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May 4, 2015by EOS Intelligence EOS Intelligence No Comments

China’s Solar Power Boom

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Solar power, once perceived as a luxury that only developed nations could afford, is becoming a viable energy source for a broader set of emerging nations, which are leaning towards solar power generation to meet their obligations under the Kyoto Protocol, conserve scarce traditional resources, reduce dependence on imports of oil and fuel, or address escalating power demand.

In particular, several emerging countries in Asia are showing signs of intensified solar photovoltaic (PV) development in the coming years. For instance, China and India, the two Asian giants, are aiming for solar revolution with the target of installing 100 GW of solar PV capacity by 2020 and 2022, respectively. Solar energy is gaining popularity in many other emerging countries in Asia as well, such as in Thailand, Malaysia, Indonesia, and the Philippines. This intensive growth of the region’s solar markets is offering a gamut of opportunities to domestic and global developers, investors, and financial institutions operating in the solar power industry.

This article is part of a series focusing on solar PV market across selected Asian countries: China, India, Thailand, and Malaysia.
The series closing article Solar Rises in the East examines challenges and opportunities in all four markets, with additional look into Indonesia and
The Philippines.

Currently, China represents the fastest growing solar market globally. While, in 2014, a total 38.7 gigawatt (GW) of new solar PV capacity was installed globally, China accounted for the largest share (roughly 27%) of this new capacity, adding some 10.6 GW, followed by Japan and the USA.

China’s strengthening position in the global solar power market is a matter of the past few years. At the end of 2010, China had an installed solar power capacity of less than 1 GW, and within three years it became a leading nation in terms of solar PV installations per year. Present outlook for China’s solar market is indicative of its bright future. Amidst burgeoning market growth, global solar companies are exploring diverse routes to benefit from China’s solar boom.

Market Overview

Total grid-connected solar power capacity in China reached 33.12 GW by the end of March 2015, with 27.79 GW from utility-scale solar PV projects and 5.33 GW from distributed solar PV projects. The country continues to add new capacity on an ongoing basis: it added 5.04 GW of new solar PV capacity in the first quarter of 2015 alone and aims to connect a total of 17.8 GW of new solar PV capacity to the grid in 2015.

Utility-scale solar refers to large-scale grid connected solar power generation, whereas distributed generation refers to electricity produced at or near the point where it is to be consumed. In China, solar power generated through rooftop solar PV systems on residential and commercial buildings as well as ground-mounted solar systems on abandoned lands, unused slopes, canopy for agricultural uses, and fish ponds are recognized as distributed solar PV projects.

All of this is just part of a larger plan to increase solar power output in this country, as according to the 13th Five-Year Plan (2016-2020), China aims to install a total 100 GW solar power capacity by 2020 (doubled from the target of 50GW set in 2013 under 12th Five-Year Plan, which we mentioned in our Perspectives in January 2015).

Growing solar market is expected to offer ample opportunities for new investments. A report released by Ernst & Young in 2014 indicated that China would require about RMB 737 billion (US$120 billion) of capital investment between 2014 and 2017 to meet its solar targets. About 71% of this capital investment value would be required for development of distributed solar PV projects.

“China’s continued demand for new energy capacity, its ongoing battle against air pollution and energy poverty, and its focus on economic development, meant the 100 GW solar target set in Beijing’s last Five-Year Plan could be treated as the bottom.” – Liansheng Miao, Chairman and CEO, Yingli (world’s second-largest solar panel producer), 2015

Such large-scale investments can be aptly utilized to capitalize on country’s abundant solar power generation potential. World Energy Council 2007 estimated China’s solar power potential at around 19,536,000 terawatt-hours (TWh) per year. 17% of mainland China receives annual solar radiation of more than 1,750 kilowatt-hours per square meter (KWh/m2) and more than 40% of China receives between 1,400-1,750 KWh/m2.

According to China National Renewable Energy Centre, several provinces in western and northern parts of the country (including Qinghai, Xinjiang, Tibet, Inner Mongolia, Sichuan and Gansu provinces) represent more than two thirds of the national solar energy resource potential. Most utility-scale solar PV power plants are concentrated in the northern and western parts of China, while distributed solar PV installation is gaining momentum in eastern parts of the country.

Solar Resource of China – Direct Normal Solar Radiation

Source: National Renewable Energy Laboratory

Key Growth Drivers

Attempts to counteract deteriorating air quality

China became the largest consumer of energy in the world in 2010, with majority of its electricity generated from domestic coal reserves. In 2014, coal accounted for 64% of the total energy consumed in the country. Consequently, air pollution, which impacts public health, is a major problem for China to combat. Chinese Ministry of Environmental Protection indicated that nearly 90% Chinese cities did not meet government-recommended standards related to air quality in 2014.

China’s solar boom is driven largely by a progressive policy framework intended to improve country’s energy mix by generating greater portion of energy from clean and abundantly available renewable sources. This push towards solar power generation is also partly aimed at creating additional demand for domestic solar equipment manufacturers.

