Chinese players are hardest hit as coal’s glory days come to a close.

Investors are no longer fired up about pouring funds into Chinese coal power plants. Investment in new coal-fired capacity in China crashed to less than 20 GW of coal power in 2016, a far cry from an annual average of 50 GW from 2011 to 2015 and 80 GW in 2006 to 2010, says Laszlo Varro, chief economist of the International Energy Agency.  “This century so far was the century of coal, especially in China and India. This age of coal investment is now coming to an end--or at the very least, it is coming to a pause,” he adds.

Total energy investment worldwide in 2016 was just over $1.7t, marking a 12% decline on a year-on-year basis. China remained the largest destination of energy investment, taking 21% of the global total. Meanwhile, energy investment in India jumped 7%, cementing its position as the third-largest country behind the United States. The rapidly growing economies of Southeast Asia together represent over 4% of global energy investment.

End of an era

The makeup of investments in China exhibited a marked change in the past year, with a 25% decline in commissioning of new coal-fired power plants. Today, energy investment in China is increasingly driven by low-carbon electricity supply and networks, and energy efficiency.

“The administration introduced a so-called 'traffic light' policy last year to prevent overinvestment in coal capacity. A year after, we can see that this traffic light policy is proving to be effective,” Varro notes. “The investment decisions taken in coal 2016, totalling a mere 40 GW globally, signal a more dramatic slowdown ahead for coal power investment once the current wave of
construction comes to an end,” he adds.

There was also a decline in coal power generation investment in India. Varro notes that this can be attributed to two factors, namely, the financial difficulties of the Indian electricity sector and the increasing competitiveness of the solar power industry in India. “Questions are increasingly being raised about the economic necessity of new coal-fired power plants,” he says.

New sources in the spotlight

Coal’s loss is renewable energy’s gain, with renewable energy sources grabbing the lion’s share of funding in the past year. IEA’s report shows that investment in new renewables-based power capacity, at US$297b, remained the largest area of electricity spending, despite falling back by 3%. Renewables investment was 3% lower than five years ago, but capacity additions were 50% higher and expected output from this capacity about 35% higher, thanks to declines in unit costs and technology improvements in solar PV and wind.

"Renewables investment is doing really well. 85% of investments into RE went into electricity production, such as hydropower and wind power. The majority of spending is coming from both the government and the private sector, but there is still very little set aside for research,” Varro says.

Spending on electricity networks and storage continued its steady rise of the past five years, reaching an all-time high of US$277b in 2016. China accounted for 30% of networks spending, driven by distribution networks and a significant expansion of large-scale transmission. Another 13% went to India and Southeast Asia, where the grid is expanding rapidly to accommodate growing demand. In the United States (17% of the total) and Europe (15%), a growing share is going to replacement of ageing transmission and distribution assets.

Overall, the grid is modernising and moving from a pure electricity delivery business to an integrated platform for data and services, enabled by rapid progress in digital information and communications technologies, which grew to over 10% of networks spending. Investment in grid-scale battery-based energy storage is ramping up quickly, reaching over US$1b in 2016,” Varro notes.
 

Consumers are there to catch them anyway, says analyst.

Asian Power reported early August that the Philippines' energy agency is studying the charges on consumers' power bill and trying to probe how to revise it. One of the changes they're looking at is the possibility of eliminating system loss charges. According to DOE spokesperson Pete Ilagan, the decision to carry out the study was a result of excessive system loss reported by DUs.

He added that the agency will probe whether the system loss cap, 9.5% for private DUs and 13% for electric cooperative, is being followed by power distributors.

We spoke with Dr. Bikal Pokharel, principal analyst for power at Wood Mackenzie's Asia Primary Fuel Fundamentals and asked his thoughts on the matter.

If implemented, how will this revision affect Philippine utilities?

This refers to the system loss charge in the electricity bill. The maximum recoverable losses for distribution utilities is regulated by ERC and currently stands at 8.5%. If the distribution utilities are asked to shoulder the burden of this, it will have an immediate impact on their bottom line.

