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Investing in Low-Carbon Asia

2017-08-07

With energy demand expected to double in Asia by 2030, and with a billion people currently without electricity, Ankur Sahu, co-head of Goldman Sachs' Merchant Bank in Asia-Pacific, says that renewables fill a crucial gap in the marketplace. Investors have been faced with ample opportunity, he says, so much so that an industry previously thought as niche has rapidly broadened to include large institutional investors -- even in emerging markets.

This podcast was recorded on August 1, 2017.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. The views and opinions expressed herein should not be construed as an offer to buy or sell any securities and such views/opinions may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2017 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is it ages. Goldman Sachs, where we discuss developments, curly, shaping markets, industries in the global economy, on Ewart, global head of corporate communications here at the firm One billion people in Asia don't have access to electricity. Meanwhile, energy demand in the region is expected to double by two thousand and thirty. So perhaps it's no surprise that AJ has won the most forward thinking regions when it comes to renewable energy technology. My guest today auger saw who is the co head of our merchants Bank in Asia, Pacific, which means he invest the firm's own capital, as well as that of our clients. Beneath some of the work that private equity firms do augurs here to talk about how renewables are increasingly a major this of his team portfolio anchor walk into the problem. Thank you, Jake. It's a pleasure to be here. Before we get into renewables. In the story of renewables in Asia, or they can be useful
for our audience dear little bit about how the front thinks belts merchant bank more Hardly had you identify high quality investments. Once you ve made those investments. What's Goldman Sachs relationship, like with those companies chore Goldman Sachs being a pre eminent Martian Bank globally has relationships with institutions corporate lines, as well as entrepreneurs and other individuals men meant or other wealth management clients. Those relationships and providing solutions to that community, where, sometimes there is need for risk capital that the farm is willing to deploy work alongside these institutions and individuals and that really the key role of motion back so we said, Tween these investors and oftentimes gin, entrepreneurs, and play an intermediary raw. Yes and at times, the solutions that the public markets may offer may not be sufficient. and for the needs of
client and that's where historically, we ve been there with our risk capital providing an investment Sure you do institutional clients at the same time, for the former Belgian an hour institutional investors looking at the renewables based environmental space little differently these days? Yes, there has been a shift where originally. This was more of our development. Higher risk with unstable policy ridge. Jameson higher lines and subsidies, it was more private, equity, longer term capital, but what's happened in the last sort of decade, this issue The two more of standard hi crowed market and that attracted a lot of traditional large institutions. Ministers, as well as young players, why is renewable energy immerse is an area of focus for you and your team, but I think stepping back historically farm energy has been an area of great sort of history into investing in success and with its upstream all the way to downstream
and within that I think even going back ten plus years, we had done stuff in the. U S on the renewal side in Europe and to some of those learning demand in Asia is so strong and with the pollution and climate impact, I think renewables were soon emerge. To be a very good solution. The key When perception was that it's a trade off, you can have clean energy or economic growth, but ultimately and if you look at various factors, not just for the good of the environment. There's lots of other reasons why today it actually is bad to do renewables to facilitate growth. As opposed to a trade off, Surely it was all subsidy driven, but today it's a very much a competitive, so to the needs and what we saw was. economies in Asia, where one of the few economies that other supplied demanded mismatch and that's where renewables could play the plug
and its played out in that manner. But that was the original thesis. I think there's motivations for governments beyond just doing good, or the environment. So going Lubeck deeper on India, premised remote ease, articulate a very ambitious target of a hundred five gigawatts and renewable energy capacity by twenty twenty two just five years from now so its currently it about forty, six gigawatts. How does it the plan on reaching that goal. That's a good it does? Look ambitious when you just look where we are and where we need to get to. But if you'd sort of break it down, what that means is wind capacity needs to grow, twenty percent a year, solar needs to grow for falls and rooftop has most amount to grow from where it is today now twenty per. grows for wind is not that aggressive a target given where things have been historically and for soul If we just look at the last three years, amount of growth that has happened in the pricing. Come down because of panel pricing financing structures, today,
Solar in India is at parity or even better and competitive then terminal once fully installed gallery yes and frankly, solar today is the lowest costs across most of the world. So. to me with that kind of most dynamic the government that was actually very excited because their achieving their goals of electrification across hundred percent of India with out providing subsidies and the whole shift has moved from Feed and tariff to competitive bidding now and be bidding very aggressive. I think the pendulum has swim too far, where is to be more rationality of economics. Us that investor will keep it sing, but certainly from our growth perspective, renewable I feel, will get to where it is. In fact, this talk that by twenty thirty four percent of India's generation would be renewables. China we talk about briefly, is in a unique position of being the world
largest clean energy producer show people that now but it's also a large to user of greenhouse gases, which progress means that big, more than anything else with the withdrawal of the from the Paris agreement. China's also taken out bit of a global leadership role renewables. How might that manifests itself going for a more opportunities? Does that Ford for investors, I would go back to win. The Paris of course happen in China and Susie signed up. I think the driving There was not so much saving the climate and the environment, but rather China sees an opportunity to a solve the pollution issue. we should primarily driven through coal and thermal generation. Secondly, they saw was the whole were signing up to renewables and then seeing tremendous new export opportunity. China's the biggest manufacturing juggernaut in terms of PV cells or wind turbines and to them was a job creation.
