Equity Analysis / Vietnam

Vietnam Energy: As demand soars, solar can shine with the right policies

  • Vietnam's solar power capacity could reach 8.9GW this year, 10x the government target of 850MW by 2020
  • But lower tariffs may only attract investment in the southern provinces, putting further pressure on the overloaded grid
  • The government needs to adopt take-or-pay, price-competitive auction schemes to attract international players

Vietnam has issued a new policy to promote the development of solar power projects, commonly known as Decision 13, effective 22 May 2020. While this ends ten months of policy uncertainty, the new feed-in tariffs (FiTs) will only be able to achieve so much by 31 December 2020 (when the policy expires). Other than a handful of international players such as Thai-listed B. Grimm Power and Singapore's Sunseap, most solar projects are owned by both unlisted and listed Vietnamese conglomerates (like Trungnam Group and Vinh Nha Trang Investment JSC). But with the right policies, this could soon change. In this note, we briefly discuss the new policy and highlight the opportunity size for renewable power capacity in Vietnam until 2030.

Vietnam's energy demand set to triple by 2030

We assume that Vietnam's 2017 per-capita electricity consumption of 1,980kWh will grow in line with its GDP/capita growth (13-year, 2018-30 CAGR of 7.8%). As a result, the country's total consumption could stand at 550bn kWh in 2030, nearly 3x its 2017 consumption.

Renewables (excluding hydro) can claim a greater share of the growing energy pie

In 2017, 45% of Vietnam's electricity was produced from renewable resources. However, excluding hydropower, the share of renewable energy stood at a meagre 0.2%. By 2030, renewable electricity may only account for 23% of total output, but the cumulative share of biofuel, solar and wind (i.e. renewables excluding hydro) may reach 7.5%.

The size of the opportunity in Vietnam for renewable power capacity until 2030

According to the Revised National Power Development Master Plan (March 2016), the country's renewable electricity (excluding hydro) should cover 7.5% of total generation by 2030. As a result, Vietnam's installed solar power capacity needs to reach 14GW by 2030 (currently 5GW) to meet this target, while the installed wind power capacity should reach 5GW (currently less than 1GW). 

This will require an estimated investment of US$7.0bn and US$6.5bn in solar and wind projects, respectively, between 2020 and 2030. According to our estimates, both types of technologies could yield up to 14% US$-IRR over the 20-year project life.

To encourage international players the government needs to adopt take-or-pay, price-competitive auction schemes

Other than a handful of international players (including, but not limited to, Thai-listed B. Grimm Power and Singapore's Sunseap in solar, and Thai-listed Sun Energy and Belgium's Enfinity in wind), most of the projects are owned by both unlisted and listed Vietnamese conglomerates (like Trungnam Group and Vinh Nha Trang Investment JSC). 

So far, international solar giants have shied away from investing in Vietnam due to its underdeveloped transmission lines which are owned and managed by the government. The overloaded grid (especially in the southern provinces) has wasted up to 40% of the new solar electricity generated, while developers have incurred losses. The government needs to adopt a take-or-pay model which will ensure predictable returns and make investment in solar projects more attractive. This, coupled with price-competitive auction schemes (expected from 1 January 2021), could be beneficial for the country's power supply.

Auction schemes will not only help reduce electricity prices, they will allow the government to manage the grid effectively (i.e. control when and where the solar power projects are installed) and also help drive out small-scale, speculative players from the market.

If Vietnam plays smart, it may replicate the record-low price of USc3.88/kWh in Southeast Asia achieved last year at neighbouring Cambodia's first solar auction, and invest the differential (i.e. USc3.21/kWh) to upgrade its transmission infrastructure. The most advisable action for investors is to wait for the take-or-pay, price-competitive auction in order to eliminate the risk of irregular off-take by the government resulting in lower-than-expected returns. 

The new solar policy

Lower and (still) uniform feed-in tariff (FiT) across the country...

In contrast to the previous flat tariff of USc9.35/kWh for all grid-connected solar power projects and the proposed FiTs (which were higher on average and categorised into four regions according to the levels of photovoltaic potential), the new tariffs are 10-24% lower (ranging from USc7.09/kWh to USc8.38/kWh) and still uniform across the country (except for Ninh Thuan province which stays at USc9.35/kWh). 

