Climate change: Why hastening Asia’s shift to green energy will not be easy?
- Perceived risks to economic growth, delays in enacting green policies and reluctance to abandon cheap, reliable fossil fuels are slowing Asia’s transition
- Asia is central to the global green energy agenda, so efforts must include policies that help developing countries afford the shift
Even as world leaders at the recent UN High-Level Dialogue on Energy discussed steps to accelerate the global transition to green energy by 2030, there is little evidence that this shift will be fast enough in Asia.
According to a recent commentary by Fitch Solutions Country Risk and Industry Research, some US$1.26 trillion has been earmarked for projects in Asia’s energy and utilities sector, with over 94.5 per cent of that for power projects.
While the demand for power is poised to increase, it is equally anticipated that carbon-neutral commitments will accelerate the energy transition. The question is whether it will be fast enough, and at what risk.
Accelerating the green transition means potentially risking lower economic growth in the short term. Uneven access to vaccinations and waves of new Covid-19 variants have weakened the growth momentum across the region.
According to the Asian Development Bank’s updated outlook for 2021, the region’s economy is expected to expand at a slower rate than forecast earlier in the year. This trend represents a threat to Asia’s transition goals.
Increased perceptions of a trade-off between the green energy transition and income inequality accelerated by the Covid-19 pandemic are likely to reduce the buy-in from countries.
Aside from the tax revenue that mining and exporting fossil fuels brings, a crunch in power and electricity means a domino effect on other sectors, including manufacturing and technology. Therefore, even as governments commit to ambitious green energy road maps, coal and gas are likely to remain dominant in Asia.
Countries that rely on fossil fuels as their most economical and reliable form of electricity – and developers of these power facilities – have been affected by investors and financial institutions shifting away from the sector towards more sustainable financing for the future. This has been challenging, given its importance in developing markets.
While carbon prices have rebounded since their drop at the start of the pandemic, they are still well below the US$50 to US$100 per ton mark needed to bring forward the massive low-carbon investment required for climate change mitigation.
At the same time, oil majors have come to recognise the benefits of long-term stability of cash flows from renewables, which are reflected in BP’s plan to add 50 gigawatts of renewable energy capacity by 2030.
Renewables provide a hedge against oil price volatility and a response to pressures from institutional investors for environmental, social and governance standards. Even so, funding a shift to green energy is costly.
Also, developers and operators of fossil fuel power facilities have been affected by insurance challenges as the availability of capacity for the sector has reduced.
The increasing cost of capital has led some operators of these facilities who are not in a project finance arrangement to self-insure assets. Others who are in long-term project finance arrangements, or do not have the appetite to self-insure, face less choice and rising costs in an increasingly volatile insurance sector.
Furthermore, an increase in natural catastrophes and more volatile localised weather because of climate change have hit both fossil fuel and renewable energy projects and facilities. This has led to a greater need for more holistic solutions to help bridge the protection gap.
Despite the decline in access to funding and risk mitigation, the cost to generate electricity from coal-powered plants is still relatively cheap.
Except for a few countries like China, South Korea, Singapore and Japan, the rest of Asia has been slower to implement some sort of carbon pricing policies. These involve capturing the external costs of carbon emitted and shifting it to polluters through a tax, while rewarding those who help reduce emissions.
While access to capital might not be a critical issue for renewable energy facilities, the technological change that underpins green industries is not happening fast enough to displace coal. So far, most of the growth in the region has been attributed to solar, followed by onshore and offshore wind.
The potential growth of the hydrogen economy has led to much excitement and discussion as to how this can accelerate the energy transition, though its development is slow. Japan is leading the way in its development in Asia, with China and South Korea also stepping up their pace. Green hydrogen is projected to overtake natural gas as the clean fuel of the future.
Adoption of green energy sources requires more interest in the development of hydrogen, fuel cells, carbon capture and storage and other clean technologies. While protectionism during the Covid-19 pandemic is more evident around vaccines and food, it could also apply to the raw materials needed for a green economy.
Therefore, while the costs of green technologies are gradually falling, it is hard for firms to find the resources to devote to them when they are fighting the economic consequences of a pandemic.
With Asia accounting for about half of global carbon dioxide emissions, it is central to the global green energy agenda. Successful implementation and adoption of large-scale renewable energy relies heavily on robust policies that enable an appropriate regulatory framework to attract investors, as well as increased investment and speed in developing the infrastructure needed to support a more stable and reliable grid.
Given that, champions of a green global economy will need to be patient as countries in the region work their way through a long transition.
Nicki Tilney is head of construction power and infrastructure for Aon in Asia.