China, being the largest emitter of carbon dioxide in the world (accounting for about 23% of global carbon dioxide emissions in 2014), is committed to move towards cleaner energy sources including solar power, and to cut down consumption of coal for electricity generation. In November 2014, Chinese President Xi Jinping pledged in an agreement with the US President Barack Obama to increase the share of non-fossil fuels in primary energy consumption in China from 9.8% in 2013 to around 20% by 2030. Country’s abundant solar power potential along with a strong commitment to move towards cleaner energy sources for electricity generation has been a contributing factor that boosted development of solar market in China.

The need to support the struggling indigenous solar panel manufacturing industry

China has been the largest manufacturer and exporter of solar PV panels since 2007, producing the cheapest solar PV panels in the world owing to massive subsidies granted by the government. China has been known to export about 90% of its solar panels. In the face of such a heavy reliance on exports, the trade tariffs recently applied by EU and the USA have affected the growth of this industry.

In 2013, EU and China came up with a trade settlement, under which in a given year, Chinese companies are allowed to export to EU solar equipment able to generate up to 7 GW power without paying duties, provided that the price is not lower than US$0.56 per watt. Any solar products sold above the permissible volume quota or below that minimum price would be subject to anti-dumping duties of an average of 47%. Consequently, EU’s share in overall Chinese solar PV module exports reduced from 65% in 2012 to 30% in 2013, and further down to 16% in 2014. At the same time, in December 2014, the USA, which accounted for 3% of the Chinese solar PV module exports in 2014, imposed anti-dumping duty rates of 52% and anti-subsidy rates of 39% on imports of solar panels made in China.

Chinese government’s aggressive efforts to drive significant expansion of domestic solar energy generation capacity is concentrated to spur new demand for solar PV equipment, and thus provide new market opportunity for indigenous solar panel manufacturing industry, dampened by series of anti-dumping duties levied by top export countries.

Favorable policies and generous government incentives for Chinese solar market
Impressive growth rate of Chinese solar market in the recent years has been largely driven by conducive investment and policy environment. The government has introduced several incentive schemes to encourage solar developers to ramp up solar PV installation in China.

Key Policies to Promote Solar PV Installations in China

While the introduction of subsidies and other solutions to fuel investment and installations of solar power facilities led to considerable positive results and increase in solar power generation capacity in China, the government intends to stop providing subsidies for solar projects by 2020 in line with falling costs of developing and operating solar projects in the country. With advancements in technology, leading Chinese solar companies’ solar PV modules cost decreased from US$1.31 per watt in 2011 to US$0.50 per watt in 2014, representing about 62% decrease in three years. In 2014, Deutsche Bank noted that the solar PV module cost could further decrease by 30-40% in next several years. Moreover, solar power generation cost in China is expected to reach a level comparable with the cost of conventional power generation by 2017. With the decrease of solar panel production costs and the decrease in cost of electricity generation using solar energy, the government will no longer consider subsidies a necessary tool to drive the solar market growth. While generous government incentives are likely to dry out over time, many renewable energy-friendly policies introduced since 2006 remain in place, and continue to ensure a favorable environment for solar power market.

Key Challenges

Lower development of China’s distributed solar PV sector in comparison with utility-scale solar PV generation

Most large-scale utility projects are concentrated in the highly irradiated northwestern regions of China, where the economy is relatively underdeveloped and electricity consumption is limited. Inefficient grid infrastructure in the country poses substantial challenge of power loss in long-distance transmission from northwest China to other regions that are rapidly developing and experiencing shortage of energy.

Considering transmission challenges and costs involved in utility-scale solar PV projects, most observers of China’s solar energy sector suggest that the country should ideally shift its solar PV market, which concentrates primarily on utility-scale solar PV in remote locations, to distributed solar PV in densely populated areas in the north, south, and east. However, as the current subsidy structure favors utility-scale solar PV projects over distributed solar PV projects, the development of distributed solar PV sector is relatively low. As of 2014, distributed solar PV installations connected to the grid accounted for only 16.65% of the total grid-connected solar installed capacity in China.

Current FiT Policy (Introduced in 2013)

Source: National Development Reform Commission

Furthermore, the market for distributed solar PV in China faces other challenges, such as the possible dearth of rooftops suitable for installations of solar systems. Therefore, solar energy developers continue to be more interested in utility-scale solar PV projects in northwestern regions over distributed solar PV projects in other parts of the country, which leads to great loss of power during long-distance transmission, a challenge that could be overcome only if the grid infrastructure is significantly improved.

