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Commentary

When Demand Matches Opportunity

Shagun Kumar, TMF Group’s Head of APAC, explains how special purpose vehicles can support private sector investment in Asia’s renewables sector.

Asia is one of the world’s most dynamic environments for investment in renewable energy assets, underpinned by a perfect storm of needs: population growth, rising demand, supply pressures and abundant renewable resources.

The Asia Pacific region is expected to attract around 40% of total global investment in renewable energy capacity between now and 2050, with Southeast Asia the focus. Asia has 60% of the world’s population, already accounts for more than half of global energy consumption, and is impeded by an energy mix in which 85% of regional consumption today is sourced from fossil fuels. The need for renewables is immense, and so too is the investment opportunity.

The focus of renewable development varies from nation to nation, shaped mainly by the circumstances of each geography. Southeast Asian nations, with abundant sunlight, tend towards solar: Thailand’s Board of Investment, for example, approved 19 investment solar projects in 2022 with a total investment value of US$1.3 billion equivalent, and the government wants 16,000MW of solar power by 2037.

In South Korea and Vietnam, with very long coastlines relative to their surface area, wind power is a natural opportunity (South Korea is considered a global pioneer in floating offshore wind, for example). And nations through which the Mekong and its tributaries flow look closely at hydro, sometimes in combination with other technologies: the world’s largest hydro-floating solar farm has been developed at Thailand’s Srindhorn Dam.

Supportive regulation

Asia’s renewable potential can only be realised with a supportive regulatory environment, and this is almost universally taking shape across the region. Many nations have developed clearly articulated strategies and ambitions – each of Malaysia, Japan, Thailand and Vietnam has committed to carbon neutrality by 2050 (Singapore has yet to set a target) – with each one setting out roadmaps along the way such as Singapore’s Green Plan 2030, Thailand’s Renewable Portfolio Standard (which requires 30% of national energy consumption to come from renewables by 2037, up from 16% today) and Malaysia’s Green Technology Master Plan.

There is a widespread understanding that the capital required for these pivotal shifts cannot be realised from state sources alone, so many Asian nations have also set about designing incentives to encourage the participation of the private sector.

Most frequently, these take the form of tax incentives. Malaysia, for example, offers a Green Investment Tax Allowance on green assets for the owners of those assets and companies that undertake green technology projects, and a Green Income Tax Exemption for service providers, including a separate category for owners of solar photovoltaic systems. These can be generous: an offset against as much as 70% of statutory income.

Vietnam, too, has a nuanced set of tax incentives, including a four-year initial tax holiday from the date of commercial operation of a renewable operation followed by a further nine to 15 years at a 10% preferential rate (standard corporate income tax is 20%). Thailand offers up to eight years of corporate income tax exemptions for renewable energy projects, and the Philippines seven.

Other incentives seek to aid access to capital. Malaysia’s Green Technology Financing Scheme 2.0 provides financial aid to companies to make it easier for green technology backers to access finance from the private sectors, with the government guaranteeing 60% of the loan amount. Singapore developed a S$180 million Enterprise Sustainability Programme to support companies in their sustainability journey as well as specific schemes to support water efficiency, rooftop green energy and building retrofits.

How SPVs work in Asian renewables

From the investor perspective, the special purpose vehicle (SPV) is a key structure bridging the gap between projects and those who wish to gain exposure to them.

From the developer perspective, SPVs are set up to balance the risks associated with a project with financial returns. They operate as legally independent financial entities with their own balance sheet and assets. They allow renewable energy companies to attract new investors and funding, while isolating the financial risk inherent in these projects.

Investors, though, must understand that the rules around SPV investment – and the consequent impact on their returns – vary from one jurisdiction to another.

In Thailand, for example, the Foreign Business Act caps foreign investors at 49% ownership in a renewable SPV, with some exceptions offered on a case-by-case basis by the Board of Investment (firms engaged in closed-loop off-grid systems like solar roof electricity generation for factories can theoretically own the whole vehicle). More commonly – and this is the case for any renewable selling on-grid energy – companies must invest in partnership with domestic counterparts.

In Japan, SPVs can take two forms: a limited liability company (known locally as GK), where investors participate through equity, silent partnership investment or debt; and a special purpose limited liability company (known as TMK) funded from numerous sources including specified equity, preferred equity and bond financing.

And in Singapore, SPVs can take the form of private limited company, limited liability company or partnership.

Pricing and risks

Regardless of the jurisdiction, the key to a successful SPV is the power purchase agreement (PPA) signed between public parties or offtakers, which agree to purchase the energy generated by the project, and private funds or investors. Among other things, the PPA will set the price.

Most have a feed-in tariff (FiT), but the methods for its calculation vary by jurisdiction. In Thailand, for example, the FiT is a guaranteed price offered by the government to renewable energy producers for their electricity published once a year and none-negotiable. In the Philippines prices are set by negotiation among the different parties, and in Singapore – where PPAs can have tenors as long as 30 years – there is a FiT but it can be negotiated directly between the SPV and the government. Prices in Japan are regulated jointly by several different government departments and commissions, always with the interests of the public in mind.

A well-structured agreement based on a clearly agreed tariff can mitigate price volatility, giving producers predictability around the revenues they will earn. But in Malaysia, for example, since the government determines the FiT based on technology, capacity and numerous other factors, there is a danger that a negotiated rate may fall below market rates, bringing financial challenge.

There are other risks, not all of them distinct to Asia: uncertainty around capacity, given that power generation is subject to weather conditions (a long-term PPA is useful here, smoothing out fluctuations over the long term); risk management around natural disasters, a particular concern in the Philippines; and changing rules, a matter of some debate in Vietnam now, where changes are mooted to how FiT rates are determined.

Beyond the SPV, other investment structures exist. Developed markets like Japan have tried listed infrastructure funds, though their popularity has declined since their inception in 2015. Singapore, which like Japan is a major issuer of green bonds in its own right, offers similar opportunities through its trust structures, more commonly applied to real estate but a practical vehicle for infrastructure investment. And Malaysia has leveraged the fund-of-funds structure to support renewable energy projects.

Uniting all of these diverse cultures and locations is a region-wide sense of need. It is expected that investment in Asia’s renewable generation will double to US$1.3 trillion across the next decade. The strongest tailwind towards private sector investor access to this sector is that it simply has to happen.

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