Twelve months do make a big difference. At this year’s PFI conference on Financing Energy Projects in Asia, the terms 'transition' and 'transition energy' were the buzz words. Added to that was 'data centre' – a phrase heard right from the word go – at the start from the first panel, in between, and of course during the DC panel at the end. Discussions have been intensive and insights have been valuable. By Minerva Lau.
This year’s PFI conference on Financing Energy Projects in Asia (FEPA 2024) saw another record number of registrations and record attendance – the highest seen in its 29 years. Attendance throughout the day was consistently high with the six panels providing frank discussions and insights from the experts in the field.
FEPA 2024, held at the Raffles Hotel last week, was sponsored by MUFG, Societe Generale, S&P Global Ratings, SMBC, Moody’s Ratings and Watson Farley & Williams.
Rod Morrison, London-based PFI editor, started the financing panel with a remark on the low volume of PF completed during the first half of this year in Asia-Pacific. But that’s a temporary blip, he said, as research shows energy investment this year in Asia totalled US$250bn, more than half of the global total of US$467bn.
Pablo Lutereau, the chief analytical officer at S&P, acknowledged the low numbers.
“We could say 2024 was low, but it's not because the fundamentals are weak. I mean, the fundamentals are extremely strong. Also, let's not forget, 24 was a year of a lot of elections,” he said. He added there is one very big election that is still coming, ie the US presidential election in November. “Nobody is expecting much to happen in the next week, but, you know, depending on the [US election] outcome, a lot of decisions are going to be triggered”.
So there must be a huge pipeline waiting to burst – and panelists talked about transition energy projects, hydrogen and ammonia, lots of solar and wind and batteries, corporate PPAs and data centres.
The first panel on financing is usually a must-attend panel for the PF industry community. Anupam Misra, head of group corporate finance for Adani Group, said the group has access to broadly all the financing products although it just cancelled a US dollar bond issuance apparently due to demand for higher yield.
He said that on financing, the company was not “nitpicky on whether it can save the last 50bp or 70bp” but rather on the kind of financing “which is able to give you the flexibility to complete the project on time. Because if you are able to complete the project on time, what you save is much more,” Misra said.
However, Shivanan Sivarajah, MUFG head of project finance for Asia-Pacific, said that that was not the “mindset of everybody” looking for financing. “There's still quite a push for the last basis point in a number of the players in Asia. And I understand that, don't get me wrong. The cost of debt is a bit like the cost of electricity. Everybody just wants it cheap. People don't care too much about the brands and everything else around it, unlike, say, phones and cars, et cetera,” he said.
Local financing is becoming more and more common and was discussed at a few panels. Ten years ago, projects in India were all financed by local banks and very few international commercial lenders joined the loan syndication. That has changed.
“I think local currency is becoming more and more common. It is now a financial engineering game in India when it comes to simpler projects. What that determines is what is the cheapest cost of capital that is available. A lot of times, depending on the rate environment, it could be local currency,” Yash Shah, head of renewables and sustainable energy at MBC.
“If you expand that further, in the rest of Asia as well. I think Indonesia is the last bastion of US dollar-linked financing but otherwise Thailand, Malaysia, Vietnam, Philippines, Korea, Taiwan, all of it is local currency. Local currency is becoming more prominent”.
India is a big market, just next to Australia, in the region. Many international banks have been actively lending in the projects there. Sivarajah describes it as a unique market by itself, very different from the rest of Asia. “It's almost decoupled to the rest of the world. If you go there just on sentiment, just on dealflows, across equity and debt markets, it's just a very, very different place,” he said. He added that there's a lot of domestic capital there and a lot of international capital that has come in.
Green financings and data centres are the current big thing, not just the next big thing. “We are seeing the global worldwide trend towards sustainability and decarbonisation with increased investments and financings into renewable projects and energy transitions. We're seeing green financings gain prominence in project finance towards projects with the positive environmental impacts being prioritised by sponsors with an agenda for corporate, for ESG priorities,” said Clarinda Tjia-Dharmadi, partner at Watson Farley & Williams.
In terms of dealflow, she said she’s seeing a lot in renewable energy, digital infrastructure, like fiber optics and data centres as well as major transportation and sustainable development initiatives. While the dealflow may not be substantial yet, a lot of projects are in early stage development readying for the financing phase.
The appetite for renewable energy is always there, and she said Indonesia has finally put itself behind renewable transitions with projects such as onshore winds with batteries, solar, geothermal, biomass, and de-dieselisation. “A lot of this project is actually gearing up and making sure the front-end is being structured so that they are capable of attracting that project debt,” she remarked.
Liquidity, especially for transition to net-zero projects, is massive. Besides the banks, there is the role of private equity. Lutereau reminded the audience that assets are being built, and private equity is playing a role in funding these projects before PF kicks in.
In addition, capital recycling becomes more important so new funds will be made available to new projects. According to Calvin Tan, head of infrastructure investment at Hong Kong Mortgage Corp, the low volume in the first six months “actually created a very interesting demand supply dynamic for the second half 2024”. He added that when the loan volume was down, “it's critical for a non-bank like us to be able to invest across different instruments so we can look at, we can work with banks like MUFG and SMBC, not just on the syndicated bank lending”.