Rising concerns about the quality of domestically produced solar PV modules

Solar developers, investors, and financial institutions are increasingly concerned about the quality, performance, and reliability of solar PV modules produced in China. General Administration of Quality Supervision, Inspection and Quarantine, a Chinese regulatory agency, indicated in 2014 that about 23% of solar PV modules produced by Chinese companies for the domestic solar market did not meet recommended quality requirements related to panel’s antireflective coating. Findings were based on inspection conducted in the third quarter of 2014 with samples from 30 companies, which represented about half of China’s suppliers of antireflective glass. Flawed antireflective coating may result in gradual deterioration of power output, thus increasing operational inefficiencies in the long-term. Experts suggest that such quality defects may not have immediate effect and can go undetected for two or more years of operation of the solar plant, raising uncertainty among investors and developers.

“A reduction in power generation caused by quality imperfections means declining investment returns or even losses from solar farms.” – Meng Xiangan, Vice Chairman, China Renewable Energy Society, 2015

Quality inspection of 3.3 GW of installed solar PV projects (about 10% of China’s installed solar capacity at the end of 2014) by China General Certification Center in 2014, indicated that a third of 425 utility-scale solar parks surveyed had several defects including faulty solar modules, poor construction, design flaws, and project mismanagement. These solar parks, built in China between 2012 and 2014, are likely to yield lower power output than originally estimated.

In light of recently identified quality issues in the domestically manufactured solar PV modules, investors and developers have increased caution in selection and implementation of solar projects in China. For instance, in a recent interview with Bloomberg, CEO of Sky Solar, a Hong Kong-based solar developer, said that the company plans to invest in China only at a “careful” pace because of quality concerns. This might be indicative of broader industry’s concerns that might hamper the rapid development of solar plants in the country.

Opportunities for Global Solar Companies

Global solar developers seek manifold opportunities in China’s expanding solar market

Global solar companies are keen to grasp the opportunities offered by rapidly growing China’s solar market. With the market’s expansion, a surge is expected in demand for imports of certain materials and instruments utilized in solar equipment manufacturing in the country.

Participation from foreign solar firms in development of utility-scale solar PV projects in China is increasing in the form of joint development ventures. For instance, in 2014, SunPower, a California-based solar developer, announced plans to develop 3 GW of solar PV in Sichuan province in collaboration with four Chinese partners. SunEdison, another US-based solar energy company, is planning to partner with Chinese companies for development of 1 GW of utility-scale solar project in the country.

Foreign solar developers also see opportunity in China’s distributed solar PV sector. For instance, UGE International, a US-based firm offering renewable energy solutions, has partnered with Blue Sky Energy Efficiency, a Hong Kong-based energy investor, to offer the power purchase agreements (PPA) to customers in China.

“Blue Sky and UGE are bringing an innovative solar energy financing structure to China that will make it possible to rapidly expand use of on-site renewable energy with no money down.” – Rosie Pidcock, Senior Manager of Commercial Solar, UGE International, 2015

According to Solar Energy Industries Association, solar PPA is a financial agreement where a developer arranges for the design, permits, financing, and installation of a solar energy system on a customer’s property (rooftop) at little to no cost. The developer sells the power generated to the host customer at a fixed rate that is typically lower than the local utility’s retail rate. This lower electricity price allows the customer to purchase electricity at a rate lower than when purchased from the grid while the developer receives revenue from selling electricity as well as tax credits and other incentives generated from the system. PPAs are common in the USA, but they will be introduced in China for the first time in 2015. PPA financing structure will provide solar electricity to local and multinational corporations operating in China at a cost lower than conventional electricity without any capital investment. Hence, success of PPA is expected to boost the growth of distributed solar PV in China.

Inadequate domestic supply of some materials and instruments used in solar equipment manufacturing will encourage global exporters to strengthen their focus on Chinese market

Foreign companies may explore opportunities to export critical materials and components used in manufacturing of solar equipment to China. According to a report released by CCM in 2015, a Guangzhou-based research firm, China relies on imports for about 40-50% of its polysilicon (a key commodity for solar PV panel production) needs. In 2014, China imported around 93,000 tons of polysilicon worth US$2 billion. Other materials used in production of solar PV modules, including silver paste, TPT back sheets, EVA encapsulant film, and slurry material, are also short in supply in China. Furthermore, huge demand is anticipated for advanced equipment required to separate high-purity polysilicon, including hydrogenation furnaces, large-scale casting furnaces, plasma enhanced chemical vapor deposition (PECVD) coating equipment, and automatic screen printing presses. China is dependent on imports of these materials and technologies used in solar PV module production, and thus, the ongoing expansion of Chinese solar market will provide great opportunities to global suppliers of these commodities.

Despite a few challenges, China’s solar market is believed to be set for rapid expansion, at least for the foreseeable future

China is installing solar PV capacity at a breakneck pace. The country is already the largest producer of solar PV modules in the world and if it is able to achieve its solar targets, it might become the largest solar power consumer as well. Chinese government’s support for the development of solar market to achieve its ambitious solar targets by 2020 will serve as a key growth driver. However, China’s ability to establish strong and lasting position as the world’s largest solar power market will be dependent on its ability to efficiently deal with challenges it is facing, challenges significant enough to cause caution amongst private investments. The industry would need to focus on potential quality issues identified in domestically produced solar equipment in order to uphold investors’ confidence. The government’s role must also extend beyond the support for solar generation targets, to include development of distributed solar PV sector, that would need additional stimulus from government to pick up pace.

