CIAO DATE: 05/02

Renewable Energy Investment And Technology Transfer In Asia
Report of a workshop at RIIA on 7 May 1998

Tim Forsyth

The Royal Institute of International Affairs

October 1998, Briefing No. 51

Introduction

This workshop was arranged by the RIIA under the sponsorship of the New Energy and Industrial Technology Development Organization (NEDO) of Japan to explore ways of increasing international investment in renewable energy technology in Asia. Enhancing renewable energy investment is clearly relevant to global strategies to mitigate climate change. However, the two debates on climate change policy and renewable energy investment have largely remained separate, and characterized by tendencies to discuss large-scale global flows of energy and investment on the one hand, and local development-oriented practice on the other. The workshop attempted to integrate these two debates, and therefore form part of a growing body of knowledge to inform the current climate change negotiations with practical options available to small and large businesses.

The workshop had three main aims:

• to identify the implications of the Kyoto Protocol for international renewable energy investment;
• to define technology transfer and identify how it may be increased for renewable energy in South and Southeast Asia;
• to assess what public and private forms of finance could be sought to ensure the success of renewable energy businesses in South and Southeast Asia.

  The workshop was attended by some 30 industrialists, financiers and renewable energy specialists from around the world. This paper is a summary of the proceedings. In order to encourage frank exchange, the workshop was held under Chatham House Rule of confidentiality and anonymity, so individual speakers are not named.

Renewable energy investment after Kyoto

The workshop started with a discussion of investment opportunities following the negotiation of the 1997 Kyoto Protocol to the UN Framework Convention on Climate Change (UNFCCC). The Protocol had created a ‘motor’ of investment activity by providing legally binding commitments among the developed, or Annex I, countries to reduce greenhouse gas emissions by an average 5.2% by 2008–12. The most obvious way to achieve these reductions is for governments to undertake energy-or carbon-saving activities within countries, or to participate in emissions trading with countries that have over-performed on emissions reductions. In addition the Protocol (Article 12) created the Clean Development Mechanism (CDM) in which Annex I countries can achieve part of their required reductions by paying money to finance climate-friendly projects in non-Annex I (i.e. usually developing) countries. If funds from the CDM could be used for renewable energy development in non-Annex I countries, then this would effectively subsidize and boost investment.

The Parties to the Convention were still negotiating the eventual form of the CDM. In particular, it was still unclear which projects would be permissible under the fund, and who would decide on its implementation. On the one hand, the USA was keen that the CDM is acted upon as quickly as possible, and that it incorporated projects currently listed under Activities Implemented Jointly (AIJ) (see Box 1). The World Bank had also stated that the rapid incorporation of existing projects – and even backdating their impacts on climate to when they were started rather than at present – would accelerate investment in the CDM.

Box 1: JI, AIJ and the CDM

The term Joint Implementation (JI) has been used since the signing of the UN Framework Convention on Climate Change (UNFCCC) in 1992, to indicate climate change mitigating activities undertaken by one country in the territory of another. The basic rationale for this is that JI could be cheaper than achieving equivalent emission reductions domestically. However, critics have claimed it allows investing countries to achieve greenhouse gas reductions without needing to act at home, and also may be inefficient for mitigating climate change because estimates of savings achieved are uncertain. Furthermore, developing countries have also claimed that most proposed JI projects have focused on reforestation which interferes with local agricultural development and does not assist host countries with industrialization.

The term Activities Implemented Jointly (AIJ) was introduced after the first Conference of the Parties to the UNFCCC in Berlin in 1995. AIJ was intended to be a pilot phase for JI, and included cooperation on a general basis between Annex I and non-Annex I countries for climate change mitigation. However, no such action was to be credited against any forthcoming national required reductions in greenhouse gas emissions. Since its launch in 1995, some AIJ projects have proceeded – notably in Costa Rica – but most of these have been forestry-related and only in a selected number of countries. However, the general consensus is that without the incentive of crediting few projects will be submitted.