...may only succeed in attracting investment in the southern provinces, putting further pressure on the overloaded grid

Photovoltaic (PV) power potential in Vietnam ranges from 2.6 kWh/kWp in the north to 4.4 kWh/kWp in the south. As a result, the majority of the new solar power projects have been installed in southern Vietnam (including the 600MW Dau Tieng project shown in the image above, which is Southeast Asia's largest solar farm). However, transmission lines, which take much longer to get approval and build, have struggled to keep pace with the new solar capacity. This has resulted in losses for the developers as the existing grid is insufficient to accommodate 100% of the new solar electricity that can be produced. 

According to VnExpress last year, some renewable power plants in the southern province of Ninh Thaun (where PV potential is high) could only operate at c60% of their maximum capacity. We believe that uniform FiTs across the country will encourage developers to prefer southern Vietnam and put further pressure on its already overloaded grid. 

Figure 1: PV power potential (kWh/kWp*) is higher in southern Vietnam

kWh/kWp is simply defined as units of electricity (kWh/day) which could be generated for every 1kW of installed PV capacity.
Source: Global Solar Atlas 2.0 

Vietnam's solar power capacity could reach 8.9GW in 2020, 10x the government target of 850MW by 2020

We estimate that 3.8GW worth of grid-connected projects could be installed by 31 December 2020. This will take Vietnam's solar power capacity to 8.9GW, or 14.1% of total installed capacity (all else being equal). 

However, aside from the tight deadline, there are some conditions to meet. For grid-connected solar power projects, it is mandatory for the electricity seller and the electricity buyer, state-owned Vietnam Electricity (EVN) or its authorised members, to sign a 20-year PPA. Moreover, the decision on investment policy must have been issued by relevant authorities before 23 November 2019. These projects could qualify for the below FiTs only if they achieve commercial operations date (COD), either partially or wholly, by 31 December 2020. The FiT for solar power projects which fail to comply with these conditions will be determined through a competitive mechanism, i.e. a price-competitive auction scheme which is expected after 1 January 2021. 

  • Rooftop solar powerinvestors (with up to 1MW capacity) will receive USc8.38/kWh versus USc9.35/kWh weighted-average FiT (or 10% lower) proposed in the draft policy.
  • Floating solar power projects will receive USc7.69/kWh versus USc8.28/kWh weighted-average FiT (or 7% lower) proposed in the draft policy. This FiT is applicable to solar projects with photovoltaic (PV) panels installed on structures floating on the water surface, and directly connected to the national grid only.
  • Ground-mounted solar power projects will receive USc7.09/kWh versus USc8.07/kWh weighted-average FiT (or 12% lower) proposed in the draft policy. This FiT is applicable to solar projects with PV panels installed on the land, and directly connected to the national grid only.

For the first time, the Government of Vietnam has allowed direct power purchase agreements (DPPAs). The term 'Electricity Buyer' now includes organisations and individuals, which means that the state-owned EVN and its authorised members are no longer the exclusive purchasers of electricity from solar power projects. 

This facility, however, is limited to rooftop solar power systems, provided that the electricity buyers 'do not make use of EVN's grid for the purchase'. The tariff and the PPA could be agreed between the buyer and the seller at their discretion, as long as it conforms with the applicable laws. This may encourage investments in indigenous solar power capacity, especially by Vietnam's manufacturing sector which consumes c60% of total electricity, and help ease pressure on the electricity grid.


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Equity Analysis / Russia

Russia Energy: Regressive new energy strategy hinders development of clean tech

  • Energy Strategy 2035 is regressive and prioritises selling hydrocarbons to the world over new technology
  • Stringent localisation requirements and unpredictable US$-based returns have discouraged investment in renewable energy
  • We estimate that more rounded policies could attract over US$2bn of annual investments until 2030
Vahaj Ahmed @
Tellimer Research
15 June 2020

Russia’s Energy Strategy 2035, adopted in April 2020, prioritises selling hydrocarbons to the world over embracing new technologies, such as renewable energy. Indeed, it regards anything that hinders Russia’s production (and export) of oil, gas and coal as threats.

