Regional Energy Industry Insights Volume II Refer to important disclosures at the end of this report DBS Group Research . Equity 5 Jul 2019 The Regional Energy space in Asia-Pacific is evolving rapidly, and we are keeping tabs to share with you. This is the next in a series of short features for the sector in a new and refreshed format, where we will, on a regular basis, present emerging trends and updates that will be of long-term interest for readers. Happy reading! ed: TH/ sa: JC, PY, CS Regional Energy Industry Insights: Issues in regional renewables markets Analyst Issues in regional renewables markets Patricia YEUNG +852 36684189 [email protected] • Investments in renewable energy capacity is on the Suvro Sarkar +65 81893144 rise in most Asia-Pacific markets, but is it all smooth [email protected] sailing? Pei Hwa HO +65 6682 3714 [email protected] • We identify some current issues in renewables sector in select countries in the region and expected progress on these issues in future • In the following pages, we will focus on China, Australia, Vietnam and Bangladesh respectively Page 2 Regional Energy Industry Insights: Issues in regional renewables markets Contents 1. Focus on China – towards grid parity Page 4 2. Focus on Australia – coping with MLFs Page 9 3. Focus on Vietnam – risking agreements Page 13 4. Focus on Bangladesh – land ahoy Page 19 Page 3 Regional Energy Industry Insights: Issues in regional renewables markets SECTION 1: FOCUS ON CHINA Widening shortfall in renewable energy fund. The delay in subsidy payments has been a major overhang for the renewable sector in China. The total subsidy shortfall is estimated to exceed Rmb140bn as at the end of 2018. The annual subsidy demand from renewable energy reached Rmb107bn while revenue from renewable surcharge was only c.Rmb78bn, with a short fall of Rmb29bn in 2018. Subsidy for renewable energy budgeted at >Rmb86bn in 2019. The Ministry of Finance recently released the budget for subsidies for renewable energy in 2019 at Rmb86.6bn, a growth of around 10% from the actual subsidy payment in 2018. This growth rate is still not enough to narrow the subsidy deficit. Renewable energy subsidies – China Breakdown of subsidies for renewable energy in 2019 Biomass power and others 6% Wind power 47% Solar power 47% Source: Ministry of Finance, DBS Bank Page 4 Regional Energy Industry Insights: Issues in regional renewables markets Push for grid-parity projects. Meanwhile, the government is trying to prevent the shortfall in subsidy from widening further through implementation of grid-parity projects. In fact, rapid technological breakthrough has enabled the construction cost of solar and wind power projects to decline by more than 70% and 25% respectively in the past seven years and we expect such momentum will continue. In addition, the government issued the Notice on the Promotion of Subsidy-Free Generation of Power from Wind and Solar (积极推进风电、光伏发电无补贴平价上网有关工作的通知) in January 2019. This policy supports the development of grid-parity projects in various ways. Higher utilization with resilient revenue. Apart from lower construction cost, grid-parity projects can also enjoy other privileges, such as usage of land, no pre-request conditions on procurement or facilities, waiver of resource fee, lower transmission fees, etc. In addition, apart from having priority in grid connection, power generated from connected grid-parity projects will also have priority for the full amount to be purchased by the grids. In case of curtailment, the loss can be converted into “prioritised generation right” which can be traded on the open market. Coupled with a concession agreement for at least 20 years, grid-parity projects will enjoy higher utilisation with resilient revenue. Downward revision in FITs. The development progress of grid-parity projects has accelerated after the National Development and Reform Commission (NDRC) lowered feed-in-tariff (FITs). For solar projects, FITs were lowered by 20-25% to Rmb0.40/0.45/0.55/kwh for zones 1, 2 and 3, and at the national level, FITs have been replaced with market-based tariffs determined by a competitive bidding process. For wind power projects, FITs were cut by 9-15% to Rmb0.34/0.39/0.43/0.52/kwh and Rmb0.29/0.34/0.38/0.47/kwh for zones 1,2,3 and 4 in 2019 and 2020 respectively. The revision in FITs would ensure grid-parity to be achieved by 2021 the latest. Page 5 Regional Energy Industry Insights: Issues in regional renewables markets Capacity of first batch of grid-parity projects amounts to 20.76GW. In May 2019, NDRC and National Energy Administration announced the first batch of grid-parity projects with a total capacity of 20.76GW, of which wind and solar power accounts for 4.5GW and 14.78GW respectively. Note that these grid-parity projects are mainly allocated in zones 3 and 4. Thus, no grid-parity projects in high curtailment provinces are