Renewable Energy Sector Update

16 April 2020

After years of strong growth, the renewable energy sector is set to take a breather – and likely into next year. Immediate demand for energy has collapsed, oil prices have fallen in tandem and capital markets are in turmoil and therefore unlikely to support capital intensive projects.

However, the structural case for renewables is robust and we expect a rebound will follow led by a significant influx of foreign investment once the Covid-19 pandemic abates. Southeast Asia is well placed as policy makers respond to booming demand for energy by easing regulations while shifting the capacity mix from coal to renewables.

Despite the current Covid-19 pandemic, many projects are sufficiently advanced to progress. The most notable of these is a 500-megawatt (MW) solar photovoltaic plant – Europe’s largest to date ­– in Núñez de Balboa, Extremadura, western Spain. It opened in early April with more than 1.4 million solar panels and the capacity to supply electricity to more than 250,000 people.

In Vietnam, land clearance has gone ahead, despite strict social distancing measures in place since 1 April, on a  US$493-million 450-megawatt solar farm in central Vietnam that will be the largest of its kind in Southeast Asia. A local government official in Ninh Thuan province, the location of the facility, told Access Asia Group that the pandemic “has not resulted in any delays and land clearance is occurring at present as scheduled,” adding that 20 of 459 hectares have been cleared and leveled as of 15 April and that construction of general infrastructure will begin in May. The facility is expected to start power generation by the end of 2020, although delays on major power projects in Vietnam are common.

Near-term Challenges

This year is expected to see a significant drop in solar rollout compared to 2019 due to general slowdowns in economic activity. The wind sector is also challenged by uncertainty, with Danish wind turbine manufacturer Vestas suspending guidance for the remainder of this year, citing disruptions to plant operations, manufacturing and supply chains.

Unfortunately, the pandemic continues to spread and with no clear prognosis on when key wind markets such as the U.S.A., Brazil and India will recover, we are suspending our guidance due to the poor visibility for the remainder of the year,” Henrik Andersen, Vestas CEO, was quoted as saying in a statement.

In Southeast Asia, the pandemic knock-on effects, in the form of social lockdowns and economic paralysis, are already coming in to play, with Filipino utility Meralco announcing that 135 MW of solar projects in Luzon, the Philippines, are delayed.  Some analysts see deep near-term contractions in the Southeast Asian renewables sector due to increased capital expenditure stemming from depreciating local currencies, as typically there is a significant import component for installation costs.

Short-term setbacks such as this need to be considered in the context of broader industry outlooks. The International Renewable Energy Agency’s “Renewable Capacity Statistics 2020” report, for example, noted that solar and wind accounted for approximately 90% of renewable rollout in 2019. By 2037, according to BloombergNEF, renewables will account for some 50% of global power supply largely due to the fact that solar and wind power are already the cheapest source of electricity in two-thirds of the world and will become cheaper on annual basis due to ever-aggregating investment in the sector, which will become more attractive as the sector becomes increasingly profitable.

Despite the immediate disruption to manufacturing supply chains and installation capability, renewables are established and more than likely to resume their former trajectory over the coming years. Against a backdrop of strong demand for energy in Southeast Asia, that will lead to a resumption of rapid growth.

Bright spot: Vietnam

In the case of Vietnam, in 2019 the government was warning of impending energy shortages that could result in blackouts within two years.

Demand for electricity has been growing at an annual rate of around 10% over the past five years, about 1.5 times the rate of GDP growth as the energy intensity of the economy increases. Coal is key to Vietnam’s energy supply and under current plans, the country’s coal-fired power plants will soon triple in number, The Economist noted in a recent report. But construction has faced regulatory problems, “neighborhood” opposition and scaled-back investor interest. Solar plants are faster to build – two years compared to a decade for a coal plant – and less likely to be slowed down by local opposition.

The government is looking to resolve some instances of over-supply in solar-friendly southeast Vietnam – where at times the local grid gets overwhelmed and refuses to buy all the power the solar farms generate. It will do this by replacing feed-in tariffs with auctions from December 31, 2020, in which the lowest bidders earn the right to sell to the grid. Until then, the government has established fixed feed-in tariff rates for utility-scale, rooftop and floating solar installations as an interim solution to give renewables access to the grid.

Wind and solar already supply Vietnam with 10% of power – and 10 years ahead of schedule. If costs continue to fall, the current commitment to coal-fired energy plants, which often operate for decades, could result in an unnecessary legacy of dirty and expensive electricity supply.