opportunity in a new sector that wasn't there in the whole world signing up to it. So there was economic benefit there. Lastly, I think energy security, not relying on importing fuel and again putting pressure on the currency and balance of payment. So all those curse. Combining China has been very savvy about signing up and being enthusiastic now with the. U S pulling out, they are over continuing because of the reasons I mentioned, but also leave the whole world starts to renege or not enthusiastic support. The Paris agreements, then the whole, manufacturing market and opportunity becomes less so in some sense, letting the other Compelling reasons for China made diminish also, having said that, I think the trains, the station in China, the goal of reaching twenty percent renewables by twenty thirty
the expectation is they will overshoot that significantly and continue to be the leader and manufacturing other opportunities for foreign investors. Their tradition has been a tough market support for foreign investors working through a gene. The, but there are still some investors that have done quite well in China in certain sectors. Where is this sector? Look like you, I think Historically, even the farm has participate across the value chain, from policy lock onto PV cell components, to cells, to winterbourne, components to energy generation and then destroyed Shannon and maintenance. I think the key in China is timing, because if the market is mature, then there's enough local financing support local, investor support and then its harder for outsiders to come in, but its higher risk areas that are now Proven and that need higher risk appetite than those places still remain very open, but today, going into
tv manufacturing or wind turbine manufacturing adding that industry China's already become the leader. They don't need capital from Russia. The World challenges remain where there is a mismatch between where the demand is on. The east side were says where the law the generation might be in the interiors and there's not the grid, connectivity transmission lines to get power from whereas mean generated towards needed and there's a lot of investments going into that area. But still there tremendous power curtailment almost five do some cases. Twenty five Santa Power generated is wasted So that's an area that the government's focused on how might them noble straight fit into some of the ambitious infrastructure projects and other growth initiative. The chinese government's pursuing the whole strategy of not finding new growth opportunities for its industry. Does that I building infrastructure by creating demand they actually can sell more chinese technology products, goods to the countries that need it not
like what happened after world war. Two in the U S invests in Europe have slowly, I do have a strong market operates on goods, and I do think renewable will be a big part, but I think give in of early stage of development for a lot of the whole region that they're looking at, I think thermal will also play a big pardon, hydro and others, but clearly now, given the capacity they have an infected some points. Overcapacity but will continue to play a bigger role that your based in Tokyo, in Japan is a pretty interesting case when it comes to renewables, topsy much mature economy than China, India, and allowed diverse facts and faction. Since Fukushima it's been moving away from nuclear power which was later on in some ways What challenges and opportunities does Japan present for the investor? You know after the earthquake it again became supplied, demand imbalance, economy where there were more demand and supply, because all the nuclear reactor shut down and nuclear was a big part of japanese production capacity.
today, only three gigawatts out of fifty or are operational, and while there is talk of getting more up and running? I think the local opposition and the citizen opposition is very strong. I'm not sure how much without will come on. They ve been me not gap with importing. And Ellen, and I think that, still more, that's not a great long term strategy, scope pressure. So again, Japan has ambitious targets under renewables, getting to twenty two percent by twenty thirty verses in a four or five percent. Today we think- and I think the expected and is that they will overshoot that particularly on the solar and rooftop solar side, also finding that the cost of capital has come down where initially they had to provide heavy subsidies, Japan subsidies or some of the highest, but they ve been. reducing that in line with the reduction in equipment, pricing and today
I think there is a lot of investor demand. Ye oriented investor demand who would fund these projects at three four percent yield, and that creates an invite and a further growth. So I think Japan the great environment, I think the cost capital probably doesn't make sense for a lot of foreign investors to come in now There are innovation and technology side. I think battery technology is called in court. holy GRAIL, where, if that solve than that, actually makes her it was even more attractive, is the store addition distortions yap? with residential, as well as for utility and lot of japanese companies are focused on that, and so I do think they'll be innovations on that side. For Japan, alongside batteries for these and other things a global emissions standpoint, the country feed talked about the most impact for, but the regions also home. To someone, smaller three dynamic economies to the Southeast Asia. What countries in sectors stand out to you there. In this space,
again, I would say, Southeast Asia, as a group, has made progress however, when you compare that too, like the investment in solar last year in South EAST Asia was one billion verses, closer twenty in China and ten billion in India. So that's the magnitude of the growth in China and India versus South EAST Asia. There still Paul see shoes, there's bank. the shoes on whether a power purchase agreement EPA has seen enough standing for global capital to get there and What it is is in agreement with normally lady or a government entity where they are. To buy power at a certain price for a long period of time. Sometimes it can be twenty five years or twenty years, but their long term, so that, against that you can raise financing and with equity, you can actually make decent return.
