Making cents out of solar

TheStar Sat, Jun 05, 2021 07:30am - 1 month ago View Original


Solar power on the spotlight

A SUDDEN and steep rise in the cost for solar panels seems to have thrown a spanner in the works of the burgeoning solar power industry.

All this while, the success of the industry, which captures energy from the sun and converts it into electricity, has been its gradually lowering costs and its green credentials – reasons which have made it the fastest-growing power source in the world.

But now, solar panels or module prices have risen 18% since the start of the year after the cost had fallen dramatically over the past decade.

Locally, a flurry of listed companies have also jumped into this space, banking that it is the next big growth industry due to the global shift towards renewable energy (RE).

Following the rise in the cost of solar panels, one issue relates to the impact on local large-scale solar (LSS) power energy projects, the latest being the LSS4, which was awarded about two months ago.

Rising cost: The increase in the cost of solar panels is due to the rise in the raw materials that go into making them as well as freight charges due to Covid-19.Rising cost: The increase in the cost of solar panels is due to the rise in the raw materials that go into making them as well as freight charges due to Covid-19.

The increase in the cost of solar panels is due to the rise in the raw materials that go into making them as well as freight charges due to Covid-19.

Polysilicon, an essential material in solar photovoltaic (PV) manufacturing, is seeing a severe supply squeeze, which is good for suppliers but not so good for solar manufacturers.

Prices of polysilicon, for example, have jumped from US$6.19 (RM25.63) per kg to US$25.88 (RM107.17) per kg in less than a year, according to German research firm Bernreuter Research.

Prices of other materials in the production of a PV cell and module – such as copper, iron-ore and aluminium – have also soared, fuelled by a global demand recovery as some economies bounce back from the Covid-19 pandemic and the energy transition trend, which serves major economies’ carbon neutralisation targets.

Part of the reason for the price hikes in solar panels is the United States, where President Joe Biden had unveiled a massive infrastructure stimulus that involved catalysing investments into green energy projects such as solar power.

Research analysts tracking the global solar industry point out that the disruption taking place has not been this bad over the last decade and said that project owners and governments are going to have to stop expecting solar to get much cheaper quickly.

A recent Bloomberg report said the higher prices may delay some large-scale projects in the United States to Canada, China and India.

Hence the question: How will this development impact Malaysia’s green energy goals?

Malaysia’s installed solar power capacity has been experiencing a “superior” compounded annual growth rate of more than 50% in the last five years, points out Kenanga Research in a recent report.

By 2025, the country has a target of achieving 31% RE in the power capacity mix, from the previous goal of 20%, to be mainly driven by growth in new solar PV capacities.

The RE capacity mix for Malaysia is projected to increase to 40% by 2035, according to the Peninsular Malaysia Generation Development Plan 2021-2039, which was released by the Energy Commission in March. During this horizon, the combined share of gas and coal is foreseen to drop from 82% to 69%.

Temporary phenomenon

The Energy and Natural Resources Ministry, in a reply to StarBizWeek, believes that the hike in material costs of solar PV is “a temporary phenomenon”.

“Therefore, it shall not have a long-term impact on efforts to attain the RE target, which the government has set forth, ” it adds.

To achieve the 31% goal, 1,178 megawatt (MW) of new RE capacities will be developed in Peninsular Malaysia from 2021 onwards, the generation development plan indicates.

The additional capacities will consist of 1,098MW of solar and 80MW of non-solar.

Currently, RE contributes 15% for the energy mix for Peninsular Malaysia, while for the whole of Malaysia, it stands at 22%.

Malaysia has been moving towards large-scale solar projects since 2016 with the commissioning of LSS projects.

The LSS4, which has the largest capacity under this scheme, is touted as an engine for the country’s post-Covid comeback where RM4bil in investment is expected to be unblocked and 12,000 new jobs created.

The 30 winning bids announced for LSS4 – 500MW awarded under Package P2 and 323MW under Package P1 – had tariffs ranging from 17.68 sen to 24.81 sen per kilowatt hour (kWh). That is the price at which the applicant intends to sell their solar-generated electricity into the country’s electricity grid, while still making the venture a profitable one. The developers have until the end of 2023 to get their plants connected to the grid.

