The financial realities behind the world's future energy needs fuelled animated panel discussions at the Singapore Energy Summit today. Moderator Javier Blas, Commodities Editor of the Financial Times, pointed to the recent blackout in India as well as Japan's about-turn on nuclear policy as two issues fuelling the debate on securing adequate energy financing.
The policymakers' perspective was presented by Soulivong Daravong, Minister of Energy and Mines, Lao PDR, and Dr Emir Mavani, President and CEO of Malaysia Petroleum Resources Corporation.
Minister Daravong discussed the recent evolution of Lao PDR's energy policy. He said power generation capacity had jumped from 200MW to 2,500MW in recent years, with as much as 1,900MW exported.
With 10 power projects underway, a plan to improve transmission lines and a policy goal of promoting renewable energy, the country's need for financing is evident. Minister Daravong said Lao PDR has put in place incentives for financing. However, environmental and social dimensions of energy investments, increasingly stringent banking requirements, and different tariff regimes in different electricity markets pose a challenge to financing.
Dr Mavani talked about financing in the Malaysian context. The energy sector has been identified as one of the 12 major economic sectors in Malaysia and contributes around 20 percent of GDP. With the depletion of finite oil and gas resources, though, Malaysia has been looking at reforms to energy pricing and subsidies as it aims to secure 5.5 percent of its energy needs from renewables by 2015.
Dr Mavani said this calls for a new financing approach, including for financing relatively small-scale renewables producers of around 5-10MW, each of which poses a unique challenge. A feed-in-tariff scheme is in place for solar, small hydro, biomass and wind, but Dr Mavani emphasised that policies will also need to address reducing the risk of such investments.
Michael T Eckhart, Managing Director & Global Head of Environmental Finance for Citigroup, spoke on the transition of energy financing since the 1970s. He said financing the energy markets started off with an initial interest in coal, which moved into nuclear technologies in the 1980s and 1990s, before taking us to where we are now with an emphasis on renewables and smart grid technology.
He said project financing is now based on a combination of two sources: Direct financing of Independent Power Producers (IPPs), as well as powerful investors like the International Monetary Fund and Development Finance Institutions (DFIs) with links to host governments. Many of these funds flow into developing countries. Eckhart said the total project debt was US$346 billion in 2011, with only 5 percent of these made up of project bonds, the rest comprising short-term bank loans. He said that on the one hand, governments promote sustainability as part of their policy agenda, but the stringent criteria on bank loans can make it difficult to realise that goal.
Jon Moore, Deputy Chief Executive of Bloomberg New Energy Finance, traced the global evolution of clean energy investments. He said the long-term trends are robust and clean energy investment reached a historic peak of US$280 billion in 2011. The US and China each accounted for over US$50 billion of such investments, and 52 percent of the clean energy investment was in solar energy.
The short-term prognosis is less promising, and the aggregate level of financing is expected to decline in 2012 for the first time since 2004. Moore identified a number of reasons for this: Persistently low clean energy stock prices and an oversupply of materials form part of the explanation, as does the global shift towards natural gas as the fuel of the future.
But mixed signals from policymakers have also played a key role. The policy uncertainty in the US, the UK and Italy, the increased frequency of trade disputes surrounding renewable energy, and the end of post-financial crisis stimulus packages have, he said, all contributed to the recent downturn in clean energy investments.
Jo Yamagata, Deputy Director General, Private Sector Operations Department for the Asian Development Bank, spoke on two key issues in the role of governments in the energy markets: Energy policy and the expansion of the banking and capital markets for the energy sector. He stressed that governments will not be able to take the lead in financing entire investments for alternative energies. Instead, they will need to help create conditions that make it easier for private bodies to do the financing.
Despite the challenges that policymakers and banks face in choosing the energy financing schemes that best meet national agendas, the discussions remained optimistic on the prospects for the development of cost-effective technologies to allow renewables to dominate the energy sector in the future.
BY : Allan Loi and Nahim Bin Zahur, Energy Analysts, Energy Studies Institute