The Kyoto Protocol of 1997 allowed full JI with crediting between countries in Annex I. In addition, it also created the Clean Development Mechanism (CDM) in order to allow climate mitigating investment in non-Annex I countries in return for crediting against national reductions targets. Many observers have argued that this is equivalent to allowing full JI between Annex I and non-Annex I countries. Since Kyoto, the World Bank and the USA have also called for the inclusion of existing AIJ projects under the CDM, and even asked that the crediting for these projects go back to the time of their inauguration – effectively overturning the statement at Berlin that AIJ would not be credited against national targets.

See EEP Climate Change Briefing Paper No. 7: Joint Implementation and Technology Transfer – Joint Benefits? (RIIA, 1997).

However, these proposals are stiffly opposed in the developing world. JI has been resisted by developing countries on the grounds that it represented an attempt by Annex I countries to avoid the need for expensive emissions reductions at home. Furthermore, many JI/AIJ projects have focused on carbon sequestration through forestry or reforestation, rather than addressing developing country demands for technology transfer. The creation of the CDM at Kyoto was controversial too, because it had been based on a Brazilian proposal for a Clean Development Fund (CDF) which sought to fine Annex I countries in the event of their failure to achieve national obligations. Instead, the CDF had become the CDM at Kyoto during the last few days of intense negotiations, and the original intention of creating a punitive device for Annex I countries was transformed into a mechanism to allow Annex I countries to achieve their obligations through investment in projects in other countries.

The full details of the CDM are currently being debated, and it is hoped that many issues will be clarified at the fourth conference of parties to the UNFCCC at Buenos Aires in November 1998. Important sticking points include:

• whether the CDM will start crediting projects before or after the agreement on scientific baselines to measure the impact of projects;
• whether the CDM will incorporate existing AIJ projects and guidelines, or be channelled into a more specifically technology-oriented investment fund: the USA is urging that the CDM accepts sinks as potential projects, but Article 12 of the Protocol makes no mention of sinks;
• the composition of the CDM Executive Body;
• the proportion of Annex I emission reductions that may be achieved through the CDM.

The workshop’s second speaker was a senior climate change negotiator from the developing world, and highly involved in the technological aspects of the UNFCCC. He reiterated that technology transfer has been a long-standing requirement of developing countries, and that it has been made an essential part of international agreements such as the UNFCCC and Agenda 21. But despite these agreements very little progress has been made in providing developing countries with the technology necessary to mitigate greenhouse gas emissions during industrialization. The usual explanation for this failure has been that much environmental technology is privately owned, and therefore it is difficult for international agreements between states to force companies to share their own property. The speaker argued that the CDM presented an ideal opportunity for increasing technology transfer by integrating this with subsidized investment, and that therefore the mechanism should not become simply an extended version of AIJ. He also suggested that the UNFCCC’s Subsidiary Bodies for Technological and Scientific Advice (SBSTA) and Implementation (SBI) should ‘kick-start’ the process of technology transfer and ensure that the CDM was adequately informed to take on this role.

The final speaker in this session – a regional economics specialist – outlined how investment in general may be affected by the financial crisis in Southeast Asia. He said that much had been predicted about the impacts of the crisis, but little was actually known. Perhaps the best models for understanding the crisis better were similar problems in Mexico during 1982 and 1994, which created short-term adjustments but no long-term decline. However, the speaker noted that long-term economic growth in Asia would be likely to be less dynamic than before the crisis, and that impacts would differ in each country. China, for instance, had largely survived the crisis because it had already devalued its currency in 1994, while Indonesia faced political as well as economic uncertainty.

For energy investment, the crisis represented a variety of impacts. States would have less money for large infrastructure projects such as grid extension or publicly funded large hydropower schemes. But it was also likely that many innovative projects such as renewable energy investment might be axed because they were seen to be peripheral to government priorities. It was important to note that the crisis was one of economy and governance, and so at a time when most energy markets were liberalizing in Asia, the economic downturn might in fact increase the privatization of energy production, but lead to the entrenchment of state electricity utilities as coordinating bodies. These trends might have negative impacts on international investment in decentralized renewable energy development if there were no attempt to break the emphasis on centralized planning and control. The crisis, however, would probably boost measures of demand-side management and other so-called ‘no-regrets’ measures of energy efficiency.