Other countries are having their utilities shoulder system losses. Is it high time for the Philippines to do it too?

The system losses are almost always paid by the electricity ratepayers. It's usually a question of accountability. As 'line losses from heating' occur in the process of making electricity available to the consumers, the ratepayers are deemed accountable for the charge. Its almost like the cost of electricity delivery. However, it can be argued who should pay for losses arising from electricity pilferage. In most jurisdictions, if not all, consumers pay for pilferage because it is generally lumped within the system losses.

Who do you think must shoulder system losses, consumers or utilities?

I think the ratepayers should pay for the line losses. However, the level of recoverable losses should be mandated by the regulators as is currently done in the Philippines. Without capping losses, the utilities won't have much incentive to curb inefficiency.

How should Philippine-based utilities deal with losses due to pilferage?

As long as the utilities are able to pass on the cost to the consumers, they wont be financially motivated to solve the problem of power theft. Normally, it comes down to the government to place policy measures to tackle with power theft. The first step to deal with losses from pilferage is to identify the place of origination. Utilities, in countries like Brazil, have used smart meters to identify the location of system loss. 

Energy and peak deficit both slid to 2.6% and 4.7%.

The average Indian may hardly be noticing some slight improvements in the country’s power distribution despite numbers revealing that it indeed has become better. Overall power deficits have been significantly--not entirely--overcome in the past year, thanks partially to the 2012 power-sector reform plan for state distribution companies taking a hard bite last year.

The 2012 plan was apparently not too successful as the government was gunning for a big change in distribution and another reform was set in motion around November last year. Analysts reveal high hopes for the new plan as it is deemed to be better structured than its 2012 predecessor. However, Rachna Jain, analyst at Fitch Ratings, says that the take-up rate for the assistance package offered to state governments, and delivering on medium-term commitments on increasing efficiencies and further reducing losses at discoms by the state governments, will determine the success of the new measures.

“The debt-restructuring plan will substantially reduce discoms’ near-term debt burden; and more importantly, their high interest costs, which account for a large share of the discoms’ losses. The federal government appears to recognise that rising power tariffs continue to be a challenge for state governments; thus, addressing the remaining losses is largely expected through reducing technical and commercial losses over the next two to three years, and by reducing generation costs via improved availability of low-cost fuel,” she adds.

Power deficit dilemma

In the past year, India has suffered an energy and peak deficit of 3.6% and 4.7% respectively, down from 8.7% and 9% two years back. The industry expects deficits to recur as growth picks up and rural areas are connected. For these reasons, capacity addition remains a priority for the government.

The National Electricity Plan 2012 targets a new capacity build of 80 GW for 2012-2017, of which 61 GW (72%) has been achieved.

According to Kameswara Rao, partner and energy, utilities & mining leader at PwC India, the distribution network connects about 200 million consumers with a total load of over 400 GW. It is served by 73 distribution companies, of which 17 are privately owned. “Several of the distribution utilities suffer large volumetric losses and are financially distressed. This raises a significant counterparty risk which is manifested in delayed payments to generators and other suppliers,” Rao further explains.

Jain also adds that to somehow solve India’s power deficit dilemma, the long-term success of the reformed programme relies heavily on reducing generation costs via improved availability of low-cost fuel. States opting for the package will have to agree on milestones on efficiency improvements and loss reduction.

Sheoli Pargal of World Bank further emphasises the importance of making sure the programme will succeed. The agenda for addressing distribution performance must now be a priority, she says. 

Despite considerable progress in implementing the EA mandates and associated policies over the past decade, the distribution segment continues to post significant losses. Utility finances—critical to realising sector goals—deteriorated sharply over 2003–11.

“These losses are overwhelmingly concentrated among distribution companies (discoms) in the unbundled states and among SEBs and power departments in the states that have not unbundled,” Pargal reiterates.

Do not be deceived by enticing investment environment, analysts warn.

Just like its neighbouring countries, the Philippines is setting its eyes on shifting to renewable energy sources and slowly shedding its dependence on coal, oil, and gas for its energy needs. The country’s market, in theory, is a bright spot for investors along with Thailand and Indonesia, but its attractiveness is marred by policy loopholes that leave analysts frustrated with its potential.