It should be noted that those tariffs are lower than what companies had proposed in the earlier iterations of large-scale solar projects. The reason is that solar panel costs have generally been on a downward slide over the years, coupled with enhanced efficiencies of new panels that are able to generate more electricity per panel.

During LSS1, the lowest bid was 39 sen per kWh; for LSS2, the lowest bid was 33.98 sen per kWh; while for LSS3, it stood at 17.78 sen per kWh.

It should also be noted that not all winning bidders of the earlier LSS schemes have been able to complete their projects on time.

Large-scale solar projects have their fair share of challenges because of unattractive rates and the requirement for vast tracts of land, which has resulted in the solar plants being located far away from the main grid.

For LSS4, analysts have said that they projected participating companies would be able to achieve an internal rate of return (IRR) from mid-to-high single-digits and that capital expenditure would hover around RM3mil to RM4mil per MW of capacity being installed.

However, these numbers are likely to be affected by the recent increase in solar panel costs.

Unlike LSS3, which comprised five shortlisted bidders with Cypark Resources Bhd being the only public listed winner, LSS4 had seen a much larger pool of beneficiaries from a diverse mix of sectors. This included a consortium comprising Tan Chong Motor Holdings Bhd, APM Automotive Bhd and Warisan TC Holdings Bhd (all belonging to the Tan Chong group), which is the first automotive group to be successful in an LSS bid.

The other listed beneficiaries are Tenaga Nasional Bhd (TNB), Ranhill Utilities Bhd, Uzma Bhd, JAKS Resources Bhd, Gopeng Bhd, KPower Bhd, Solarvest Holdings Bhd, Advancecon Holdings Bhd and MK Land.

Players have different advantages and disadvantages

Seasoned solar power entrepreneur Boumhidi Abdelali (Adel) explains that solar panels make up almost half of the cost in starting up a solar power plant. “It is the single-largest cost item, so naturally, with prices up, this will impact your project numbers, ” he explains.

“This is why it is important to take into account the prices of solar panels and projections of how high it can rise to, by reading the global marketplace. If you do not factor future price rises (of solar panels), then this could potentially be a problem that could impede the viability of your project, ” he says.

Adel is the managing director of reNIKOLA group of companies which has been involved in solar power plants since 2015. The reNIKOLA group is being injected into listed firm Pimpinan Ehsan Bhd.

In addition to LSS programmes, reNIKOLA’s growth plans include supplying solar energy to private companies, such as multinational firms, via TNB’s grid. When asked what impact the spike in solar panel prices will have on reNIKOLA’s business, Adel says: “Yes, there will be minimal impact on profitability. But at the same time, we have a bit more room and headway and are confident of our numbers and profit margins. We have been a bit more conservative from the start”.

Industry experts say while the bidding process was good, it unfortunately does not take into consideration the time to market, unless it is a significant player with a lot of rolling stock of panels, for example. On the other hand, new players would not have had the basis to buy stock on the assumption that they would win the bid.

Solarvest’s group CEO Davis Chong (pic below) says with solar modules representing some 40%-60% of the engineering, procurement, construction and commissioning (EPCC) value of a solar project, any movement in prices will inevitably have a direct impact on its project costs.

Listed in late 2019, Solarvest provides turnkey EPCC and operations and maintenance (O&M) services for solar systems and power plants in the country.

It is also the owner of a 1MWp solar PV plant in Kedah.

Chong says the price hikes were mainly driven by a shortage of raw materials and strong demand within China as solar players there are expediting their installation to meet the 2021 target of adding 55 gigawatts (GW) to 65GW of solar PV capacity in China.

“One way to mitigate this is by implementing our value engineering expertise which includes optimising the solar plant design and using high-quality substitute materials which do not compromise on safety and performance for components such as cables and other construction materials, ” he tells StarBizWeek.

That said, he too sees the situation to be a temporary one, posing a short-term challenge to the industry.

He foresees the demand-supply curve to be more stable in 2022.

“We anticipate that some solar project owners may delay the delivery timeline due to the temporary increase in solar module prices right now. Once prices normalise, the installation process will accelerate accordingly, ” he says.

As for its LSS4 projects, he sees minimal impact as the projects are only scheduled to come on stream in 2022 and 2023.

