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July 2014
Issue 7
Asia Pacific
Power & Renewables
BMI's monthly market intelligence, trend analysis and forecasts for the power & renewables industry across Asia Pacific
ISSN: 2054-1430
ASIA
Economic activity continues to soften across Asia, particularly in Japan and China. We expect industrial production and electricity
consumption in these countries and their major trade partners to remain weak.
There were several major political developments in the region, such as the lower house elections in India, and the military coup in
Thailand. These developments affected India positively and Thailand negatively.
China maintains its top place ranking in the regional ratings, owing to its unrivalled market size (in terms of capacity, generation and
consumption) and its substantial growth prospects.
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CONTENTS
Asia ........................................................................................................................................................................ 1
Power Ratings Stable Amidst Modest Revisions ................................................................................................................ 1
Table: ASIA POWER RISK/REWARD RATINGS .................................................................................................................... 3
China ..................................................................................................................................................................... 5
Power Views In Play ................................................................................................................................................... 5
Table: Fact Box: Statistics Provided By President Xi in June 2014 .............................................................................................. 5
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We highlight that the level of political risk faced by the power sector has also increased over the last quarter, in line with our expectations.
On May 21, the District Court of the Fukui Prefecture ruled in favour of a lawsuit by 189 plaintiffs to block the restart of two reactors at the
Ohi nuclear power plant. We previously highlighted the risk local communities and governments pose to reactor restarts, and see this risk
coming to the fore. This is because the ruling by the Fukui District Court creates a legal precedent for local communities across Japan to try
to prevent or at least delay reactor restarts (see 'Reactor Restarts Threatened By New Legal Precedent', May 23).
Thailand: Heightened Political And Economic Risks
We have revised down the R/R scores for Thailand due to the political turmoil that has gripped the country since November 2013, and its
increasing impact on the economy. Thailand's economy is clearly reeling from the strain of the political unrest, with real GDP growth
contracting by 2.1% quarter-on-quarter in Q114. The manufacturing and construction sectors have been hit particularly hard, contracting by
3.1%year-on-year (y-o-y) and 12.4% y-o-y respectively (see 'Economic Resilience Fading Fast', May 21). This will act as a clear drag on
electricity consumption, and we have moderated our forecasts and ratings for the Thai power sector as we see no end in sight to the crisis.
Construction Sector Acting As A Major Drag
Thailand - Real GDP Growth, % chg y-o-y
While we continue to expect an eventual return to civilian government, we note that the military appears to be in no rush to hand over power,
and this poses a risk to our Long-Term Political Risk Rating. The head of the military junta General Prayuth Chan-ocha has refused to give a
timeline for the eventual handover of power, and such a move seems unlikely to happen within the next 12 months. We note that the longer
the junta remains in power, the more likely it is that a fully functioning democracy will not be formulated anytime soon. Such a scenario
would negatively affect policy continuity and clarity over the long-term (see 'Risks Rise That Military Could Outstay Its Welcome', June 25).
India: Optimistic On Modi Victory
We believe the victory of Narendra Modi and the Bharatiya Janata Party (BJP) in India's lower house elections in May 2014 will have a
positive impact on the business environment for the power sector, and have revised up our ratings accordingly. Modi is keen on addressing
the country's chronic shortage of electricity due to its detrimental impacts on economic growth, and his administration has already taken a
number of direct and indirect steps to boost growth in the renewables sector (see 'Solar: State- And Federal-Policies Increasingly
Conducive', June 24). The BJP will also look to reduce red tape for power projects, improve the fuel availability for thermal projects, and
possibly privatise certain parts of the sector to improve competitiveness and access to capital (see 'Power Sector To Be Modi-Fied', May 22).
