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An Ideal Financing Hub For Renewable Energy And Carbon Credits
Perspective | 15 May 2009
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By: Xavier Lim
Articles (51) Profile

According to Jotdeep Singh, Rabobank’s regional head for Asia renewable energy & carbon credits (RECC), activities in the renewable energy sector have intensified across Asia since 2005 as various Asian countries are increasing focus on renewable energy sources that are best suited to their natural advantages. Jotdeep believes there should be a regional hub for Asia’s renewable energy and carbon trading sector to achieve critical mass and diversification across renewable and carbon technologies and project types and Singapore could become Asia Pacific’s RECC financing hub.

Renewable energy is energy that is derived from natural processes that are replenished constantly. It can be derived directly or indirectly from the sun, or from heat generated deep within the earth. Included in the definition is energy generated from solar, wind, biomass, geothermal, hydropower and ocean resources, and biofuels and hydrogen derived from renewable resources.

pasted-graphic-copyWhereas carbon credits are a key component of national and international attempts to mitigate the growth in concentration of greenhouse gases. Carbon trading is an application of an emissions trading approach. For example, if a company that is running a plant in the US emits more gases than the accepted norms of the United Nations Framework Convention on Climate Change (UNFCCC), it can tie up with its own subsidiary in China under the Clean Development Mechanism (CDM). It can then buy the ‘carbon credit’ by making its Chinese plant more eco-savvy with the help of technology transfer or tie up with any other company in the open market.

Prospects In Recc
In Asia, asset financing in renewable energy projects has attracted strong interest (especially in wind, small hydro and biomass) even as the US and Europe have seen a significant slowdown. Therefore, investors should look into this huge untapped sector.

Jotdeep pointed out that according to New Energy Finance, renewable-energy financing within Asia has grown from US$3.3b in 2005 to US$16.9b in 2008. However, Jotdeep feels it should have been US$160b, if banks are equally well-equipped to understand the workings of wind or biomass project financing. He also noted that renewable energy options like wind, biomass, biogas and small hydro are already cost-competitive compared to fossil energy sources in some parts of Asia, especially with carbon credits. Currently, 75% of the world’s registered carbon credit projects are in Asia.

Jotdeep said that although renewable energy and carbon financing is affected in Asia due to the economic crisis, the impact is smaller compared to the West attributed to the financial institutions in Asia. Renewable energy projects in Asia are still constructed at a healthy rate on robust demand for power in China and India. In addition, over the last 2 to 3 years, a lot of equity that was raised for renewable energy and carbon credits investments in Asia is gradually being deployed.

Need For A Financing Hub
Relatively, RECC projects are small compared to fossil energy or transportation infrastructure projects. A wind project may require about US$20m in financing, while a coal-based power plant may need 10 times of the amount required by the former. However, no single renewable energy suits all countries. For example, wind is only suitable in some parts of China, India and Korea. In short, RECC projects and manufacturing plants are unlike fossil energy projects, which can be implemented anywhere. They are also unlike transportation infrastructure projects, which are needed by all countries. These explain why a RECC financing hub is useful to achieve critical masss and diversification across renewable and carbon technologies and project types, according to Jotdeep.

Jotdeep pointed out that Singapore is an ideal RECC financing hub in Asia because of its centralised location vis-à-vis the other Asian regions and is also centrally located relative to most of the registered and pipeline CDM projects within the region. Moreover, CDM projects require detailed due diligence and ongoing monitoring, hence, frequent travel from the hub to the rest of the region is needed. Which is probably why Singapore can attract mega clean-tech investments such as Finland’s Neste Oil, which is starting up a $1.2b second-generation biodiesel plant here in 2011 – the largest in the world and Norway’s Renewable Energy Corporation’s $3b solar cell plant, which will also be the world’s largest when it starts up in 2010.

Jotdeep argued that although Singapore may not be the largest renewable energy market in Asia, it can definitely be a successful ‘model’ of an ideal RECC financing hub. Besides, Singapore has a pro-business government that shows strong interest in promoting clean technologies, as evident by the recent unveiling of a blueprint to help build a greener, more energy efficient and sustainable nation over the next 10 to 20 years. For a start, the government will set aside $1 billion to be implemented over the next 5 years. The plan will change everything from the cityscape and landscape to the way Singaporeans live and the way businesses are run. Of course, not forgetting that Singapore has an established financial infrastructure with a good legal framework and most importantly, it is already a financial hub for many other sectors.

Small caps dream big on CDM
Fighting climate change is probably too important to leave to altruism. So seven years after the Kyoto summit in 1997, rules in the Kyoto Protocol integrated market mechanisms could make environmentally sustainable policies compatible under stark economic realities. Of course, instituting market-based solutions to tackle such conflicting objectives are not new, and the initiatives could potentially spur new frontiers in the financial world.

Noble Group is a case in point. In 2007, it hammered out a US$48m prepaid financing deal secured on carbon credits generated from an Indian chemical firm. The commodities giant’s groundbreaking deal is the kind of investment that some local players are looking at. But given the still-nascent industry, SGX-listed companies blazing a path into the sector are mostly small caps, on a hope that this would propel them into the big leagues.

Advanced Holdings, mid last year, shelled out $1.8m to build a biogas plant that it is looking to certify under the United Nations Framework Convention on Climate Change’s (UNFCCC) Clean Development Mechanism (CDM) and allow it to monetise its carbon assets. In this respect, recycling firm ecoWise Holdings has seen the most success. Late last year, the company registered Singapore’s first CDM project under the UNFCCC.

Under the agreement, carbon credits generated from ecoWise’s plant here will be bought by Kansai Electric Company (KEC), the number-two power generator in Japan. The project to recycle thermal energy to dry biomass, which used to be done by conventional power, thus saves the environment from emissions generated from an estimated 6.1m litres of diesel yearly. And KEC will use the credits to offset its own emissions, which could also be tradeable as Certified Emissions Reductions (CERs) on climate exchanges.

Unfortunately, Singapore’s base for CDM projects remains limited. But up north, China’s power hungry economy has given her a majority 34% share of global CDM projects and is a hotbed of opportunities. And ecoWise, committed to developing its Renewable Energy segment, recently acquired a coal-fired power plant in Wuhan to convert into a biomass cogeneration plant.

Exploring such new frontiers is, undoubtedly, fraught with uncertainties. Since 2007, office equipment manufacturer, Asia Tiger Group, has been trying to forge a new direction along this path, which saw it take a 75% stake in Industrial Power Technology, a niche player that builds biomass cogeneration plants in the region. However, despite announcing contract wins in Thailand and making inroads into Indonesia, projects have been delayed by difficult credit conditions and the segment has yet to earn any revenue.

Brave New World
Still, no matter how appealing, setting up pollution permits will throw up its own set of problems. First, it is unclear how hard the UNFCCC’s regulations will bite and the carbon credit market, literally carved from thin air, is likely to have inherent flaws. Ongoing economic turmoil has also crimped demand for industrial projects and as prices of CERs fall, it has crippled the commercial viability of some CDM projects and perversely made polluting the environment cheaper.

At the height of the Oil Crisis back in the 70s, investments in renewable energy had gained some traction but interest dissipated when oil prices waned. 30 years on, the world is a different place. People are increasingly aware of environmental issues and dwindling oil supplies worldwide have given energy security issues added urgency. While it is likely that markets will not be able to solve all of our climate concerns, any success in reducing environmental damage would go a long way towards restoring some faith in the free market system.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

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