Southeast Asia cleantech: Shifting priorities?

When Nikunj Jinsi, global head of venture capital at International Finance Corporation (IFC), looks at the environment for cleantech development in Southeast Asia, he sees a mentality that is not welcoming to those concerned about long-term ecological issues.

"I don't think there is impetus and incentives from government or anyone to stimulate the local population to change their behavior at a consumer level," says Jinsi. "It's very myopic, I don't know that people think mid-term or even long term in that way."

He cites the absence of any government incentives for electric vehicles in Singapore, a developed urban market, as a small but significant example of this myopia. "There's a lack of availability of funding from the government to put charging stations in place or something like that, and yet it's a small example where one could start with fairly easy solutions for that," Jinsi adds.

When people invest into hydro power, or larger solar plays, they’re not thinking about going after cleantech, they think they're investing in a commercially viable operation – Nikunj Jinsi

These concerns are echoed by other members of the investment community. While many can point to individual cleantech projects that show promise - as well as a wealth of innovative ideas - investors are skeptical that the development community can overcome the resistance of currently entrenched thinking in many parts of the region. Promoting the growth of cleantech requires an adaptive mentality on the part of developers and investors alike.

With its large number of island nations, Southeast Asia is vulnerable to the dangers posed by global climate change, particularly rising coastlines and higher risk of severe weather. However, it is also a major contributor to the problem thanks to the ongoing impact of urbanization and industrialization among the developing economies in the region.

As Takehiko Nakao, president of the Asian Development Bank (ADB), noted earlier this year, the Asia-Pacific region accounts for more than a third of global greenhouse gas emissions. Southeast Asia's contribution to this figure has grown over the past few decades; ADB's records show emissions of carbon dioxide and other greenhouse gases rising for all countries in the region since 1990.

King coal

ADB has responded to this rise by increasing its own commitment to counter climate change in developing countries, pledging $6 billion by 2020, up from the present commitment of $3 billion. Nakao emphasized the potential of technologies that have already received backing from ADB. However, he said that private sector efforts will not be enough to effect the needed changes.

"Adequate regulatory and financial arrangements should also be in place to ensure the technologies are economically viable," Nakao said. "Otherwise, countries with constrained budgets will almost certainly opt for cheaper, more polluting energy sources based on fossil fuels."

Fossil fuels such as oil and coal has been crucial to powering Southeast Asia's development goals. Data from the International Energy Agency show that the demand for coal, oil and natural gas rose considerably from 1980 through 2011, and the use of all three is projected to continue to grow over the next 20 years. Coal in particular is expected to become the second-largest source of energy, compared to its fourth-place rank now, behind oil, gas and bioenergy.

Compared to fossil fuels, the IAE's outlook for growth in renewable energy sources is far less optimistic. Demand for bioenergy, hydro power and other renewables is projected to rise, but each will grow by less than the equivalent of 50 million tons of oil, as opposed to over 100 million tons each for oil and natural gas, and nearly 200 million tons for coal.

This is not to say that the public sector in Southeast Asia is ignoring the issue of clean energy. Several governments in the region have set targets for the development of renewable energy sources. Among the most ambitious goals are those of Indonesia, which aims to meet 25% of its national energy needs with renewable sources by 2025 (up from 4.8% now); Thailand, which is targeting 25% by 2022; and the Philippines, which is planning for 50% of electricity production to come from renewable sources by 2030.

Of course, while these are impressive targets, they mean nothing without action to give them strength, and players in the sector say these have so far been lacking. Liam Salter, the CEO of Hong Kong-based renewable energy consulting firm Reset Carbon, notes that the majority of his firm's clients are most motivated by a desire for regulatory compliance, and that the use of this tool by Southeast Asian governments is far less effective than its use by the Chinese authorities.

"I think what we've seen in China over the last, maybe three to five years, is that there's more regulatory pressure there than in a lot of other markets," says Salter. "Related to energy efficiency, related to wastewater discharge, related to air pollution, there has been a higher level of government response than in those other markets."

The regulatory foot-dragging is only one of the public sector-related issues raised. Also relevant is the absence of active encouragement, similar to the subsidies provided by governments to traditional suppliers such as oil and coal companies. Positive support of this kind is even more lacking than the negative enforcement provided by regulations.

Damned by extension

The relatively low importance attached to sustainable and renewable energy development has reverberated through the private sector. A lack of incentives for implementing environmentally friendly technology and infrastructure has naturally led to a corresponding dearth of companies exploring the potential in this sector. That, in turn, has discouraged interest among private equity and venture capital investors.

"I can't think of a single player that is focused purely on Southeast Asia in cleantech - in fact there are very few players around nowadays that call themselves cleantech," says IFC's Jinsi.

