Transitioning to Green Electricity Supply in The Lantau Pique Transitioning to Green Electricity Supply in Asia

In this new edition of Lantau Pique, we take a closer look at green power procurement and decarbonisation frameworks available to MNCs in Asia. We particularly direct our discussion toward some of the deeper and often overlooked or misunderstood challenges that must be overcome before the green energy space for MNCs in Asia can be catalysed and grow materially larger. We conclude that the “time is now” but much still needs to be done to achieve decarbonisation efficiently and equitably.

CSR Focus Shifts to This shift in focus is starting to take hold toward some of the deeper and often in Asia. We observe—even amidst the overlooked or misunderstood challenges Asia stresses of the global Covid-19 that must be overcome before the green In recent years, leading multinational pandemic—increasing corporate interest energy space for MNCs in Asia can be companies (MNCs) have been shifting in strategies to identify and prioritise catalysed and grow materially larger. We their sustainability focus from a simple green energy procurement throughout then take a fundamentals-based look at compliance orientation towards one of the region. This strengthening trend was emerging frameworks and some of the strategic leadership. As noted recently foreshadowed by growth of the RE100 associated challenges in Mainland China. by BlackRock’s CEO, Larry Fink: “all initiative which, in 2019, “experienced its Policies, politics, and commercial investors, along with regulators, insurers, biggest year yet” with 241 member opportunities will periodically deviate from and the public, need a clearer picture of companies and with 40 percent of its economic fundamentals for how companies are managing growth coming from the Asia-Pacific understandable reasons, but the sustainability-related questions.”1 The region.3 RE100 is the global corporate longer-term implications generally tie expanding range of Environmental, initiative bringing back to those fundamentals. Social, and Governance (ESG) scoring together hundreds of large and ambitious initiatives that aim to quantify Corporate businesses committed to 100 percent Social Responsibility (CSR) activity— renewable electricity.4 The Time is Now broadly with the intent to guide future The RE100 commitment and similarly Even as they shift their focus, MNCs face investment—depend on robust oriented initiatives are growing, but they challenges advancing their renewable frameworks capable of providing both still represent nothing close to the level of energy strategies in Asia. In most Asian comparable and timely data. overall activity and interest across the countries, the available green corporate sector required to achieve In Asia, however, opportunities for procurement options are generally a mix science-based decarbonisation CSR-minded MNCs to invest in green of insufficient, complex, unclear, or objectives.7 An emerging realisation is energy procurement opportunities can be unexpectedly expensive.5 It is not the dramatic extent to which corporate difficult to identify. Furthermore, the surprising that many MNCs have been commitment to CSR activity must further frameworks and transparent information focussing in North America and Europe. increase to move the needle on access needed to support more robust Yet, without much greater progress in decarbonisation. investment are still evolving in most Asia, MNCs will not be able to meet their markets. As an increasing number of increasingly stringent global targets as Accordingly, one has to at least consider CSR-minded MNCs and leading regional members of initiatives such as RE100 or that there will, or at least should, be 6 companies—and their supply chain Science Based Targets. faster growth in the focus on renewable partners—work to meet ambitious and energy over the next decade—and this In this new edition of Lantau Pique, we often high-profile Scope 2 and Scope 3 increase must not simply offset growth in take a closer look at green power emissions targets by 2025 or 2030, they electricity demand, but it must start procurement and decarbonisation will need to do redouble efforts to meet materially displacing conventional frameworks available to MNCs in Asia. those commitments in Asia.2 generation at an increasingly faster rate. We particularly direct our discussion

Transitioning to Green Electricity Supply in Asia 1 | The obvious consequences for costs and Figure 1: Project Economics are Relative displace generation from existing associated risks feed into more difficult (Illustrative) conventional generation resources. and nuanced questions of who pays, Cost per MWh (Levelised) Accordingly, renewable energy resource when do they pay, and how much will it development depends on the MWh all cost. One can reasonably expect a supplemental revenues from green step-change in the complexity and attribute certificate sales, DPPA materiality of the associated commercial, NEW arrangements, or special tariffs (e.g. policy, and regulatory challenges for RE subsidies).10 Resource energy system stakeholders. But how might this play out? Stage 4 is reached when the penetration of renewable energy hits such a high level Early adopters stand to gain more than in a location that some volume of slower adopters in the same way that the electricity that could be generated must swift can win in a game of musical NEW be wasted due to constrained system Conventional chairs.8 These advantages include the Power Station conditions. Whenever more renewable possibility of lower cost options; more energy is available than the system can informed integration of renewable energy Mostly Mostly safely and securely accept at a location Fuel Capital- certificates and green attribute Cost Related or point in time, then some renewable Cost certificates in general; and greater energy generation resources must be certainty in relation to future cost curtailed (limited). Additional costs such INEFFICIENT exposure. Additionally, early adoption EXISTING as battery storage must then be incurred Conventional offers opportunities to influence the Power Station to enable recovery of this curtailed power development of renewable energy and and maximised renewable energy green attribute certificate arrangements generation potential. as they evolve. Stage 5 is reached after the

EFFICIENT decarbonisation target has been EXISTING sufficiently satisfied that there are no The Future Cost Curve Conventional Power Station longer any carbon-emitting options left is ... Complex for consideration. At this point, if it is no

When the cost and performance of new More Expensive Less Expensive longer permissible or economic to renewable energy technologies are develop further conventional generation compared directly to the prospect of cost-related-risks facing stakeholders resources, there would be no further building new conventional technologies, during the energy transition. need for green attribute certificates with renewable energy options are getting 11 any value linked to CO2. closer and closer to being “in the money” The initial development of renewable where they are not already. The energy resources at scale requires The speed with which a power system economics of offsetting incremental comparatively high subsidies, often in the traverses these stages and, of course, growth or displacing the most expensive form of Feed-in-Tariffs (FiTs). As their precise shapes, depend on a peaking resources on a system, however, illustrated conceptually in Figure 2, the combination of technological progress, are very different from the economics of result was a dramatic reduction in cost the degree of policy pressure, and the displacing relatively more efficient existing and an improvement in performance over collective impact of MNC activity. It can generation, a point illustrated in Figure 1. time. In retrospect this was effectively be more cost-effective (and predictable) Stage 1. to lock-in long-term renewable energy New renewable energy resources are resources at the earlier stages of this most likely to be “in the money” in an Stage 2 is where much of Asia is now or development trajectory. economic sense when they compete is soon approaching. Each year there will with the cost of developing additional or be more opportunities for renewable Additionally, these stages are neither replacement conventional energy that have reached strictly sequential nor mutually exclusive. resources.9 With a continuing push for “grid parity” or that can otherwise be Depending on the physical and electrical more and more renewable energy, developed with minimal or no subsidies. limitations of the transmission or however, new renewable energy distribution networks, it is possible to be resources must begin to displace existing Stage 3 is where some Asian countries at Stage 4 with curtailment in certain efficient generation capacity or wait for (or regions within countries) are moving, locations given the nature of renewable such capacity to break-down or retire. and where we expect to see increasing energy resource availability (better wind The speed and extent of this replacement focus and interest. Stage 3 is attained or solar resources can be geographically / displacement process determines the when new renewable energy resources concentrated), while being at Stages 2 or 3 in other locations.

Transitioning to Green Electricity Supply in Asia 2 | Figure 2: Stages of Renewable Energy Relative Cost

Period of dramatic price / performance improvement More costly Transition Complete. (Higher REC price or Renewables are less combinations of Certificate-based FiT needed) expensive than building renewables plus storage programmes may cease to new conventional or other options to support certificate value once RPS targets increase, generation and may maintain security of transition is made – as requiring renewables to also displace least supply conventional energy ceases displace more efficient efficient existing to be allowed or available as 1 existing generation, conventional generation alternative options – as all materially reducing value is once again in the wholesale prices due to 4 electricity market periodic excess supply 2 and we start to see 5 periodic curtailment 3 (Effective) Cost per MWh