Technology trends and transfer

The workshop then began to identify the more localized and practical impacts of investment and technology transfer in Asia. Two key forms of technology transfer were identified: vertical, or point-to-point investment or relocation of new technology and management skills; and horizontal, or diffusion of investment, which was often associated with capacity building for transferring skills from investors to local populations. It was noted that the second form of transfer was often necessary in order to ensure the long-term success of point-to-point investment.

The first speaker represented a Japanese organization which produced advanced technology ready for export to the developing countries of Asia. He stated that photovoltaic (PV) technology was now at a stage when mass production and distribution could provide renewable energy at relatively low cost to new locations. PV technology represented a good example of vertical technology transfer because it was generally not manufactured locally in developing countries, and it therefore encouraged manufacturers to distribute it through their own internal networks and subsidiaries at low cost, rather than by using local intermediaries. One potential application of PV technology was in decentralized rural electrification, or the so-called ‘zero emission village’.

The second speaker came from a developmental research centre in Southeast Asia, and adopted a more critical approach. He questioned the relevance of concepts such as renewable energy and global environmental policy in rural areas of Asia where villagers were more concerned with rural livelihoods and base-level income. He stressed that macroeconomic analysis of the financial crisis in Asia was not useful for understanding rural renewable energy because demand for this came from rural households, which were often disconnected from large-scale impacts on GDP. As a result, renewable energy technology transfer in rural Asia depended on a blend of market creation from below and market penetration from above by the private sector.

The speaker argued that the key way to increase the adoption of renewable energy was to ensure that local users could harness the technology to make profits. This could be summarized briefly as a ‘government-enabled market based approach to rural energy development’ (GEMBASED). Funds should be used for enabling factors such as capital costs, market infrastructure and training, and not for non-productive items such as institutional capacity and the downstream costs of investment. Unfortunately, he claimed, the main activities of large intergovernmental funding agencies had gone into the latter and not the former. Microcredit institutions or non-conventional NGOs could help facilitate local development when government or private-sector actors were lacking.

The third speaker, from an energy research institute in India, focused upon governmental programmes. India is often regarded as an example of a proactive approach to renewable energy, with its own ministry of alternative energy and many examples of local technology development. In fact, the speaker argued, the government took only a half-hearted attitude to renewables. The renewables programme in India suffered from inadequate integration into the energy planing system. Two instances were cited. On April 25 1998 the Indian government promulgated an ordinance creating the Central Electricity Regulatory Commission, thereby changing the pattern of regulation of the electric power sector in India, established fifty years ago in 1948. It was noteworthy that despite the forward-looking nature of this ordinance, which established independent regulation on the US pattern, the promotion of renewables was not explicitly included as one of the objectives of the Commission. A similar disregard for the potential for renewable energy was evident if the expenditure on subsidy was analysed. For example, the Indian government spent $1.5 billion each year on subsidizing kerosene. The ostensible reason for this outlay was that kerosene was the lighting fuel of the poor. However, subsidy leakage was widespread. A similar outlay on popularizing solar lanterns instead could both meet the lighting needs of the poor, targeting the subsidy better, and also generate a sizeable renewable energy appliances industry. Government plans for rural grid extension were also widespread, and consideration of possible decentralized options largely absent.

The workshop discussed why such failures of planning might occur. It was pointed out that a catastrophic failure in quality standards during the 1980s had led to the failure of some 90% of new PV in India. It was suggested that ‘dumping’ of outdated or below-quality technology through international trade was a common problem, and had to be anticipated in trade agreements.

The last speaker in this session – from an international energy consultancy – discussed case studies of renewable energy investment and technology transfer, and argued that technology transfer often failed because investors did not ask the question what to transfer, and how. The key difficulty was in choosing which features to develop in the host or investing country.

