Emergence of Asia-Pacific Renewable Energy Sector

By Suman Jagdev, Director & Lead – Strategy Consulting, GCA Corporation, Mumbai 

The Sustainable Development Goals (SDGs) adopted by the United Nations has led to articulation of clear actions for a sustainable world underpinned by responsible consumption and production.  Governments are required to meet targets assigned by the United Nations and frame adequate regulations and policies to drive behaviour at a corporate and societal level. 

Climate action is a key goal and current dependence on fossil fuels for electricity generation is adversely affecting the realization of other inter linked SDGs. Globally, there has been a rise in greenhouse gas emissions over the years (carbon dioxide approximately accounts for 72%-75% of total greenhouse gas emissions) with electricity generation being one of the largest contributors (27%-30% globally) to carbon dioxide emissions due to the current dependence on fossil fuels. Apart from air pollution caused by carbon dioxide emissions, electricity generation from fossil fuels has other negative effects like water pollution, noise pollution and land degradation. 

The Asia-Pacific region, home to some of the fastest growing and most populous countries globally, has seen the highest growth in electricity generation, with coal being the predominant source. Around 60% of the electricity in the Asia-Pacific region is generated from coal, making the region the largest contributor to global carbon dioxide emissions. 

International organizations and local governments around the world have shifted their focus to decarbonization of the grid and promotion of electricity generation from renewable energy sources, with Asia Pacific at the forefront of these efforts due to environmental concerns and nascent renewable energy capacity development. While share of renewable in total electricity generation is at 35% in Europe and 33% in America, it stands at 23% in Asia Pacific indicating significant headroom for growth. 

The countries in Asia Pacific have set specific renewable energy targets for the medium to long term, either in terms of absolute renewable energy capacity or renewable energy as a percentage of total electricity generation. India, for instance, has set itself an ambitious target of reaching 226 GW by 2022 and 450 GW by 2030. 

Given the headroom for growth and the long-term focus on renewable energy adoption, the Asia-Pacific region has been the recipient of the largest proportion of global investments in the sector.

Many countries in the Asia-Pacific region are in the earlier stages of renewable energy adoption compared to countries in Europe and North America and are hence, incentivizing capacity build-out, thus providing opportunity for early movers. Countries like Japan, Taiwan and South Korea offer long-term feed-in tariffs which are higher than auctioned prices in Europe and North America and hence provide higher risk-adjusted returns. Investors are acquiring assets in Asia-Pacific to balance their portfolio across auction-based and feed-in tariff projects. Most countries in Europe and North America are phasing out government-backed subsidies leading to market-based price variation for developers. 

In terms of total investments in 2019 (foreign and domestic), China saw the highest investment at USD 84 Bn, followed by Japan (USD 16.5 Bn), India (USD 9.3 Bn) and Taiwan (USD 8.8 Bn). In China, majority of the investment was in wind projects due to the planned reduction in subsidies while solar was the preferred technology in Japan and India. Taiwan witnessed investments in offshore wind. The Western European countries funded the highest number of projects, with the Asia-Pacific region being one of the key destinations for new projects.

Many countries in the Asia-Pacific region are in the earlier stages of renewable energy adoption compared to countries in Europe and North America and are hence, incentivizing capacity build-out, thus providing opportunity for early movers. Countries like Japan, Taiwan and South Korea offer long-term feed-in tariffs which are higher than auctioned prices in Europe and North America and hence provide higher risk-adjusted returns. Investors are acquiring assets in Asia-Pacific to balance their portfolio across auction-based and feed-in tariff projects. Most countries in Europe and North America are phasing out government-backed subsidies leading to market-based price variation for developers. 

In terms of total investments in 2019 (foreign and domestic), China saw the highest investment at USD 84 Bn, followed by Japan (USD 16.5 Bn), India (USD 9.3 Bn) and Taiwan (USD 8.8 Bn). In China, majority of the investment was in wind projects due to the planned reduction in subsidies while solar was the preferred technology in Japan and India. Taiwan witnessed investments in offshore wind. The Western European countries funded the highest number of projects, with the Asia-Pacific region being one of the key destinations for new projects.

Globally, the Asia-Pacific region witnessed some of the largest VC/PE fund raising activity in the renewable energy sector in 2019.

India aspires to take centre stage is driving the shift to renewable energy and is making concerted efforts to create an enabling eco system. Several policy initiatives have been announced by the government to support the end-to-end value chain including generation, transmission and distribution of renewable energy and recent tenders indicate the evolving technical complexity of renewable energy projects in India. Both strategic and financial investors have been active in the renewable energy sector, which has been resilient during the COVID-19 crisis and was provided with a ‘must-run’ status during the nationwide lockdown. 

Opportunities for investment exist across the value chain in the renewable energy sector in India: equipment manufacturing (solar cell, solar module, wind turbines), renewable energy generation and energy storage systems. The near-term challenges such as land acquisition, PPA finalisation notwithstanding, we keenly look forward to the evolution of the sector as it unfolds and believe in its long-term potential.