently introduced FiT schemes. We believe this is positive for Asia as it means that the governments will not have to provide unwieldy subsidies to utilities for purchasing renewable energy, compared to many developed nations such that have racked up tremendous fiscal deficits as a result of subsidies (Spain's electricity sector has a tariff deficit of EUR24bn).
|Tariffs In Asia Below Developed States|
|Average Tariff Available and No. On Offer, By Region|
Renewable portfolio standard (RPS) - We believe that having a RPS is extremely important in developing growth in the renewables as the costs of renewable energy is generally higher than conventional energy, and the majority of privately owned utilities are unwilling to bear the higher costs. As seen from the table above, most of the key Asian markets for renewables have already implemented RPS, and our outlook for these markets are generally more positive.
Carbon taxes - Carbon taxes have yet to gain much popularity in Asia, and only Korea and Australia have implemented taxes so far. We also believe that the carbon tax system is relatively ineffective in encouraging growth in renewables as the carbon price is too low. For instance, energy generators in Australia predict that coal will remain viable unless carbon prices surge towards AUD100 a tonne. At present, the carbon price is AUD23, and we believe that this is insufficient to incentivise utilities to adopt a greater share of renewable energy (see ' Carbon Tax: Not All Sunny', May 02 2012).
Low-interest loans - We believe that the provision of low-interest loans to renewable energy companies in China and India has greatly aided sector growth in both countries. Malaysia also introduced a financing scheme in the form of the Green Technology Corporation earlier this year (see ' Improving Credit Conditions For Renewables', October 09 2012), and we have already seen remarkable results from the scheme (see 'New Regulations Playing Out Well', November 19 2012).
Looking Ahead: Keeping Electricity Affordable
We believe that the regulatory conditions for renewable energy in Asia will remain favourable in the medium-term as economic growth in the region remains healthy and various governments seek to achieve electricity security.
That said, we expect that keeping electricity affordable will become an increasingly important theme for policy makers across Asia. Renewable energy has yet to reach price parity with thermal or nuclear energy in most of the region, despite strong reductions in equipment costs over the past three years. Additionally, a large share of the higher costs of renewable energy is passed on to consumers in Asia as most governments in the region do not subsidise utilities or renewable energy generators for electricity produced.
A higher share of renewable energy on the grid has already led to significant increases in electricity prices in Australia and Japan. Electricity prices in Australia have nearly doubled since the start of 2012, and this prompted the Australian government to phase out its Solar Credits mechanism (SCM) earlier than planned. Greg Combet, the Minister for Climate Change and Energy Efficiency, said that the electricity bill for consumers and businesses in 2013 could go down by as much as AUD80-100mn (US$82-103mn) as a result of the government's decision.
|Renewables Driving Electricity Prices Up|
|Australia - Electricity Prices By Region, AUD per kilowatt hour|
That said, we note that increasing the share of renewable energy on the grid could have a positive effect on electricity prices in countries that are highly reliant on oil-based energy generation. Higher global oil prices in recent years have caused electricity generation costs in Sri Lanka and Indonesia to increase dramatically. For instance the cost of fuel-fired electricity in Indonesia is currently between US$0.35-0.45/kWh, compared with tariff of US$0.10-0.17/kWh for geothermal power.
The higher costs of electricity generation have also led the governments of both countries to provide direct subsidies to energy utilities to keep electricity affordable. For instance, the Sri Lankan power ministry said that it would disburse LKR61bn (US$470mn) of electricity subsidies in 2012, with the bulk (US$287mn) going to households. We believe that these subsidies are increasingly unsustainable, as the country's fiscal deficit at elevated levels (6.2% of GDP in 2012 according to our estimates), and we expect the average price of crude oil to remain around US$100 per barrel in the coming years.
|Oil Prices To Remain Elevated|
|Brent Crude Prices, US$/bbl (LHS) and Sri Lankan Exchange Rate, LKR/US$ (RHS)|
We believe that developing renewable energy could help alleviate the financial burden on Sri Lanka and Indonesia. The Sri Lankan government has already recognised these positive aspects of renewable energy and has proposed two new incentives that greatly improve returns for renewable energy producers.