Insufficient momentum in Asia energy transition

Asia’s energy transition is underway but the pace has been insufficient to curb emissions. Reducing reliance on coal, accelerating the deployment of renewable energy sources, developing hydrogen and improving energy efficiency are areas key to lowering the region’s carbon footprint.

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Given its place in the global economy, Asia has a critical role in climate change mitigation and the de-carbonisation of the region’s energy system needs to be at the core. Asia is under increasing pressure to move faster on its energy transition as the global shift towards carbon neutrality accelerates. While the restructuring of the region’s energy system is underway, its pace has been insufficient.

"There has been a material rise in cancellations of proposed coal power projects in Indonesia and elsewhere.”

Phasing out coal

The stakes from climate change are high for Asia with multiple studies showing the region to be among the world’s most vulnerable. A crucial issue for Asia has been its energy system’s heavy reliance on thermal coal which generates the most carbon dioxide (CO2) emissions of any fossil fuel. Notably, while global CO2 emissions from coal have been on the decline, the same cannot be said for Asia. The reliance on coal in Vietnam, Indonesia and the Philippines has remained on an uptrend.

There have been some encouraging developments though. Vietnam has announced plans to either shelve or cancel some coal-fired power projects while the Philippines has announced a moratorium on new coal projects.

Phasing out coal will be more challenging for a major producer like Indonesia. Still, there has been a material rise in cancellations of proposed coal power projects in Indonesia and elsewhere.

A more challenging financing landscape plays a key role as traditional lenders are under increasing pressure to phase out coal financing. For instance, an increasing number of Japanese banks are tightening their coal finance policies or halting new financing for coal-fired projects altogether and South Korea has proposed legislative bills to ban financing of coal power abroad.

Accelerating renewables

There is a strong push on renewable energy sources in Asia with installations rising three-fold in the region (including China, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Thailand and Vietnam) between 2010 and 2019, outpacing the global average. Government policy, alongside falling costs, will play an influential role in determining the pace of the transition.

Still, the market penetration for renewables remains low in Asia. Renewable energy sources accounted for less than 8 per cent of Asia’s primary energy mix in 2019, some way below the global average of over 11 per cent. Regionally there is significant variation with renewables accounting for just 0.2 per cent of primary energy in Singapore but 15 per cent in Vietnam.

The World Bank’s Regulatory Indicators for Sustainable Energy (RISE) offer a guide to compare policy and regulatory frameworks. India and South Korea score best on this measure and, together with mainland China, are also the economies that have made more progress in recent years.

Indonesia and Malaysia have made relatively less progress but there are endeavours to boost renewables. Indonesia’s parliament is set to deliberate a new and renewable energy bill starting June 2021 that would help provide a stronger legal framework for the sector while Malaysia’s Net Energy Metering (NEM) 3.0 program announced at the end of 2020 is aimed at boosting solar energy installations.

Developing hydrogen

Hydrogen is rapidly emerging as a low-carbon fuel option to decarbonise the global economy. Its versatility as an energy carrier that emits no harmful emissions lends it to many applications including transportation, heavy industry and manufacturing. However, the most common production method of hydrogen is to split water molecules into hydrogen and oxygen and that requires significant amounts of electricity or a thermochemical reaction - using fossil fuels.

Global demand for hydrogen is expected to grow rapidly, underpinned by Japan’s decision to prioritise the use of imported hydrogen. Both Japan and South Korea have published road maps detailing the need for imports to meet domestic hydrogen targets. Demand in China, Japan, South Korea and Singapore could hit 11-56 million tonnes by 2040 according to consultancy firm Acil Allen.

Raising energy efficiency

Energy efficiency plays a critical role towards reducing energy emissions by alleviating energy demand and reducing the need for additional energy supply.

Energy efficiency can be calculated using energy intensity, a measure of the amount of energy the economy requires per unit output. Most of the region’s economies have made progress in reducing their energy intensity. Still, energy intensity in South Korea, China, Vietnam and Thailand remained above the global average in 2017 according to the latest available IEA data.

Based on energy efficiency RISE scores, the region as a whole has done well in terms of improving their policy frameworks in more recent years. The progress is reflected in energy efficiency RISE scores with notable headway made in the industrial and commercial sectors.

Attention will now need to shift towards strengthening policy frameworks and measures for energy efficiency, particularly in terms of encouraging the efficient use of energy in buildings, implementing carbon pricing and putting incentives and mandates in place for the utilities sector.

Clear direction

While some economies have made more progress than others, all have much more work ahead.

Still, recent policy signals are encouraging, with growing political will to make the transition to net-zero carbon. Net zero commitments in 2020 from some of the region’s biggest emitters – China, South Korea and Japan – mark a milestone and may spur others in the region to follow. Japan in April announced plans to double its target for cutting carbon emissions in response to the US’s own plans to halve emissions.

While individual economies are expected to flesh out detailed climate strategy plans in the lead up to the United Nations’ ‘COP26’ climate conference in November, an expanded role for both renewables and energy efficiency in future policy and actions is expected.

Krystal Tan is Asia Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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