If, for whatever reason, the promised amounts are not delivered when you deliver the energy than the whole cappel structure breakdown I think there needs to be a lot of work done both on policy and economics and financing structures to enable the growth in those economies. So, throughout all the country they talked about their very different approaches, as a reference by the government's terms of incentives, mandates what models work best in. View with this global view, you have and the ability to look at different markets. How important do you think are incentives? in facilitating the transition to a low carbon economy. Critical in some of the charging countries we talked about, so I think the key is facilitating. I think it's very important to facilitate the transition, because otherwise it's hard to get people to come in initially the government may be, has to step up and I'll take in deserts ample place where, from a very small base, its going to a very large base and the Gulf
Actually proactively came aggressor with incentives, but very quickly. They saw there was demand for investing in the country, and now they switched to competitive bidding Ultimately, I feel compelled Bidding without subsidies is the way to go, and what that has done is dramatically reduce almost fifty percent. The price that the f I d regime was worse is what's been better today now. I think it's gone way too aggressive, because people are assuming continual fifteen percent decline, equipment prices, which I think this year. It won't be the dramatic and also innovative financing, long term structures and ethics etc. Hedging, so I do think It's gone way to the other side, but net net. It's still cheaper than thermal, so in some sense that it's a great experiment of how a government can transition from a male. Are more based economy and energy regime to now going to be merely renewables,
What are some of the more nascent technologies that you're watching that could ultimately deliver better economic growth and help reduce emissions or industries might be the risk of disruption on either side of you look at the broad spectrum of what else you doing in terms of penetration in the whole lighting market- and one interesting fact, is that Pretty soon renewables as a share of global energy production will be ten percent verses commerce, today's eight percent of retail, so gives you a perspective on how much the penetration is going deep into these markets. clearly there is a lot of talk about the with battery pricing coming down. That mark is expected to continued explode and seen innovators there and Tesla and others who have done really well now, everyone sort of trying to find their own solutions there. We talked about the storage, and today the pie produced by renewables as not uniform, so
son, it produces when it's dark a dozen now she could store and use when it's not sort of producing, then that's a pretty disruptive change and lot of innovation. I expect to comment types of technologies and then there's offshore wind there's some technologies that innovative Silicon Valley companies are doing, for example, generating energy through kites that fly and the sky and there's all sorts of innovative things that people are trying to do too. See how they can harness natural energy. So, with any growth sector in any industry the impediments to growth and sometimes talent. Raw materials, and perhaps just a sheer technological issue, wonders the biggest constraints on renewable growth in Asia. Ultimately deed growth, I think, is here to stay. There needs to be enough returned for investors to continue
thus and continue their growth? And so there needs to be a balance between reducing price for power, verses, making, sure there's enough economic return, a policy shift. You ve seen what happened in the? U S went from signing the greatest accords to pulling of it in a matter of a few years and just don't like uncertainty, stability. Things like if peoples changing the agreements for purchase like the ppm we talked about if a government change then says, I'm not gonna honour that adding that's a disaster for investors. So having stability in policy continual tat oh gee innovation leading to reduce pricing, so the history of the twentyth century, particularly in the industrialized world, was one of very carbon intensive economic growth. Is it reasonable to say that further emerging economies of the twenty first century, the economic, It can really rest on low carbon technology and why
has to happen from both the policy to technological standpoint, to make that more of a reality yeah I certainly believe that low carbon technology will be the defining feature this century and you're already seeing that in early in noble power in ease stories, bad he saw all of is even a decade ago, was not to the level where it is and today adding the penetration of these traditional industries very high. And there's a lot of new sort of entrance and disruptor. So I feel the shifting already started in its here to stay, and it's actually not just good the environment but makes better economic sense on that helpful, notable wrapper problem thanks for joining us. Thank you Jake. It's always a pleasure. That concludes this episode of exchanges of Goldman Sachs subjects
you weren't. We hope you join us again. Next time this bought gassed was recorded on August first, two thousand seventeen, this pod cash should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to the listener
the views and opinions expressed here and should not be construed as an offer to buy or sell any securities, and such views and opinions may differ from those of Goldman Sachs. Global investment, research or other departments are divisions of Goldman Sachs and its affiliates. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast, or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this pod cast. In addition, the receipt of this pod cast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too that listener, nor to constitute such person a client of any Goldman Sachs Entity,
Transcript generated on 2021-10-13.