Mobilizing Investments for Cross Border Green Energy Infrastructure in GMS

Venkatachalam AnbumozhiEconomic Research Institute for ASEAN and East Asia

v.anbumozhi@eria.org

Seminar on Financing Quality Infrastructure for Long-Term Investment and Mobilizing Private Sector Capital, 19-20 December 2016, Hanoi, Viet Nam

Outline

ASEAN- GMS Energy security and the prospects of cross-border connectivity

Costs and benefits of cross-border energy connectivity in GMS

Realigning financial systems for green infrastructure

Source: ERIA (2014); ADB (2013); IEA (2013)

ASEAN Today: Economic and Energy Landscape

Source: ERIA (2014); ADB (2013); IEA (2013)

4

ASEAN in 2035: Economy and Energy Landscape

Meeting the Energy Demands through Regional ConnectivityASEAN Power Grid (APG)

Source: ACE, 2013

Current Status of ASEAN Power Interconnectivity

Source: HAPUA, 2016

Source: FY2014 1st EIPI Presentation Material by EVN

Cost estimation for each routes

including land acquisition

Cost by case (Million US$)

Cost by case per trade flow (US￠/kWh)

Comparison of cost and benefit

of interconnection lines

Net benefit and cost by case (Million US$)

Net benefit and cost by case per trade flow

(US￠/kWh)

Selection of specified routes

Return on investment

Possible cumulative net

cost benefit range

[mil.USD]

Estimated cost of

trasmission line

[mil USD]

A: THA-KHM 4,560 -- 5,470 162 -- 1,009 second priority

B: THA-LAO 19,282 -- 20,604 728 -- 1,957 first priority

C: THA-MYA (4,607) -- (2,766) 2,244 -- 3,956 need careful assess.

D: MYA-THA-MYS-SGP (1,118) -- 3,064 2,384 -- 6,272 need careful assess.

E: VNM-LAO-THA 21,604 -- 23,715 922 -- 2,885 first priority

F: MYS-IDN 3,968 -- 4,087 1,790 -- 1,901 second priority

G: LAO-THA-MYS-SGP 23,217-- 26,557 868 -- 4,273 first priority

Line

Methodology for Estimating the Cost of Energy Connectivity

Source: ERIA, 2015

Estimating the Benefits of Regional Connectivity

Source: IEA-ERIA, 2015

Estimated Energy-related CO2 emissions in the ASEAN region2015- 2025

Energy related CO2 emissions will increase by over 60% by 2025

Benefits of Integrating Renewables into the Energy Grid

100

200

300

400

2000 2010 2020 2030 2035

TWh

5%

10%

15%

20%

25% Solar PV

Wind

Geothermal

Bioenergy

Hydro

Share of total generation(right axis)

160,000

165,000

170,000

175,000

180,000

185,000

984,317 950,000 916,586 900,000 850,000

(kt-CO2)

(million US$)

lax

increase

Status quo Case(no capacity addition after 2012)

Base Case(AIMSⅡachieved)

stric

decreaseuse of coal power plant

CO 2 regulation

Cost reduction

Energy Security & Employment Economics & Environment

Source: IEA-ERIA, 2013 Source: ERIA, 2014

2.5 million new jobs- direct and indirect

Costs and savings of Low Carbon Options in 2025

Reduced externalities resulting from higher deployment of renewables can amount to between 0.2-1.0% ofGDP – at a minimum at least 10 times higher than costs

Source: ACE, 2015

Barriers to Hydro-Power IntegrationBarrier Description Barrier Removable Measures

Regulatory and Permitting Procedures:

Developing new hydro-projects can be

particularly challenging from a permitting

perspective because they involve navigable

waters and require permission from national

and provisional governments

Burdun some permitting and approval

process can be overcome by pilot permitting

and training programs

Proximity to Existing Infrastructure. The

economics of hydro developments are greatly

dependent on the distance of resource to

transmission infrastructure

A through resource inventory should be

conducted for the sites closer to existing

infrastructure should take priority over more

distance ones

Environmental Impact. Very large hydro

projects in particular tend to be controversial

and if they result in upstream flooding, they

can have enormous impact on ecosystems

Limiting the size and ensuring full impacts are

considered vital. Employing run-of-the river

technologies is one approach that limit

environmental impacts. Measures to reduce

impacts on fish (eg passages/ladders) shall be

key.