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Asia Pacific
ASIA
Industry
Rewards
Country
Rewards
Industry
Risks*
Rewards
Power R/R
Ratings
Rank
China
88.0
52.4
74.3
50.7
63.4
56.2
68.0
Australia
52.0
56.6
53.8
77.4
80.0
78.5
62.4
South Korea
67.5
44.0
58.5
56.6
76.9
65.3
60.9
India
72.3
50.8
64.0
53.1
56.1
54.4
60.6
Malaysia
53.3
66.6
58.4
62.4
66.6
64.2
60.4
Vietnam
71.3
56.4
65.5
40.3
54.1
46.2
58.8
Indonesia
63.5
57.2
61.1
43.2
56.1
48.7
56.8
Japan
56.5
27.4
45.3
72.1
69.9
71.1
54.3
Singapore
36.0
44.8
39.4
75.6
83.9
79.2
53.3
Taiwan
58.0
40.0
51.1
56.4
57.8
57.0
53.2
10
Thailand
57.5
47.0
53.5
49.9
53.8
51.6
52.8
11
Philippines
40.3
58.8
47.4
49.5
58.0
53.1
49.4
12
Sri Lanka
41.5
62.0
49.4
35.8
51.6
42.6
47.0
13
Cambodia
44.5
62.2
51.3
27.1
36.9
31.3
44.3
14
Hong Kong
30.8
33.0
31.6
65.1
71.0
67.6
44.2
15
Pakistan
40.3
49.8
43.9
38.3
38.2
38.2
41.9
16
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ASIA
These revisions have also translated into similar moderations in our power forecasts, and we now expect electricity consumption in Japan to
grow at an average of just 0.5% per annum between 2014 and 2023 (down from 0.9% previously). We also moderated our forecasts for the
various components of generation. Gas- and oil-fired generation experienced the most aggressive moderation, with coal and nuclear energy
generation receiving less aggressive revisions. This is in line with the country's fourth Basic Energy Plan. The plan, approved by the Cabinet
on April 11, highlighted coal as an important baseload source, and reversed a plan to phase out nuclear energy (see 'Nuclear Proves Critical,
Coal Remains In The Mix', April 15).
Table: FACT BOX: KEY STRATEGIES OF FOURTH BASIC ENERGY PLAN
Generation type
Policy Change
Nuclear
This new policy reverses the previous administrations' plans to gradually phase out nuclear energy, and defines nuclear energy as an 'important
baseload power source' without specifying the share of nuclear in the nation's energy mix.
Conventional
Coal and hydropower were highlighted as important baseload sources, with coal set to play a major role in the policy over the long-term.
Renewables
The new policy said that Japan would aim to surpass renewable energy targets in past plans, but did not set any specific targets. The previous
target was for renewable energy to account for 13.5% of total power generation in 2020 and around 20.0% in 2030.
Energy Mix
Minister for METI Toshimitsu Motegi told reporters after the cabinet meeting that the government might decide on an ideal energy mix within
two or three years.
We note that Japan's nuclear sector continues to present significant risks to both our outlook for the country's broader power sector. On May
21, the District Court of the Fukui Prefecture ruled in favour of a lawsuit by 189 plaintiffs to block the restart of two reactors at the Ohi
nuclear power plant. We previously highlighted the risk local communities and governments pose to reactor restarts, and see this risk coming
to the fore. This is a major risk to reactor restarts in Japan as the local authorities must give their approval for reactors in their jurisdiction to
be restarted (see 'Reactor Restarts Threatened By New Legal Precedent', May 23). There is also a risk for a greater-than-expected number of
reactors to be restarted, and this poses an upside risk to our forecasts (see 'Core View In Play: Nuclear In The Mix', March 18).
India: Upside Materialising
We had said in our previous analysis that the outcome of India's lower house elections in May 2014 posed an upside risk to our forecasts, and
this has materialised. We expect the election of Narendra Modi and the Bharatiya Janata Party (BJP) to have an impact on the power sector
as Modi is keen on addressing the country's chronic shortage of electricity due to its detrimental impacts on economic growth. Modi himself
had introduced several reforms during his time as Chief Minister of Gujarat (2001-2014), which are widely credited for helping the state
avoid persistent power shortages.
We believe that Modi will try to implement regulations and reforms that are conducive for growth across all parts of the power sector. The
Modi administration has already taken a number of direct and indirect steps to boost growth in the renewables sector (see 'Solar: State- And
Federal-Policies Increasingly Conducive', June 24). The BJP will also look to reduce red tape for power projects, improve the fuel
availability for thermal projects, and possibly privatise certain parts of the sector to improve competitiveness and access to capital (see
'Power Sector To Be Modi-Fied', May 22). That said, we have refrained from revising our forecasts for the Indian power sector this quarter as
we are waiting for the administration to make progress in passing legislation on the sector.