Policy Support (FiT) Move past FiT  RPS Tighten RPS Time

Power systems are complex and their terms of sophistication, commercial used to guide more efficient use of underlying economics highly location opportunity, third-party access rights, technologies that influence demand, specific. At any of the above stages, tariff levels and structures, and policy and integrate storage, and signal the value of there may be a need to build out or regulatory settings (including level of using renewable energy to displace otherwise augment transmission or deregulation across the electricity conventional generation resources more distribution network capacity, or to cover industry value chain). In Asia, only efficiently. After all, the world is moving the costs of ancillary services to maintain Singapore and the have towards digitalisation as well as system security (due to renewable well-developed electricity wholesale and decarbonisation, and big data solutions resource intermittency). The policy retail markets. are seeing application in a wide variety of settings for how to attribute these costs industries, including electricity. Markets (who pays)—whether using a causer or Japan has wholesale and retail markets that use data to produce more accurate beneficiary pays framework, or in some which support green energy contracting, price signals can support deeper and other manner—become important as but Japan’s electricity markets operate more effective integration of new well. What might initially be thought as within several structural and institutional demand, supply, and storage politically and commercially “easy” constraints that limit effective technologies.13 renewable energy strategies and policies, competition. South Korea has a working can quickly become much more complex wholesale market and an RPS Most Asian electricity pricing is still over time. (Renewable Portfolio Standard) system regulated, and few Asian countries have that supports a renewable energy markets to signal the economic or The intersection of renewable energy and certificate (REC) market. However, these commercial value of wholesale electricity power system operations and economics operate within an overall Single Buyer supply at any point in time. In situations results in a much more complex beast to structure centred around KEPCO. where there are no wholesale markets, it tame; one that unfortunately rears its Customers have neither a choice of is important to develop a proxy value head exactly when and where supplier, nor can they purchase directly based on the fuel savings and other stakeholder interest in renewable energy from the wholesale spot market. costs that are avoided at the instant a and sustainability is most desirous of Consequently, there are no DPPA MWh of renewable energy is generated simple, attractive, and easy to arrangements available in Korea at and fed into the system. A wholesale understand solutions. present. market will have a wholesale market price that can be used as one measure of this Establishing an underlying wholesale “avoided cost.” Systems without The (Types of) Options market should be viewed as a significant wholesale electricity market head start in the race towards integrating Must Increase arrangements can utilise a value built up more renewables efficiently into power from the estimated system marginal cost The options available in each market 12 systems. The price signals from as a practical measure of “avoided cost.” depend on underlying commercial and wholesale electricity markets can be regulatory structures that vary widely in

Transitioning to Green Electricity Supply in Asia 3 | If the wholesale price (where it exists) or from some generators to customers that is that each market will develop at the estimated avoided cost proxy (where can take advantage of the wholesale different rates, with some being more it must be calculated) is not enough to market. This can result in stranded progressive than others. If MNCs must justify the renewable energy investment, generation costs. Most electricity match renewable energy procurement then some other source of value is markets in Asia, however, are regulated with their local usage within each grid, needed. Once a foundational “value” is such that any reduction in fuel costs may MNCs will likely find themselves stuck available via a market or proxy eventually be passed through to with few options in some markets whilst arrangement, it is much easier to customers whereas the costs of the others have options that they cannot take structure and evaluate additional capital invested in conventional power advantage of. Visions of future energy commercial structures and options. stations are still regulated and are worlds (Figure 3) invariably appear more recovered through tariffs. Who pays for orderly than practical realities allow.14 such “stranded” costs is a key question, Benefits and Costs Need particularly given the extent of cross to be Understood subsidisation in many electricity tariffs in Summary Asia. At the same time, the extent that As the focus of many CSR-minded The adoption of more renewable energy conventional generation benefits from MNCs shifts more intensively towards can reduce CO emissions but that is not 2 subsidies of any sort should also be Asia, there’s no time like the present to the only positive impact. When considered. establish a strategy for meeting assessing different policies and objectives whilst recognising and either approaches, the wider range of benefits Another issue is the relative time profile mitigating or working around the and costs may also need to be of collective MNC renewable energy challenges in the region. This considered. One of the major benefits of targets versus the pace that a country extraordinary period marked by falling the original US sulphur dioxide emission might have adopted on its own. The renewable energy prices and increasing regulations that set up a trading market faster that MNCs seek to reach 100 performance is not coming to an end in emission “allowance” (much like percent renewable energy for their Scope anytime soon, but as power systems renewable energy certificates) was that 2 emissions (and the more pressure display increased penetration rates for many of the same efforts to reduce SO MNCs place on their supply chain 2 renewable energy during the run-up to emissions resulted in reductions of other partners to reduce emissions), the more 2030, more complications will emerge, types of emissions, especially particulates aggressively these companies will potentially leading to higher system (which were later shown to constitute a implicitly “compete” for a proportionately integration costs. Accordingly, waiting for material health risk). In the case of larger share of the commercially available future developments or clarity involves renewable energy, CO is the emission renewable energy at any point in time. 2 exposure to potentially volatile future type likely to see a significant reduction. Such competition within a given market is costs versus taking steps now that lock The benefits of renewable energy in Asia one part of the challenge. The other part in reasonable outcomes over a longer are thus also a function of the time frame. environmental standards applicable to existing conventional generation Figure 3: Visions of a New Energy World Abound resources.

On the other side of the ledger, there is the question of what (if anything) renewable energy resources pay (or should pay) for access to the transmission or distribution system and for ancillary services that are required to manage system security. Various market designs around the world address these types of issues differently. From an economic efficiency perspective, the main challenge is to identify how to assign costs in ways that achieve a balance.

In competitive wholesale markets, significant adoption of renewable energy tends to depress wholesale prices, resulting in a potential transfer of value

Transitioning to Green Electricity Supply in Asia 4 | At the same time, the absence of information, then they will support poorer potential to further expand opportunities practical or viable options in many decision-making and less effective for DPPA arrangements. Mainland China countries creates pressure for change. outcomes. The fundamentals matter. At is a good example of the problems of New policies and markets will need to be the same time, waiting for perfection is a emerging green attribute certificate developed and pricing will need to bit like waiting for Godot.15 markets and is the subject of a mini- become more dynamic, while tariffs will review in the final section. need to be restructured. Information and The challenge is to find the right reporting standards must also mature practical balance while still getting to and become sufficiently transparent and green. A Growing Certificate robust that the information reported Market(s) properly reflects the underlying To date, there is no single trading and contribution to sustainability that is the Green Attribute accounting framework to support a ultimate intent. Certificates global REC market (nor even one that A variety of options will be needed. contemplates how to make such a global Currently DPPAs are widely seen as Overview market work). There are no suitably robust and accepted mechanisms to preferred instruments—almost as A green attribute certificate—sometimes support REC inter-changeability, or even one-stop solutions to the green energy called a renewable energy certificate standardisation of reporting and tracking. procurement challenge. More flexible (REC)—is an instrument that represents Nor do we seem to be heading very REC-based options will also be needed the legal property rights to the quickly if at all in an international trading- over time especially as CSR activity environmental attributes associated with oriented direction from a policy extends throughout supply chains. a specific MWh of electricity produced. development or commercial Flexibility and profile matching become Buying a certificate does not require the implementation perspective.16 This is increasingly more valuable the closer one consumption of the associated unfortunate as standardisation and gets to a 100 percent target, which many electricity—in that sense the certificate is simplification are important to the MNCs are proposing to reach in less than ‘unbundled’ from the electricity. longer-term success of market-based a decade. There will be a need to Information on a certificate generally green attribute options. balance renewable energy supply and includes the generating site, the demand through trading and through environmental attributes (e.g. renewable The absence of robust standardisation smarter signals that robustly support electricity or carbon emissions reduction), has been well noted. For example, the storage and integrate smarter energy and its vintage (year issued). The International REC standard (I-REC) is an usage technologies. credibility and relevance of the attempt to develop a global “energy information on the certificate determines A key risk for policymakers is that the attribute tracking systems” emphasising its value from a CSR perspective. temptation to introduce attractive- information transparency to motivate standardisation (and acceptance). sounding green policies in the short run In this section, we focus on green I-RECs are available to be issued in many loses sight of the ‘big picture’ need to attribute certificates as an unbundled Asian countries and regions, including implement coherent and comprehensive product, rather than as part of a DPPA Mainland China, , Indonesia, restructuring over the long run. arrangement involving a bundled offtake Malaysia, Philippines, Singapore, Sri Unfortunately, poorly developed policies of electricity and the green attribute Lanka, Taiwan, Thailand, and Vietnam. that overlook fundamental economic (whether such attribute is in a formal REC Notwithstanding the number of countries realities may create opportunities for or just a stated right to the attribute). We in which I-RECs can be issued, activity in green energy development that consider that it will not be possible to most is still low. unintentionally benefit green stakeholders maximise the rate of decarbonisation at the expense of all others, setting up without both instruments. DPPAs will Despite the efforts of I-REC and many much more difficult problems for later. struggle to be suitable for smaller others, each country tends to pursue its customers without a costly tier of Along the way, ESG reporting and own initiatives as well, helping to keep aggregation and management given scoring has a natural and increasingly the overall market balkanised. In addition economics of scale of renewable energy important role in guiding future to standardising around a well- project development—much of which is developments. ESG reporting standards recognised green attribute certificate, it intended to be solved by smarter green and scoring are intended be based on would be useful to more clearly and attribute certificate arrangements. actual contribution to sustainability and logically define relevant regions within Conversely, if green attribute markets do not just adoption of specific mechanical which green resources can be developed not continue to consolidate and evolve, compliance instruments. If those with the support of the financial flows their weaknesses will eventually limit their instruments are founded on poor quality linked to the green attribute certificates. usefulness and value—constraining the or unreliable or mis-conceived For example, the market for European