January 21, 2015by EOS Intelligence EOS Intelligence No Comments

China’s Green Energy Revolution

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China is widely criticized as the world’s largest emitter of carbon dioxide and other greenhouse gases. Less noticed, however, has been the fact that the country is also building the world’s largest renewable energy system. China plays a significant role in the development of green energy technologies and has over the years become the world’s biggest generator and investor of renewable energy. As China heads towards becoming the global leader in renewable energy systems, we pause to take a look at the major drivers behind this development and its implications on China as well as on the rest of the world.

Reducing CO2 emissions has become one of the top priorities and the Chinese government has set its eyes on developing sustainable energy solutions for its growing energy needs. To support this objective, China has set forth aggressive policies and targets by rolling out pilot projects to support the country’s pollution reduction initiatives and those which reflect the strategic importance of renewable energy in country’s future growth.

Why has China suddenly become so environmental conscious and investing billions on renewable energy?

Air and water pollution levels have become critical, causing tangible human and environmental damage, which lead Chinese authorities to rethink on the excessive use of fossil fuels. Considering current and potential future environmental hazards of burning fossil fuels, China decided to decrease the use of coal and is actively seeking for greener energy solutions. While serious concerns about climate change and global warming are key drivers towards expanding the use of renewable energy for any country, for China, the motives are well beyond abating climate change; they are creating energy self-sufficiency and fostering industrial development.
China is witnessing a dramatic depletion of its natural gas and coal resources and has become a net importer of these resources. China’s increased dependency on imported natural gas, coal and oil to meet its growing energy demands bring along some major energy security concerns. The current political volatility in Russia, the Middle-East and Africa pose serious challenges not only for China, but, for other countries as well to secure their energy supplies for the future. Not to mention the risks associated with energy transport routes.

Taking into account these geo-political risks and in order to achieve a secure, efficient and greener energy system, China started its journey towards developing an alternative energy system. A new system that reduces pollution, limits its dependency on foreign coal, natural gas and oil was envisioned.

China’s Ambitious Renewable Energy Plans

According to RENI21’s 2014 Global report, in 2013, China had 378 gigawatts (GW) of electric power generation capacity based on renewable sources, far ahead of USA (172 GW). The nation generated over 1,000 terawatt hours of electricity from water, wind and solar sources in 2013, which is nearly the combined power generation of France and Germany.

The country has now set its eyes on leading the global renewable energy revolution with very ambitious 2020 renewable energy development targets.

In May 2015, we published an article on the solar power boom in China, in which we presented the revised, higher solar power generation targets.

To achieve the 2020 renewable energy targets, China has adopted a two-fold strategy.

Rapidly expand renewable energy capabilities to generate greener and sustainable energy.

It has significantly expanded its manufacturing capabilities in wind turbines and solar panels to produce renewable electricity. As per data from The Asia-Pacific Journal, China spent a total of US$56.3 billion on water, wind, solar and other renewable projects in 2013. Further, China added 94 GW of new capacity, of which 55.3 GW came from renewable sources (59%), and just 36.5 GW (or 39%) from thermal sources. This highlights a major shift in energy generation mix as well as China’s commitment towards cleaner energy technologies.
Reduce carbon footprint.

The government has banned sale and import of coal with more than 40% ash and 3% sulphur. Government’s Five year plans have stringent targets on reducing coal consumption as well as CO2 emissions. It is expected that environmental and import reforms will become more stringent along with greater restrictions, which would help accelerate China’s migration to a green economy.

The government has also announced a range of financial support services, subsidies, incentives and procurement programs for green energy production and consumption. Solar PV and automotive industries are good examples.

By supporting domestic production and providing export incentives, China has become the global leader in solar panels. Over the last few years, the government has also financed small-scale decentralized energy projects, deployed and used by households and small businesses, in order to make them self-sufficient in their energy needs
China has also positioned itself as the leading manufacturer of electric vehicles globally. According to Bloomberg, China is mandating that electric cars make up at least 30% of government vehicle purchases by 2016. To achieve this target, the government has started investing on essential infrastructure and providing tax incentives for purchasing of electric vehicles.

China has laid the foundations for a future where renewable energy will play a vital role. The advancements in technology and changes in policies will further enhance the country’s renewable energy landscape and will drive affordable, secure and greener energy. How the Asian giant achieves to balance between its economic, industrial, regulatory and environmental goals with sustainable renewable energy investments will, however, only become clear in the next few years.