Recent project announcements attest to the Philippines’ investment appeal including the 92.5MW module shipment from Chinese manufacturer, JA Solar Holdings. This represents JA Solar's first entry into the Philippine renewables market and is representative of analysts’ view that Chinese solar manufacturers will increasingly turn to rapidly expanding Asian renewables markets in order to offset some of the overcapacity in their domestic market. Renewables developer Conergy also announced in October 2015 that it is developing over 200MW of solar capacity across the Philippines.

 "We have previously noted in our analysis that the ongoing power supply issues in the Philippines will gradually improve over the coming years as a robust power project pipeline is commissioned. Although the project pipeline is dominated by coal, the pipeline for renewable energy is also strengthening, on the back of the strong regulatory environment in place to attract renewables developers into the market," says Georgina Hayden, senior energy & infrastructure analyst, BMI Research.

The government seems to be committed to expanding the domestic renewables industry and has implemented a number of policies to encourage investment. These include tax incentives, duty free imports of equipment, a feed-in tariff programme (FIT), net metering and utility quotas - amongst other regulations. Furthermore, Hayden says, the Philippines has some of the highest electricity tariffs in the southeast Asia region, which allow for attractive returns for prospective developers.

These scenarios seem pretty decent and enticing for investors, but Roberto S. Verzola, executive director, Center for Renewable Electricity Strategies (CREST), thinks otherwise.

The Philippine Energy Plan 2012-2030 “business-as-usual” scenario expects peak demand to increase to 23,158 MW by 2030. To cover the peak demand plus the required reserve margin, a capacity of at least 25,788 MW must be ready by that year.

Verzola says that with 1,767MW of capacity additions already committed, the plan still requires new additions of 11,400 MW over the planning period, to bring the total capacity by 2030 to 27,714MW. This is 1,926MW above the necessary supply of 25,788MW, presumably to cover for the retirement of aging power plants.

“If we scaled down the demand using energy efficiency measures and covered the scaled-down demand with renewables only, then peak demand will have risen more slowly than usual and the renewables-only additions will have sufficed until 2030 to cover the peak demand plus reserve requirements with 670MW to spare, based purely on existing government plans in 2012,” he asserts.

“Sadly,” he adds, “the Philippine government went instead on a construction binge of 23 coal plants that is scheduled to go on until at least 2020, squandering a golden opportunity for the country to show the world how to make an early energy transition to renewable electricity.”

Fernando Vidaurri from Dezan Shira & Associates, concurs with Verzola’s view, saying that one of the reasons renewable energies have been seeing slow growth is that investment in this industry is not seen as offering the same investment returns as fossil fuels.

“In addition to costs, investment has been affected by the slow approval process. For this reason, solar industry officials have started putting more pressure on the government to increase investment incentives and process project permits faster,” Vidaurri says.
 

Utlisation levels have all been plummeting.

China’s thermal power plants have been making the rounds among headlines quite frequently as of late due to issues on coal use that are being constantly thrown at them. Unbeknownst to many, IPPs are grappling with another mishap as thermal power plant utilisation levels have dropped alarmingly, making profitability vulnerable to risks.

It is true that IPPs with coal-fired plants benefit from low coal prices and higher on-grid tariffs, which support their profitability. Thermal-power plant utilisation levels, however, are under pressure because of lower electricity demand growth, capacity additions and the increasing share of renewable and nuclear energy in the generation mix. To make matters worse, any further cuts to on-grid tariffs will be negative for the profitability of coal-fired electricity generators.

The latest coal-fired power tariff adjustments - the last was in April 2015 - have not followed changes in coal prices in proportion, as China gave thermal IPPs some room to repair damage to their balance sheets that was caused by tariff controls during 3Q08-2010, when coal prices increased substantially. However, Penny Chen, associate director, Corporate Ratings, Fitch Ratings warns that with the weakening of China's economic growth and industrial users under some stress, cost of power will be a concern for policy makers.

