Asia changes its energy mix

Consumption of fossil fuels will eventually diminish – but not for many years

1 November 2021 Joseph Incalcaterra, Chief Economist, ASEAN

How close the world comes to net-zero emissions will depend largely on Asia. The region is a driver of global growth but has a coal-heavy power sector. The world’s 130 most-polluted cities are all in Asia – largely the result of energy policies. But the continent is also vulnerable to climate change: it has 75 per cent of the cities that are most susceptible to rising sea levels.

As the region recovers from the pandemic, the focus is turning to energy transition and decarbonisation, with 11 nations setting some form of net-zero target. But fossil fuels – especially coal and gas – will remain important for several years, despite substantial investment in renewable energy.

Electricity is key to a net-zero future. It currently accounts for less than 25 per cent of Asia’s final energy consumption but could be the majority source by 2050 as electric-vehicle use soars and grids connect more consumers, particular industry.

At present, coal dominates Asia’s electricity generation and contributes 65 per cent of total emissions – 72 per cent in mainland China. Grid limitations and unstable production limit the use of renewable energy.

This helps explain mainland China’s power crunch. Droughts restricted hydroelectric generation, requiring more coal to meet high demand, but bottlenecks in mainland China, India and Indonesia – the largest producers – led to record prices and power curbs. India and Vietnam have similar problems and also turned to coal.

Chinese consumption should peak in 2024 and Asia in 2025, but coal looks set to remain an important electricity source well into 2030. An earlier peak would mean retiring plants prematurely, which might require public financial assistance for the private producers.

Mainland China’s long-term coal production is unlikely to increase substantially because Beijing has reaffirmed its decarbonisation targets despite growth headwinds. But imports will continue, as they will in India, despite state producers boosting output.

Indonesia, as the world's largest exporter, is the beneficiary and we expect prices to remain high, helping the national finances and its trade balance – though prices may ease after 2023 due to growing Indian production and sharply falling Chinese demand.

Natural gas is already the main source of electricity generation in Thailand, Bangladesh, Japan and Korea, and demand is rising significantly in mainland China, Vietnam and Malaysia. But its price has spiked too, largely because of rising demand in Asia, which is unlikely to peak until 2035 or later.

While this demand is boosting the region’s three net exporters – Australia, Malaysia and Indonesia – declining reserves mean much of the region’s supply will have to be sourced from outside Asia.

An ongoing surge in renewable capacity will eventually meet most of the growth in electricity demand until 2030. Mainland China is on track to add nearly 1,175GW before then, roughly 130GW per year – equivalent to Germany’s entire current renewable capacity – and India has a target of 450GW of installed renewable capacity by 2030 too.

But elsewhere, progress has been mixed. Announced additions in renewable capacity in Vietnam, Malaysia and Sri Lanka are below targets, and Indonesia’s low public investment into renewables suggests the private sector must carry much of the financial burden of the energy transition.

A fresh policy push across the region is necessary to accelerate capital expenditure, including regulatory clarity and more assertive fiscal support to close the financing gap and offset negative factors faced by traditional energy sectors represented by entrenched interests.

First published 18th October 2021.

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