Transitioning to Green Electricity Supply in Asia 5 | Guarantees of Origin (GOs) operates as a MNCs is that their actions be perceived otherwise be commercially viable on their hybrid market in which some can utilise positively as an example for others. own to reach levels that actually displace GOs from anywhere within Europe while lower cost conventional generation (and others may be limited to securing GOs thus need additional value support to do from specific countries. Such a hybrid Not All RECs are Created Equal so). Otherwise, the pace of approach could at least allow Voluntary RECs have relevance from a decarbonisation is strictly limited to stakeholders with relatively more financial CSR perspective if they are issued by meeting demand growth and the resources but with relatively less local projects that are not otherwise receiving retirement profile (natural or forced) of access to renewable energy projects to a subsidy.17 The absence of a subsidy is conventional generation resources. That use their financial resources more key—if a project is being supported by hardly seems to be an optimal or sensibly efficiently. some other green-related support structured framework for getting to scheme, then the green attributes green at anything close to least cost. European countries share electrical associated with the project should not interconnections and electricity trading logically be attributable to the REC In some instances, REC pricing is arrangements. Singapore is a good purchaser unless or until the REC particularly difficult to put in context. It example of a situation where physical purchaser also buys-out the other has been, for example, possible to buy limitations of local land resources and subsidy as well. hundreds of thousands of wind I-RECs in limited international electricity Mainland China from dealers at a price transmission interconnections have Compliance RECs are specifically utilised less than US 50 cents per MWh in confounded the process of renewable to comply with certain obligations, such voluntary market, technically making it energy development in ASEAN, whereas as specific RPS requirements. The value almost immaterial (relative to their a hybrid approach could help move of a compliance REC is strongly baseline electricity costs) for a company things along faster. RE100 standards influenced by the size of the penalty. The to claim 100 percent renewable energy. require that renewable energy purchased value of a compliance REC is often At best, however, this pricing reflects a needs to be in the same location as the higher than a voluntary REC because plain vanilla I-REC from a that electricity consumed. Physically this failure to comply typically involves a is not supposed to be receiving any could mean that renewable energy penalty. A REC registry should set out forms of subsidies. Such projects may resources are located anywhere on an the details of the underpinning REC indeed not be receiving any FiT, but they interconnected electricity grid (provided source in a way that assures—together may nevertheless enjoy additional the physical transmission capacity exists with the standard set by the revenue (relative to, say, Mainland China’s with which to actually accommodate a corresponding issuer and registry—that standard “on-grid coal price”) from other hypothetical transaction). Commercially the REC purchaser is gaining clear sources designed to promote green and from the perspective of regulation ownership of the green attributes. energy in particular locations. The and policy, however, there may be no specifics of these situations are rarely In voluntary REC markets, the lowest way to implement such arrangements transparent, necessitating almost REC price may involve lesser degrees of without electricity market reforms. project-by-project due diligence and the location matching, timing of generation associated costs. There is clearly much work to be done, (i.e., vintage) against timing of use, or but first it helps to understand REC guarantees that the projects are not In contrast, an “LGC” (a green attribute pricing. double dipping in other possible registries certificate from a large renewable or green funding sources. Double generator) in a compliance market in dipping would invalidate the creditability Australia could cost around AUD 30-40 The Wacky World of REC of MCN’s CSR claims—the key objective (around USD 21-28) in 2020 per MWh Pricing of sustainability initiatives. A project that (which in turn is half the price of two is cost-effective to develop without any years ago). Similarly, Mainland China’s From an economic perspective, the subsidy could also choose to issue own domestically issued and traded concept of a REC is straightforward. All voluntary RECs and attempt to raise even Green Electricity Certificate (GEC) is the difficult problems that may arise are more money as a result. There is little currently priced at around USD 25 per associated with the details of how RECs that can or should be done to stop this, MWh from wind resources. This price are implemented—including how to however, as the true problem is likely to accords roughly with what is required to establish and maintain a transparent and be that the demand for RECs is too low, obtain green attributes from a project credible linkage between a given REC rather than that some suppliers might otherwise expected to receive a subsidy and the CSR claims it is intended to make additional profit under certain payment under the FiT scheme. support. Perception matters. If RECs conditions. The point is not to stop at are viewed as inferior by stakeholders, some modest, non-disruptive level of It is difficult to sustain confidence in REC then for CSR purposes they are inferior, renewable energy but to continue market products unless they are as part of the benefit for CSR-minded pushing past lower levels that would fundamentally transparent and credible.

Transitioning to Green Electricity Supply in Asia 6 | The extremely low prices for wind-based Figure 4 highlights differences in REC restrictions limit the supply of eligible I-RECs in Mainland China suggest a lack pricing across different REC markets, RECs while ensuring demand from of confidence in the origin of the lower including those that are driven by load-serving entities, causing upward pressure on prices for RECs. This cost I-RECs. This is due to limited compliance requirements (linked to RPS upward pressure on REC prices 19 transparency across various voluntary targets) and those that clear voluntarily. translates to higher prices for REC/emission platforms, combined with The differences highlight the very compliance-based and voluntary RECs in the potentially high cost of private localised nature of REC pricing dynamics states with RPS. As a result, RECs (both compliance assurance checking as explained in the next section. compliance-based and voluntary) tend to exhibit higher prices in the states with the (verification/validation costs) as would strictest RPS requirements and lower likely be required to confidently recognise prices in states with low or no RPS.20 these I-RECs under the RE100 Why the Big Differences? framework. When pricing anomalies or As hinted in the last section, REC prices RECs represent one part of the overall transparency exist, the question will vary because the value of a REC flow of value to the renewable energy invariable emerge: “what is one getting” depends on what specific requirement project developer. The other part is the for a given expenditure on a particular give rise to the need for the REC in the money received for the electricity that the type of REC? When this question has no first place, and these requirements also renewable energy resource produces. clear answer, or when it can only be vary. When analysing REC pricing in the The developer would pursue the project if answered clearly after undertaking United States, Barbose (2017) noted: and only if these sources of revenue separate, expensive validation tracking cover the costs of developing and RECs used for RPS compliance have operating the project. Accordingly, the efforts, then the overall marketplace is different pricing than RECs used for not (yet) working. voluntary purposes. Prices for RECs more money a project expects to receive used for compliance purposes tend to be from producing electricity, then the less it Consider again the Australian LGCs, and higher due to RPS programs that require needs to receive from RECs. Chinese GECs. These certificates derive regulated entities to source RECs from their value from fundamentally different specific states or regions. These dynamics versus voluntary I-REC market in Mainland China. The Australian LGC Figure 4: Compliance and Voluntary REC Prices Evolution in Different Markets price is intended to support build-out of Price evolution on different compliance REC markets renewable energy in the Australian 120 market, where wholesale electricity 100 market revenues on their own were not enough to support new renewable 80 energy projects at the time the 60

government set out the LGC obligation USD/MWh for electricity retailers. The Chinese GEC 40 price is higher because the GEC is 20 intended to replace much higher subsidy 0 payments expected to be received by 2013 2014 2015 2016 2017 2018 2019 already existing projects.18 The system is Korea REC Solar Korea REC Non-Solar India REC Solar India REC Non-Solar Australian LGC UK ROC meant to collect funds from voluntary corporate/individual contributors to close the subsidy fund deficits. For RE project Price evolution on different voluntary REC markets developers, GEC is an option to receive 60 the regulated FiT at a negotiated discount at present, rather than waiting for the 50 long-delayed payment. 40 The oversubscribed and delayed subsidy fund payments have indirectly become 30 USD/MWh the key driving force behind GEC pricing. 20 Understanding the underlying dynamics helps to assess the strategic value of 10 acting earlier versus waiting for further market developments, with a focus on 0 2013 2014 2015 2016 2017 2018 2019 the instruments available or expected at any point in time. Dutch Wind GO Dutch Solar GO Belgian Solar GO EU Solar GO EU Wind GO USA Voluntary REC

