Are renewable energy costs affordable enough in Asean?

??This week: Investors in Singapore are becoming bullish on renewable energy as its growth accelerates amid the global push towards a low-carbon economy.?

Companies pivoting to renewable energy are performing slightly better than the broader market, propping up stock indices focusing on environmental, social and governance (ESG) strategies, as reported by my colleague Sharanya Pillai.?

With interest rates expected to come down slightly in 2024, this could boost renewable energy-related stocks even further. Renewables are typically more sensitive to rate hikes because clean energy projects require high amounts of capital at the outset.

This may not be the case in South-east Asia, however, as the region already faces elevated development costs for solar and wind projects due to the lack of deployment scale and underdevelopment of supply chains.?

This is in addition to increased borrowing costs over the last year as a result of higher interest rates.?

Sure, the costs of renewables everywhere, including South-east Asia, have come down significantly over the last decade.?

But renewables still cost more in South-east Asia than in other parts of the world.

While the LCOE of solar PV in 2021 is between US$0.05 and US$0.075 per kilowatt-hour in most of South-east Asia, with the exception of Vietnam, the global weighted average LCOE for new solar PV projects is US$0.048/kWh, according to data from the International Renewable Energy Agency.?

A similar cost difference can be seen in onshore wind, with South-east Asia achieving an LCOE of US$0.048 per kWh, while the global weighted average is US$0.033/kWh.?

High local content requirements for renewables in some countries, inflexible power purchase agreements, lack of an integrated policy approach towards scaling up renewables and incumbent interests in fossil fuels are some contributing factors to the elevated costs of renewables in South-east Asia.

The end result is that many renewable projects in the region are only marginally bankable, and are unable to attract sufficient private-sector investment.??

Of course, efforts are underway to get around these impediments and bring down the costs of capital in renewable energy investments. Some new initiatives were announced during the recently concluded United Nations climate change conference in Dubai.?

This includes a US$5 billion blended finance initiative by the Monetary Authority of Singapore and a new financial instrument called transition credits, which are carbon credits generated when coal-fired power plants are shut down and replaced by clean energy.?

At the end of the day, though, what would really bring down the costs of renewables in South-east Asia is the removal of fossil fuel subsidies and the setting of a carbon price, whether through taxes or an emissions trading scheme.

Unfortunately, that is a political problem that financial markets cannot solve.?

?? Top ESG reads:

1. Seatrium has secured a S$400 million loan from DBS that includes a sustainability-linked conversion option.
2. Singapore’s buildings are 71 per cent more energy efficient than its 2005 levels, but hitting its 80 per cent target may be a technical challenge.?
3. Key emissions data are not reflected in the first sustainability reports of some Singapore government agencies.?
4. Unpredictable weather patterns at key trade routes may threaten global supply chains in 2024.?
5. Used batteries are becoming the next hot commodity to trade in China.?

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