Solar energy – Emerging investment opportunity in Malaysia

Renewables is fast establishing itself as a major global energy source. Emerging markets are leading the charge with solar becoming the preferred energy choice. Renewables investors can look forward to varied investment opportunities in this space.

Yvonne Tan, Chief Investment Officer, Equities
Eastspring Investments Berhad

Apr 2019


The changing global energy landscape

The global energy sector is undergoing a major transformation. Visible global warming effects along with the push by the United Nations to meet its sustainable development goals have propelled the move to a cleaner and greener energy mix. Fossil fuels (coal, oil and gas), the traditional energy mainstay, are giving way to renewables (see Fig.1). Supportive government policies and falling costs are also fuelling the shift to renewables (solar, wind, hydro, geothermal, biomass).

fig1-Solar-energy

The push to renewables is most evident in the power sector. Renewable power accounted for 70% of the net additions to the global power generating capacity in 2017 mainly due to the cost-competitiveness of solar and wind power.2 Increasingly these additions are taking place in Emerging markets; in 2017 they accounted for 63% of the global new investments in renewable energy and as of 2017, on a cumulative basis, they were on the verge of surpassing Developed markets (see Fig. 2). 3

fig2-Solar-energy

Solar is the fastest growing segment

In 2017, solar was the largest source of new power generating capacity installed globally than any other power generation technology. Region wise, Asia-Pacific took the lead with a 55% market share of total installed capacity (see Fig 3). Although majority of this share is attributed to China, other Emerging markets such as India and Turkey are making good progress; both doubled their solar capacities in 2017. According to the Deloitte research, Emerging markets have the highest renewable energy investments as a percentage of their GDP.

fig3-Solar-energy

A win-win situation

This push towards renewables not only brings major environmental benefits but also the promise of new jobs in the energy sector. By 2050, the shift to renewables would create more jobs than are lost in the fossil fuel industry; the estimate by the International Renewable Energy Agency suggests that 7.4 million jobs will likely be lost in fossil fuels versus the 19 million new jobs created in renewables.

fig4-Solar-energy

While the above outlook appears promising, it is not without challenges. Existing infrastructure and systems would need to be revamped. Countries would need to address the issue of fluctuations in supply from renewables versus the more reliable supply from fossil fuels. For example, clouds blocking the sun can lead to a drop in solar power. Similarly, it is hard to predict wind speeds and hence the amount of energy that can be created at any one point in time. Thus, developing energy storage mechanisms is essential.

Malaysia’s ambitious target

In line with the trend for Emerging markets to move to renewables, Malaysia has set an ambitious target for renewable energy to account for 20% of its total energy mix by 2025, from the current level of 2% (excluding large hydro). While we think it is challenging to achieve this high target, the government’s initiative will create plenty of investment opportunities in the renewable energy space in the next 5 years.

Currently within the renewables space, solar accounts for 60%, followed by biomass 23%, and the remaining from biogas and mini hydro.6 As large-scale hydro projects may not be classified as renewables due to environmental concerns and biomass and biogas projects require highly subsidised tariffs to be viable, solar seems set to become the main renewable energy contributor. Further, declining solar panel prices is making solar an even more financially viable option.

The opportunities and challenges

The government has announced a tender for 500MW of new solar projects in Peninsular Malaysia. The project entails solar parks ranging in size from 1-100 MW and is expected to raise around RM2 billion in investments. We expect the existing solar players and some potential new players to participate in the bidding.

Apart from new investments in solar parks, solar leasing is another opportunity. This programme offers a tailor-made system for commercial and industrial customers to optimize their electricity cost savings. Customers can choose to purchase the solar PV system, and have it installed at their building rooftop or opt for multiple financing plans with zero capital expenditure.

This programme is also appealing to the existing Engineering Procurement and Construction (EPC) solution providers for solar PV projects in Malaysia. One EPC provider recently launched a solar leasing package with no upfront cost. Customers will be purchasing the solar energy generated at 10-15% cheaper than grid tariff during the leasing tenure of 20-25 years. While the initial take-up may be slow, we expect more players to join in the coming years.

Net energy metering (NEM) is yet another opportunity that has risen from the solar drive. NEM is a mechanism whereby an eligible consumer installs a solar PV system primarily for his own use. Under the NEM, consumers only pay for the excess electricity consumption after deducting the electricity generated and consumed through their solar PV system.

To promote NEM, the government has announced the “one-on-one offset” where excess solar energy can be sold to the grid at the same tariff consumers are charged, effective 1 January 2019. The improved economics of the solar project under the revised NEM will encourage more consumers to take up the NEM quota.

While the investment opportunities are evident, it is not without challenges. Players need to identify huge land area for solar PV installation; land cost and location are key investment considerations. Funding cost too can be an issue as banks normally deem solar projects as higher risk than conventional power plants. In addition, execution risk poses a real challenge, even for existing solar players.

Notwithstanding these, the conditions for solar energy investments in Malaysia and other South East Asian markets are favourable given that the sun shines abundantly on this fast-growing region of 600 million people.7 Renewables investors looking to new markets for their next source of growth can look to the region. It is up to the respective governments to support the sector with appropriate policy initiatives and reforms.

Malaysia seems off to a good start!


Yvonne_Tan

Yvonne Tan

Chief Investment Officer, Equities

Eastspring Investments Berhad

How to invest in Eastspring's fund(s)

Sources:
1 World Energy Outlook 2017, International Energy Agency
2 Renewable Energy Policy Network for the 21st century: Renewables 2018, Global Status Report
3 Deloitte Insights: Global renewable energy trends, 2018
4 http://www.solarpowereurope.org/wp-content/uploads/2018/09/Global-Market-Outlook-2018-2022.pdf
5 Global Energy Transformation: A roadmap to 2050, International Renewable Energy Agency 2018. * Estimates for jobs in energy efficiency and grid enhancement are not available for 2016. ** Accounts for all jobs in the fossil fuel industry including in their extraction, processing and consumption. ***The jobs in grid enhancement make reference to the jobs for T&D grids and Energy Flexibility, created in the development, operation and maintenance of infrastructure to enable the integration of RES into the grid.
6 Energy Commission, Peninsular Malaysia Electricity Supply Outlook 2017
7 https://asian-power.com/power-utility/exclusive/southeast-asias-solar-industry-thrives-amidst-dimming-market-expectations

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