It is also worth considering that Vietnam – at the very least in a Southeast Asian setting – is uniquely positioned to shift from dirty coal energy production to renewables. Solar power production averages four-to-five kilowatt-hours (kWh) per square meter and the country has a 3,000-km coastline with winds that average 5.5-to-7.3 meters per second. During the first quarter of 2020, the country’s solar power generation surged 28 times year-on-year to 2.3 billion kWh, while Data from Vietnam Electricity (EVN) showed that renewable energy, consisting of solar and wind power, accounted for 4.8 percent of total power generation, up 6.3 percent year-on-year. Coal-fired power accounted for 59.2 percent of the total, followed by gas-fired, hydropower and renewable energy generation, the data stated.

Both renewables are expected by analysts to continue to eat into scheduled coal energy production in the years ahead regardless of the current pandemic-related global economic crisis as Vietnam stays on track to find the cheapest sustainable solutions to long-term local electricity demand.

Access Asia Group sees huge potential for foreign investors in Vietnam’s renewable energy sector, and we have seen a steady increase in foreign investment interest in the sector over the past three years. Favorable demographics, climate and geography, rapid urbanization, strong growth from an expanding industrial and manufacturing sector, and continued government prioritization will drive significant growth of the sector for years to come. Moreover, there are no foreign-ownership restrictions that apply to the development of renewable energy projects in Vietnam.

Winds of Change

Meanwhile, in Taiwan, Bloomberg reports that Orsted, the world’s biggest offshore wind-farm developer is still considering USD 13 billion in projects in Taiwan, a move, analysts say, that suggests Covid-19 has not affected the Danish utility’s “optimism about the region.”

At the moment we don’t see the coronavirus changing any of our plan[s] … Business is as usual. We aim to be a long-term player in Taiwan,” Matthias Bausenwein, Orsted president for Asia Pacific, said.

Taiwan is set to become a leading green energy player in the region, with a targeted 5.7 gigawatts (GW) of offshore wind power by 2025 and a further 10 GW by 2035. While such ambitions may see a temporary scaling back in the year ahead, they will continue to be long-term goals that align with the need for sustainable and affordable energy demands.

To be sure, the Global Wind Energy Council has warned that wind energy faces near-term challenges, stating that wind power will “undoubtedly be impacted by the ongoing Covid-19 pandemic, due to disruptions to global supply chains and project execution in 2020,” but that this is highly unlikely to slow down a global transition to green sources of energy.

As Abigail Hopper, president of the Solar Energy Industries Association told the New York Times that the solar industry alone expected to add more panels in 2020 than in any other previous year, which will no longer be the case but can be expected to do so when demand and supply-lane stability returns in future.

We believe, over the long run, we are well positioned to outcompete incumbent generators,” Hopper said.

Skeptics might look to New York State, which is currently reeling from Covid-19, but which also still passed legislation to facilitate the construction of clean energy plants on April 3.

Renewables are on a growth trajectory today that I think isn’t going to be set back long term,” Dan Reicher, the founding executive director of the Steyer-Taylor Center for Energy Policy and Finance at Stanford University and an assistant energy secretary in the Clinton administration, told the New York Times in the first week of April. He added, “This will be a bump in the road.”

All the same, despite such optimism, it would be wise not to downplay the immediate challenges ahead for the renewables sector.

In early April, renewable energy and environmental groups wrote a letter of concern to the US Congress, The Hill reported.

We wanted to highlight specific damage to the clean energy economy, which we know best, and what that will mean for the roughly 3.4 million Americans who work in a sector whose jobs are in serious peril due to the economic downturn caused by Covid-19,” the letter said, highlighting the risk of projected layoffs amid reduced demand and other issues. The letter also noted concerns about drops in electric vehicle sales and projected job losses in the solar and wind industries of anywhere between “38,000 and 120,000 jobs.”

The abrupt change in fortunes facing renewables at present, however, needs to be viewed in light of almost unprecedented sudden global demand and supply shocks. If the pandemic and its attendant economic impacts had struck 10 years ago, when renewables were just becoming economically attractive as an alternative to fossil-fuel energy, the current crisis would likely have been a major setback for the sector.

As it now stands, renewables are entrenched as a power source and will continue their long march to commercial viability and mass rollout. Scale-backs on immediate implementation plans should be considered inevitable, but many utilities are likely to seek opportunities in this crisis over the year ahead.