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Asia Pacific – Solar Energy In South East Asia: Recent Developments And Regulatory Landscape.

12 September, 2014

With subsidy cuts, policy uncertainty and funding gaps characterizing Europe’s clean energy landscape, it is not surprising that interest in the Asian renewable market is growing. One area that is continuing to attract a lot of attention is solar energy. Indeed, Bloomberg recently reported that almost all new investments in clean energy in Thailand have been in solar power projects. This article will look at the changing regulatory landscape for commercial solar power projects in South East Asia and explore some of the key legal and regulatory challenges that may be encountered in this burgeoning market.


There are two main types of solar power systems used in commercial operations: photovoltaic (PV) and thermal solar power systems. These systems can be defined by the way they convert solar energy into other forms of energy. In PV systems, sunlight is converted directly into electricity through the use of panels made up of photovoltaic cells. The PV panels are usually placed on the roofs of residential and commercial buildings, or on large areas of land (known as “ground mounted” systems). When sunlight hits the panels, electric fields are created due to the semi-conductive nature of the cells. Thermal solar power usually takes the form of concentrated solar power (CSP). Under a CSP system, lenses or mirrors track and reflect sunlight onto solar towers that heat fluid and create steam which turn generators, thereby producing electricity. An advantage of this type of technology is that the heat can be stored, whereas under a PV system the electricity must be used immediately.


Renewable Targets In South East Asia


While coal, the most affordable but environmentally unfriendly fuel, continues to dominate the Asian power market (it fuels around 60% of Asia’s electricity), the growing interest in renewable energy is undeniable. This is reflected in the targets that many countries in the region have set. Like Europe, where the 2009 Renewable Energy Directive requires the EU to source 20% of its energy from renewable energy by 2020, many countries in South East Asia have set targets in the renewable energy sphere as well. In Indonesia, an ambitious target of 25% by 2025 has been set (referred to as “Vision 25/25”), in Thailand a similar target of 25% by 2021 is in place, while Vietnam has a more modest target of 5% by 2020. Malaysia’s target forms part of the National Renewable Energy Policy and Action Plan and is 11% by 2020, while the Philippines aims to triple its renewable energy usage by 2030 to 15,000MW.


Unlike the EU, there is no organization in South East Asia with authority to monitor compliance with the targets and penalize failure. Within the EU, each Member State is legally bound to contribute to the target, with each country’s contribution linked to its current energy mix (for example, the target is 15% in the UK and 23% in France by 2020). Each Member State is required to provide the EU Commission with regular reports, and enforcement action may be taken in the event of non-compliance. Countries in South East Asia are also free of sanctions being imposed under the Kyoto Protocol. While all ASEAN countries are members of the Kyoto Protocol, as developing countries there are no ramifications in the event that greenhouse gas emissions are not reduced.


Feed-In Tariffs


Renewable energy targets in South East Asia have the potential to remain just that – targets – without proper incentive schemes in place to support them. Currently, the cost of generating solar power in the region is about twice that of fossil fuels. Absent incentives, it is difficult for solar to compete with traditional forms of energy, and electricity companies may find little reason to adopt such measures. In order to address this gap in grid parity, incentives in the solar world traditionally take the form of feed in tariffs (FiT), which offer small scale producers of clean energy a fixed price for generating electricity and selling it to the grid for a fixed duration. Other incentive schemes for solar power include net metering, panel subsidies, tax breaks, soft loans and preferential grid access.


A country in the wider Asia region that has been very successful in encouraging solar energy use is Japan. Japan first introduced a FiT scheme in 2009. Following the Fukushima disaster in 2011, an attractive FiT scheme for utility scale PV projects was announced, with some of the highest FiT rates in the world. The lucrative nature of the solar market in Japan has attracted major global investors, including Goldman Sachs who plans to invest almost half a billion US dollars in Japanese renewable projects over the next 5 years. In South East Asia, both Thailand and Malaysia have had solar FiT schemes in place for some time, and Indonesia and the Philippines have also both recently adopted them.


Price Of Panels


The price of solar panels has decreased substantially in recent years (Bloomberg has reported that global solar PV module costs declined by 83% during the 2000 to 2013 period) brought on to a large extent by the mass production of subsidized panels in China, together with advances in technology. The combination of cheap panels and attractive tariffs can paradoxically create difficulties. In the UK, this led to a flood in the market, which prompted the Government to retrospectively lower the FiT rate. This resulted in a court case which found that the Government had acted illegally and had caused significant commercial damage to the industry. In the EU, one of the responses to the lowering panel costs has been to increase import tariffs on Chinese solar panels, which has resulted in trade tensions between the EU and China.