Two case studies were explored in depth. The first company, Heliodynamica, was an indigenous Brazilian manufacturer of PV which established a fully integrated manufacturing process during the 1980s. This investment eventually failed because it did not secure partnerships with other manufacturers and distributors locally, and because its initial large investment was undercut by aggressive pricing from importing competitors. As a result, the company’s products soon went out of date.

The second case study was of IT Windpump developed by IT Power of the UK. This company exported the manufacturing technology of windpumps to Kenya, Pakistan, South Africa and Botswana, and then sought partnerships with local companies with similar aims, and created jobs at the local level. The next stage is to assess new products and markets in China, India and Zimbabwe. The lessons of the two case studies are summarized in Box 2.

Box 2: Making technology transfer work

• Local partnerships are vital to ensure strength in marketing and distribution.
• Partners must have similar aims.
• Aid money alone is not a panacea: the market must exist beforehand.
• Investment must be made in support and management.
• New manufacturing must adhere to world standards.
• Investment, adaptability and patience are necessary.
• Sustainable programmes do not include technology ‘dumping’.
• Projects do not have to be large to provide large benefits.

A key point made by this speaker was that market research had to be undertaken before investment to assess how far host countries could absorb the new technology. Although an earlier speaker had suggested that there were one billion people in Asia without electricity, this was irrelevant without further information on how much of this billion were likely to be served most cheaply by grid extension, or had money to pay for services, and which technologies might be most successful in particular regions.

Similarly, investors had to be adaptable. In Mongolia, for example, the British wind generator Marlec had once agreed to accept yak skins as part payment for turbines during the early stage of business development. Perhaps the most important point was that management and entrepreneurial skills also had to be transferred in order to achieve maximum success in new technology investments. In effect, these lessons indicated that the most successful technology transfer involved vertical integration from global standards and expertise, and ensured that investors were not exposed by focusing specifically on one location. However, local horizontal integration was also necessary to ensure that investors were integrated into local markets and business practices, and could maintain market share against competitors.

Public and private finance

The final session of the workshop discussed available financing mechanisms for renewable energy investment in Asia. The issues here are complex and evolving. The traditional approach to investment has been to see it as part of Official Development Assistance, and also to seek funding for development on a project-only basis. The first speaker – from an international consultancy – explained that these old funding models were insufficient to build long-term confidence among both buyers and sellers of technology. Now, there were a wide variety of mechanisms for funding development.

Available mechanisms could include:

variations upon the old project finance model: Build-Operate-Transfer schemes and their varieties could ensure a short-term limited risk for both governments and investors, and lead to good projects if coordinated into long-term strategy.

International equity investment in local stock exchanges could also support renewable energy projects. Some Southeast Asian governments such as Thailand had already raised funds for electricity development through selling part of the state utilities, or shares of subsidiaries through international share sales, and this could also be done for renewable energy schemes.

International mutual funds specializing in sustainable development were also a new trend, and offered direct ways to invest in local equity markets.

Debt finance was another possibility, although to date very little of this had gone towards renewable energy, with the exception of some new venture capital funds being channelled into new energy through the International Finance Corporation (IFC).

The CDM was also an option, although there was a fear among investors that this might be unnecessarily bureaucratic and costly.

International aid or assistance from multilateral lending agencies was also considered, although the workshop agreed the Asian Development Bank had been conspicuous in not encouraging renewable energy schemes.

The second speaker built on this theme by discussing recent World Bank initiatives towards renewable energy development in Asia. He stressed that Asia was now the largest borrower from the World Bank, and that renewable energy schemes had grown in recent years. Much of this demand still came from large-scale hydro and geothermal projects, but the Bank was also keen to accelerate local decentralized schemes if these could be proven to be financeable. However, he was pessimistic after the Asian financial crisis, predicting a general rise in costs, including interest rates, and more uncertainty in future financial projections.