Beyond 2014: Outlook Stable And Sanguine
Our outlook beyond 2014 remains relatively stable and we are forecasting electricity generation in the region to grow at an average rate of
5.1% per annum between 2014 and 2023. This is notably higher than the global growth average, which we attribute to several reasons:
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CHINA
Economic and demographic growth: We believe that emerging Asia is set to outperform the global economy over the medium- to longterm due to positive demographic and structural factors, and this is set to drive electricity consumption growth over the long-term.
Low electrification rates: Electrification rates in Asia are relatively low, and are set to increase alongside economic and technological
development in the region. Several countries in the region have already initiated programmes to improve electrification rates, with
Myanmar's first 500kV line being a key example (see 'Myanmar Transmission Project Desperately Needed', March 6).
Electrification Rates Still Low
South East Asia - Electricity Access In 2009, %
Source: IEA
Positive regulatory developments: The majority of governments in Asia are pushing for greater competition, transparency and
sustainability in their power sectors through various reforms. A number of countries have already allowed electricity prices to increase,
and we see room for price increases and reforms in the future (see '2014: Upward Pressure On Electricity Tariffs In Asia', January 10).
CHINA
122%
Thermal
80.4%
35%
Nuclear
2.1%
15.4%
Hydropower
15.0%
1.9%
Renewables
2.5%
The statements and statistics announced by President Xi on June 14 reaffirm our outlook for the Chinese power sector, particularly with
regards to the need to diversify the energy mix and improve energy efficiency. As we have said previously, the government faces a
tremendous challenge in finding ways to grow energy supply at the same rate as demand, while contending with factors such as fuel
availability, the cost of generation, and environmental impacts. This has led the government to focus on the development of cleaner energies,
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CHINA
with the country's 12th Five-Year Plan (2011-2015) outlining plans to boost the share of non-fossil fuels in primary energy consumption and
installed generating capacity to 11% and 30% respectively by 2015.
A Growing Pollution Problem
Global - Increases In Energy-Related C02 emissions by fuel type (non-OECD), 1990-2040 (billion metric tons)
Source: EIA
Bullish nuclear: We have been bullish towards the growth prospects for China's nuclear generation industry since the country resumed its
new build programme in 2012 (see 'Third Generation Reactors Usher In A New Atomic Age', August 29 2013), and said that the country
was on track to exceed its 2020 target of 58GW capacity (see 'Nuclear Sector On The Path To Criticality', March 13). Our outlook is
based on the scalability, efficacy, and environmentally friendly nature of nuclear energy, which makes it an extremely viable source of
energy for China. We note that nuclear energy accounted for only 2.1% of the country's generation mix at the end of 2013, and we see
tremendous upside for the sector if private capital were to be brought in (see 'Nuclear IPO: Economic And Environmental Motivations',
May 7).
Ambitious Nuclear Plans
China - Nuclear Capacity Data And Forecasts (GW)
Source: f = BMI/Government forecast. Source: BMI, EIA, World Nuclear Association, CNNP, CGN
Bullish renewable energy: We have also been extremely optimistic on the growth prospects for the renewable energy sector, and find
President Xi's statements in line with our expectations. We correctly predicted there would be several regulatory changes in the sector in
2013 (see 'Renewables Outlook Stable Despite Major Developments', November 4 2013), and highlight that our 2013 growth estimate for
solar generation (of 120%) was accurate (122%). We note that the political and operating environment for renewable energy developers
and operators remains conducive (see 'Mega Solar Project Highlights Continued Sector Attractiveness' January 7), and are forecasting
strong and sustained growth in 2014 and beyond.
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CHINA
Asia Pacific
Conventional to grow as well: We had said in May 2013 that coal-fired generation will remain integral to the Chinese power sector, and
that the sector would have to find ways to reduce emissions intensiveness (see 'Pollution In China: Clean Coal The Key', May 16 2013).
