Cleantech investment in Asia


Financier Worldwide Magazine

November 2013 Issue

November 2013 Issue

With Asia emerging as a global engine of economic growth, the region’s requirement for energy and resources has rocketed. In meeting this demand, governments have been forced to confront the twin issues of finite resources and environmental degradation, so it should come as no surprise that the region is fast becoming a centre for cleantech investment. New technologies, however, require investment, and there is a huge thirst for money from emerging cleantech companies. With public money stretched to the limit, governments are keen for local companies to become global leaders in the development and commercialisation of cleantech. And with cuts to government incentives in Europe and North America, institutional investors are starting to flock to Asia in search of companies that harness the sun and wind to generate power. 

Significant growth

In the last decade, Asia’s cleantech sector has witnessed significant growth, sustained by a growing middle class, rapid urbanisation and increasing consumer demand for ‘green’ and sustainably-sourced products. Indeed, according to Ernst & Young’s Global cleantech insights and trends report 2012, Asian cleantech sales overtook those of European companies in 2011. That year, sales by Asian companies rose 20 percent, to $56bn, while European and North American sales fell 32 percent and 29 percent to $49.5bn and $30bn respectively. 

At present, China and India remain the major markets for cleantech. Since 2007, these countries have accounted for 15 percent of all cleantech-focused PE investment – 60 percent of all transactions outside Europe and the US. Japan is also an exciting market for renewable energy projects, particularly in light of recent shifts in its renewable energy policy, and the country’s renewable energy sector continues to grow rapidly. The Association of Southeast Asian Nations (ASEAN) is also attracting increasing interest, with Singapore becoming something of a hub for Asian cleantech funds. 

But while the figures may paint a picture of health, the reality is somewhat blurred. Reduced government subsidies and market overcapacity mean that investment in the region for 2012 was close to half that of the previous years. The cleantech sector also faces unique challenges in each country across the region. India’s numerous incentive regimes, for instance, have recently come under fire, with a lack of enforcement and oversupply bringing the country’s renewable energy certificate (REC) market close to collapse. Requests for retroactive cuts to solar subsidies by Gujarat – India’s biggest solar power-producing state – have sparked unrest, and a court filing is currently stalling the country’s first wind auction. 

Looking toward China, while solar and wind technologies have received particular domestic attention, a focus on manufacturing has had a number of repercussions, according to Philip Andrews-Speed, Principal Fellow and Head of Energy Security at the Energy Studies Institute of the National University of Singapore. “China’s government has provided substantial direct support to the wind and solar PV manufacturing industries in the form of funding for research and development, tax breaks and preferential loans for equipment manufacturers, and local content requirements for renewable energy projects. Support for domestic deployment of wind and solar PV installations has developed more slowly. As a consequence, these manufacturing industries have relied heavily on exports and are now suffering from overcapacity. In response, the government has accelerated support for domestic deployment.” 

In Japan, as the country moves away from nuclear energy, grid constraints threaten to severely slow the pace of solar deployment. A decision by Hokkaido Electric Power to limit solar capacity connections to 400MW means more than 1GW of applications already received will likely be refused. Clearly, while Asia’s cleantech landscape may look promising at first glance, many experts are wary. Investors and firms entering the region will find many opportunities, but should approach them cautiously. 

Key industries

As Asia develops as a global powerhouse, its demands for energy and resources grow along with the importance of sustainable living. Increasing urbanisation and industrialisation, in tandem with expanding populations, have placed a great strain on the most basic of requirements, such as water resources. In the long term, this drives market opportunities for technology that can alleviate this impact – water purification and wastewater processing, for example. 

Water management is a particularly broad area, and demand is high across the Asian markets. In China, this relates to tackling water pollution. Across much of Western Asia, providing clean drinking water is the issue. In India, a major concern is protecting water resources for key agricultural industries. Looking at the wider Asia-Pacific region, in Australia, water management projects are more focused on irrigation and the protection of rivers. Throughout the region there are prospects for investment in water management. 

Sustainable energy is, of course, a major trend. Late July, for example, saw Thailand announce plans to increase the proportion of electricity generated from renewable sources to 25 percent over the next 10 years, and the country’s 2021 target renewable capacity will increase 51 percent to 13.9GW. 

Solar and wind projects are at the top of the agenda, and, in the past 10 years Chinese firms have gone from anonymous players to champions of the global market. Firms such as Sun Tech Power, Trina Solar and JA Solar are regularly counted among the top photovoltaic cell manufacturers. Sinovel Wind Power and Xinjing Goldwind carry the flag for wind turbine makers.

Demand for wind energy is strong across the region, with many large-scale wind farms being built and planned. Such projects have been seen in the southern Chinese provinces, northern Japan, and across Taiwan, the Philippines and Indonesia. Further afield, in New Zealand, consent has been granted to Genesis Energy to take forward its ambitious Castle Hill wind project, the country’s largest proposed wind farm to date. 

The manufacturing power of the Asian markets – particularly China, South Korea and Taiwan – lends itself to clean technology development. Although this often involves working with Western partners, mass production of new technologies is central to the success of cleantech products in the region. That is not say that the region lacks ingenuity. This trend is obvious in the development of more powerful batteries for electric vehicles, and major investment opportunities exist in the manufacturing of Olivine powder, a key raw material in these batteries. As China is currently driving ahead with electric vehicles as part of the country’s five-year economic plan, it is easy to see how this market could be lucrative. 

Less conventional options are also being explored. Waste-energy conversion technologies emerging from the US and Japan have long been recognised, and Asia is now waking up to their benefits. China, Taiwan, India and Korea are all looking into waste-energy solutions. Their ambitious energy targets, and growing populations − or more importantly the waste products they generate − make these countries ripe targets for firms with the right expertise. 

