The Philippines Emerges as Southeast Asia's Clean Energy Leader
Dear Investors,
The Philippines has surged ahead of its Southeast Asian neighbors to become a regional leader in planned clean-power projects, according to Bloomberg. This impressive leap is due to fewer investment restrictions and eco-friendly policies that are attracting both domestic and foreign investments.
Key policy changes, including allowing full foreign ownership of renewable energy projects, have significantly boosted the country’s clean energy sector. This has resulted in a robust pipeline of 99 gigawatts of wind and solar projects, enough to power all households in the Philippines. This figure surpasses Vietnam’s 86 gigawatts and is approximately five times Indonesia’s capacity.
The transition to renewable energy in coal-dependent nations like the Philippines is crucial for achieving global net-zero targets and mitigating climate change impacts. However, many middle-income countries face challenges in balancing the move away from fossil fuels with rising energy demands and economic growth.
Currently, only 3% of the Philippines’ ambitious renewable energy projects are under construction. Nevertheless, this is a significant step towards increasing the share of renewables in the country’s energy mix to over a third by the end of the decade, up from about a fifth today.
At a recent clean energy forum in Manila, companies like Oslo-based Scatec ASA expressed optimism about the Philippines’ potential. Unlike other regional markets plagued by funding and regulatory issues, the Philippines offers numerous growth opportunities, according to Scatec CEO Terje Pilskog.
Other notable companies involved in the Philippines’ renewable projects include Japan’s Advantec, Singapore-based Vena Energy, and local firms SP New Energy, Citicore Renewable Energy, Repower Energy Development, Alternergy Holdings, and Raslag.
Successive governments in the Philippines, Southeast Asia’s second-most populous country, have eased restrictions on large-scale power projects. Recent initiatives include an offshore wind development strategy, tariff and tax incentives, and opening the renewables sector to full foreign ownership. These measures have spurred a 41% increase in clean energy investment, reaching US$1.3 billion in 2022, according to BloombergNEF.
The growing interest from renewable developers is attributed to falling equipment costs and increased familiarity with building and operating facilities within the domestic power sector, says Lawrence Fernandez, head of utility economics at Manila Electric Company.
Unlike many of its neighbors, where state-owned entities dominate the power markets, the Philippines allows private firms to participate in electricity generation and sales. This environment fosters innovation and attracts foreign investment, as noted by Ramnath Iyer, research lead for sustainable finance in Asia at the Institute for Energy Economics and Financial Analysis.
Additionally, the Philippines has mandated that electricity suppliers increase their renewable energy output by at least 2.52% annually from 2023, up from 1% in 2020. This policy, according to Eric Francia, CEO of Acen, is crucial for motivating further renewable energy development.
While renewable energy investment is expected to rise across the region, the Philippines and Malaysia are projected to lead this growth, according to energy data and analytics firm Wood Mackenzie.
Despite these positive trends, the Philippines faces challenges such as extending transmission lines across its more than 7,000 islands, expanding grid capacity, enhancing storage, and streamlining land permitting processes. However, policy certainty has allowed the country to leapfrog its peers, according to Ramesh Subramaniam, director general at the Asian Development Bank.
Even with Vietnam and Indonesia receiving substantial funds from G7 Just Energy Transition Partnership deals, their progress is hindered by regulatory and technical issues. This scenario positions the Philippines as a key player in driving renewable energy growth in Southeast Asia.
The country’s success in this sector is not guaranteed. Effective execution is critical to prevent project delays and ensure sufficient grid capacity for power distribution, emphasizes Iyer. “The auctions have been done, projects have been awarded. Now the work has got to be done,” he says.
How has the industry performed?
The chart below shows that the total earnings and revenue of the 12 publicly traded companies that comprise the Philippine renewable energy industry grew by 23.5% and 15.9% per year, respectively, over the past three years.
The industry’s total market value, however, declined by 2.2% per year over the past three years. The industry is currently trading at a price based on earnings ratio, or PE, of 8.8x, which is lower than its 3-year average PE of 13.3x. This indicates two things:
Investors are pessimistic about the industry’s future earnings growth rate. They are expecting it to be slower than in the past. This is likely as analysts are forecasting an earnings growth rate of 12.7% per year over the next three years, which is slower than the previous three years’ earnings growth rate of 23.5% per year.
The industry is potentially undervalued.
What does this mean for investors?
For investors, the Philippines’ leadership in Southeast Asia’s planned clean-power projects signifies a promising yet challenging investment landscape. The country’s progressive policies, including the removal of investment restrictions and incentives for foreign ownership, have created a fertile environment for renewable energy growth. This, coupled with a robust pipeline of wind and solar projects, positions the Philippines as a key player in the region’s energy transition. However, the sector’s under-construction rate and infrastructure challenges highlight the importance of effective execution to capitalize on these opportunities. Despite a dip in market value and investor skepticism about future earnings growth, the industry’s lower-than-average market value suggests potential undervaluation, presenting potential buying opportunities for discerning investors.
I hope you found the content insightful and useful.
I wish you profitable returns on your capital.
Eric, The International Investor