Asia Faces Uniques Smart Grid Challenges
Compared to deregulated electricity markets in other parts of the world, in much of the Asia Pacific region the electricity supply industry is characterised by incumbent suppliers with exclusive rights to supply to consumers. These monopolistic suppliers are also the only permitted buyers of wholesale power from any licensed power generators.
These energy supply chains constrain opportunities for new entrants, particularly companies looking to commercialise smart or clean energy opportunities, due to limited entry points into the industry.
Adding to that challenge, some of the national utilities in Asian countries operate in environments where many consumers are unable to pay for electricity at rates that reflect the true cost, resulting in government subsidies and financially weak utilities. Any company looking at participating in these markets therefore has to look at complex project structuring, particularly in terms of credit risk and the payment obligations of the utility.
These challenges have contributed to a noticeable shift in the profile of companies active in the Asian electricity supply industry over the past two decades.
Whereas 20 years ago the market attracted large US and European independent power producers (IPPs), few of these remain in the region. The void has been filled by large regional companies, either investing in their domestic markets or making cross-border investments within the region. Regional companies feel they are better able to manage country risks across the region given their local knowledge and familiarity.
Nevertheless, unlike the mature and slow-growing markets of western Europe, growth in demand for power in much of Asia continues to be strong, presenting opportunities for the most determined new entrants.
This is particularly true in recent clean energy investment, as we have seen a strong policy push by governments across the region towards low or no carbon generation, particularly in solar projects. This has presented opportunities in smart and clean energy developments. We have seen significant developments in solar generation right across the region, from Japan, Korea and China, through to Philippines, Thailand and Malaysia.
That said, with the huge amount of energy that is needed in the region the bulk of new capacity is likely to continue to come from conventional power generation sources. Given the enormous capital costs involved in delivering these projects, the electricity supply industry in Asia will likely continue to be dominated by large balance sheet companies with the required financial ability to deliver these projects.