Will feed in tariffs light up the solar power industry in Asia Pacific?

The high capital costs associated with solar power mean that it has been prohibitively expensive for many countries in Asia Pacific which, ironically, dispose of greater insolation levels than well-developed solar power markets such as Germany.

Investors' caution in the Asian solar power sector may gradually be allayed as more flagship projects such as Thailand's Solarta 3MW Sai Sena Solar Park become operational and prove to be successful. But investors also need clear financial incentives and commitments from governments if solar power is ever to reach the critical mass necessary to make grid parity with fossil fuel prices a possibility.
Around the Asia Pacific region governments are announcing feed-in-tariffs for solar power projects.

In August, China announced a national FIT for solar projects of 1 or 1.15 Rmb per kilo-watt hour (USD 0.157 or 0.180) depending on the location and timing of the solar power project. China is already a leading global manufacturer of solar photovoltaic technology, but over 90% of its production is exported. If the new FIT helps to grow the domestic Chinese market, Chinese manufacturers may start to look at taking an equity stake in key projects rather than simply providing design and installation.

Thailand has experience of FITs through its Small Power Producer and Very Small Power Producer programmes. The FIT for solar comprised an adder of 8 baht (USD 0.247) per kWh on top of the avoided wholesale cost of generation. This was the highest of all the adders available for renewable energy under the programmes. Furthermore, in order to alleviate investment risk in certain southern provinces, solar projects located there were entitled to a special adder rate of 1.5 baht per kWh in addition to the existing 8 baht adder.

While this undoubtedly grew the solar industry in Thailand, the schemes seem to have become a victim of their own success. The number of applications submitted to the SPP program total 477MW, which far outstripped the power target of 55MW by 2011 set out in the government's Alternative Energy Development Plan (2008 – 2022). As a result, in July 2010 the Thai National Energy Policy Council passed a resolution reducing the adder to 6.5 baht per kWh (USD 0.214) for the projects already in the pipeline but not yet approved, and stated that no new solar applications would be accepted by the SPP programme.

Thailand's experience is probably weighing on the minds of law-makers in the Philippines. Despite the unit cost of solar power coming down dramatically in recent years it remains one of the more expensive sources of renewable power and this is reflected in the level of FIT required. The National Renewable Energy Board of the Philippines proposed a FIT rate of P17.95 (USD 0.409) for solar power projects (the highest of all the renewable energy FITs). But this was still disappointing news for renewable energy developers who had sought a rate of P19.87. Given that the unit costs of solar may decrease even more in the near future as the industry gains critical mass, the debate in the Philippines and elsewhere is whether or not to use FITs to support presently less expensive renewable energy sources and consider the position of solar in 5 years time when costs have come down even more. For the time-being, the implementation of the Renewable Energy Act, and particularly the setting of FITs, has been postponed for further review.

In August of this year Vietnam introduced a subsidy for wind power production, however any sign of a FIT scheme for solar energy in Vietnam remains to be seen. Meanwhile, Indonesia has long supported off-grid PV programs in rural areas but never implemented a national FIT. To reach the target of between 800 and 1,000 megawatts for PV installations by 2025 (as set out in the National Energy Management Blueprint 2005-2025) Indonesia has instead charged the national electricity utility Perusahaan Listrik Negara with investing in the establishment of communal grid-connected solar power installations on approximately 100 islands in Indonesia.

The Malaysian government announced its solar FITs in December. The FIT for small developments is set at RM1.23 per kWh (USD 0.386) and between RM0.8 and RM0.95 per kWh (USD 0.251 and USD 0.298) for large scale developments.However, at the same time the government has introduced a quota of 40-50MW of solar projects for 2011 to 2012. Such as small quota will not provide the economies of scale that are required to bring down the overall costs of solar power.

While governments have several mechanisms available to them to promote the development of renewable energy, such as customs and duty exemptions or corporate income tax holidays, the level of FIT appears to remain the predominant incentive for investors. Nevertheless FITs still need to be part of a bundle of carefully balanced measures taken by governments to demonstrate the commitment to solar power necessary to make it a viable renewable energy source for the future.

John Yeap is an Energy lawyer and heads the Energy practice in Asia for international law firm Pinsent Masons. Clare Watson is an associate with the firm.