Cash, investors’ confidence and supportive governments are the key factors for the rapid growth of green energy projects. Banks have given renewables projects preferential financing terms, such as low interest rates and long payback periods.
“Power demand growth has been phenomenal, and this has given global investors the confidence to put money into projects that provided stable returns while offering low perceived risk,” commented Alex Whitworth, Wood Mackenzie’s head of Power & Renewables for Asia Pacific.
Falling generation costs
Operation costs of new solar and wind plants across Asia Pacific have fallen by 54% and 29%, respectively, over the past five years. “This took average costs for new projects below those of gas-fired power by 2018, though in most places renewables are still around 30% higher than coal.
In China, subsidies and preferential dispatch polices have helped new wind and solar projects gain a competitive edge over fossil power plants. However, as the scale of renewable investments increase, many Asian governments are now reducing or cancelling these subsidies, and feed-in tariffs - similar to how green energy markets evolved in Europe.
Sharp and short recession
Gauging the impact of the coronavirus pandemic on energy investment across Asia Pacific, Wood Mackenzie current base case sees a “sharp but relatively short world recession” though there’s clearly risk to the downside.
“In our base case, we now expect APAC power demand to grow by 0.3% this year, resulting in the loss of 380 TWh of demand. But this is followed by strong recovery in 2021 and growth averages 3.6% over the next five years, in line with our pre-pandemic outlook,” Whitworth explained.
Confidence in demand growth
Though most investors have been hesitant to process projects to financial close since mid-February, the lower infection rates across Asia have renewed confidence in Asia Pacific power demand.
Capital markets are expected to soon re-open to the renewables sector, supported by government stimulus and a broader recovery will also push coal and gas prices higher. As a result, Wood Mackenzie sees APAC’s wind and solar build-out recover from 2021. That would mean the crisis results in a modest 26 GW of wind and solar projects being taken out of the pipeline through to 2024, a 5% decline by this time compared to WoodMac’s pre-pandemic outlook.
In case of a prolonged recession, analysts see around 1,000 TWh of demand permanently lost by 2023, equivalent to about two years of growth. In response, governments are likely to prioritise low cost coal, with renewable projects negatively impacted by higher financing costs, increasing the levelised cost of electricity.
“In this scenario, we could see 150 GW of project cancellations or delays across Asia Pacific in the next five years,” Whitworth said, noting, “this is equivalent to pushing back the Asia Pacific renewables construction pipeline by nearly two years.”