Degression Rates & Quotas


The price of solar panels has decreased substantially in recent years (Bloomberg has reported that global solar PV module costs declined by 83% during the 2000 to 2013 period) brought on to a large extent by the mass production of subsidized panels in China, together with advances in technology. The combination of cheap panels and attractive tariffs can paradoxically create difficulties. In the UK, this led to a flood in the market, which prompted the Government to retrospectively lower the FiT rate. This resulted in a court case which found that the Government had acted illegally and had caused significant commercial damage to the industry. In the EU, one of the responses to the lowering panel costs has been to increase import tariffs on Chinese solar panels, which has resulted in trade tensions between the EU and China.


Malaysia’s approach to the issue of falling PV prices has been to apply a “degression rate” (a year-on-year gradual decrease) to the applicable FiT rates. The Malaysian FiT regime, which took effect in 2011 and applies to a variety of renewable sources (biomass, biogas, mini hydro and PV solar), requires the winning applicants to enter into power purchase agreements with the electricity distributors. The applicable degression rate is then determined at the time the project is connected to the grid and ready for commercial operation. The degression rates are reviewed at 3 year intervals. In Germany, where a similar scheme is in place (Malaysia’s FiT regime is modelled on it), the latest degression rates have been described as “so severe” that some market experts have suggested it is likely they will impact on the viability of the market. While this seems less likely to have an impact in Malaysia (in 2013 the degression rate for solar increased from 8% to 20% for schemes above 24KW with little industry reaction), it is certainly a factor that needs to be considered when assessing the attractiveness of the market.


Malaysia also sets a quota, subject to review on an annual basis, to control the amount of renewable energy eligible for FiTs. In Malaysia’s regulated energy market, the FiT scheme is funded by a Renewable Energy (RE) Fund, which is sustained by the implementation of a 1.6% levy on all electricity consumers that use over 300 kWh of electricity per month (this was increased from 1% in January 2014). The quota in Malaysia can also be adjusted in order to increase interest in different types of renewable energy. There is presently discussion that the quota may be revised to favour biomass and biogas, which have not received as much attention from the market as solar power. Potential investors should therefore keep a close eye on the annual quota levels.


While renewable energy has been a part of the Philippines energy mix since the 1950s when the first hydropower plant was constructed, solar power has been slow to take off and a FiT scheme for renewables (including hydro, biomass, solar and wind) only came into effect in 2012, under the auspices of the Renewable Energy Act 2008. However, there has already been quite a lot of interest and a PV solar park of 22MW is under construction, with the first phase completed in May 2014. In addition to a reasonably attractive FiT rate, the solar park will benefit from an exemption from customs duties and taxes on imports, and a seven-year tax exemption on profits. Like Malaysia, there is a quota in place which limits the amount of renewable energy projects eligible for FiTs. This is currently set at only 50MW but may soon increase to 500MW, which would see the Philippines becoming a much bigger player in the solar market.


Capacity, Uptake & Duration


Most countries have restricted large scale solar projects from being eligible for FiTs. For example, projects in Malaysia cannot exceed 30MW without special Ministerial approval, and the FiT rate reduces the larger the project. In Indonesia the capacity quota is currently 140MW for 80 locations, with most listed projects between 1-6MW. In contrast, Thailand’s original subsidy scheme encouraged medium-scale solar (up to 90MW), and solar projects above 1MW currently make up almost 99% of the solar market. Thailand is also currently one of the only countries in South East Asia which has seen much uptake in the larger CSP systems, with capacity at the end of 2013 at 5MW and more projects in the pipeline (the leading markets for CSPs remain the US and Spain, which at the end of 2013 had a combined capacity of over 3GW, or 0.9GW and 2.3GW respectively).


Thailand’s attractive subsidy rates (known as “adders”) were introduced in 2006 under the Very Small and Small Power Producers Scheme (VSPP for projects less than 10MW, and SPP for PV projects between 10MW and 90MW), and led to what was described as a “solar gold rush” in 2008. A major difficulty with the scheme was that the level of uptake in permits far exceeded the amount of completed projects: there were many speculative applications as there was no requirement for a project to be completed within a set amount of time. This led to the Thai Government introducing measures, such as retrospective bid bonds and termination provisions, which were viewed by the market as confusing and lacking transparency and resulted in less investor confidence. The Thai Government has since sought to address these concerns, but investors should still play close attention to the conditions attached to any successful bid.