This is in line with statements and statistics (coal consumption grew only 1.9% in 2012, compared to an annualised growth rate of 8.3%
between 2002 and 2011) provided by President Xi. We had also predicted that gas-fired generation would grow aggressively - forecasting
generation to grow at an average annual rate of 16.2% between 2014 and 2023 - and the growth of demand for natural gas in the past two
years (15.4% in 2012 and 13.9% in 2013) reaffirms our expectations.
China Already At The Top
Global - Thermal Coal Exports (LHS) & Imports (RHS) By Geography (2012e)
Energy efficiency: We highlighted the increasing momentum behind smart grid and meter development in China in February, and this
could help improve energy efficiency and reduce the rate of electricity consumption growth in the country (see 'Smart Grid: New Highs,
But Early Adoption Woes', February 20). We believe that the rate of development is likely to accelerate as China is behind its energy
efficiency targets based on President Xi's statements. According to President Xi, China aims to reduce energy consumption per unit of
GDP by 16% from the 2010 level by 2015, but this had only dropped 9% between 2011 and 2013, accounting for only 54% of the overall
target.
We note that Chinese officials had, at the start of June, made mention of plans to introduce a cap on carbon emissions (possibly an
incremental cap), and that this has the possibility to create huge opportunities for investment (see 'Carbon Cap Would Supercharge Power
Sector Diversification', June 6). While we are unsure about the efficacy and enforcement of emissions reduction targets in China, we believe
that even the discussion of such targets highlights the growing political pressure on Beijing to address the issue of pollution, and thus the
need to further diversify its energy mix.
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CHINA
Source: EIA
When looking at diversification of the Chinese energy mix, we emphasise that, although we forecast that the rate of coal capacity expansion
may decelerate (in part due to slowing growth in electricity demand), coal capacity will continue to expand at a rapid pace. Under our current
forecasts we expect coal-fired generation to grow at an annual average rate of 5.2% between 2014 and 2023. Attempts at diversification although staggering in terms of the volumes of gas needed and the number of nuclear facilities in the project pipeline - will have a limited
impact on the overall generation mix.
Coal To Remain King In China
Planned Coal-Fired Power Plant Capacity Additions (MW)
Nevertheless, we believe that efforts at energy mix diversification are already gaining added impetus and the scale of expansion of non-coal
capacity will create numerous opportunities for investors. As such, if the aforementioned cap on emissions is ultimately implemented, certain
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CHINA
segments of the power sector would receive much greater attention. This would boost our forecasts for non-coal-fired generation
considerably. Areas we highlight as critical to diversification include:
Gas: Although gas only accounts for 1.5% of China's electricity generation mix in 2014, Beijing is ramping up its efforts to utilise greater
volumes. Despite infrastructure, pricing and supply constraints, this is clearly underscored by the recent deal with Russia - under which
China will receive 38 billion cubic metres (bcm) of Russian gas for 30 years (see 'Geopolitics Takes Centre Stage In Sino-Russian Gas Deal',
May 22 2013). We forecast that gas-fired generation will grow at an annual average rate of 16.2% between 2014 and 2023 - creating
opportunities for growth in midstream and liquefied natural gas (LNG) infrastructure expansion, as well as China's nascent shale gas
industry. A cap on emissions would accelerate growth across the gas sector.
Nuclear: China has the biggest nuclear expansion plans globally and has 31 nuclear reactors under construction and more than 100 under
early consideration. The scalability and efficacy of low-emissions nuclear creates major upside to our forecasts and we have recently
highlighted that we believe sentiment in the nuclear industry is improving as concerns about safety begin to dissipate four years on from the
Fukushima disaster in Japan. A carbon cap would boost already-robust sentiment in the world's biggest nuclear market and - by extension support our long-term bullish view on uranium (see 'Long-Term Bullish On Uranium As Pockets Of Growth Drive Demand', May 30 2014).
