October 29, 2007 (FT.com) – Green investors, pension funds and private equity managers have a “wall of money” poised to flow into renewable energy ventures in Asia where demand for energy is growing exponentially, say observers. Investable opportunities may remain frustratingly elusive but the sector could soon explode into life.
Few doubt that sustainable energy in Asia could be lucrative, offer acceptably safe returns and be environmentally appealing with energy consumption in the region currently rising at almost 30 per cent a year – if regional authorities were not so focused on typically cheaper traditional fossil fuels.
“We are kind of stuck at the moment. We’ve got quite high-risk capital coming in but not much in the way of investment one step up from that,” says Melissa Brown, executive director of the Association for Sustainable and Responsible Investment in Asia.
“It’s the classic Asian dilemma: immense potential but you don’t know when you are going to get the commercial structures to make it work,” adds Ms Brown.
Biofuel has fallen out of fashion, with controversy raging over its efficiency and its potential to damage food supplies. Some Asian governments, notably India and Thailand, have already said they want no food crops diverted into biofuels.
In Europe, wind and solar power as well as biomass generators have flourished because government targets, such as the European Union’s goal that 20 per cent of all energy should come from renewable sources by 2020, have created opportunities. Asia’s high-stakes energy scramble has a decidedly more hard-nosed, mercantilist edge with the energy demands of the big emerging economies needing immediate solutions. Biomass and mini power plants have been shunned by state energy companies.
Many green funds have merely been able to screen for “bad” companies. The Henderson Industry of the Future fund invests in Chinese solar cell manufacturers such as Suntech Power and JA Solaralthough Chinese solar panels are almost invariably shipped overseas. It also invests in wind turbine makers that now trade on high price/earnings ratios, such as China High-Speed which makes windmill gears.
The stasis in renewables investment would not last forever, said Tim Dieppe, manager of Henderson’s Future fund.
Investment in renewables climbed to more than $100bn in 2006 from $80bn in 2005, according to the recent United Nations Environment Programme report. Just 2 per cent of current global power generation comes from renewable sources but it takes 18 per cent of new investment. The US and the EU account for 70 per cent of new investment but Asia is “growing quickly”, with China taking 9 per cent, mostly in wind and biomass, the report says.
“Asian governments can learn from Europe. If national grids will guarantee to take energy from a renewable plant for 25 years, all of a sudden you have a project that, tied with others, will interest a pension fund looking for a safe, decent yield. In the end it comes down to risk and return,” says Ben Warren, a director in consultancy Ernst & Young’s renewables team. Global investment in renewable energy will increase sevenfold over the next decade to more than $750bn, the consultancy calculated recently. China’s oil and gas investments in 50 countries clearly signal its worries over its ability to fuel an economic growth rate taking it towards mass car and air-conditioner ownership. China now has a target of 10 per cent renewable energy by 2020 and India (quickly acquiring similar problems) has a target of 10 per cent by 2012.
“Every country will do it differently but the combination of pressures is going to produce something important. Three or four years ago there wasn’t much investor interest. Now there’s a lot,” says Eric Usher, head of the UNEP’s Renewable Energy and Finance Unit.
A score of big private equity funds are actively searching for renewable and clean technology opportunities in Asia, according to the New Energy Finance newsletter. Elsewhere, the Asia-Pacific Carbon Fund, backed by the Asian Development Bank closed at over $150m this summer.
The Peony Fund is promoting clean technology in China with $100m in seed money from Bill and Melinda Gates. Man Investments has raised more than $300m for its China Methane Recovery fund.
Fund managers should avoid “technology traps”, the one technology solution, says Mark Campanale, a pioneer of sustainable investment analysis and a director of London Bridge Capital. “Wind turbines might work better in tandem with storage devices to release energy at peak demand,” he suggests.
Mr Campanale says current moves in Asia do not add up to a managed fund explosion, but something is afoot.