He cited data centre financing. “It has gone from the time where it was mostly financed by corporate loans to now that a data centre can actually be financed through a PF structure or hybrid or real estate or even a corporate loan. It's interesting that the data centre as an asset class is maturing,” Tan said.
While there is a lot of talk about clean energy, carbon capture and storage and how the transition should be done, a lot of activity is driven by the tech companies, said Sivarajah.“So it is the tech companies who have come in and said, right, we're going to put up this many data centres. We're going to need this much power. And it needs to be clean or largely clean,” he said. The demand for power by the data centres is creating the big push for renewables.
Portfolio financing or financing at the holdco level was another trend that was discussed. Tan said using a portfolio of renewable assets with wind and solar and battery deployed at different times can offset some of the merchant risk.
Lutereau said to finance more projects, developers will have to look for alternative investment funds because they are “looking into something that is an open portfolio and that they can keep on adding assets and still leveraging … I think that we are going to see less pure traditional PF and we are going to see something that is somewhat new”.
The second panel talked about sustainable fuelling which focused mainly on hydrogen and ammonia. The panelists discussed the measures the governments in the region have been taking to promote the use of ammonia or hydrogen as the new fuel. There is expectation for the CfD tender for the import of ammonia in Japan.
According to Ryoichi Abe, JBIC chief representative in Singapore, the Japanese government has allocated US$20bn for the supply of ammonia for 15 years. “This is one attempt to lower the cost of the hydrogen when imported to Japan, and also it enables long-term commitment of the Japanese offtaker to offtake low-carbon hydrogen and ammonia. He added that the Japanese government has also started subsidising domestic infrastructure that are being developed for the import of hydrogen and ammonia, such as tanks and the pipeline.
Simon Wilson, head of renewables at JERA Singapore, said with all the support from the different governments – such as Japan, South Korea and Singapore, ammonia and hydrogen are like “LNG in its early days”. The projects are currently not bankable. “The only way you can really draw that out is to have these programmes with the government, which forces people to focus,” he said.
The panelists said a clear and stable fiscal framework for the development of hydrogen and ammonia projects are critical.
On corporate PPAs, Vietnam received attention with its announcement of direct PPAs split into physical PPA and virtual PPA.
According to Pham Ba Linh of Lexcomm Vietnam, a number of regulatory reporting steps that need to be taken for both of those options. “Particularly in relation to the synthetic virtual PPA model, there are certain key issues that still need to be addressed, one of which relates to the determination of the spot market price, which is one of the keys.
"This is going to be the tariff to be paid by EVN to the renewable energy genco, and also the number of factors that need to be taken, because it's important to have the ability of EVN to pass through what we call the wheeling charges. So it's not still very clear on the decree. So at least those two key items need to be clarified in order for the DPPA decree to be implemented smoothly.”
Solar was one of the earlier clean energy projects. Now batteries can be financed on their own. iSquared was one of the first global funds that have invested in solar farms. Talking on the solar and BESS panel Chenhua Shen, fund partner at iSquared said: “We actually play around from market to market, primarily from developed market to learn the know-hows to pick up the experience and then move to the other markets where we can become the first runner, take advantage of this early runner advantage.”
With regards to batteries, she said Japan in a global context, “is still the most attractive, given the long-term capacity payment of 20 years, indexed with CPIs, very unique”.
Speaking about hedging, Shen said: “For a lot of currency, especially in the low interest countries, we do see the hedging gains every year across Japan, South Korea, and Taiwan. You can get a nicely 2% to 3% uptick in your returns every year by entering into a long-term hedging,” she said. “But I think most of the cases, especially in South-East Asia, yes, hedging needs to be embedded in our underwriting, and you need to take a long-term view what is the current linkage, and we have to, because we are US dollar investor”.
On data centres, Eelco Holst of EdgeConnex said that what is new is the emergence of AI and that would require a lot of power. “All the megawatts that we have sold to date are still cloud, however, the whole market is talking about AI already for a year … our customers are just trying to get their heads around the technical aspects of it”.
He added that Nvidia is building the chips but the whole infrastructure around it, from technical perspective, are still being worked out. So that is driving some of these very large scale deployments.
In data centre financing Spencer Ng, senior credit officer of Moody’s, said it looks at the quality of the contract.
“For data centres that are fully contracted, cashflow is sufficient to pay down the debt through amortisation. Obviously those are the ones that we will see more favourably,” Ng said.
“Now, to the extent that you have data centres where you are only partially contracted or some of the contracts could potentially expire during the term of the debt, then that is where we really need to spend a bit more time looking at the market fundamentals”.
He said the agencies look at data centre demand and contracting risk in the near term. “We think that probably isn't going to be that much of a challenge, particularly in a market like Malaysia,” he said. For new projects, Moody’s will be looking at power supply, the power producer and the back-up systems as well.
