Revealing the top infrastructure deals in Asia
New asset class and a new business model define the changing renewable energy landscape as the transition to cleaner sources of energy to create a low-carbon future accelerates
23 May 2019 | The Asset

The change to a more favourable landscape for renewable energy in Asia is gathering momentum across the region. While it is fair to say Asia still lags other parts of the world in terms of renewables’ contribution to the energy provision, new trends are likely to accelerate the transition in the next two to three years.

This was evident as the board of editors of The Asset reviewed and evaluated the different project finance transactions that were undertaken during the past 12 months to select the winners of The Asset Triple A Infrastructure Awards 2019.

“The energy transition is happening in Asia across the spectrum with projects ranging from offshore and onshore wind, solar, geothermal and waste-to-energy,” notes a project finance banker.

One of the new trends was the introduction of a new asset class following the closing of the first offshore wind farm project financing in Asia in June 2018. This ground-breaking transaction in Taiwan – Formosa 1 offshore wind farm – is expected to set the trend in the region with two similar projects, also in Taiwan, reportedly finalizing their funding requirements.

Bankers say the next projects will be substantially larger than the inaugural financing of NT$16.7 billion (US$595.20 million) for the 128MW Formosa 1 offshore wind farm. The two projects to be launched are the Yunlin offshore wind farm with a capacity of 640 MW and the Guanyin offshore wind farm with a capacity of 350 MW.

The Formosa 1 offshore wind farm – sponsored by Macquarie Capital, Orsted and Swancor Renewable – represented the first project in the Taiwan government’s ambitious plans to develop 5.5 GW of offshore wind capacity by 2025. This is part of its strategy to phase out nuclear energy and increase the contribution made by renewables to its energy mix.

Another banker credits the Taiwanese government for vigorously promoting offshore wind farm projects to international sponsors/promoters, investors and lenders. “The government has really gotten these projects off the ground with the right sort of incentives on the tariff structures. They are attractive enough to get the investment flowing in,” he says.

“We will likely see similar offshore wind farm projects taking roots next year in South Korea and maybe Japan,” another project finance banker tells The Asset. “There are also discussions about the prospects of these projects in Australia and possibly in Vietnam, which have the potential to develop them into full-blown assets in the next three to five years.”

As a new asset class, offshore wind farms hog the limelight in Taiwan, though efforts to promote solar farm projects are also gaining momentum, further boosting the renewable energy mix. In May this year, a private fund managed by BlackRock Real Assets entered into an agreement to acquire a 115 MW solar portfolio comprising 14 projects in Taiwan from New Green Power and J&V Energy Technology.

What makes renewables a very interesting proposition - particularly in Australia - is the changing business model employed when selling power output, which was traditionally done through the utility companies. That model is now evolving with the renewable projects starting to sell power directly to end-users.

One such project is the Bulgana Green Power Hub, developed by French renewable energy producer Neoen, and described as the first agribusiness partnership of its kind globally. The A$350 million (US$240 million) project will provide 100% renewable energy directly to Nectar Farms, which will be the largest hydroponic greenhouse in Australia, producing organic vegetables planted on over 30 hectares of land, deriving higher yields and high overall levels of efficiency.

Another project that exemplifies the changing business model is the Beryl solar farm, which is one of the biggest in New South Wales in Australia. The farm will primarily supply the electricity requirements for Sydney Metro Northwest Rail, a critical infrastructure serving Australia’s most populous city. The Beryl solar farm will produce enough clean energy to displace more than 167,000 metric tonnes of carbon dioxide – the equivalent to taking about 45,000 cars off the road.

“There is now a shift in mindset across industries, looking for greener sources and investing more in renewable energy,” adds the project finance banker. “We are seeing mining companies interested in obtaining power directly from renewable projects to power their operations. We will see in the next few years projects in this part of the world that are actually selling their power output directly to commercial and industrial end-users.”

Harnessing renewable energy is also high on the agenda in India, where several wind and solar farm projects are being undertaken. Consolidation is also taking place in the industry, witness ReNew Power Services’ acquisition of Ostro Energy, the renewables platform of Actis, a leading growth and emerging markets investor.

The transaction helped make ReNew Power - voted once again as the Project Sponsor of the Year in the Triple A awards - the largest renewable energy IPP (independent power producer) in India and reinforces its already-strong position in this sector.

Another trend that is gaining traction in the region is the increasing reliance on natural gas as a source for power generation, as showcased in the Jawa 1 gas-fired power plant project in Indonesia. Jawa 1 is an innovative, integrated liquefied natural gas (LNG)-to-power project, which allows Indonesia to improve its energy mix in power generation.

Gas is described as the most efficient among non-renewable energy, and this fuel is widely recognized as playing a role in the energy transition towards renewable power generation. Jawa 1, a public-private partnership considered a priority project by the Indonesian government, also reduces the country’s reliance on coal.

Analysts expect that similar gas-to-power transactions will be undertaken in countries such as Bangladesh, the Philippines, Thailand, and possibly even Sri Lanka and Myanmar, as more countries in Asia start to import LNG to help power their economic growth.