The policy is not only at odds with President Putin's ambitions to lead the climate change response, it serves as another stumbling block for Russia's renewable investments, which have already been impeded by (among other things) two key problems: 1) requirements that 65-70% of the materials involved in the construction of renewable energy facilities should be made in Russia (aka localisation requirements) and 2) unpredictable risk-adjusted returns.

In this report, we also discuss why Russia might not meet its (very minimal) clean energy target, analyse the outlook for the country's electricity generation up until 2030 and look at the size of the opportunity for renewable sources of energy.

In the following tables, we also look at some of the major current solar and wind projects in Russia. So far, US$4.5bn (1.9GW) of solar projects and US$5.5bn (3.4GW) of wind projects have been selected through competitive auctions which is only a fraction of the total opportunity size of US$7.7bn (6.1GW) of solar and US$21.1bn (19.4GW) of wind energy.

Problem 1: Localisation requirements – too much, too soon

Russia's renewable equipment manufacturing industry is at a nascent stage. Mostly, the industry comprises joint ventures between foreign companies and Russian power companies and component manufacturers; this has helped reduce planned capital costs by more than 50% since 2015. Some of these joint ventures in wind power include:

  1. Vestas Manufacturing RUS LLC (the technology partner for Finland's Fortum and state-owned Rusnano Wind Energy Development Fund);

  2. WRS Towers LLC (a partnership between Spain's Windar Renovables, Rusnano and Russian steel-maker PJSC Severstal); and

  3. Madrid-listed Siemens Gamesa Renewable Energy's JV with Siemens Gas Turbine Technologies (which is also a JV between Siemens and Russia's Power Machines).

Meanwhile, for solar photovoltaic (PV) technology, Hong Kong-listed Harbin Electric's subsidiary has set up Solar Systems LLC to produce PV panels in Russia, while local companies like Hevel Solar can produce more than 340MW of solar modules annually with up to 23.5% cell efficiency.

However, a major impediment to an expansion of renewable energy investment in Russia is the requirement that, in terms of the materials involved in the construction of facilities, 70% of solar and 65% of wind and small hydropower projects should be made in Russia. If an investor does not satisfy these localisation requirements, the final tariff (which is approved after the commercial operation date) can fall by up to 65% and 55% for solar and wind projects, respectively. As a result, project deliveries have been running behind schedule. As of 2018, only 59% of solar and 13% of wind capacities (selected through competitive auctions) had managed to come onstream.

The current renewable energy policy only runs until 2024. To attract more international renewable developers, Russia must first commit to the the long-term role of renewable energy in its overall fuel mix and relax the localisation requirements, but this is challenging without a clear decarbonisation agenda. Indeed, Energy Strategy 2035 is a testament to Russia's unwavering reliance on its hydrocarbon reserves, at the expense of the development of clean energy in the country.

Problem 2: 'Unpredictable' risk-adjusted returns

Based on the publicly available policy papers and projects installed so far, we observe that the tariffs offered by the Administrator of Trade System (ATS) aim to ensure a project internal rate of return (IRR) of 12% for a 15-year power purchase agreement (PPA). However, the tariffs are not indexed to the US dollar, which is a regular feature in many emerging markets to ensure a US$-based return to attract foreign investment in renewable energy. Without this, the returns for foreign investors on renewable energy plants could be lower in the event of the Russian ruble's depreciation against the US dollar, which is more likely in the context of lower-for-longer oil prices fuelled by the transformation of the global energy market towards cleaner sources and, more recently, the Covid-19 pandemic.

Low electricity prices in Russia (estimated at US¢8.1/kWh, US¢6.8/kWh excluding 20% VAT) further exacerbate the unattractive investment case. If allowed, higher feed-in tariffs (FiTs) would add to the inefficiency of Russia's power sector, which received subsidies on electricity worth US$13.7bn in 2019 (or 17% of total cost). If we assume the feed-in tariffs (FiTs) for renewable energy projects are equal to US¢6.8/kWh (thus allowing the power sector to run efficiently), the estimated US$-IRRs would range from 3.4-16.8% for solar and 12.7-19.9% for wind (assuming stable RUB:US$ parity and 2019's average capital costs of US$748/kW and US$974/kW for solar and wind projects, respectively ). The risk-adjusted returns, however, could be as low as negative to 7.0% if the ruble continues to depreciate 5% yoy against the US$ (as seen in the last 12 months).