The third speaker explained the role of NGOs and market intermediaries in ensuring project success. He represented a non-profit-making development organization specializing in agroforestry and renewable energy in Asia. The speaker argued that the global trend to privatization in power production was bypassing rural areas, and that this opened new opportunities for public institutions to reduce credit risk, set development priorities, and in general establish an enabling environment for investment and technology transfer. An important part of this was to use privatization to develop new markets through careful cross-subsidization of rural electrification, rather than simply as a way to value state-owned assets.

It was also important to identify the different circumstances in which renewable energy may develop in Asia, relative to Europe, Japan or North America. For example, imported compact fluorescent lights in India were easily damaged because of fluctuations in current. It was therefore important to place investment not just in the new technology, but also in the management and skills to ensure a regulated electricity flow.

The speaker argued that an important need in facilitating private investment was to reduce the transaction costs of new investment. Lowering costs might include a variety of actions such as replacing expensive expatriate staff by locally hired experts, or linking project development with those activities that generated an ability to pay for the new technology. Again, the speaker reiterated that it was important to deal with real market demand for new technology, and that any subsidization should be conducted in a transparent manner.

The workshop then listened to two experts on PV and windpower development. The PV specialist urged the workshop not to forget the role of government schemes. These were potentially very powerful because decentralized rural electrification would avoid macroeconomic costs such as were associated with rural–urban migration, and increase local development. He therefore argued that the most effective way to accelerate renewable energy development would be to lobby government planners in order to encourage support for technologies such as solar heating systems.

The wind specialist – from the second largest manufacturer of turbines in the world – urged that technology transfer had to be approached from the perspective of investors. No investors were interested in technology transfer in its own right: instead policy-makers had to incorporate mechanisms to encourage transfer during usual business practice. This often implied joint ventures and long-term commitment to projects.

The last speaker discussed the role of new mutual funds specializing in sustainable development. She represented a UK finance company which had introduced such funds, and explained that there had been a global increase in demand for investment in sustainable development: between 1994 and 1998, there had been a growth from US$8 to US$150 million. Much of this money was coming in every month as a result of retail saving schemes, and so provided a regular flow of finance. The aim of the investment companies was to identify exemplary companies and support their activities in renewable energy development, energy efficiency, healthcare, multimedia, telecommunications, waste water management and mass transport.

Sustainable development investments represented a variety of exciting prospects, but there were still relatively few practical opportunities for investment. One important feature of the market, she noted, was that the Kyoto Protocol did not yet register among retail investors or many corporate managers. For this reason, renewable energy investment was not yet sufficiently attractive to retail investors. Similarly, retail interest in environmental investment in some countries of Asia also implied that investors often considered the best use of resources to be support for golf courses and parks, for example, rather than avoidance of long-term environmental degradation. There were also important differences between countries: Japan, for example, was considered to be a highly attractive opportunity for investing in renewable energy development, but Australia was surprisingly unattractive at present. Also, some liberalization programmes in developing countries were clearly not integrated with energy-saving schemes or accelerating renewable energy – a point made earlier by speakers in regard to India.

Conclusions

The workshop touched upon a wide variety of topics, and in many cases merely introduced the underlying themes rather than providing long-term answers. Some key conclusions, however, did emerge:

The UNFCCC refers mostly to horizontal aspects of integration, and government transfer, rather than encouraging the flow of private investment in new technology via vertical integration. Properly implemented, the CDM could accelerate vertical integration in renewable energy technology in developing countries. However, this depends on the willingness of the Parties to the UNFCCC to make technology transfer a requirement of the CDM rather than continued forestry projects under AIJ.

Technology transfer is highly complex and often misunderstood. The tendency is to see it as a simple transfer of new equipment from one location to another. However, for such direct relocation to succeed, it has to be accompanied by the transfer of management and entrepreneurial skills, which effectively equate to transferring businesses rather than just technology. The most successful forms of technology transfer involve a complex blend of both vertical and horizontal integration.