Transitioning to Green Electricity Supply in Asia 7 | Conversely, if a REC in a location has a and with DPPA arrangements is that the The physical transmission system is a very high price, it should be because the location of the resource and the location key factor in determining how much electricity that corresponds to that REC is of consumption are not always the same. renewable energy can be developed. As at a much lower price. In an extreme These issues have been particularly renewable energy targets increase, or as case, the price of the REC could cover relevant in Mainland China where the high-profile customers seek to accelerate the entire cost of the resource with the best wind and solar resources are often their own progress towards RE100, the result that the electricity is paid zero value located thousands of kilometres from physical electricity system and in the wholesale market.21 This implies consumption centres. In recent times, associated trading arrangements need to an opportunity to develop battery storage Mainland China’s transmission system evolve much faster. It is time for third- that taps into the very low or zero-priced could not handle the renewable energy party access of the electricity system— wholesale electricity and time-shifts that being generated and the resources had which means it is time to get wholesale electricity for use in another period where to be curtailed. Location matters, but an markets or equivalent market-like the wholesale price is much higher. Such overly strict focus on location can also systems back on the table. The future a relationship does not necessarily apply delay global decarbonisation. green and digitalised world depends on consistently in practice, however, as few more accurate information about prices Asian countries have underlying electricity Throughout Asia, an even larger problem and quantities and the flexibility to wholesale markets that vary dynamically is that while most countries have optimise these through trading, changes with overall supply and demand. electrical grids that are interconnected in behaviour, smarter technologies, with neighbouring countries, these storage integration, and other smart If the value available for the electricity interconnections are barely used to incentives or pricing signals.23 generated by a renewable energy anything close to their potential. The resource is high enough, then investors comparatively unused interconnection may propose and develop green energy between Singapore and Malaysia is a Summary resources without any additional source case in point.22 Of course, Malaysia is Credibility and relevance are the key of revenue. This can be great when it also interconnected with Thailand and so concerns when markets are just getting happens, and very desirable. However, if on. Other markets have abundant started and before a clear best standard there is value in decarbonising even renewable energy resources far in excess has emerged. European GOs are an faster, then once a given renewable of local demand. Interconnection access example of an attempt at standardisation energy technology is “in the money” in a is a way to make those resources that creates flexible benefits as a result.24 particular region or at a particular point in available to other nearby regions. There is no such equivalent regionalised time, the target for total renewable Electrical interconnection is an important option established yet in Asia. Instead, energy adoption should be increased aspect of localisation—it is what allows there are often multiple certificate issuers accordingly – providing on-going support European Guarantees of Origin (GOs) to and registries and types of certificates for REC pricing whilst also managing the work throughout Europe or for emerging in Asian markets. Certainly, impact of increasing renewable energy companies in Houston to buy RECs from this is the case in Mainland China, where on the energy market (and all of its other wind farms in the Texas panhandle, the lack of a standardised product with stakeholders). Clearly this means that which is about the same distance as exclusive environmental attribution REC pricing is inextricably tied to policy from Singapore to a wind farm in Phuket, means the certificate market currently choices concerning the speed with which Thailand. sees unstable prices, limited trading a country decarbonisation. Suppose that there are end users with volume, and competing products with All of this highlights a very useful feature financial resources and strong renewable near-identical functions. of DPPA arrangements. DPPAs can be energy commitments in Singapore REC pricing and availability are naturally structured as a single price that bundles looking for renewable energy that cannot policy sensitive. Consequently, electricity and corresponding RECs be developed in Singapore—hardly a forecasting REC pricing involves a together from the perspective of both the far-fetched notion. What do you do? To combination of detailed analysis and seller and the purchaser—which unleash the renewable energy structured thinking to account for the fact mitigates risk. DPPA arrangements development potential of electrically that underlying REC price drivers are depend on how all other aspects of interconnected regions, there first needs linked to policy directions, the availability electricity systems that still need to be to be a structure to support physical and cost of conventional generation paid are recovered from the buyer and electricity trading as well, complicating resources, and technological the seller, as appropriate. and delaying progress in the developments affecting renewable energy development of renewable energy and performance and cost. Developing and increasing the cost (potentially) to end maintaining a transparent and stable Local Not Loco users in locations with fewer renewable policy framework for REC pricing is energy options. One of the challenging issues with RECs important and difficult.

Transitioning to Green Electricity Supply in Asia 8 | Absent a viable REC market, many MNC are also emerging challenges from need to resolve electricity pricing, strategies invariably have shifted towards the perspective of the designer or cross-subsidy, and associated energy DPPAs as mechanisms that provide sustainability-minded policymaker. At poverty concerns. control over project development, timing, some point these two perspectives and access to the corresponding green must be reconciled. Amongst the most attributes.25 DPPAs can provide MNCs complex and politically sensitive involve The Bedevilling Issue with a clearly traceable renewable energy the prospect of tariff reform to address of Tariff Structures and source but they do not necessarily (cross-)subsidies. support the least cost long-term best In some cases, proponents of green Cross Subsidies approach. A circular challenge awaits energy transactions seek wheeling As shown in Figure 5, commercial and us. DPPAs will struggle to address the charges or transport charges that— industrial customer tariffs are much needs of smaller companies without depending on how they are structured— higher than those of domestic customers robust mechanisms to facilitate bypass these cross subsidies or other in markets such as India, Malaysia, aggregation and trading of the green charges that must still be recovered from Mainland China, Taiwan, and Vietnam. attributes—precisely what RECs are other customers. Accordingly, the This result stands in sharp contrast to supposed to be in the first place. impact of CSR activity and policy what is seen in Singapore, Europe, and evolution is not strictly limited to those the United States. Accordingly, any Confronting who produce and seek to consume policy that opens options to large green electricity or secure green energy commercial and industrial customers in Structural Design attributes. There are other often complex the cross-subsidised markets has Challenges impacts with implications for other power potentially complex and politically system stakeholders and customers. It awkward implications for tariff There are many challenges from will be difficult to advance the CSR rebalancing over time. the MNC perspective. But there agenda fully without also recognising the

Figure 5: Tariff Structures to End Users

Ratio of C&I to Domestic (Residential) Tariffs

Commercial Customers Pay Commercial Customers Pay More than Domestic Customers Less than Domestic Customers

(Cross Subsidy Indicated) (Likely to be Cost Reflective)

Industrial Customers Pay Industrial Customers Pay More than Domestic Customers Less than Domestic Customers

(Cross Subsidy Indicated) (Likely to be Cost Reflective)

Transitioning to Green Electricity Supply in Asia 9 | What this means is that every opportunity The Vexing Issue of currently embedded in the tariffs charged for a larger commercial or industrial to the corporate customer.26 customer to secure a DPPA via wheeling Wheeling Charges charge arrangements needs to be A common issue that emerges time and Figure 6 strips away all the detail to make thought through carefully in terms of what time again is whether there should be a simple but important point. When a costs the green customer should something like a “wheeling charge” or decision-maker makes their choices, they continue to pay. It also affects the “tolling charge” that must be applied to only consider the factors that are relevant opportunities for behind the meter solar convey green electricity from a grid- to the decision-maker. If factors are not development and the implications for net connected solar or wind resource to relevant to the decision-maker but are electricity metering programmes. When corporate (commercial and industrial) relevant to others, these may be commercial and industrial tariffs embed customers willing to enter into a DPPA. overlooked. The left-hand panel depicts cross-subsidies that benefit domestic In fully unbundled and restructured a good private decision involves benefits customers, the loss of electricity sales to electricity markets, the various functional that are greater than the costs. The commercial and industrial customer components are typically separated outcome is good privately and socially. In revenue can have a disproportionate (unbundled); risks are defined and the right-hand panel, the same decision impact on the utility and subsequent tariff allocated; and in some cases, legacy is good privately, but certain costs are adjustment process. contracts or other potential stranded not apparent to the decision-maker and costs have been separately managed or thus have unexpected consequences for Tariff design changes may be accommodated. society at large. If these consequences appropriate, such as removing or are negative and material, then the retooling cross-subsidies between A wheeling charge in a developed conditions have been created for a good different end-user categories, as well as market may indeed be a transport- private decision that still leads to bad the inclusion of fixed charges (demand oriented cost recovery charge. But many public consequences. charge), or other arrangements—and other forms will likely already have these will necessarily impact the occurred. When thinking about how to To bring this abstraction back to the perceived value of renewable energy structure a wheeling charge in markets question of wheeling charges, consider developments on customer premises. with significant embedded cross- that pursuing the best possible deal Some degree of tariff reform and cost subsidies—or that have not been fully commercially has obvious merit but may shifting is likely to be inevitable—the unbundled, or where there may be not align with the best long-term pathway challenge is to navigate the necessary significant legacy fuel and generation for reaching decarbonisation. Leaving a transition while maintaining support and contracts or capacity costs that are still big part of the problem for others to pay consensus around increasing renewable being recovered—sticky political and for is unlikely to facilitate the kind of energy development. A political backlash regulatory problems can quickly emerge. accelerating decarbonisation trend that is that chills the pace of green development A transportation-only wheeling charge needed to meet global science-based out of concern over who is really paying accompanied by a DPPA between a targets. A significant part of what is for it all is unlikely to be a preferred overall green resource and a corporate needed going forward is sensible policy outcome. customer has the potential to bypass a advocacy backed by analysis and significant portion of the costs that are insights that identify and support options