To be able to offer more attractive returns, Russia could also bring its electricity prices in line with the EU average (currently 2.8x higher). The dilemma, however, is that energy is still considered a public good in Russia and any attempt to increase electricity prices will receive heavy criticism. Moreover, the increase in electricity prices will reduce the competitiveness of Russia’s industries, especially metals, which are energy-intensive and comprised 9.3% of the country’s exports in 2019 (or 2.4% of GDP).

Electricity outlook in Russia

Russia's energy demand set to increase c60% by 2030

We assume Russia's 2017 per-capita electricity consumption of 6,661kWh will grow in line with its GDP/capita growth (13-year, 2018-30 CAGR of 3.8%). As a result, the country's total consumption could stand at 1,557bn kWh in 2030, c60% higher than its 2017 consumption.

The share of renewable energy in total electricity production could only reach 1.1% by 2024

In 2017, 17% of Russia's electricity was produced from renewable resources, while solar and wind combined stood at a meagre 0.1%. By 2024, these renewables could reach a maximum 1.1% of the total electricity generation (according to the capacity targets stated in Order No. 1472-R). However, according to the renewable energy scenario (or REmap) published by the International Renewable Energy Agency (IRENA), the share of solar and wind combined could reach 3.4% by 2030, while the share of total renewable sources could reach 34%.

The size of the opportunity in Russia for renewable power capacity until 2030

It is estimated that the installed capacity for solar and wind energy stood at 818MW and 135MW, respectively. Based on the projects that have been selected through competitive auctions since 2013, solar capacity could reach 1,858MW by 2024 (higher than 1,520MW national target), while the wind capacity could reach 3,377MW (lower than 3,600MW national target). However, based on the generation targets laid out in IRENA's REmap, we estimate Russia's solar and wind capacities will have to increase to 6,066MW and 19,391GW (respectively) by 2030. This will require an estimated investment of US$3.4bn and US$17.4bn in solar and wind projects, respectively, between 2020 and 2030.

This is the second in a series of reports on the future of clean energy tech in emerging markets, which kicked off with a report on Vietnam.


 
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Macro Analysis / China

China: Covid-19 adds pressure to exports

ING Think
2 July 2020

Covid-19 creates hot and cold of the Chinese economy

The Chinese economy shows domestically-driven growth, but an external demand drag.

Domestically, the government has continued to promote more research and development on advanced technology so that it can achieve self-reliance in the most advanced semiconductor chips in the coming years. Most of the growth we see is around this sector.

Some stimulus money has flowed into the real estate market as shown by the increase in land sales fees. Though this is not ideal, it shows that there are still people in good financial shape. They are willing to invest and spend, which at least provides some short-term support for the economy. In the longer-run, this means that Covid-19 has widened the wealth gap in China. As not all the stimulus money has found its way into infrastructure projects, we see little support from infrastructure to economic growth.

The pain point of the Chinese economy are small manufacturers, and they usually produce for small exporters

Although there are still some occasional Covid-19 clusters in China, they have quickly been brought under control by semi-lockdown practices. As such, those cluster cases have not disrupted the economy. We see that recovery in consumption continues albeit slowly.

But when it comes to foreign demand-related industries, the economic picture is different. Covid-19 cases have increased overseas, and export orders continued to shrink on a monthly basis in June as shown by the PMI index. This means that China’s exports and export-related manufacturing and service activities (e.g port-services) will continue to be under pressure.

The pain point of the economy are small manufacturers, and they usually produce for small exporters. These two groups are expected to face an increased chance of a shutdown. Even though the People's Bank of China set up an innovative re-lending programme for SMEs, they might not be willing to borrow if they can’t see orders coming.


 
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Macro Analysis / Global

New alliance helps close sustainable data gap

Refinitiv Perspectives
18 May 2020

Gaps in ESG data are among the factors influencing the adoption of sustainable behavior and financing. How will the recently launched Future of Sustainable Data Alliance (FoSDA) help to understand what data investors and governments need to meet the requirements of regulators, citizens and market demand for sustainable investments and portfolios to 2030?


