Financing the shift from coal to renewables

This digital panel discussion was hosted by Marissa Lee, associate director, Global Counsel Asia. Our guest speakers were Adrian Wong, Head of Projects, Herbert Smith Freehills Prolegis; and John Rockhold, Head of Power & Energy Working Group, Vietnam Business Forum. 

Key insights from the discussion: 

• Regulatory risk is one of the biggest risks to address when building sustainable, bankable power purchase agreements (PPAs). Adrian outlined how he thinks about regulatory risk at two levels: “At the first level, there is the regulatory risk in the form of laws. But at a higher level, there is also the risk that the laws may not even be enforceable… So if you take a look at Asia, you will see some jurisdictions that seem to have on their face very investment-conducive laws and statutes, but yet have challenges inviting investments into their country, because there have been cases where judges don’t uphold laws that are, perhaps, at pain of the incumbent government authorities.”
• The regulatory landscape in every jurisdiction differs, and local context is important. John gave an illustration: “In Vietnam, there has been very little done (in terms of regulatory frameworks to mobilise the private sector), because everything in the past has been done by their state utilities firm Electricity Vietnam (EVN).” Corruption is another problem that inflates costs. But he noted that Vietnam is “slowly moving” on some issues: “The decree permitting direct PPAs (DPPAs), there’s a lot of hopes for it. It only took us eight years to get that approved. So there’s a keen interest on that, and let’s see what happens.” In dispute resolution, Vietnam also accepts arbitration from Singapore, John noted. A big concern is that Vietnam will not offer sovereign guarantees to the private sector (to backstop the offtake obligations of EVN): “However, they’re working very hard to raise Moody’s credit rating on EVN, that does write these.”
• Expectations about what blended finance can deliver need to be realistic. Uncertainty relating to the regulatory and political landscape in any country receiving an investment remains a key consideration. Adrian noted that blended finance is not a panacea for all the inherent challenges faced by developers in emerging Asia today: “The assumption is that there is a certain risk profile that results in a very expensive project, that might make the project non-feasible economically. And from that respect, if you are able to locate another lender who is able to accept that same level of risk, but for a lower premium, then the returns on the project might make the project feasible. The working assumption in this kind of scenario is that that the risk profile is just merely a spectrum. (But) if the regulatory framework in that country doesn’t allow the particular project – if, for example, you know there is no ability of solar developers or wind farm developers to sell their power to customers that are willing to pay the price for these slightly more expensive electrons. Then, no amount of aggregation of lenders of different risk appetites can solve that.”
• Another reason why large-scale blended finance initiatives such as the Just Energy Transition Partnership (JETP) is making slow progress in Vietnam is because it takes time for funding and recipient countries to reach alignment on targets and goals. John offered some context: “Blended finance is not new to Vietnam. Vietnam did their whole poverty alleviation from 1995 to 2015, using blended financing for water, rural electrification… Vietnam is in a position now where they see no need for multilateral and bilateral financing. They don’t want to take on more debt, even though they have probably one of the lowest debt-to-GDP ratios (34%). Their big concern is how this type of blended financing was used in Africa, especially East Africa, where now a lot of these big wind projects are having to be restructured because they just didn’t pay off, and the governments owe a lot of money. Vietnam also sees no need to put in public sector money. They see the energy sector as something that makes money. And what they’ve seen from their big generation projects are that these companies are making money. And they want to see the private sector moving into this by themselves.”
• These risks have never stopped investors from being bullish on Asia. Adrian observed: “The reality is at least for a lot of Southeast Asia, market energy demand still needs to be met. Regardless of whether the power comes from green, brown or hybrid sources... Some have even ventured to speculate that we might actually not have enough energy for all the data centres that that the market wants to build. So I think that there is a demand. And whenever there’s demand there will be supply.” John agreed: “The big businesses (Samsung, Apple, Google) are saying, ‘We need green energy.’ But top on their list is: ‘I need electricity.’ Energy security is first, and that’s what Vietnam is doing. Because Vietnam hasn’t reached energy security, and being able to produce that electricity is top on their priority list. Once they’ve (achieved) energy security, which is their PDP8 plan (Eighth National Power Development Plan) until 2030, then they have a very robust transition plan to go into renewable energy.”