Figure 6: The Good, Bad, and Ugly of Wheeling Charges and Third-Party Access (TPA)

Good Private Decision with Good Public Consequences Good Private Decision with Bad Public Consequences

Costs/ Apparent Benefits - = Net Benefits Benefits - Charges = Charges Benefits

Costs Costs recovered recovered through through TPA TPA charges charges What happens if certain costs are not accounted for in the Costs not TPA regime? recovered “Good” TPA ensures that decision-makers see through Who pays in this signals that reflect the underlying costs and benefits of their TPA case? potential choices charges Why should they?

Transitioning to Green Electricity Supply in Asia 10 | for MNCs while providing a robust much more expensive options to Summary pathway for energy sector development contribute to the acceleration of Taiwan’s Most end users pay attention to the in each country. overall decarbonisation; or (3) find some prices they face for the electricity they way to carve out credit for use but will also pay attention to material decarbonisation initiatives that would savings from any options available to Who Gets the Credit? have happened anyway. them for managing and sourcing their Renewable energy development clearly To continue with Taiwan as an example, electricity usage. Even customers has been increasing, but typically the DPPAs are currently available but have thought to be broadly resistant as a class resulting green electricity has been been commercially inferior (from the have shown around the world that they purchased directly by “the grid” or is perspective of the renewable energy will pursue rooftop solar opportunities supported by feed-in-tariffs or other developer) to the available feed-in tariff once the savings become sufficiently mechanisms. These have been arrangements. Accordingly, despite the clear. A highly compelling combination of especially successful in Mainland China, availability of a renewable energy increasing technology options, material Taiwan, and the Philippines. Recently contracting mechanism for corporate cost reductions, and growing Malaysia’s experience has been similar customers, DPPAs have been sustainability preferences has launched with respect to its Large-Scale Solar uncommon. The recent announcement an irreversible process. programme, in which the Large-Scale by TSMC concerning an extraordinarily Solar (LSS) participants receive a price When customers make choices, they do large offshore wind DPPA being a set by an auction. so with their own costs and benefits in stand-out exception that is so far from mind. Accordingly, tariffs become one of recent norms as to almost be the For every MWh renewable electricity the more complex issues to resolve, in exception that proves the rule.27 consumed, the presumption is that there part because of the linkage to policies of is one less conventional MWh from a In some markets, such as Mainland cross-subsidy, and more generally CO -emitting resource produced. This is 2 China, there are opportunities to directly because regulated prices are almost how a renewable energy resource can be invest in projects, but it is still necessary always ‘sticky’ or very slow to respond to used to imply an amount of avoided CO 2 to ensure that you obtain clear access to changing market dynamics. Slow emission. When countries support the associated green attributes and not moving tariffs pose durable signals to renewable energy via mechanisms such just the investment returns on the project. those who have options to reduce their as feed-in tariffs and auctions, the green Typically, this requires a close alliance costs by avoiding those tariffs. Eventual attributes are paid for by the system on with a trusted developer/operator partner. tariff adjustments pose an unavoidable behalf of all customers. The result is a Unlike the conventional utility industry risk that decisions taken to avoid tariffs reduction in overall system emissions with its relatively few, very large-scale will fail to produce the savings desired attributable to electricity usage, but this is units and traditional ways, the ownership (owing to subsequent changes to those a passive outcome from the perspective and control structure of the renewable tariffs to reduce their fundamental of MNC CSR activity and associated energy sector in Mainland China (as in “avoidability”). All stakeholders should messaging to stakeholders and many countries) is a very diverse mix of know by now that this is the nature of the customers. small, medium, and large businesses and game. Those who have taken steps to reduce their electricity costs by some Suppose a market pursuing this joint venture partners. These projects combination of self-generation and approach increased its renewable or often change hands over time, as contracting may well see (certain decarbonised electricity incrementally developers or investors successfully spin components of) their tariffs increased in until finally achieving zero carbon off individual projects or meaningful the future to re-align who pays for what. emissions. At that point, all customers portfolios or, in many cases, run into financial challenges. using electricity from the grid would enjoy For MNCs, the additional challenge is the benefits of being carbon zero with Sorting through attribution is complicated how to stay “ahead” of the curve when respect to their electricity usage, at least. by the challenges of avoiding double countries pursue renewable energy However, if this point in time is after the counting of what one is paying for. We policies but do not provide mechanisms target dates established by a CSR- recommend that any project—whether for voluntary supplement. Countries will minded corporate, then it will not help the using existing or newly emerging green need to devise mechanisms that facilitate corporate meet its own private target certificate registries or utilising a bespoke a mix of mandatory overall minimum and deadline. For example, if a corporate arrangement—be carefully audited and voluntary incremental renewable energy customer operating in Taiwan seeks to documented. uptake. In this way, it is possible to be carbon zero by 2030 but Taiwan itself ensure that both country-wide targets are aims for 2050, then either the corporate met and MNCs and others contribute must either (1) wait for alignment with additionality, whilst still meeting their own Taiwan’s goals; (2) undertake potentially more stringent standards.

Transitioning to Green Electricity Supply in Asia 11 | Case Study: are unsure of how to best evaluate them When More Options is from a cost and effectiveness Mainland China perspective. There is no single way to Too Many Options advance the objectives of the RE100 and Table 1 summarises the emerging range Mainland China’s massive economic similar decarbonisation initiatives, of domestic and international instruments growth alone accounts for a significant however, without a significant expansion that are currently available to support green attribute trading in Mainland China. portion of the world’s increased CO2 or simplification of the options available in emissions over the past decade (Figure Mainland China and throughout Asia. Over time, greater convergence is 7). For example, whereas Mainland The nature of the options emerging in needed around a common standard and a more standardised certificate product China’s share of global CO2 emissions Mainland China and the speed with was 11 percent in 1997, it had increased which they become commercially for which it is easy to verify and validate to 40 percent of the world’s emissions by attractive to MNCs will materially authenticity. 2017.28 Mainland China’s emissions determine the intensity of the impact of growth dwarfs that of Japan and South MNC activity on global CO2 emissions. Korea put together. Accordingly, some of Mainland China the more common questions we received In this section, we take a more forensic Renewable Portfolio for the Asia Pacific region focus on the look at Mainland China—an emerging prospects for development and and evolving market for renewable Standard (RPS) procurement of renewable energy in energy procurement. With extensive In May 2019, Mainland China formally Mainland China. power sector reform and development of introduced its Renewable Portfolio the electricity markets, more renewable Standard (RPS) after several rounds of Over the past few years, an increasing procurement options will become comments by NDRC (National number of MNCs have made progress in available and mature. The clean energy Development and Reform Commission) being able to contract for renewable transition in Mainland China and and NEA (National Energy energy in Mainland China, but most have emerging Renewable Portfolio Standard Administration). Later, in February 2020, 29 found it challenging. Some have opted (RPS) policies will broadly increase the the NDRC provided an outline for a to wait and see what future arrangements options for (and the focus on) renewable provincial-based mandatory renewable emerge while others see options now but energy development. consumption plan, further advancing

Figure 7: China’s Rapidly Growing Share of Global CO2 Emissions

Transitioning to Green Electricity Supply in Asia 12 | Table 1: Available Green Attributes Certificates in China

Estimated or Framework Type Name Issue Entity Approximate Recent Comments Fulfilment Price Range I-REC (International I-REC Registry Solar 0.65 USD/MWh RE100 Prices are bilaterally negotiated Renewable Energy between the I-REC Participants Certificate) Wind 0.45 USD/MWh and the I-REC buyers.

