Powering Asia’s energy transition with institutional capital

How can institutional capital accelerate Asia’s shift to sustainable energy?

Asia’s transition to renewable energy is picking up momentum and is expected to characterise the region’s development over the coming years. Diversified and resilient sources of institutional capital can help accelerate the shift, bringing benefits for all.

The pandemic has already put significant pressure on government budgets. And while the renewable energy industry has weathered the COVID-19 pandemic well, financial commitments in the sector have still dropped1 , widening the chasm that needs to be filled.

In Asia Pacific, the power generation sector could attract USD1.5 trillion worth of investments2 by 2030, with countries like Vietnam, Philippines and Indonesia already paving the way toward clean sources.

But balancing economic development with sustainability while maintaining reliable and secure energy access is the region’s key challenge. Therefore, a well-balanced mix of mature and new technologies will set the tone for a smooth transition.

“Asia Pacific is clearly the undisputed engine of power demand globally and there remains confidence in the long-term trajectory of the sector,” says Sujay Shah, Managing Director and Global Head of Clean Tech at Standard Chartered. “ By providing funds in markets where it is scarce, institutional capital has a critical role to play in their sustainable development.”

Ambitious goals set by some countries offer opportunities for investors from around the world, for example solar, wind and biomass are forecast to make up more than a third of Vietnam’s total power generation by 2030, up from about 10 per cent in 2019.

Role of institutional capital in powering Asia’s energy transition

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Innovative finance

While investment is flowing to this region, distribution is uneven. The East Asia and Pacific region attracted around a third of global renewable energy financial commitments in 2017-2018, but this was mainly driven by increased spending on solar photovoltaic panels and onshore and offshore wind in China. Funnelling finance to smaller projects and nations can be tricky.

That’s where debt financing and structured financing can play a key role, helping to mobilise institutional investors to areas and companies in need of investment. Thailand and Malaysia are among the countries that offer strong institutions4 and favourable policy environments, according to an analysis by the Climate Policy Initiative.

Instruments like green bonds can also bring more capital to renewable energy projects. This is already a growth area. Issuance of green bonds earmarked for renewable energy climbed from just USD2 billion in 2013, to USD8 billion by 2019 - and there is yet more growth to come.

Current green bond issuances6 make up less than 1 per cent of the global bond market, which is estimated at about USD 100 trillion, according to the International Renewable Energy Agency. Strong demand is set to continue to drive issuance upward and the large ticket size that green bonds can create is already attracting institutional investors.

Tailoring investment

Tailored investment funds are another way to make capital available, with institutional investors keen to deploy financing, companies are looking to fill the void. The Climate Finance Partnership7 an investment fund managed by BlackRock, aims to raise as much as USD1 billion to finance green infrastructure, energy efficiency solutions and clean mobility.

Financial institutions can also help push emerging energy technologies to the fore. While solar and wind dominate current investments, structured finance deals could help back less-prominent sources of renewable energy like green hydrogen or ammonia.

Understanding the local environment and specific needs is key to overcoming challenges like scale, the size of deals, the regulatory environment and the risk-return balance of many of the projects that are seeking finance.

Asia is already on the way to making its energy generation climate-compatible and requires the rapid availability of additional capital to help power it forward. Ensuring that investments are directed toward the economies and areas that need them most depends on partnerships between governments, institutional investors, banks and other organisations.

Continuing to build capacity and generate innovative blended finance initiatives will help bring more large institutional investors on board. The appetite to finance Asia’s green energy transition is here – now is the time to put more plans into action.

This article is based on themes discussed during a panel discussion at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.

1 https://irena.org/IRENA_Global_Landscape_Renewable_Energy_Finance_2020.pdf

2 https://www.woodmac.com/press-releases/asia-pacific-power-generation-could-attract-us$1.5-trillion-investments-this-decade/

3 https://www.eco-business.com/news/renewables-are-booming-in-vietnam-will-the-upswing-last/

4 https://www.climatepolicyinitiative.org/publication/blended-finance-clean-energy-experiences-opportunities/

5 https://irena.org/IRENA_Global_Landscape_Renewable_Energy_Finance_2020.pdf

6 https://irena.org/IRENA_Global_Landscape_Renewable_Energy_Finance_2020.pdf

7 https://www.oneplanetsummit.fr/en/coalitions-82/climate-finance-partnership-198