Financing cleantech

Cleantech in Asia has something of an image problem, and many investors are put off by its perceived dependence on government handouts. Around 20 years ago, governments across the region came to recognise the looming challenges of sustainable development, energy security and the environment. In response, many countries set ambitious renewable energy targets, heavily subsidised by government spending. Today, many Asian governments aim to increase renewable energy usage by five to 10 percent by 2020, though many believe that to subsidise the sector further would be a great mistake, arguing that previous subsidies have led to market overcapacity and under-investment. “Business leaders in a number of cleantech verticals are coming to the contrarian conclusion that now is the time to develop a roadmap to end subsidies rather than ask for more,” says Gil Forer, Leader of the Global Cleantech Centre at Ernst & Young, in the firm’s 2012 report. “They recognise that success depends on driving the efficiencies, innovations and business models needed to compete head-on with traditional technologies.” 

As governments begin to withdraw subsidies, opportunities in cleantech investment are opening up. Some experts say there has never been a better time to invest in the sector. “You want to be investing when the sector is in distress, not when everyone is clamouring for an opportunity,” Ron Mahabir, co-founder and Managing Director of Asia Cleantech Capital, told Asia Venture Capital Journal in December 2012. “Since 2006, this has been by far the biggest macro opportunity of our lifetime,” he added. 

Private equity has proved itself a major player in the sector, and there is a broad spectrum of parties – from pension funds to financial institutions – investing in cleantech PE. Central banks, sovereign wealth funds, pension funds and multilaterals have become extremely active in the space. In the past few years governments have introduced a variety of initiatives to facilitate this investment. Such initiatives have included feed-in-tariffs, tax breaks for energy companies and guaranteed electricity grid access for projects. Thailand, for example, has encouraged investment in large-scale solar power parks and private equity has subsequently taken an interest, with Singapore-based GP Equis Funds Group paying $200m for a portfolio of Thailand solar energy assets last August. Malaysia, meanwhile, has introduced non-financial support mechanisms such as power purchase agreements between electricity providers and buyers, and has also invested in infrastructure to provide grid access. In China, hydropower has played a major role in government electrification programs for rural areas, and has gone beyond the need for subsidies completely. However, the industry still represents an opportunity for private investment as the costs of small and medium-sized hydropower assets are relatively low. 

Sector challenges

In the past decade, the story of the cleantech sector has been one of boom and bust, and, despite the opportunities, the market does not provide an easy ride for investors. What then, are the strengths and weakness of the Asian cleantech sector, and why should investors take a chance? 

Government support for cleantech firms has proved a primary challenge to private investment, and the development of the sector as a whole in recent years. Dr Andrews-Speed draws attention to the Chinese example. “China’s government has focused its attention on supporting the manufacturers of wind and solar PV equipment and this led to an explosion in the number of manufacturing companies and in their capacity,” he says. “For many companies, this generous support was combined with soft budgetary constraints and additional informal support from local governments. As a consequence of the global financial crisis, demand for this equipment in international markets crashed, leaving China’s industry with massive overcapacity and large debts. This approach to renewable energy policy has the advantage of producing large quantities of equipment at a low price which in turn can enhance the deployment of renewable energy around the world; but it is economically inefficient as it a wasteful use of Chinese government funds and undermines more technically advanced manufacturers in the advanced economies.”

Fortunately, the sector has learned a lot in recent years, and firms are becoming less reliant on government assistance, understanding that in the bad times subsidies will be reduced, placing undue strain on the firm. Steps are also being taken to tackle overcapacity. It should also be remembered that investing in under-performing sectors is not always a bad move – distressed sectors often bounce back, albeit after some transformation. That said, investors must be aware of the unique challenges that arise in cleantech investing. For instance, companies in the sector often require considerable time and resources to commercialise their products and services – investments, therefore, typically display a much longer gestation period than in other sectors. Investors in the sector need to take a long-term view of potential returns. 

Going forward

As Asia continues to grow as an economic power, it seems unlikely that the demand for cleantech solutions will die down any time soon. Indeed, according to a recent Asian Development Bank report – Asian Development Outlook 2013 – the region is moving down a perilously unsustainable energy path with likely results including environmental disaster and a growing divide in energy access between rich and poor. Asia could be consuming more than half the world’s energy supply by 2035, says the report, and the region must contain rising demand and explore cleaner energy options, which will require creativity and resolve. Without clean solutions, Asia’s expansion cannot be sustained. 

A further driver of cleantech will be the region’s dominance of manufacturing within the sector, particularly in countries such as China, South Korea and Taiwan, where cleantech products are beginning to drive industry. “In China, the wind and solar PV industries will continue to grow, possibly after a phase of consolidation, as will other cleantech industries,” says Dr Andrews-Speed. “For China, the drivers are threefold. The first driver is industrial policy – to be a world leader in clean energy technology; second is energy policy – to reduce reliance on energy imports; and third is environmental policy – to reduce emissions of all sorts from energy production.” 

For investors, the key to good returns is to look for businesses with proven technology, that do not rely too heavily on government support, and which offer a measurable environmental impact. They must also remember that cleantech is a specialised asset class. Generalist funds investing in cleantech companies because it is the ‘next big thing’ have not fared well, and those entering the market without specific knowledge should make use of sector expertise to capitalise on investment opportunities. Finally, investors must remember that the cleantech markets across Asia are as diverse and individually unique as any other sector. As ever, local knowledge and contacts will serve investors well.

© Financier Worldwide


Matt Atkins

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