June 9, 2014by EOS Intelligence EOS Intelligence No Comments

Japan’s Quest for Renewable Energy

Japan, for many years the symbol of safe use of nuclear energy, started to revise its focus on atomic power following the 2011 tsunami and Fukushima plant meltdowns. After the accident, atomic plants were shut down, and in 2012, the government declared its commitment to the diversification of energy sources, working towards making the country renewable energy-powered.

Yet this wishful thinking was soon confronted with the reality of slow growth of renewable energy generation. In April 2014, a new energy plan re-designated coal as an important long-term electricity source, with similar importance given back to nuclear power. While Japan is unlikely to abandon fossil fuels and nuclear power in any foreseeable future, the shifting focus and public reluctance to atomic power gave start to a more dynamic development of renewable power generation technologies.

Several projects across solar, hydro, biomass, and to a lesser extent geothermal, had already been developed prior to Fukushima accident, but it is now the time for Japan to embrace its renewable energy potential at a larger scale.

Read our report – Japan’s Quest for Renewable Energy

October 17, 2013by EOS Intelligence EOS Intelligence No Comments

Wind Energy in South Korea – Aiming High

Over the past couple of years, South Korea has undertaken considerable efforts to research and develop renewable energy generation across technologies such as fuel cell, solar, wind, geothermal heat, and tidal power. While supporting growth in several renewable energy sectors, the country has focused on expanding wind power generation in particular, given Korea’s access to strong and steady winds due to its long coastal line and mountainous terrain, as well as relatively well developed wind power technology and related skill set. We take a look at current state of affairs in the renewable energy sectors in Korea as well as the development of wind energy capacity goals set by the country’s government.

Read Our Detailed Report.

August 6, 2013by EOS Intelligence EOS Intelligence No Comments

South Africa: Clearing the Air with Renewable Energy

South African ailing energy sector seems to have found a new lease of life in clean energy. In 2012, South Africa witnessed investment of $5.5 billion in new renewable energy projects, leaving behind some well-known usual suspects such as Brazil, France, and Spain. With the local government looking at renewable energy as a long-term answer to the country’s energy problems, we evaluate the scope for private sector involvement in developing South Africa’s energy infrastructure.

In March 2013, Eskom, the national electricity provider in South Africa, warned about the possibility of power outages during the coming winter season. As soon as the news spread, millions of South Africans were left reflecting on the energy crisis of 2008, which brought the mining and industry sectors, and thereby, the economy, to a halt.

Increasing winter demand and planned electricity network maintenance are putting pressure on the power system. In May this year, long before the peak winter season, South African power system capacity exceeded demand by just 0.17% (let’s just point out that the recommended reserve margin for a power system is 10-15%). With consumption expected to increase further during winter (June and July), Eskom will be forced to look at extreme measures to prevent scenarios similar to those of 2008. Some of such measures include power buy-backs from large consumers, and triggering of ‘interruption clauses’ included in contracts, through which Eskom can cut supply to consumers in case of tight supply situations, in return for discounts.

While these measures could help deal with the short-term spike in demand this year, the South African government is looking for alternatives to achieve long term sustainability of the country’s energy sector. Investment in clean energy (particularly renewable technologies such as wind and solar) is one of the possible solutions contributing to solving the country’s energy supply problem. While achieving energy sustainability, clean energy investments will also help South Africa adhere to its commitment to achieve a 42% cut in carbon emissions between 2011 and 2025, by reducing dependence on coal for power generation. Furthermore, renewable energy projects can come online on a shorter horizon compared with coal and nuclear power plants.

Let’s focus on clean energy

According to a 2013 report published by Bloomberg New Energy Finance, South Africa stood 9th in the world with US$5.5 billion worth of new clean energy investments in 2012 (a whopping 20,563% growth over 2011). Majority of this investment (US$4.3 billion) has gone into developing solar photovoltaic (PV) technology based power plants, with the remaining being spread across wind, concentrated solar plants, landfill, biomass and biogas, and hydro-projects.

The onset of clean energy investment projects in South Africa is correlated with the introduction of the Integrated Resource Plan (IRP) in 2010, as well as Department of Energy’s Renewable Energy Independent Power Producers Procurement (REIPPP) program in 2011. As a part of the 2010 IRP, South African government outlined its plans to increase electricity generation capacity by additional 18,500 MW by 2030. About 42% of this additional capacity is envisaged to be generated through renewable energy technologies.

Introduction of REIPPP program in 2011 facilitated private sector’s involvement in electricity generation. Through this program, the government plans to procure 3,725 MW of renewable energy from independent power producers by 2016. A significant focus has been laid on procuring power generated through onshore wind and solar PV technologies. The REIPPP program sets up a bidding system through which independent power producers can bid for power generation allocations. Electricity thus generated is purchased by Eskom on a 20-year Power Purchase Agreements (PPAs). The tariff for purchasing electricity is decided through a bidding process. Some independent producers cashed on the first mover advantage, and received tariffs as high as R2.6/KWh ($0.26/KWh) during the first phase of bidding in 2011 (more than Eskom’s electricity price). With increasing competition, these tariffs have fallen in the successive bidding rounds to as low as R0.89/KWh ($0.09/KWh).