“A cut in coal-fired power tariffs, when utilisation levels are under pressure, will hurt thermal generators' margins and delay deleveraging of these entities. However, bigger-scale and more cost-efficient companies will be better off,” Chen says.

Ephrem Ravi, analyst at Barclays, agrees and says, “We lower our thermal power generation forecasts by 3.8% on average for the period, due mainly to clean power generation taking market share from thermal, as well as taking the brunt of lower power demand growth in China. Note that renewable and nuclear power have grid dispatch priority over traditional coal-fired power plants (without steam supply), hence any decline in power demand directly impacts coal-fired power supply as it is the first one to dispatch less power.”

The country's plan is deemed "overly ambitious".

If the big “yes” is finally revealed for the construction of two nuclear plants in Malaysia, it will soon be joining the nuke bandwagon by 2030. This is despite apparent protests from activist groups and the absence of a final detailed timeframe for the nuclear plants’ actual construction.

The development of the two plants is estimated to cost RM23.1bil (S$7.68bil) and will be able to generate 1,000 MW. With these numbers in mind, will Malaysia be able to make this happen? Nuclear engineer and energy expert Akira Tokuhiro says that although this plan is impressive, it is overly ambitious. “Realistically, as nuclear energy requires a high-educated engineering workforce as well as a construction technology workforce adhering to high standards of quality and verified workmanship, this infrastructural challenge can easily take 15 years itself. Several IAEA INSAG reports describe the infrastructure needed by emerging nuclear nations,” he says.

The main challenge, he says, is infrastructure--both in terms of a skilled/educated engineering and technology workforce and larger, heavy industrial concerns that can meet the high standards in construction, operations, maintenance and management needed for nuclear power. “In order to realise their ambitious goals, Malaysia will need to set goals that they can meet over the next 10-15 years,” he adds.

However, Global Movement of Moderates Foundation (GMM) chairman, Tan Sri Razali Ismail, says that Malaysia is still not prepared for going nuke as public awareness is still at low levels. If it is done absolutely right, nuclear technology could help the environment he says. “But if even 1% or 2% is flawed, the repercussions would be severe.”

Zaini Abdul Wahab, an energy consultant, says that nuke power is not the be-all and end-all to Malaysia’s power problems. “We do have other options – renewable energy and energy efficiency,” he notes. “These would be faster, cheaper, safer and more inclusive.”

When it comes to power generation in Asia, coal is still undeniably the king.

But growing investor interest in hydroelectric and wind power has got analysts thinking that maybe coal is being dethroned very, very slowly.

Now may not be the time for investors to turn their noses up at coal as overall investment is still hitting almost US$900b, however, Neil Martin, manager at Timetric’s Construction Intelligence Center, says that renewable energy such as hydroelectric and wind power is getting increased prominence in the Asia-Pacific region, currently valued at US$389.3bn and US$184.7bn respectively.

“China, although increasing investment in renewable energy, is still spending heavily in coal and nuclear power generation with projects valued at US$104bn and US$203bn respectively. Moderating growth in the economy and environmental concerns in the large cities is beginning to have an effect, so the growth of coal power generation has peaked,” Martin says. It currently accounts for 77% of capacity and will continue to provide the majority of power generation for the coming years.

Hydroelectric, in second place after coal, will make inroads into hydrocarbon fuels' share of power generation. “While in countries such as Nepal and Laos it is the predominant power generation source; however, India, China and Pakistan dominate the value of projects for hydroelectric, with India accounting for a value of US$97bn,” Martin says.

Developing nations enjoyed a 24% increase in wind investment to $58.2 billion last year, their share of this technology expanding to 59%. With $38.6 billion, China alone accounted for over two-thirds of the wind financing in developing countries, driven in part by anticipated reductions in the feed-in tariff.

Bloomberg New Energy Finance claims in a report titled “Global Trends in Renewable Energy Investment 2015” that taking the middle of the 2014 range, and an average capital cost of $1.75 million per MW, as estimated by BNEF, would be equivalent to investment of around $31 billion last year. That would make capacity investment in large hydro about a third of that in wind and a fifth of that in solar. Large hydro would, however, be much larger in investment terms than biomass and waste, or geothermal.