Another important factor for developers and investors exploring solar opportunities in these markets is the length of the power purchase agreement (PPA). In this regard, all countries in South East Asia with FiT regimes have suitably attractive PPA durations, for example the duration is 21 years in Malaysia, 20 years in Indonesia and the Philippines, and 25 years in Thailand. However, there exists uncertainty in some aspects, for example, it is not clear under the Indonesian scheme whether or not the FiT rate will be indexed for inflation.




Another means of controlling the level of renewable energy in the market is through auctions. Together with the adoption of a FiT regime, Indonesia has recently adopted a “capacity quota” style auction system, which came into effect in June 2013. The Government owned electricity company, PLN, is required to purchase electricity from the power producers that win the auctions, and the parties enter into a PPA for a period of 20 years. The winners (those with the most competitive tariffs) are required to deposit 20% of the project cost into an escrow account with an Indonesian bank upon signing the PPA. They are also required to secure finance within 3 months of the award and commence construction within 3 months of financial close. Foreign entities looking to invest in this market should ensure they consider the implications that these potentially onerous timelines may have on the viability of the project.


Foreign Investment Rules & Local Components


Both the Philippines and Indonesia have “Negative Lists” which limit the amount of investment by foreign entities in many sectors, including renewables. The Negative List in Indonesia has recently been revised, and imposes restrictions on foreign investment in power generation in Indonesia, including a ban on foreign investment in generation of less than 1MW and only a 49% interest in generation between 1MW and 10MW. In Malaysia, in order to benefit from the FiT scheme, a foreign company may only own up to 49% of a solar project. In both Malaysia and Indonesia, there are also incentives in place for the use of locally produced components. In Malaysia, locally produced modules attract a bonus payment under the FiT scheme, while in Indonesia the FiT rate is higher if local components make up at least 40% of the PV power plant.


Land Acquisition


For ground mounted solar projects, access to and use of large areas of land is essential. However, acquisition of land in South East Asia by foreign entities can prove difficult. In Indonesia, foreigners are not entitled to directly own land. While it is possible to obtain the right to use land, the process can be complex and bureaucratic. In the Philippines foreign land ownership is also heavily restricted, and it has been reported that this has been one of the factors slowing down the adoption of large-scale solar projects. In Malaysia, land rights are somewhat more straightforward, but interested parties still need to consider issues such as the ease with which the land can be accessed, grid access and the state of infrastructure development in the relevant province.


Construction Duration


An attractive feature of solar power projects is that they are less capital intensive than other forms of renewable power, such as wind and hydropower. The equipment is less complex and the installation process much more straightforward. As a result, the construction period is much shorter. For example, a 30MW solar PV project will usually take around nine months to construct whereas a hydropower project of similar capacity could take between three to five years. Compared to offshore wind projects, there is also less risk of time delays, as inclement weather and changing sea conditions do not have the potential to cause as much (if any) disruption.


However, the construction period is still a critical phase, especially in jurisdictions where the applicable FiT and degression rates are linked to the grid connection date, such as in Malaysia, or where there are penalties imposed for late completion, like in Indonesia, where if a project is not completed within 18 months of signing of the PPA there are staggered reductions in place (if up to 3 months late, 3%, between 3 and 6 months, 5%, and over 6 months 8%). Some factors affecting completion will be outside the control of developers, like for example grid connection and certification, which require the participation of regulators and local electricity companies, and may be subject to administrative hurdles. These factors need to be considered when negotiating the terms of the PPA and the construction contract, particularly in relation to the calculation and imposition of delay damages.


Climatic Conditions


Changes in weather conditions can have an adverse impact on the financial attractiveness of solar projects. Even in South East Asia, where the equatorial position of most countries make them incredibly well-suited for solar, dramatic or unpredictable changes in weather patterns could have a detrimental effect on forecasted financial returns, which depend upon a set amount of sunlight. While it is not yet clear what impact global warming will have on weather conditions in South East Asia, this may feature more in future analysis. Solar heat is also affected by the “haze” brought about by the burning of palm oil plantations, a practice still common in some countries in the region.


Looking Forward


The Asia Solar Energy Initiative, which was launched by the ADB in 2011, provides a good indication of the growing interest in the solar market in the region. The implementation of well-defined and relatively robust FiT regimes by many countries in South East Asia, including the recent adoptions by Indonesia and the Philippines, should provide a solid platform for foreign investment in this expanding market. While there is no doubt that investors need to bear in mind issues such as foreign land and project ownership restrictions, degression rates and onerous completion requirements when considering the viability of such schemes, the future renewable energy landscape in South East Asia looks set to be a bright one.


Clyde & Co


For further information, please contact:


Glen Warwick, Partner, Clyde & Co

[email protected]


Tia Starey, Clyde & Co

[email protected]

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