Private sector holds the key

One possible mode of involvement is continued private sector participation in the REIPPP program, selling the generated electricity to Eskom at rates agreed in the PPAs. However, several independent power producers (IPPs) have raised concern about the attractiveness of such a system, where only a single buyer (Eskom) is present in the market.

IPPs feel that lack of certainty about feed-in-tariff structures and a single buyer model are likely to deter large scale investments from the private sector. In 2012, the South African Independent Power Producers Association put forward a proposal to set up an independent grid to challenge Eskom’s dominance of the transmission (grid) network.

In March 2013, the South African government passed the Independent System and Market Operator (ISMO) Bill, which will create an independent entity by 2014, to manage procurement of energy from Eskom’s power generation business and independent power producers. Establishing an independently operated power grid would encourage competition in the power generation sector while keeping a lid on prices.

Another possible form of investments could be in the shape of independent (off-grid) solar/wind power projects by large enterprises (particularly in mining sector) to meet part of their internal demand. Industries could reap several benefits from these independent projects. Benefits of a solar power project could include:

Several large energy consumers are required to operate diesel generators to meet the surplus demand from their operations. Even though the current cost of producing solar energy is higher than what is procured from Eskom, the cost is lower than that of electricity produced through diesel generators. In the short-term, solar energy projects could replace generators, as an additional input source of energy
The national energy regulator (NERSA) recently approved an annual 8% hike in electricity tariffs charged by Eskom till 2018. With price of solar PV panels expected to decline further, the cost of solar energy production could even be lower than Eskom’s prices 5-6 years down the line
Furthermore, solar power plants have an effective life of 25-30 years, greater than the typical 20 year PPAs offered by Eskom. Independent projects enable more efficient utilization of electricity generation capacity over a longer horizon, compared with the REIPPP program

Foreign investors also to step in

With the removal of subsidies on renewable power in several European countries, South Africa becomes an ideal investment location for both foreign renewable energy developers and infrastructure financing organizations.

Participation of foreign firms in the REIPPP program has increased in subsequent bidding phases. Working as a part of a consortia, several foreign developers, such as Abengoa (Spain), Gestamp Wind (Spain), SolarReserve (USA), and Chint Solar (China), have already won bids for setting up power projects, working in partnership with local developers and BBBEE partners.

International financial institutions, such as European Investment Bank and IFC (member of the World Bank Group) have also invested in several renewable energy projects being undertaken by international developers in South Africa. In 2012, European Investment Bank agreed to provide €50million ($64.9 million) for the Khi Solar One Project being undertaken by Abengoa.

So is the energy sector out of the woods?

With a power crunch looming, the mining and industry sector companies are left searching for options to keep their operations running, or risk large-scale shut-downs during the winter season. With the declining cost of setting up and generating renewable power, investment in renewable energy projects could be a sensible option to achieve sustainability of power supply, over both short and long-term.

Setting up of an independent transmission company will go a long way in reducing Eskom’s dominance over the electricity networks, urging more private sector participation in the REIPPP program. But, is this enough? Will there be further deregulation/liberalization of the renewable power generation sector to additionally boost competition in the market? The fate of private sector investments hinges on government’s willingness to risk its control over probably the most important utility system.

April 1, 2013by EOS Intelligence EOS Intelligence No Comments

Will Shale Gas Solve Our Fuel Needs for the Future?

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At first glance, shale gas might look too good to be true: large untapped natural gas resources present on virtually every continent. Abundant supplies of relatively clean energy allowing for lower overall energy prices and reduced dependence on non-renewable resources such as coal and crude oil. However, despite this huge potential, the shale gas revolution has remained largely limited to the USA till now. Concerns over the extraction technology and its potentially negative impact on the environment have hampered shale gas development in Europe and Asia on a commercial scale. However, increasing energy import bills, need for energy security, potential profits and political uncertainty in the Middle East are causing many countries to rethink their stand on shale gas extraction development.

How Large Are Shale Gas Reserves And Where Are They Being Developed?

An estimation of shale gas potential conducted by the US Energy Information Administration (EIA) in 2009 pegs the total technically recoverable shale gas reserves in 32 countries (for which data has been established) to 6,622 Trillion Cubic Feet (Tcf). This increases the world’s total recoverable gas reserves, both conventional and unconventional, by 40% to 22,622 Tcf.