“Total public market investment in wind jumped 120% in 2014 to $5.4 billion, although this was just half its peak level in 2007. Total public market investment in solar rose 73% to a record $8.3 billion, despite concerns over prospects for Chinese PV manufacturers,” BNEF says.
 

Their inability to purchase power pulled utlisation down.

As if India’s power sector woes aren’t enough, its financially-stressed power distributors have become the country’s latest troublemakers as they continue to cut down on purchasing power. This inability to buy power from power generators has pushed the gencos to suffer low and declining capacity utilisation--and analysts are becoming wary about where this worrying trend will lead.

This underscores the importance of making sure that power distributors’ financial health is in tip-top shape. “For the first half of the financial year ending March 2016, the overall coal-fired plant load factor (PLF) in India fell 3.2pp YOY to 60%, with that of central-government-owned generation companies (gencos) falling 1pp YOY to 72%, state gencos falling 5pp to 55% and private gencos down 2.3pp to 57%,” says Rachna Jain, associate director, APAC Energy & Utilities, Fitch Ratings.

“The country’s gas-based PLF for the period was unchanged at a low level of around 22%. The 7pp increase in private gencos’ PLF to 19% was offset by the 5.3pp drop in central gencos’ PLF to 23% and a 2.9pp fall for state gencos to 23%. It is primarily fuel unavailability that led to gas-based capacity either stranded or operating at grossly sub-optimal levels,” Jain adds.

The situation has prompted the government to introduce a “revival package” in November 2015 for the distressed distribution companies. Although Jain is positive that it will provide some breathing space, she warns that successful implementation of adequate and timely tariff hikes, and lower aggregate technical and commercial (AT&C) losses will be essential to sustain structural improvement.

Separately, the country’s thermal power-generation capacity has increased by an impressive 11% over the last year to 194GW at end-September 2015, driven by the addition of coal-fired power plants and privately owned facilities.

Hiren Shah, CEO, Global Wind Power, says that an eerily similar problem is plaguing the wind power sector. In their eagerness to secure orders, Indian manufacturers, including the multinationals that have set up operations here, are making concessions and commitments that they will struggle to deliver upon. “Examples include providing extended warranties and generation guarantees, signing up for aggressive delivery schedules and lowering the cost of maintenance contracts,” he explains. 

China is awfully torn between coal power reduction and further growing its exports.

When the OECD agreed to restrict subsidies for coal-fired power plants’ exports, both investors and the press had a field day. It was a big step in curbing the growth of global coal-fired power generation and it could have been a phenomenal day for the power industry--except that China, the biggest elephant in the room, was missing when the coal power reduction pact was made.

The world’s coal-fired power generation fleet is almost 1,900GW and half of it is China’s. “That in itself should make any deal less ground-breaking than it initially appears,” Ephrem Ravi, analyst at Barclays, says. “The average utilisation rate of Chinese coal-fired power plants has been 49% YTD and the current project pipeline will add c.5% per annum to capacity over the next two years. So Chinese capacity growth itself could offset any retirement in old coal fired power plants in developed countries, let alone the degree of overcapacity in power generation domestically in the first place.”

On the bright side

In China’s defence, Lauri Myllyvirta, senior global campaigner at Greenpeace, says that the power giant has already accomplished a completely amazing feat in reducing coal-fired power generation at home: coal-fired power generation this year will be at the same level as in 2011. In the meanwhile, power demand has grown 20%, and all of that growth has been covered by non-fossil energy. Coal use on the power sector peaked in 2013. Going forward, power demand growth will be slower and renewable energy growth will be faster, meaning that coal use for power is in structural decline.

Evan Li, head of Utility & Alternative Energy Research, Asia Pacific, HSBC adds that in China’s 12th FYP (Five-Year Plan, 2011-15), it targets to control the emissions of coal-fired power plants by lowering per-unit intensity against GDP (from 2010-level) by 16% (SO2), 29% (nitrogen oxides) and 29% (CO2). “These targets have already been achieved in 2014, ahead of schedule,” Li says.