Planning and Decision Making Hierarchy/Constraints

PM

Energy Minister

Power Department

Utilities Commission &Environment Ministry

Grid Infrastructure Investors

Power Generation Infrastructure Investors

Consumers

General Public

Private sector

Banks/Financiers

Citizen Groups

Consumers

Influencers Hierarchy of Decision Makers Eg of decisions that affect RE Choice

The ultimate decision maker. Guide direction of the Minister in overarching policies and legal framework

Can change the legal framework of Renewable energy market and wields considerable power over which RET are adopted by the grids

Make grid specific RE decisions, has authority to deny permits, if grids do not meet standards. Also decide the tariff structure

Decides whether or not grid is needed, reviews environmental impacts of proposed RE projects

Decides what transmission and distribution projects to invest in

Decides what electricity generation plant to invest in and choose RE source/tech

Under optimal conditions decide from whom to buy electricity or invest in own RE generation capacity

Private Sector Investments and Cross-Border Energy Projects

Country

Energy Cross-border Energy

Investment Investment Share

USD Billion USD Billion %

Cambodia 0.002 0 0

China 0.231 0 0

India 34.847 0 0

Indonesia 17.978 0 0

Lao PDR 11.68 0.536 21

Malaysia 2.586 0 0

Myanmar 0.719 0.719 100

Philippines 15.463 0 0

Thailand 12.244 0 0

Viet Nam 2.715 0 0

Total 121.304 1.255 1.035

Cumulative Private investment in Energy Sector from 1991-2011

Source: Bloomberg Energy Finance Source: World Bank data base

Challenges to Private Financing of Cross Border Green Energy Projects

• Internalizing environmental externalities• Information asymmetry between investors and recipients• Inadequate analytical capacity of issuers and investors• Lack of clarity on generally accepted definition of green infra• Short term horizon of investors vs long term benefits of green

infrastructure projects

• Specific challenges to different actors- Banks: priority lending requirements, below market rate finance- Institutional investors: insufficient no of bankable projects,

negligence by rating agencies- International financial institutions: inability to build coalition of

green financiers, absence of shadow prices for pollutants

Maximizing benefits through Debt Financing Instruments

Construction Operation

Financial

Characteristics

Cross border project does

not generate positive cash

flows. It is fundamental to

structure the debt holder –

banks, payback period far

beyond this stage

The asset deliver positive

cash flow

General Risk Level High risk phase.

Unexpected events are

likely due to complexity in

cross-border transactions,

infrastructure designs,

construction delays

The risk of default lessens

Appropriate Debt

Instrument

Loan financing such as bank

syndicated

Bond financing such as green

bonds, asset backed securities,

project bonds

Inconvenient Truth of Climate Financing

35,000

17,000

13,000

2,300

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Pledged Deposited Committed Disbursed

Mil

lio

n U

SD

Source: www.climatefundsupdate.org

0

0.5

1

1.5

2

2.5

3

3.5

UK Italy Germany France Japan Canada USA

Oil- Taxing Business( $/lit )

Crude Oil Price Industry Margin Tax

1,082

966

OECD OIL TAX REVENUE (2009

-13)

OPEC OIL EXPORT REVENUE

Tax revenue Vs Export revenues(billion $)

116

95

OECD OIL TAX REVENUE (2009 -13) OPEC OIL EXPORT REVENUE

Tax revenues Vs. Export revenues (per barrel of oil)

Source: OPEC annual statistical bulletin, 2014

Green Financing through Energy Tax

What Needs to be Done?

Conduct an Overall Assessment, Optimization and Adjustment of Regional Power Connectivity Plans, to provide detailed information for public-and private decision makers about the quantity, quality and location APG and GMS master plan projects, technical standards and institutional capacities.

Develop a Comprehensive Low Carbon Investment Road Map, as a strategy to show bold leadership in removing the barriers to RE integration and to make RE investments more cost effective at grid level through regulations, incentives and capacity building for taking credit risks.

Earmark Financial Resources for Green Energy Connectivity, by expanding energy tax and ASEAN infrastructure fund to drive private investments with clear policy signals as well as by backing Sustainable Development Goals (SDGs) and the Paris Agreement.

Establish Voluntary Principles and Monitoring Guidelines for all green finance asset classes: bank credits, bonds and secured assets.