Continent	Shale Gas Reserves and Development
North America	Technically Recoverable Reserves: 1,931 Tcf Till now, almost whole commercial shale gas development has taken place in the USA. In 2010, shale gas accounted for 20% of the total US natural gas supply, up from 1% in 2000. In Canada, several large scale shale projects are in various stages of assessment and development. Despite potential reserves, little or no shale gas exploration activity has been reported Mexico primarily due to regulatory delays and lack of government support.
South America	Technically Recoverable Reserves: 1,225 Tcf Several gas shale basins are located in South America, with Argentina having the largest resource base, followed by Brazil. Chile, Paraguay and Bolivia have sizeable shale gas reserves and natural gas production infrastructure, making these countries potential areas of development. Despite promising reserves, shale gas exploration and development in the region is almost negligible due to lack of government support, nationalization threats and absence of incentives for large scale exploration.
Europe	Technically Recoverable Reserves: 639 Tcf Europe has many shale gas basins with development potential in countries including France, Poland, the UK, Denmark, Norway, the Netherlands and Sweden. However, concerns over the environmental impact of fracturing and oil producers lobbying against shale gas extraction are holding back development in the region with some countries such as France going as far as banning drilling till further research on the matter. Some European governments, including Germany, are planning to bring stringent regulations to discourage shale gas development. Despite this, countries such as Poland show promising levels of shale gas leasing and exploration activity. Several companies are exploring shale gas prospects in the Netherlands and the UK.
Asia	Technically Recoverable Reserves: 1,389 Tcf China is expected to have the largest potential of shale gas (1,275 Tcf). State run energy companies like Sinopec are currently evaluating the country’s shale gas reserves and developing technological expertise through international tie-ups. However, no commercial development of shale gas has yet happened. Though both India and Pakistan have potential reserves, lack of government support, unclear natural gas policy and political uncertainty in the region are holding back the extraction development. Both Central Asia and Middle East are also expected to have significant recoverable shale gas reserves.
Africa	Technically Recoverable Reserves: 1,042 Tcf South Africa is the only country in African continent actively pursuing shale gas exploration and production. Other countries have not actively explored or shown interest in their shale gas reserves due to the presence of large untapped conventional resources of energy (crude oil, coal). Most potential shale gas fields are located in North and West African countries including Libya, Algeria and Tunisia.
Australia	Technically Recoverable Reserves: 396 Tcf Despite Australia’s experience with unconventional gas resource development (coal bed methane), shale gas development has not kicked off in a big way in Australia. However, recent finds of shale gas and oil coupled with large recoverable reserves has buoyed investor interest in the Australian shale gas.

What Are The Potential Negative Impacts Of Shale Gas Production?

Despite the large scale exploration and production of shale gas in the USA, countries around the world, especially in Europe, remain sceptical about it. Concerns over the environmental impact of hydraulic fracturing, lack of regulations and concerns raised by environmental groups have slowed shale gas development. Though there is no direct government or agency report on pitfalls of hydraulic fracturing, independent research and studies drawn from the US shale gas experience have brought forward the following concerns:

Will Shale Gas Solve Our Future Energy Needs?

Rarely does an energy resource polarize world opinion like this. Shale gas has divided the world into supporters and detractors. However, despite its potential negative environmental impact, shale gas extraction is associated with a range of unquestionably positive aspects, which will continue to support shale gas development:

Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.
Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.
Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.
More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.
Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company	Acquisition/Partnership	Year	Investment
Sinopec	Devon Energy	January 2012	USD 2.2 billion
Total	Chesapeake Energy	January 2012	USD 2.3 billion
Statoil	Brigham Exploration	October 2011	USD 4.4 billion
BHP Billiton	Petrohawk	July 2011	USD 12.1 billion
BHP Billiton	Chesapeake Energy	February 2011	USD 4.75 billion
Shell	East Resources	May 2010	USD 4.7 billion
Exxon Mobil	XTO Energy	December 2009	USD 41.0 billion
Source: EOS Intelligence Research

Shale gas production is expected to spike in the coming three-five years. Extensive recoverable reserves, new discoveries, large scale exploration and development and technological improvement in the extraction process could lead to an abundant supply of cheap and relatively clean natural gas and reduce dependence on other conventional sources such as crude oil and coal For several countries including China, Poland, Libya, Mexico, Brazil, Algeria and Argentina, where the reserves are particularly large, shale gas might bring energy stability.

The need for energy security and desire to reduce dependence on energy imports from the Middle East and Russia (and hence to increase political independence), are likely to outweigh potential environmental shortfalls of shale gas production, and some compromise with environment protection activist groups will have to be worked out. Though the road to achieving an ‘energy el dorado’ appears to be long and rocky, it seems that with the right governments’ support, shale gas could become fuel that could significantly contribute to solving the world energy crisis over long term.

February 19, 2013by EOS Intelligence EOS Intelligence No Comments

India – Reducing Reliance on Diesel

India’s subsidy on diesel currently stands at about INR 950 billion (~ USD 19 billion).

Total diesel consumption was 64.74 million tons in 2011.

Diesel accounts for about 38% of India’s total fuel consumption.

3 million ton of diesel is consumed in private power generation.