C-GEC National Renewable National Renewable RPS Unproven/inactive: Only ~0.15 Information Centre/ Information Centre/ percent of the approved (China Green CREEI CREEI RE100 certificates were traded as of Electricity Certificate) April 2020.

GoldPower Climate Friendly/ N/A RE100 Registered with the I-REC WWF standard. LEED Designed to signal additional contributions (in areas such as healthcare, education, employment, gender equality, and biodiversity.

Third-party auditors certified. Renewable Electricity Focus Limited wind, hydro and biomass projects in China.

TIGRs APX N/A RE100 Require third party verification.

(Tradable Instruments Strict no double counting for Global requirement. Renewables) Can convert carbon credits to RECs and vice versa.

Nearly no China projects.

Emission Offsets CCER NDRC N/A CORSIA CCER Scheme has been suspended since March 2017. (China Certified Emission Reductions)

towards actual implementation. The RPS Surplus quota trading will likely become a Renewable Energy Procurement imposes minimum requirements for mainstream forum for green attribute Opportunities in Mainland renewable energy consumption at the trading in Mainland China. Like all China provincial level covering all large RPS-supported green attribute trading, The extent of all types of corporate electricity consumers, as well as the price of surplus quota /GEC will renewable procurement in Mainland provincial-level grid companies, retailers, depend on the aggressiveness of the China is also still comparatively limited. consumers with captive power plants, RPS, the ability of the generator to find We summarise the options currently and any end users participating in direct costumers and secure revenues from available in Mainland China in Table 2, power purchase. renewable project electricity generation. ranking them qualitatively from most The underlying representation of GEC will mature to least developed. To fulfil the new RPS, obligated market also be the fundamental element in GEC entities are required to consume pricing in the future. With so many GECs As in many markets, the most accessible renewable energy directly or indirectly. linked to projects exposed to FiT subsidy opportunities often involve what can be Direct options include purchasing deficit issues, initial market price done immediately on a customer’s renewable electricity and/or having their dynamics are likely to be complicated premises (e.g. onsite, usually rooftop own on-site renewable facilities. Buying and will take some time to work out. solar). Grid-connected options involve equivalent products, which includes Ideally, GEC eventually becomes a substantially greater complexity and purchasing other market-obligated standardised certificate with clear uncertainty as direct power purchase entities’ surplus quota through representation of green attributes and agreements (DPPAs) are only beginning negotiation or purchasing GECs (Green easier to validate credibility. to emerge in Mainland China, are Electricity Certificates), can also fulfil RPS regionally limited, and are by no means indirectly. demonstrably robust.

Transitioning to Green Electricity Supply in Asia 13 | Table 2: Renewable Energy Procurement Opportunities in China

Capital Investment Nature of Availability Options Business model Comments Required? Certification in China

Off-site Direct Direct investment in Yes Developer is Yes Greatest control, but need a Investment projects responsible partner.

International Information Disclosure No Need to specify Yes Not all I-RECs are the same. Renewable Energy criteria to identify I-REC is not a single common Certificates acceptable I-RECs product but rather a common (I-RECs) information reporting platform.

On-site Renewable Self-consumption Yes Direct physical Yes Details depend on physical site. Generation delivery Development Net-metering Yes Direct physical Yes Negotiated with RE developer. delivery

Contractual Purchase Arrange with Energy Not required in most Negotiated Yes Service Company cases (Buyer involvement (Corporate/Direct in investment may be PPA) negotiated) Bilateral negotiation No Parties are Some Negotiated with RE developer. via power exchange responsible provinces centre Centralised bidding No Unclear – not well Some RE developer submits trading via power exchange developed provinces volume and price. centre Distributed energy No Emerging Some Requires proximity/ access to market trading provinces nearby projects. peer-to-peer trading with wheeling cost) Standardised China Standardised Green No Emerging Yes Currently not actively traded. Green Certificates Certificate Trading Market

That said, the overall renewable energy 8760 hour load curve at least one month sections, FiT pricing creates an issue procurement environment continues to prior to the start of dispatching year. Yet, when considering how those projects improve and there are policy updates by July 2020, no distributed solar project should count towards an RPS target. every year. Even so, there are few “quick has registered on JSPX for trading.30 wins.” For example, Jiangsu Province The FiT price is composed of two parts: launched a decentralized (1) the on-grid coal benchmark price; (2) 31 market (<20MW if on the 35kV Double Counting and the FiT subsidy . The FiT subsidy is implicitly the payment for the relevant distribution grid or <50MW if on the Solar and wind projects in Mainland green attributes of the renewable 110kV transmission grid) in 2019. Solar China developed under a FiT regime sell projects, so these green attributes are project developers/owners and the electricity generation to the Grid. Like logically attributable to those who pay the prospective RE customers must register the challenges associated with the FiT subsidy (in this case, from all at Jiangsu Power Trading Center (JSPX) question ‘to whom do the green end-users (excluding agriculture) who as market participants, and provide an attributes belong?’ addressed in prior

Figure 8: Subsidy/REC Double Counting

Grid company Under FIT I-REC buyers

On-grid coal price + Subsidy REC price REC price Electricity

RE generators I-REC Green Attributes Green Attributes (or other equivalent Green Attributes (Carbon reduction via using renewable electricity) (Carbon reduction via using (Carbon reduction via using renewable electricity) renewable electricity) renewable electricity certificates)

Transitioning to Green Electricity Supply in Asia 14 | Figure 9: RPS/GEC Double Counting

RPS Obligated Entities RPS Obligated Entities

Grid company Other RPS obligated entities (e.g. end-user with direct Under PPA power purchase)

On-grid coal price GEC price GEC price

RE generators China Green Energy 1 Electricity (Grid-parity projects) Green Attributes Certificate (GEC) Green Attributes 2 (Carbon reduction via using (or other equivalent (Carbon reduction via using Purchased GEC, Consumed renewable renewable electricity) renewable electricity) electricity, counted as renewable electricity counted as RPS RPS fulfillment certificates) fulfillment pay renewable energy surcharge). a double counting situation, the I-REC grid-parity projects without a FiT subsidy. Projects receiving subsidies are not registry cannot provide assurance. Care However, when grid-parity projects sell supposed to issue GECs unless they first (and additional expense) is often required electricity to the Grid at coal-benchmark surrender their subsidy, as they would to confirm clear entitlement to the prices, the Grid company can still claim otherwise receive the subsidy and a GEC corresponding green attributes. the environmental attributes via as payment for the very same thing. In consuming renewable electricity to fulfil practice, however, it is still widely RPS. Yet the RE generator is also eligible believed to be possible to participate in Double Counting Across the to issue GECs for sale to RPS-obligated multiple REC registries or continue RPS/GEC Schemes when entities. The existence of the RPS collecting the FiT subsidy while issuing Promoting Grid Parity Projects changes the nature of the associated RECs at the same time, as a result of the Figure 8 highlights another form of GECs, but trading behaviour can still complexities of frequently changing or double counting. With the recent result in double counting. complex ownership structures and the phasing out of Mainland China’s FiT expense and difficulty of auditing and scheme and on-going transition to REC/GHG Offsets Certificate tracking. grid-parity pricing, the concerns over double counting have changed in nature, Double Counting Figure 8 illustrates one type of double but have not been eliminated. Starting in A third problematic area of double counting. Whereas I-RECs have been 2019, grid-parity projects can both issue counting, illustrated in Figure 9, arises structured in Mainland China to reduce GECs and sign multi-year PPAs with grid because the carbon market and the REC the likelihood of a CSR-minded REC companies. This policy change was market have been set up as two purchaser from inadvertently entering into intended to promote development of separate markets. A renewable energy

Figure 10: Double Counting of REC/GHG Offsets

Grid company Under FIT or RPS REC price

Green Attributes Issue Green (Carbon reduction via using RE generators Attributes I-REC renewable electricity) (Carbon reduction via using (or other equivalent renewable electricity) renewable electricity certificates)

Carbon certificate price

Green Attributes Emission offset (Carbon emission reduction) based certificate (CCER, CER etc)