approved, including Inner Mongolia, Gansu and Xinjiang. This is in line with the government’s intention to push down the curtailment rate further. Note that the 1.19GW of wind power projects in Jilin are existing capacity that will be switched into grid-parity projects. These projects will have priority in selling electricity to the grid over other projects. Capacity of first batch of grid parity projects Wind power Solar power Distributive pilot project Prov ince (MW) (MW) (MW) Guangdong 200 2,380 Shaanxi 100 2,040 100 Guangxi 1,930 Henan 1,100 270 360 Heilongjiang 1,000 1,650 50 Hebei 1,310 150 Shandong 350 910 Shanxi 1,000 200 Jilin 1,190 Liaoning 1,190 Jiangsu 1,090 210 Anhui 50 670 110 Hubei 340 90 Hunan 350 Tianjin 160 110 Xianing 10 90 T otal 4,510 14,780 1,470 Source: NDRC, DBS Bank Page 6 Regional Energy Industry Insights: Issues in regional renewables markets Operation efficiency is also important for grid-parity projects. These grid-parity projects will be “pilot” projects for operators to gain experience in seeking a reasonable return amid the new “grid-parity” environment. While equipment cost, which accounts for 65-75% and 40-50% of total investment cost for a wind and solar projects respectively, is a key parameter in determining project return, operational efficiency and management are also important in enhancing project return. As we see limited room for reduction in wind turbine, wind farm operators have to put in more effort to enhance operational efficiency, reduce maintenance expenses and technology upgrades in order to enjoy a more reasonable return for grid-parity projects. Solar installations to catch up in 2H2019. Data from CEIC showed that new solar installations slipped c.56% y-o-y to just 5.5GW in the first four months of 2019 but we believe it should pick up again during the rest of the year. Firstly, the government has offered Rmb3bn (Rmb750m for residential distributive PV projects and Rmb2.25bn for utility-scale and commercial and industrial distributive projects) to fund subsidies for new solar projects in 2019. Assuming an average subsidy is <Rmb0.1/kwh, we estimate new utility-scale solar projects can amount to >17GW. There is upside if solar farm operators become more aggressive in bidding. Coupled with grid-parity projects, forerunner programme, poverty alleviation and residential distributive projects, we estimate total new solar installations to be >40GW in 2019, compared with 2018’s 44GW. Going forward, the new capacity from subsidised projects will drop along with the declining subsidy pool. But the shortfall should be offset by rising capacity from grid-parity projects. We expect total new solar installations to remain stable going forward. Wind installations to catch up in 2H2019. New wind installations amounted to 5.5GW in the first four months of 2019, down from 5.97GW in the same period in 2018. Unlike solar power, we reckon the percentage of grid-parity projects is lower for wind power in the short term. There is a large order backlog for onshore wind power projects with estimated aggregate capacity of around 60GW. These subsidised projects will have to be on-grid by 2020 at the latest, otherwise no subsidies will be granted. Thus, we expect new installations of 25-28GW p.a. in 2019/20 and that more grid-parity projects will be built only after 2020. Page 7 Regional Energy Industry Insights: Issues in regional renewables markets Total solar power installations - China Total wind power installations - China Source: CEIC, DBS Bank Page 8 Regional Energy Industry Insights: Issues in regional renewables markets SECTION 2: FOCUS ON AUSTRALIA Low MLF for renewable generators in 2019/20 due to grid congestion. The Australian Energy Market Operator (AEMO) released the final version of marginal loss factor (MLF) in May 2019. Wind and solar farms in eastern Australia suffer major de-ratings of their output while the rest will not be de-rated by as much. Wind and solar farms near Broken Hill are the worst affected, along with other solar farms in south-west NSW and north Queensland. In fact, as shown in the chart below, the downtrend in MLF has become more serious along with increasing penetration of renewable energy. The major reason for the decline in MLF is grid congestion. It is true particularly when more generation is connected to electrically weak areas of the network that are remote from the regional reference node. Marginal loss factor 1.02 1.00 0.98 0.96 0.94 0.92 0.90 2008/09 2010/11 2012/13 2014/15 2016/17 2018/19 Fossil Hydro Solar Wind Source: RenewEconomy Page 9 Regional Energy Industry Insights: Issues in regional renewables markets Why is marginal loss factor important? What is marginal loss factor? Marginal loss factor (MLF) reflects the impact of electricity losses along the network during the transmission and distribution of electricity due to physical factors, such as electrical resistance.