This is not to say that there is no involvement by outside investors in the region's cleantech sector. AVCJ Research has records of a limited number of deals involving renewable energy and ecology-focused businesses over the past 10 years, though the deal flow is not substantial enough to draw a clear trend line.

One leader in the sector is Singapore's Armstrong Asset Management. The GP launched its first Southeast Asia-focused cleantech fund in 2012, closing it the following year at $164 million with commitments from development finance institutions including DEG and IFC. It has made several investments in renewable energy projects across the region, but Managing Partner Andrew Affleck acknowledges that the sector is not for everyone.

"A lot of institutional money is still focused on the later stages, where projects have been de-risked, i.e. where they are operational," he says. "Where there is a gap in developing markets is in raising enough money that is willing to take the development stage risk prior to projects being built."

Another major player is ADB itself, which last year partnered with Japan's ORIX Corp. and Netherlands-based Robeco Institutional Asset Management to launch a private equity fund for cleantech and renewable energy investments. The Hong Kong-based Asia Climate Partners received initial commitments of $400 million from the partners and has since been backed by other groups, including Bank of Tokyo-Mitsubishi UFJ, which committed $30 million in September.

While the launch of this fund could reflect a lack of interest in the cleantech category by the third-party GPs that ADB would normally partner with, industry players stress that this shortcoming does not mean the technology itself has no attraction for the private sector. "It's going to be a thematic play that is part of a bigger issue," Jinsi says. "When people invest in hydro power, or larger solar plays, they're not thinking about going after cleantech, they think they're investing in a commercially viable operation."

This difference in perspective plays into the thinking of governments as well. While an argument for cleaner power sources based on environmental thinking might not impress officials and administrators, making the case based on energy security or energy independence issues has the potential to appeal on a different level.

"In some cases renewables - where there is an abundance of sun or wind, or water for hydro - are cost-competitive without subsidies," says Armstrong's Affleck. "So I think policy makers are saying, ‘If we don't have our own conventional fuel sources, and we're having to import, that has a high cost, and it also has an environmental impact. So what can we do with the free resources that we have, in terms of the sun, the wind and the water, and can they be cost-effective solutions.'"

Several public-sector efforts reflect this kind of thinking. In Indonesia, for example, the new government has created a number of projects to promote solar and hydropower in order to reduce reliance on imported oil and hard-to-tap natural gas reserves. But in this area as well the government's well-known bureaucratic entanglements complicate matters.

"In the latest implementation of small hydro power, often the government will actually announce that the tariff has increased. But then when a company wants to sign a contract with the PLN [the national electricity monopoly] using that new tariff, the implementing regulation is not ready yet," says Mohammad Afdal Pamilih, president director at Indonesia's Danareksa Capital. "So sometimes there's a catch-up to be done."

One company that has built a successful appeal on a resource efficiency basis is New Zealand's Lanzatech, a developer of smokestack filters that convert waste gas into usable chemicals that can be recycled back into industrial production processes.

"Right now you can build a billion-dollar pipeline and ship it to another place to use the carbon dioxide or carbon monoxide, or you can drill underground, and you hope that geologically it works," Chung adds. "Here, for less than $15 million, you can get a facility that will sit next to your steel mill, or your industrial factory, that can address that gas immediately on site," says Andrew Chung, affiliated partner at Khosla Ventures. The GP has invested in four of Lanzatech's funding rounds since 2007.

The company's technology is already being used by Petronas, Malaysia's national oil company; Petronas' venture arm joined in Lanzatech's Series C round in 2012. Lanzatech has also brought its technology to Indonesia to implement solutions for recovering usable materials from non-food feedstock, to complement palm oil biofuel manufacturing.

The long haul

Despite these positive steps, industry players still caution that there is a lot of work to be done changing mindsets to spot potential opportunities for efficiency. Currently pollution reduction and energy replacement are simply not high enough priorities to induce the market players to move forward.

IFC's Jinsi points out one case of opportunities that are going unfulfilled: mobile phone services. The proliferation of mobile phones across Southeast Asia has led to the building of towers in remote areas that are difficult to connect to the national power grid. These towers are usually powered by diesel generators, running off of imported fuel.

Not only is this approach polluting and wasteful of resources, but the generators and fuel tanks are frequent targets of theft. Adding solar panels to these towers would at least reduce the amount of fuel needed, since the towers can power themselves during the day, and given suitable energy storage mechanisms during the night as well. However, there has been little serious attention paid to making such investments.

"In Indonesia, some of the operators are working on solutions there, either on the storage side, or on the energy replacement side," says Jinsi. "But you'd expect a lot more of that to happen. That's just an example of a highly inefficient, expensive and polluting solution that's used today, that is not actively being replaced and looked at."

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• Topics
• Cleantech
• Infrastructure
• Expansion
• Southeast Asia
• Cleantech
• Infrastructure
• Southeast Asia
• Armstrong Asset Management
• Asian Development Bank
• IFC