Transitioning to Green Electricity Supply in Asia 15 | project can potentially register for RECs energy transactions are still yet to evolve. on-site development as well as REC in one market and for GHG offset The pace of change, however, is trading are consistent with certificates in the other market because accelerating, with a growing mix of recovering the costs of the systems there is currently no system tracking and instruments available and a gradual move that are providing electricity supply reconciling both types of green attributes. away from subsidised FiT-based and backup to all customers. Green third-party access or wheeling Although green electricity usually arrangements and perceptible shift arrangements should not mitigates carbon emissions as well, there towards enabling and supporting a wider unintentionally or inadvertently shift has been some concern over double variety of renewable energy procurement cost recovery to unsuspecting counting if projects issue both certificates arrangements. customers or other stakeholders at at the same time. The I-REC some later point in time. organisation recently amended its code to require all registrants to include the Concluding Remarks: • Related to the above, unbundled potential avoided emission rights within RECs must also be recognised as a the I-REC.32 In the future if more Supporting Green complement to bundled sales under DPPA structures. DPPAs are good, interactions take place between the Energy In Asia but not everyone will be able to carbon and REC markets, further Solutions are emerging for many utilise DPPA options efficiently given regulations or guidelines will likely be renewable energy related challenges, the typical minimum size of such required in relation to the scope of each which is good, but these solutions still projects and the fact that syndicating certificate type. address only part of the overall set of interest in a DPPA project is issues that must be resolved over time: analogous to issuing and trading the corresponding RECs; Summary • REC types and markets must mature to a point where fewer • Sector regulators much also As the 2019 RE100 member survey different types of RECs are needed establish physical and financial highlights, Mainland China is still seen as to achieve the same overall result trading and access arrangements for one of the more challenging countries to through enhancements in electricity across jurisdictional procure renewable options due to its transparency, appropriate borders so that regions that have regulatory complexities—especially standardisation of requirements and fewer or more expensive renewable because the energy regulatory framework processes, and effective auditing energy options available can access in Mainland China is not mature and is and compliance checking; regions with more and lower cost frequently subject to change. It’s also renewable energy options – • CSR-minded stakeholders need to impossible for MNCs to ignore, given its recognise that this is one of the key recognize the likelihood of higher size. success enablers of REC and DPPA costs in Asia for green energy, markets in Europe and the United especially as renewable energy Key issues in Mainland China include the States which benefit from large and uptake and penetration increase to fact that: highly diverse electrical grids and the point of not just catering for renewable resource distributions; • Double counting issues require demand growth or displacement of on-going attention and focus to the most expensive conventional • Regional (multi-country) hybrid ensure the credibility and electricity generated on the system markets should be considered to acceptability of green attribute today; facilitate common standards, more certificates in Mainland China; flexible project development, and a • Policymakers, MNCs, and ESG faster pathway towards greater • Green certificate markets need to standard-setting organisations must regional renewable energy adoption; evolve to a more consistent and identify and work to eliminate robust standard; opportunities for double counting • More careful consideration should (“greenwashing”) without be given to the potential role of • Underlying pricing of electricity via undermining the concept value of technology in eventual matching of the so-called coal-on-grid tariff will RECs themselves. The march the time profile of renewable energy need to change; and towards decarbonisation will need generation and renewable energy RECs for smaller customers, trading consumption. While such matching • DPPA opportunities exist but are and balancing, and to support the is neither practical nor necessary at currently better suited to very large most efficient mix of future large and this time, it is technically achievable MNCs with substantial operations in smaller scale renewable energy and likely to become more important Mainland China that can support projects and storage resources; as the amount of renewable energy bespoke solutions. increases and the amount of storage • Governments and regulators need to required on any given system also More flexible, trading-based ensure that any new arrangements increases. At the end of the day, arrangements and more structured made available for green energy power systems must always balance pricing to support commercial green contracting (DDPA) or green tariffs or supply and demand.

Transitioning to Green Electricity Supply in Asia 16 | Ultimately CSR activity and green energy system between the point of renewable If electricity markets do not become investment must increase severalfold energy generation and the presumed correspondingly more sophisticated, then over the next decade. This will require point of its consumption? What were the simple REC markets or DPPA strong corporate participation, not only losses along the way? What time of day arrangements will eventually fail to by a relatively few, high profile leaders, was the renewable electricity generated support sustainable renewable energy but by many more, including the compared to when electricity was development in a cost-effective manner. collective supply chain partners. It will be consumed by the end user who And if REC markets must become more very difficult to achieve such growth purchased the REC? complex – perhaps to ensure that without a more robust green attribute renewable energy is produced and marketplace. Decarbonisation and the To state the challenge more plainly: as consumed with a much more accurate transition to a new energy paradigm will the amount of renewable energy degree of locational, vintage, and most likely accelerate, not so much increases in a system, the system itself time-of-use based matching—REC because of specific policies or must become more sophisticated in markets are more likely to fail. prohibitions or even specific technologies order to accommodate that electricity in or fuels, but because of the cumulative ways that always allow supply and For now, most renewable energy impact of many factors, any one of which demand to be matched. It is not enough consumers are enjoying a period in which makes for a good starting point. that the wind blows when it blows and the challenges of balancing the system the sun shines when it shines and are often left to (and paid for by) others. To the above we should draw out one everyone who uses electricity uses it As the renewable energy proportions further observation and corresponding whenever they want. To balance supply increase, the underlying system details challenge. Ultimately, RECs and even and demand, there must be something and associated challenges will matter most DPPA arrangements involve more than a simple REC price signal or much more. separating certain green attributes from DPPA contract. That something more is the many other underlying attributes that a sophisticated underlying electricity Welcome to a greening Asia. remain bound with electricity itself. wholesale and retail pricing model the Where was the electricity generated likes of which is not (yet) found in many relative to where it is consumed? What Asian countries. was the condition of the transmission

Transitioning to Green Electricity Supply in Asia 17 | Endnotes

1 See: “A Fundamental Reshaping of Finance”, Larry Fink, BlackRock CEO letter, 2020, available at: https://www.blackrock.com/us/individual/larry-fink-ceo- letter (downloaded 22 June 2020) 2 Scope 1 emissions are all direct emissions from the activities of the reporting company or under their control. These include fuel combustion on site such as self-equipped electricity generation units, fleet vehicles, air-conditioning leaks and so forth. Scope 2 emissions are other, indirect emissions from electricity and heating/cooling purchased and used by the reporting company. Scope 2 emissions are created from the electricity generation used by the organisation. Accordingly, by sourcing renewable energy, a company can reduce their attributed Scope 2 emissions. Scope 3 emissions are all other indirect emissions including upstream and downstream emissions that occur in the value chain of the reporting company. Scope 3 emissions usually accounts for the greatest share of the carbon footprint of the reporting company, covering emissions associated with purchased goods and services, transportation and distribution, investments, leased assets and franchises, business travel, employee commuting, contracted waste and water, and use of sold products. 3 See: https://www.theclimategroup.org/news/going-100-renewable-2019-re100-progress-and-insights-annual-report (downloaded 22 June 2020). 4 See: https://www.there100.org/re100 5 See RE100 2019 Annual Report, p.16. In 2019, China was voted by RE100 members as the most challenging country for renewable electricity sourcing. Few countries or regions in North and have developed retail electricity markets – only Japan, Singapore, Philippines. Some, like China and Vietnam, have emerging market mechanisms options but without the developed commercial or regulatory structures that make them robust. MNCs in most Asian countries are still served by entities that are state-owned or vertically integrated (or both). 6 https://sciencebasedtargets.org 7 In 2019, the RE100 companies claim to consume renewable energy on par with the “21st largest electricity consuming country in the world”, but this suggests a total of only around 5 percent of the world’s electricity. 8 In a game of musical chairs, there is always at least one fewer chair than players. The music starts and everyone walks around all the chairs. When the music stops, everyone tries to sit down. The ones who sit down get to keep playing. The ones who have no place to sit, lose. 9 By “in an economic sense” we mean that they reduce the costs of the system overall – not just to a particular stakeholder. Of course, it is also possible that existing regulatory or market arrangements are such that renewable energy opportunities appear cost reducing to a given stakeholder or from a particular perspective because of costs shifted to others to pay or bear a loss on. 10 DPPA is short for “Direct Power Purchase Agreement”. Sometimes these are also called “Corporate PPAs” as they typically involve a corporate buyer procuring energy (usually renewable) directly from a generating resource. 11 The US sulphur dioxide allowance market followed a similar pathway, in which stage 1 involved a combination of regulations that forced the creation of emission allowances. Their price was modest for some time even as the reduction target got more stringent. The prices spiked over a quite short period as a result of a confluence of factors before collapsing because so many coal plants were shut down in the wake of the natural gas boom (analogous to coal

