After two weeks abroad, Haresh Patel returns to Mercatus with new insights into the Asian project finance landscape. In this Q&A interview, we get a glimpse into both the challenges and opportunities of project development in the East.
What was the purpose of your trip, and which countries did you visit?
As we look to expand into the Asian market, I wanted to hear first hand how the project development and finance landscape has evolved, and what challenges power producers and project equity firms are experiencing as they expand into emerging markets. I met with different power producers and IPPs in India, and project equity firms in Thailand and Singapore, who largely invest in Vietnam, Thailand, the Philippines, Cambodia and Indonesia. In the fourth edition of our Global Advanced Energy Insights Report Volume, we reported that emerging markets are yielding significantly higher returns than in North America and Europe. This still holds true.
What challenges do Asian utilities and independent power producers have that are common to North American and European players?
Ultimately these power producers are trying to figure out how to get onto a deterministic path towards profitable growth. High project acquisition costs, deal friction and cost of capital are all hindering factors. Similar to what we’ve heard in the US and EU, they need a better way to illuminate their project pipeline and operating asset data. Having transparency into the financial performance of their assets, strong visibility into their pipeline, control over their costs and better compliance are necessary to attract low-cost capital that is needed to develop their project pipeline. As we’re seeing across all markets, they need to gain speed and agility in order to compete in a highly competitive environment.
What challenges are unique to the region?
In Asia, it is quite easy to find labor at a low cost. However, the talent pool is still developing and turnover amongst employees remains very high. As a result come the hidden cost of recruiting, training and challenges with knowledge retention as employees leave the firm. The cost of capital is also higher in these emerging markets, as they are considered higher risk and not yet well understood.
How do you see these challenges evolving in the future?
Today the emerging markets in Southeast Asia have very attractive returns compared to other regions. On average we’ve seen unlevered IRRs of renewable utility-scale projects well over 8% in Asia and over 7% in Oceania. However, as the market becomes more attractive to investors, those numbers will be driven down as strong returns will attract more capital and competition. National support for decarbonization initiatives in these nations is also a contributing factor to higher to returns. Solar is particularly favorable in India and China as they work to phase out coal, and in Japan as they move away from nuclear.
What role can technology providers play in helping to accelerate the development and installation of renewable energy assets in this region?
For all the challenges listed earlier, power producers need to be able to articulate their pipeline and operating assets in a more meaningful way to attract low-cost capital. Technology providers like Mercatus solve for this by providing increased data visibility, full transparency into their pipeline and better compliance through accurate reporting. Technology can also help with knowledge retention and gives employees the behind the scenes “smarts” they need to do their job well (think of spell check which makes us better writers than we really are). Having these capabilities and added insights will provide the ultimate competitive advantage that power producers need to navigate the complexity of new regions and changing market dynamics, while still maintaining profitable growth.