For one thing, LNG is now relatively cheaper as new production comes on stream in countries such as Australia and from as far as North America. This will make LNG more affordable, which was not the case before.

About four years ago shipping LNG into Asia cost an importing country between US$16 and US$20 per mmbtu (metric million British thermal unit), the project finance banker points out. Those were the sort of prices paid by the richer economies in the region – Japan, South Korea and Taiwan – but very high price tags for emerging economies such as Indonesia.

“Nobody was talking about gas four years ago – all the discussions were about coal – because people thought it was expensive to bring capacity in the markets,” the banker says. “That has fundamentally changed during the past year and this trend will accelerate, which will make LNG a substantial asset class in this region over the next few years.”

Today, the LNG cost hovers between US$6 and US$7.50 per mmbtu – a substantial reduction from just a few years ago that has made the fuel more affordable, although still not as cost-effective as coal, the banker adds. But as the price gap narrows, it will become more problematic to use the argument of cost to justify the reliance on coal because the collective mindset is changing – which is people are genuinely concerned about pollution and other environmental impacts.

Financing the infrastructure projects in Asia is still being driven by the bank market, though there is a promise of a new source of funding. Banks in this region routinely provide long-term capital, which in a way displaces the capital markets because it takes away the primary advantage that the capital markets offer – the long maturities.

“Capital markets do have a role to play because the project finance assets, by definition, are long-term asset classes with long economic lifespans, so they are a good fit for the capital markets,” the banker says.

Indeed, the bank market in Asia behaves differently to the other markets in the world. The project finance bank landscape in the Americas, for instance, offers medium-term financing, providing sponsors with five- to seven-year loans that allow project sponsors to build the asset and put together an operational track record in about three years. This puts the sponsors in a position to refinance these loans in the capital markets, which offer longer term maturities.

A deal that could have been a poster child for the capital markets in Asia, the banker says, is the refinancing deal for the refinery and petrochemical integrated development (RAPID) project in Malaysia – a joint venture between Petronas and Saudi Aramco. The transaction, designed to refinance the short-term loans that the project raised last year, is getting done in the bank market with a lot of the money reportedly coming from the participating Asian financial institutions.

Another deal that generated a lot of interest in the project finance market last year was the US$458 million collateralized loan obligation (CLO) arranged for Bayfront Infrastructure Capital, which was chosen as The Triple A Most Innovative Deal. With Clifford Capital acting as the sponsor, the transaction was the first-ever securitization of project and infrastructure finance loans out of Asia-Pacific, which created a new source of liquidity for the project finance space in the region.

The transaction effectively mobilized institutional investor liquidity into the project finance market. While this is more of a refinancing tool rather than a primary tool to fund projects, it allows the banks to recycle their debt capital and redeploy it in new transactions.

Among the institutions that define the project finance market in Asia during the past 12 months, Macquarie Infrastructure and Real Assets and the Russian Direct Investment Fund (RDIF) were selected as Institutional Investors of the Year. RDIF has established joint strategic partnerships with leading international co-investors in Asia, including China Investment Corporation, Silk Road Fund, Tata Power and Japan Bank for International Cooperation.

The Multilateral Agency of the Year award goes to International Finance Corporation, whose investment team extended and arranged funding to support several private sector project finance projects in 2018.

PT Penjaminan Infrastruktur Indonesia, or Indonesia Infrastructure Guarantee Fund, was awarded the PPP Agency of the Year. Based on the Indonesian Ministry of Finance regulation, its scope of activities is no longer limited to providing guarantees, but also provide guidance, starting from the preparation stage to the transaction stage of the PPP infrastructure projects.

Sumitomo Mitsui Banking Corporation (SMBC) retains the honours as the Project Finance House of the Year as it remains at the forefront in financing several significant transactions in Asia during the past 12 months, including the Long Son Petrochemical Company project in Vietnam and the WestConnex Stage 1 A$4 billion acquisition financing.

Selected as the Project Finance Advisory House of the Year, DBS had a bumper year for its project finance franchise as it worked on several advisory projects across different geographies and across different sectors, ranging from renewable energy, utilities, power, metals & mining and transport.

A new award category – ECA Coordinator of the Year – goes to HSBC as it worked on different project finance transactions with the likes of Sinosure, Euler Hermes, SERV and K-Sure.

Shearman & Sterling again emerged as the Project Finance Law Firm of the Year as it represented both sponsors and lenders in several landmark transactions such as the Jawa 1 gas-to-power project, RAPID project in Malaysia and Eastern Indonesia renewable energy project.

For the complete list of winners of Institution Awards, please click here

For the complete list of winners of Best Regional Deals, please click here

For the complete list of winners of Best Deals in ASEAN, please click here

For the complete list of winners of Best Deals in Australia, please click here

For the complete list of winners of Best Deals in North Asia, please click here

For the complete list of winners of Best Deals in South Asia, please click here