Ambitious Nuclear Plans
China Nuclear Capacity Data And Forecasts (GW)
Source: f = BMI/Government forecast. Source: BMI, EIA, World Nuclear Association, CNNP, CGN
Renewables: We currently forecast average annual growth in renewables capacity of 11.3% per annum and a carbon emissions cap would
boost our robust outlook exponentially - particularly in the solar sector. Continued government support for renewables companies and the
sheer scale of installed capacity already make China an outperformer in the renewables space, and we believe an emissions cap could lead to
aggressive revisions to solar installation targets.
Huge Opportunities In Diversification
China - Power Generation Mix, 2023
In addition to power generation segments noted above, an emissions target would generate added momentum behind China's pilot carbon
markets (see 'Carbon Trading Pilot Schemes Gaining Momentum', November 29 2013). We have highlighted in our previous analysis that
China is rolling out seven separate pilot carbon markets with a view to integrating them in 2015. We believe that placing a cap on carbon
emissions would boost the credibility of such schemes, support their wider rollout across China and ramp-up the pressure on state-owned
companies to take part in cap-and-trade schemes.
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Preliminary duties of 35.2% and 18.6% would be imposed on imports of Suntech and Trina Solar respectively, while other Chinese solar
producers will immediately receive tariffs of 27%.
The duties will be levied on solar photovoltaic (PV) panels and the cells used to make them. This is in contrast to the 2012 tariff, which
only affected Chinese solar cells.
US Customs have started collecting cash deposits on imports based on the duty rates, and these deposits will be repaid if the tariffs are not
confirmed.
The Commerce Department is still conducting an investigation on the dumping issue (a separate issue from unfair subsidies), and could
decide to increase or introduce new tariffs. A decision is due on July 25 2014.
The tariffs will be reviewed by the US International Trade Commission (ITC) in October 2014 before a final decision is made.
This ruling will effectively seal a loophole that Chinese solar manufacturers have allegedly used to circumvent tariffs imposed by the US on
Chinese solar cells in 2012, when the US government imposed tariffs of between 18% and 250% on Chinese solar cells (see 'Changing
Dynamics Of Renewables Manufacturers', October 18 2012). However, Chinese producers were able to evade these tariffs by purchasing
solar cells or moving their production overseas (with the most common alternative being Taiwan) before shipping these cells back to China
for assembly into solar panels. In many instances, the cells manufactured outside of China were derived from components - namely solar
ingots and wafers - from China. The new tariffs will mean that Chinese companies will not be able to exploit this loophole any longer, and
will have to move production and assembly of both solar cells and panels overseas in order to avoid tariffs.
Effects Of The Tariff
We believe that the imposition of these tariffs will have effects on several parts of the US solar sector:
Domestic manufacturers: Solar equipment manufacturers with sizeable production bases in the US - such as First Solar, Sunpower and
Germany's SolarWorld - will benefit from these tariffs as the prices of panels imported from China will increase. It is estimated that at
least half of the solar equipment (and up to 70% of the rooftop solar market) installed in the US in 2013 was sourced from China.
International panel manufacturers may also benefit from these tariffs on Chinese manufacturers.
Domestic project developers, investors, and consumers: Developers, investors, and consumers in the US are likely to be negatively
affected by elevated project development costs arising from higher panel prices. The elevated project costs will reduce margins for all
three groups, increasing the length of time needed for solar projects to breakeven. This could negatively affect growth in solar capacity,
and poses a significant downside risk to our solar forecasts (see 'Solar Forecasts Boosted As Market Conditions Strengthen', June 5).
Growth Already Set To Slow
US - Solar Capacity, MW (LHS) and %y-o-y (RHS)
40,000
75
50
20,000
2023f
2022f
2021f
2020f
2019f
2018f
2017f
2016f
2015f
0
2014f
2013e
25
We note that some of the larger solar developers in the US have taken steps to reduce their exposure to solar trade disputes and price
fluctuations. One of the country's largest developers, SolarCity, announced that it would be purchasing solar panel manufacturer Silevo on
10
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CHINA
Asia Pacific
June 17 2014. SolarCity currently obtains its solar panels from China's Yingli and Trina Solar, but announced plans to build a massive solar
panel factory in New York on the day of the Silevo acquisition. This will give SolarCity a greater control over its supply and protect it from
price fluctuation that can vary greatly as a result of trade disputes or market forces governing supply and demand.