ceasing to be a viable alternative). See: Burtraw and Szambelan, “U.S. Emission Trading Markets for SO2 and NOx”, Resource for the Future, RFF DP 09-40, p. 10. Downloaded 7 July 2020 at https://media.rff.org/documents/RFF-DP-09-40.pdf. 12 Of course, wholesale markets do need to be both (1) sufficiently obustr in their design and participation to be able to integrate high levels of renewables reliably and securely; and (2) equitable enough in their policy settings to recognise the role of compensatory arrangements when introducing fundamental changes. These are indeed challenges, but they have reasonable solutions. 13 Mainland China has developed several regional pilot wholesale markets in which some larger customers can participate, though none of these have the commercial contracting and trading flexibility or robustness seen in more developed markets. Many ASEAN countries have undergone various waves of energy sector reforms with varying degrees of impact, though most, including Malaysia, Thailand, Indonesia, and Vietnam remain largely regulated markets. As part of on-going sector reform discussions and policy development initiatives, DPPAs are likely to emerge in Malaysia and Vietnam soon, but details remain to be worked out. In addition, unlike North America and Europe, electricity prices throughout most of Asia comprise a mix of subsidies and cross-subsidies which complicates the process of exposing commercial and industrial customers to any form of “choice.” 14 Odoroaga Monica/123rf.com. 15 See: Beckett, Samuel. Waiting for Godot. New York: Grove Press, 1954. In Beckett’s play, two men meet, talk, and experience a number of mysterious interactions and events, whilst waiting for a man named Godot who never shows up. 16 A company with significant operations in Asia could theoretically procure all its green attributes from, say, Europe in the form of GO certificates. However, if all companies operating in China were to only purchase European GO certificates to cover their green energy requirements in China, then European companies would eventually run out of available GO certificates in Europe and would have to look elsewhere. Mathematically, a corresponding number of equivalently credible certificates would eventually need to be procured from Chinese green resources in order to restore balance. Conceptually, such a global market could work. Practically speaking, however, it is not the way things have developed. In any event, it is just a matter of time before the problem of option availability in Asia must be resolved. 17 In some cases, voluntary RECS can be issued even if a project is receiving a subsidy, which undermines the validity of the REC from a CSR perspective. It is crucial to validate the basis for the REC standard being reported. 18 The Renewable Subsidy (RE-Subsidy) payable to eligible renewable projects is sourced from Renewable Energy Development Fund (REDF) set up by the Ministry of Finance in2011. REDF is funded from a surcharge added to all consumer’s electricity bill (excl. agriculture) . Since its introduction, the surcharge has been increased four times, and it is now RMB 0.019/kWh Over time, the RE-industry has greatly outgrown the government plan, and the resulting deficit in the RDF is unexpectedly high, reaching 216 billion RMB by the end of 2019. 19 GO prices are from Greenfact.com. 20 See: https://www.nrel.gov/docs/fy19osti/72204.pdf, page 19, which refers to Barbose, G. 2017. U.S. Renewable Portfolio Standards 2017 Annual Status Report. Berkeley, CA: Lawrence Berkeley National Laboratory. 21 Wholesale market prices could even be negative if there are resources generating on the system that cannot be shut down (curtailed) such that some resources are willing to pay to keep running through a period of system imbalance while other resources must be curtailed or shut down. In such cases a battery storage resource could even be paid to use available electricity from the system to charge up. Electricity systems are complex and must be operated within tight constraints. When the task of operating within those constraints becomes more difficult for any reason, the value of whatever it takes to keep the system in balance can temporarily become very high indeed. This is one reason why complex power systems are increasingly about processing massive amounts of information to find better ways for supply and demand side esourcesr to respond to frequently changing system conditions rather than just planning out the development of new power stations to meet predicted growth. 22 The interconnection provides both countries with emergency backup, but the interconnection is not generally scheduled for electricity supply into either country for any reason, including for the purpose of exporting or importing renewable energy. 23 Smart systems are about the capability to be smart, not about actually being smart. Smart systems respond to signals. The outcome of a smart system is only as smart as the signal to which the system responds is appropriate. There is far too much focus right now on systems that are capable of being smart and not nearly enough on what it takes for those systems to actually be smart. Smart pricing and smart regulation and smart policy frameworks are crucially required to raise the effective “IQ” of a power system that seeks to go green. 24 GOs are administered at the European level but may still be subject to localisation preferences. For example, one might prefer GOs from certain locations for certain compliance reporting purposes, and this could necessitate paying a premium if GOs from that location cost more than those from another location. Such localisation preferences undermine the idea of getting the most RE for the least amount of money, but it may it easier to think about certificates as something other than traded pieces of paper. Inherent in any multi-regional certificate-based regime are usually political concerns about who

Transitioning to Green Electricity Supply in Asia 18 | wins and who loses when money flows from one region (buyers) to another (sellers). 25 With energy project developers and project owners in Asia constantly being acquired, sold, or restructured, it is essential to assure a clear line of sight between the resource that “creates” the renewable energy attributes and the end user. Accordingly, some green energy development partners (particularly larger high-profile international players) offer guarantees of authenticity, at a higher cost. Typically, they will source the green attributes from their own projects, as there is no better way to maintain and assure control. 26 The ability to avoid these embedded costs would immediately make green energy appear less expensive than the conventional or mixed supply sourced from the grid overall. However, the costs avoided by the overall electricity system when a corporate customer adopts DPPA plus a transport-only wheeling charge are much smaller than the revenue lost when the corporate customer ceases to pay the standard tariff for its electricity use. This bypass issue bedevils tariff option development, especially given the rapid speed with which corporate customers can take decisions on options that appear to immediately reduce their electricity costs. Regulated tariff structures, cross subsidies, and the absence of functionally unbundled and restructured electricity sector arrangements have been significant obstacles to DPPA adoption. The collective result of all these aspects is that DPPA options involve renewable energy and that do not involve avoidance or bypass of existing embedded costs could involve a premium to the existing tariff rather than a discount. 27 https://www.greentechmedia.com/articles/read/orsted-signs-worlds-largest-corporate-ppa 28 IEA (2019), CO2 Emissions from Fuel Combustion 29 See RE100 2019 Annual Report, p.16. In 2019, China was voted by RE100 members as the most challenging country for renewable electricity sourcing. 30 In view of the limited availability to date of corporate renewable purchase agreement in most provinces, some industrial and commercial customers have considered sourcing nuclear power which brings 40% energy-related emission reduction at a net cost saving of RMB 20~30/MWh. 31 The on-grid coal price is also known as the coal-fired power plant (CFPP) benchmark on-grid price. 32 See “Change to ability to disaggregated potential avoided emission rights”, I-REC standard, 14 April 2020.

Transitioning to Green Electricity Supply in Asia 19 | About the Authors

Mike Thomas is the managing director and co-founder of The Lantau Group. He has three decades of experience mostly focused on the Asia Pacific energy sector. He combines a commercial perspective shaped by over 50 GW of commercial transactions and numerous strategy engagements with extensive experience in economic regulation and energy market design. He has been an expert witness in numerous regulatory matters and commercial disputes. He co-founded The Lantau Group in 2010 after a decade as the Asia Pacific head of the energy and environment practice of a global consultancy. Mike has an MPP from Harvard Kennedy School and a BA in economics from Carleton College.

Xiaoran Liu is an analyst with expertise in economic, financial and policy nalysisa of renewable energy. Prior to joining TLG, she worked on China’s power market reform and renewable policy with the National Renewable Energy Laboratory (NREL). She holds a Bachelor’s degree in economics with a concentration in energy economics from China University of Petroleum, Beijing, and a Master’s degree in Energy and Earth Resources from The University of Texas at Austin. She is fluent in English and Mandarin.

With special thanks the TLG Team of Anna Leung, David Fishman, JP Stovall, Liyuan Zhao, Ian Yao, Miaosu Li, David Broadstock, Stefan Robertsson, and Zander Bischof for research support, insightful comments and inspiring suggestions along the way. None bear responsibility for any errors of omission or commission that remain. Special thanks to ENGIE China for insightful comments.

About The Lantau Group

The Lantau Group is a specialist economic and strategy consultancy focussed on the energy sector in the Asia Pacific and Middle East regions. With offices in Hong Kong, Shanghai, Singapore, Korea and Australia, we also have senior advisors based in Abu Dhabi, Indonesia, New Zealand, Thailand, UK, USA, and Vietnam.

Disclaimer: This newsletter has been prepared for general information only. It does not constitute consulting advice, cannot be relied on, and should not be acted on without professional advice. If you have questions or require further information regarding matters covered in the newsletter or related matters, please contact the author or your regular TLG advisor. This material may be considered advertising.

For more information on this Lantau Pique please contact Mike Thomas ([email protected])

For more information about The Lantau Group, please visit www.lantaugroup.com.

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