Investment professionals say China has the brightest renewable energy opportunities in Asia, but that has not stopped other asset owners from being successful in Australia and India.
Investments in renewable infrastructure, in particular, has drawn interest from asset owners and fund managers, with insufficient official backing presenting opportunities for investors.
A report released last month by the Asia Investor Group on Climate Change (AIGCC) said the region has an “uneven availability” of wind and solar resources, meaning it suffers from a lack of the long-term support needed to develop wind and solar energy sectors.
The opportunities for renewable energy investment in the region will only increase as more countries, companies, and funds strive to meet zero carbon goals. In fact, a quarter of companies in Asia expect to be carbon neutral by 2030, according to an analyst survey by Fidelity International. A similar percentage of companies is aiming to achieve the same goal globally, with European firms leading the pack at 30%.
The AIGCC report found that renewable power costs 25% less in China and India compared with developed countries. Both countries have ambitious renewable energy targets. China aims to be at net zero by 2060, with carbon emissions peaking before 2030, while India is aiming to reduce emissions by 33%-35% of GDP by 2030, from 2005’s levels.
Portfolio managers told AsianInvestor that even though, among Asia Pacific countries, China shows the most promise, particularly in wind, solar and electric vehicles (EVs), hurdles it has to watch out for include getting the right alignment with partners, the economic viability of battery makers for EVs and long-term sustainability.
AsianInvestor asked investment professionals to share their views on where the key renewable energy investing opportunities in Asia Pacific are and what challenges they have faced.
The following contributions have been edited for clarity and brevity.
Brent Snow, associate portfolio manager
Aware Super has invested in several renewable energy projects in recent years, and the sector continues to be a priority area for the Fund to support our target of net zero by 2050.
The combination of retiring ageing fossil fuel generation, government policy towards renewable energy, and customer and corporate demand for green power, has created strong tailwinds for renewable power investment. There are, however, numerous challenges to investment including strong competition for operating assets, relatively short-term off-take contracts, volatile merchant prices
, and grid congestion.
Notwithstanding the challenges, we believe interesting investment opportunities will emerge, particularly in sectors like onshore and offshore wind, pumped hydro, and battery storage. The challenges to making these investments include: partnering with the development and operational expertise, getting the right alignment with partners, investing in strong parts of the transmission grid, making accurate merchant price forecasts for uncontracted revenues, and for large investors finding opportunities of sufficient scale.
William Yuen, investment director
The key renewable energy investing opportunities in Asia will mainly come from China, particularly in the solar, wind, energy storage, electric vehicle (EV), and fuel cell space. All these are China’s key areas of focus to achieve its peak carbon emissions before 2030 and carbon neutrality by 2060.
While the cost of solar and wind power generation is trending down to reach grid-parity, the biggest challenge is to its stability, which requires the strengthening of grid infrastructure and energy storage facilities.
EV and fuel cell trucks can replace internal combustion engine (ICE) vehicles in the long run. Near-term competition is intensifying on the auto OEM side, but battery capacity expansion and demand growth is for certain. High-quality battery suppliers will gain more market share. Battery equipment makers will also benefit from the Capex cycle.
However, they are still not economically viable and will continue to need significant subsidy support from the government before they can reach cost-parity with ICE vehicles, possibly in the late-2020s. EV charging infrastructure support will be more challenging with the rapid rise of EV penetration rates.
Alice Li, investment analyst
In greater China, I see investment opportunities in wind and solar equipment manufacturers. China is targeting to reach peak carbon emissions by 2030 and carbon neutrality by 2060. In this context, wind and solar have the greatest growth potential among non-fossil energies.
The government is also mandating minimum renewable energy consumption annually in the next decade, which supports at least 40GW wind and 70GW solar annual installation. Compared to the past five years, wind installation demand grew 45% and solar installation demand grew 75%. Equipment manufacturers are key beneficiaries. I prefer companies which are competitive in cost and product quality, and have strong potential for market share gains.
The biggest challenges for rising renewable energy consumption is to maintain power supply stability, as renewable energy is not as dispatchable as thermal power. This requires investment in energy storage, smart grid as well as peaking demand service. For investors, identifying disruptive technology and breakthroughs is the key focus.
Mark Mao, Greater China research analyst
JP Morgan Asset Management
China’s quickly evolving electric vehicles sector presents many interesting renewable energy investment opportunities. China’s EV sector is not only underpinned by strong structural growth potential but is also poised for a cyclical uptick coming out of Covid-19.
A confluence of local policy support and improving product functionality is creating significant tailwinds: as part of prioritising decarbonisation, China’s government has established sustainable subsidies and policies that are driving EV innovation and investment. Meanwhile, private demand is coming from strong customer acceptance of EV technology, with a growing demographic of younger consumers highly interested in this market.
For investors, the challenge as well as the opportunity is to research the best companies up and down the supply chain, looking beyond the major EV brand names to find alpha. In conducting due diligence on these companies, investors need to consider factors such as: quality, long-term sustainability, how the company allocates capital, differentiation in product and branding and of course, technological edge. Ultimately long-term investors need to pick investments selectively to generate returns.
Ray Fung, co-founder
Albamen Capital Partners
Energy, as we know, is experiencing a tectonic shift, from energy source and generation to how it is ultimately consumed. This revolution will take two to three decades to complete as the cost structures of energy production undergo major changes. Wind and solar (photovoltaic) renewables are becoming more affordable and scalable as previous limitations are being overcome and new business models such as energy as a service (EaaS) businesses will emerge and capture a significant part of the value in energy.
Investors are presented with a unique opportunity to participate in, and potentially profit from, the global energy transition. This is especially true in China, which is at the forefront of renewable energy adoption and application. For instance, China’s new solar renewables reached grid parity (the levelised cost of electricity is equal or less than the cost of electricity from fossil fuels) in 2018 and wind renewables will reach grid parity in 2020.
In 2019, China State Grid embarked on an ambitious smart-grid Internet of Things (IoT) and announced a Rmb24.7 billion big data, industrial IoT, 5G, and machine-learning-based investment programme for 2020, while aiming to attract another Rmb100 billion in investment to connect a further the development of the whole industry.