“There is still some room. Reason being, the purchase of the solar modules are usually done nearer to the tail end of a project, by which time we anticipate prices would have returned to normal levels, ” Chong says.

Samaiden Group Bhd group managing director Chow Pui Hee believes that “solar projects are still viable, although the return on investment of the project developer would be affected”.

Listed in October 2020, Samaiden is primarily an EPCC provider of solar panels systems and power plants and have carved a track record following contract wins from the LSS1 and LSS2 schemes.

reNIKOLA’s Adel says that each player has different advantages and disadvantages.

“All will be impacted, some more than others, ” he says. Variables include solar panel stocks in hand, the ability to bulk purchase and balance sheet strength, he points out.

While no one knows for sure how long the price rise in solar panels will be, or if it will trend higher before stabilising at some point, most industry players remain confident that solar power remains attractive, relevant and its growth will not cease.

A bright future

“Solar is a key component of Malaysia RE space. The rising demand for clean energy among the multinational companies, coupled with the rollout of government-backed programmes, are set to stimulate growth in the local market, ” says Pimpinan Ehsan executive director Lim Beng Guan.

On its part, upon completion of reNIKOLA acquisition, Lim says the group plans to aggressively expand in the RE sector and aims to own and operate one gigawatt of RE assets in the future.

“The plan is to first expand our solar portfolio. Gradually, the company is looking to expand into different verticals within the green energy sector, “ Lim adds.

Notwithstanding the competition, Solarvest’s Chong believes that solar investments will continue to be in demand.

“It is an affordable and reliable source of RE, providing investors with earnings visibility and stable recurring income over the long-term tenure of 21 years as per the power purchase agreement, ” he adds.

Moreover, he says the short-term increase in solar modules is offset by lower financing costs and attractive government tax incentives. This continues to make solar investments a bankable industry.

“In addition to economic benefits, the environmental, social and governance (ESG) push has also been the driver for adoption among multinational corporations.

“We believe the increase in material costs will not be a big hindrance in the movement towards clean energy, ” adds Chong.

Both Solarvest and Samaiden are eyeing regional expansion. Kenanga Research in a recent report noted that Solarvest is eyeing further forays into the Philippines and Taiwan, where its channel checks suggest that EPCC rates in the latter are higher at 12%-15% versus Malaysia’s LSS of 10%-12%.

In April last year, Solarvest secured its maiden contracts in the Philippines via two small EPCC projects. Meanwhile, in Taiwan, the group recently acquired a 51%-stake in Tailai Energy Co Ltd as a local partner, with operations expected to start by the middle of this year.

Together with its local partner, it will bid for rooftop feed-in-tariff projects.

As for Samaiden, the company is currently participating in some regional tenders including in Vietnam, which is leading the way in RE adoption in the region.

“In Vietnam, we have set up offices and is in the midst of negotiating and tendering for some rooftop solar EPCC works together with local partners.“Regional prospect of RE/solar is very encouraging, evidenced by the increasing of RE mixed target for the countries, ” Chow adds.

Meanwhile, Pekat Group Bhd, which is en route to a listing on Bursa Malaysia’s ACE Market, aims to grow its market share in the solar industry in the country.

The solar PV as well as earthing and lightning protection (ELP) specialist seeks to raise RM44.4mil from its listing to expand its solar PV and ELP businesses to take advantage and capture the anticipated growth in the local solar industry in the near future.

For 2021, the International Energy Association (IEA) expects renewables to regain momentum with delayed projects coming back online.

In its latest market update released last month, it said that renewables were the only energy source for which demand increased in 2020 despite the pandemic, while consumption of all other fuels declined.

It expects solar PV development to continue to break records, with annual additions reaching 162 GW by 2022 – almost 50% higher than the pre-pandemic level of 2019.

China remains at the centre of global renewable demand and supply, accounting for around 40% of global renewable capacity growth for several years. The country is also the largest manufacturer of solar panels and wind turbines, as well as the biggest supplier of raw materials such as silicon, glass, steel, copper and rare earth materials needed to build them.

Supply chain constraints, including due to a fire in a Chinese silicon factory last year, have recently pushed up prices of PV modules, highlighting the sector’s potential vulnerabilities, adds IEA.

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