Concerning the impact on renewable energy development:

Ownership of technology: at the workshop it had been observed that the liberalization of energy markets was a necessary but insufficient requirement for building renewable energy in Europe. Additional requirements may include such regulations as the UK’s Non-Fossil Fuel Obligation (NFFO) which specifies that utilities buy a minimum proportion of electricity from nuclear or renewable energy sources. While it is now uniformly agreed that the NFFO has increased renewable energy investment, it has also encouraged foreign ownership of technology, and led to a greater competitive threat to UK manufacturers. Opening new markets to international investment under the CDM may therefore represent a threat to local manufacturers in developing countries. This could clearly be opposed by local governments, unless some mechanism in the Executive Body of the CDM could ensure the limitation of direct investment in technologies (such as PV) which are generally not manufactured locally, the protection of some technologies manufactured in the South (such as biomass equipment or biogasifiers), or could otherwise ensure a ‘level playing field’ between foreign and local manufacturers.

Which technology: the Japanese discussion of the ‘zero emission village’ at the workshop represented the optimism about technological solutions to climate change and rural electrification. Successful diffusion of such a concept would require careful attention to the issues raised by development practitioners at the workshop who urged that renewable energy investment be linked to local demand and local income generation. If not properly handled, direct vertical investment in rural PV might create a disproportionate demand on local spending power, and thus might even undermine some local renewables such as biogas. In some cases, simple subsidization of foreign PV investment could be uncomfortably close to dumping – which, as past experience has shown, fails in terms of long-term business and technology transfer. In these circumstances, the term ‘zero emission village’ would risk becoming controversial in the international negotiations when the main users of the technology are more interested in base-level incomes, and when similar ‘zero emission’ technology is not equally directed to more affluent areas of the world.

In terms of local implementation:

Government policy: the role of governments must not be underestimated, despite the trend towards privatization. Renewable energy investment may not always be justified in terms of local project economics, but it also represents an alternative to the large-scale macroeconomic costs of an imabalance in regional development, and so can still be seem to be within broad government objectives. Furthermore, the use of subsidies needs to be clarified and directed more towards rural electricity and renewable energy. Currently most subsidies are directed at indigenous fossil fuel resources, and often implemented in ways that distort investment opportunities and therefore erode the confidence of both buyers and sellers in the long-term attraction of renewable energy.

Finance opportunities: financial mechanisms are still evolving and are not yet assured of success. Old project finance models have been criticized for not being integrated into larger-scale investment. However, new retail-based mutual funds are insufficiently sensitive to the environmental or energy-efficiency attractions of renewable energy to provide an immediate boost to investment. Some other problems are caused by the varied rate and nature of privatization and liberalization within Asia, and by the separation of renewable energy options from liberalization plans. The current financial crisis in Asia is helping neither investor confidence in alternative energy plans, nor government willingness to decentralize control.

The role of intermediaries: evidence at the workshop indicated that intermediary organizations such as micro-finance institutions, or international non-profit organizations, may accelerate investment in renewable energy, and also ensure greater success in long-term technology transfer. A key principle is to ensure that such institutions are in tune with the requirements of both investors and local consumers, by lowering transaction costs and ensuring that renewable energy investment provides local income.

The climate change negotiations may indeed provide an impetus to renewable energy investment in Asia. However, this has to be undertaken on the basis of long-term commitment to developing renewable energy through policy measures such as the NFFO, and of fostering a constructive rather than destructive relationship between inward investment and indigenous industries. But, perhaps most importantly, ensuring the long-term success of investment and technology transfer implies addressing local market demands and investment structures rather than trusting in environmental concerns or technological benefits alone.

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Tim Forsyth was research fellow at the Energy and Environmental Programme at the Royal Institute of International Affairs until June 1998. He is now research fellow in Environment and Development at the Institute of Development Studies, University of Sussex.

The Royal Institute of International Affairs is an independent body which promotes the rigorous study of international questions and does not express opinions of its own. The opinions expressed in this publication are the responsibility of the author.