  1. Reliable ESG data is a critical requirement for effective sustainable investment and for achieving the UN’s 17 Sustainable Development Goals.
  2. At January’s World Economic Forum in Davos, Refinitiv was one of the founding partners behind the launch of FoSDA.
  3. FoSDA aims to foster co-operation between regulators and the industry, empowering all organizations to help to understand what data investors and governments need to meet the requirements of regulators, citizens and market demand for sustainable investments and portfolios to 2030.

As the COVID-19 impact is felt around the world, we cannot lose focus on the urgent need to protect our planet and address the many social and environmental challenges faced by all.

What we invest in and how we invest needs to change, and we urgently need to plot the path to get there by understanding the data needs of the future and urgently making progress to make it available.

FoSDA is driving sustainable finance for a better future. New alliance helps close sustainable data gap

Significant growth in sustainable investment is evident towards our 2030 goals, but our efforts, nonetheless, remain in the starting blocks.

Become a supporter of FoSDA

Despite many governments and regulatory bodies developing policies focused on sustainable investment as part of their strategies to meet the SDGs, no country is as yet on track to meet the 2030 deadline, and the COVID-19 crisis has moved us even more off track.

Therefore, reliable ESG data – which can help guide the allocation of trillions of dollars of investment capital – is now a critical requirement for effective sustainable investment.

Watch: Future of Sustainable Data Alliance: David Marsh

ESG data: evolution in action

The need for standardized, accessible data to guide the financial industry — as well as governments, central banks and regulators — on how best to incorporate ESG risk into decision-making processes has grown in recent years.

There has been much progress in disclosure standards, driven in particular by the Task Force on Climate-Related Financial Disclosures. Despite this, the available data still needs more depth, breadth and connectivity.

Significant work is also needed to address fundamental data requirements in climate risk assessment, water, waste, and biodiversity for environmental risk assessments.

To successfully ensure that the world shifts towards a sustainable future, ESG data — the bedrock of sustainable financial markets — needs to continue its evolution. To become truly valuable, data needs to be complete, coherent, and comparable.

There is an urgent need for the industry to identify gaps in existing data sets, plan for future data needs and pinpoint what it is that the investment community needs in order to make better and more impactful investment decisions at scale.

Future of Sustainable Data Alliance

Against this backdrop, Refinitiv spearheaded the formation of a new multi-member alliance. In January 2020, we launched the Future of Sustainable Data Alliance with the World Economic Forum in Davos.

Fostering ecosystem collaboration. New alliance helps close sustainable data gap

The other founding partners are the World Economic Forum, United Nations, IIF, ASIFMA, Tsinghua University, OMFIF, GFMA, Climate Bonds Initiative, FinTech4good, Everledger, Oxford University, The Spatial Finance Initiative, Catapult, Finance for Biodiversity, and GoImpact.

This newly formed collaborative body of global influencers will focus on the fact that investors actually need to confidently invest more in sustainable economic activities.It will also aim to accurately inform and increase capital raising and allocation at the scale needed to tackle global societies’ environmental and social challenges.

FoSDA has the following key goals:

  • To articulate the future data requirements that investors and governments need to accurately integrate ESG data into decision-making processes.
  • To highlight new technology and data sets, in a post-COVID-19 world, there is even more need to channel stimulus that can support a just transition to sustainable development.
  • To determine data needs and how to satisfy them for investors who want to take greater account of SDG-related risks and impacts.

The Future of Sustainable Data Alliance will lead the way in delivering decision-ready data to the investment community, and in so doing, empower all stakeholders to make better, more sustainable decisions.

FoSDA members will strive to foster an evolving mindset; co-operate with regulators and the industry; and work to empower all organizations to meet our shared goals of economic stability and inclusive growth.

As we step into a new decade, it is this form of deep collaboration that will ensure that we have the right mix of data, tools and human expertise necessary for all stakeholders to make a positive and informed contribution to the fulfillment of the UN’s SDGs.

Tell us about your company and how you can help FoSDA achieve its sustainable data goals this year.Webinar: Biodiversity loss: Why your portfolio is already at risk

The post New alliance helps close sustainable data gap appeared first on Refinitiv Perspectives.


 
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