On 17th January 2013, the Indian government took a major step towards the deregulation of diesel prices. A monthly (duration, undecided) hike of INR 0.50 (USD 0.01) for retail customers and INR 11.00 (USD 0.20) increase in diesel price for bulk customers has been proposed. This move is expected to reduce India’s fuel subsidy burden by about INR 150 billion (~ USD 3 billion) annually.

Why such high dependence on diesel?

Agriculture and power generation account for 20% of India’s diesel demand.

The agriculture sector, the mainstay of India’s economy, accounts for about 12% of India’s total diesel demand. For a typical Indian farmer engaged in semi-mechanized farming operations, diesel can account for up to 20% of the input cost. This primarily consists of expenses towards fuel used to plough field and a substantial amount used to operate water pumps for irrigation purpose.

The power sector demand for diesel is largely driven by inadequate and inefficient power generation, transmission and distribution infrastructure. As per available statistics, there is about 10% supply-demand gap in India’s power sector, which results in regular outages. Though India added about 20GW of generation capacity in 2011, more would be required if the country aims to match global per capita electricity consumption standards of 2,700Kwh. At present, India’s per capita consumption is about 900Kwh.

This mismatch in supply-demand of power is met by private power generation, accounting for 8% of India’s diesel demand. Shopping malls, housing societies, large hospitals and telecom towers are among the major consumers of diesel-generated power.

Across the country, diesel generators operate for 8-10 hours every day, to supplement government-supplied electricity, thus leading to excess demand for diesel.
According to government statistics available for 2011, private power generators and mobile phone towers consumed 4.6% and 1.93% of diesel, respectively.

Power is also lost in the form of aggregate technical and commercial losses, which amount to about 30% of the total power produced in the country. With a generation capacity of 205GW, approximately 60,000MW is lost while transmitting and distributing power to end-users.

As an indicator, reduction of these losses by even 50% can ensure power to about 8 million diesel pumps of 5 HP rating thereby saving of about 4-8 million litres of diesel per hour.
If the government took necessary steps to improve power availability by 50% of the current outage time (assumed to be eight hours daily as an average) then it is estimated that it would lead to the reduction of diesel usage in private power generation by about 4.5 million litres annually.

So, how can the heavy reliance on diesel be reduced?

Reduce price differential – Minimizing the price differential between petrol (gasoline) and diesel, which can be up to 30%, could go a long way in helping reduce the burden on diesel. Artificially-kept low diesel prices (coupled with better efficiency of diesel engines vis-à-vis petrol engine) have led to increased demand for diesel vehicles in India, thus resulting in greater diesel consumption. In 2012, diesel cars accounted for more than 50% of all passenger vehicles sold in India. In 2011, approximately 16% of diesel sold in India was consumed by passenger vehicles. Economists have often questioned the rationale behind selling subsidized diesel to passenger vehicle owners who can afford it at the market price. Policymakers have also mulled options to discourage the sale of diesel cars, which include higher taxes on diesel cars. However, such moves have been opposed by the Indian automobile industry. Industry experts admit that parity in diesel and petrol prices can shift balance in favour of petrol vehicles with a sales ratio of 55:45. For instance, if achieved in 2013, this could reduce the consumption of diesel by 200 million litres (based on a conservative estimate).
Alternate sources of power – Adoption of renewable sources of energy for power generation could also help in reducing the current diesel burden of India. Renewable power currently accounts for only about 12% of total installed capacity. For instance, an Indian telecom service provider Airtel has installed a 100 KW solar power plant in one of its major routing centres in Northern India. This is expected to save 26,000 litres of diesel annually. The company is planning to install similar system in six other locations as well.
Other measures – Better roads and highways would result in improved fuel efficiency of vehicles leading to lesser use of vehicles. Efficient intermodal logistics infrastructure, with a larger share of railways would reduce dependence on road transport.

Diesel demand in India would remain high due to its close linkage with day-to-day economic activity. However, it is apparent that current diesel usages are more than the actual requirement due to infrastructural shortcomings in the power sector. Therefore, addressing these issues would directly help in reducing diesel demand in India.

In the near term, it would be interesting to see how the gradual hike in diesel prices impact the economy at large, and more so, the budgets of the common man. As with several such measures in the past, the step towards change has to be politically driven and with general elections in sight in 2014, only time will tell how effective this much awaited reform is for India.

March 15, 2012by EOS Intelligence EOS Intelligence No Comments

Solar Photovoltaic Market – Contemporary Scenario and Emerging Trends

As concerns about global climate change become more salient with growing population, depleting natural energy sources and subsequent rise in traditional energy prices, the search for alternative sources of power generation has become a prominent societal issue.

New sources of energy are typically not as cost competitive as traditional sources such as coal and natural gas, thus, local governments across various countries have rolled out incentives for private players to invest in the renewable energy sector, thus driving innovation and creation of cost-effective solutions.

Read our report – Solar Photovoltaic Market – Contemporary Scenario and Emerging Trends

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