China’s schizo role in power

“The problem that we have highlighted is that Chinese state-owned companies and local governments have failed to scale back investment in coal-fired power plants in response to the triumph of clean energy and to the slower power demand growth stemming from fundamental structural changes in the economy,” Myllyvirta clarifies. “Hence China is still building more than one coal-fired power plant per week while coal-fired capacity is already sitting idle for more than half the time.”

As an overseas supplier of power generating infrastructure and finance, China plays a slightly schizophrenic role as the largest producer of wind and solar power equipment in the world on one hand, and as a growing exporter of dirty coal-fired power plants on the other, Myllyvirta says. Wawa Wang of CEE Network agrees to this, saying that while the recent US-China high level joint statement spells out China's determination to ''strictly control'' public financing projects of high pollution and carbon emissions both domestically and internationally, it is not clear how China intends to translate the goodwill of this statement into operational policies in curbing its investments of coal-fired power plants and mines overseas.

“Chinese policy banks have thus far not shown any slowing down in providing funding to coal projects globally,” Wang confirms.

Li from HSBC remains hopeful though that China will make a big leap of change next year. “In the 13th FYP, we expect further emission caps to be imposed on coal-fired power generation in order to encourage efficiency improvements through upgrades.”
 

Current electrificiation rate is just 30%.

As the economy of Myanmar begins to open itself up to global trade, the country is expected to grow at an average of 7% per annum between 2016 and 2024. This rapidly growing economy will have a commensurately expanding demand for power as the very low rates of electrification could hamper the country’s continued development.

According to Georgina Hayden, senior commodities analyst at BMI Research, the power sector in Myanmar has experienced a notable amount of investor interest over the past few years. “There are over 17.5 gigawatts (GW) of power and renewables projects at various stages of development and we continue to see companies target the market for investment,” according to Hayden. She explains further that large foreign firms indicating interest include Singapore-based energy, water and marine group, Sembcorp Industries, Japanese firm, Marubeni Corporation and Thai firm, Global Power Synergy.

The country has abundant energy reserves particularly in hydropower and natural gas, and is actually a net exporter of power. According to GlobalData Senior Power Analyst, Siddhartha Raina however, the country is only able to export energy due to the very low level of domestic consumption.

Recent data shows that the country’s electrification rate is only about 30%, which is strikingly low compared with its neighbors such as the Philippines (87.5%), Indonesia (96%) or Vietnam (99%). One of the biggest hurdles towards bringing this number up is the poor transmission and distribution network (T&D Network) that causes huge system/transmission losses of about 27% of output.

The country’s ministry of power has released its National Electrification Plan, which aims to increase electrification rates to 100% by 2030. Large institutions such as the World Bank have committed finance to this undertaking, with the World Bank approving a USD400Mn, interest-free credit facility for the country’s power sector. To realise the country’s plans for increasing generation capacity and lift itself from its current status of having the lowest electricity consumption per capita, Myanmar needs to make significant headway in T&D.

The government of Myanmar has recognized transmission and distribution as a key area of improvement to support the country’s development and has committed to channeling much of its dedicated financing into development of grid infrastructure. Rural areas will be the the main focus of grid improvement given that the National Electrification Plan is looking to create 1.7 million new users a year, with most of these new users being found outside the city.

The government is also exploring off-grid renewable power sources to supply remote and isolated regions as the cost of developing the grid in those areas may be too large. In addition to physical improvements that have to be made, the country also has several structural and policy-based changes that have to take place. The government still lacks a transparent institutional and legal policy framework to facilitate the exploration and development of power resources.

The country also has to address the lack of policy framework to proliferate renewable power, despite its goal to source 15-20% of its energy supply from renewables by 2020, nor has it made any indications of a plan to provide feed-in tariffs. Despite these hurdles, the country’s power sector has already been generating investor interest, indicating that there could be a great upside to potential direct investment flows if these are addressed.