Asia’s decarbonisation ambition isn’t matching reality
Vice Chairman, Energy – Asia Pacific
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It is for good reason that world leaders are urgently trying to address the energy trilemma of security, sustainability, and affordability. As the impact of supply disruptions and price shocks in Pakistan and Sri Lanka have recently shown, governments that fail to act decisively can soon end up on the street. Nervous politicians elsewhere will have taken note.
Many governments are accelerating decarbonisation plans in response. The hastily formulated REPowerEU plan aims to increase the EU’s renewables target to 45% by 2030; President Biden just invoked the US Defense Production Act to boost domestic solar panel manufacturing; and we now expect Asia Pacific countries to invest US$1.8 trillion in renewables over the next decade.
But none of this can obscure the reality that the energy crisis has forced many countries back to coal to keep the lights on. This is abundantly clear in Asia Pacific. Even at high prices, regional coal demand is proving resilient, particularly in those markets able to ramp up production of cheap domestic resources, such as China and India. Just last month, Indonesian coal output hit a record high while Australian exports climbed to their highest level this year.
With soaring LNG prices and Europe outcompeting Asia for LNG supply, there is an increasing risk of coal rivalling gas for the role of the transition fuel in emerging Asian economies. Even mature markets such as Australia and Japan are currently running their coal-fired power generation hard.
This doesn’t mean governments across the region are abandoning emissions targets. But resilient Asian coal demand risks being sticky, nudging up emissions – or at least resulting in emissions failing to fall fast enough - just as governments need to push harder to decarbonise. Without action, a disorderly energy transition across Asia Pacific is looming.
Coal is still King in Asia
Stratospheric LNG prices and increasing competition with the EU are weighing on Asian LNG demand and supporting coal consumption across the region. Should Europe go all out for LNG to replace Russian pipeline gas by end-2023, Asian demand could be down by over 40 Mtpa by the middle of the decade compared to our base case. In this scenario, it is coal that picks up most of the slack, not renewables.
Much attention is inevitably focused on China. Even with recent Covid lockdowns, China is expected to post positive power demand growth in Q2 and recover to 5% growth for full year 2022.
As my colleague Alex Whitworth puts it, despite China’s huge investment in renewables it would be a mistake to sugar-coat the environmental impact of meeting this demand. China still produces around 60% of its power from coal and domestic coal production is receiving strong government support to help prevent a repeat of last summer’s power brownouts and reduce dependence on expensive LNG.
It’s a similar story across Asia Pacific, which still gets 56% of its power from coal. This is related to the region's highly competitive energy and manufacturing costs, and the trend we continue to see of power demand moving to the region’s more coal-intensive markets.
The curious case of Asia’s struggles with renewables
On the upside, the region will see massive investment in renewables over the next decade. But even this needs some perspective: China will account for 60% of the US$1.8 trillion we expect to be spent but has set the unambitious target of meeting "at least half" of incremental power demand growth with renewables in the 2020-25 period. Never mind existing demand - even the growth in Asian power consumption over the next five years can't be met by renewables alone.
There should be obvious upside to the region’s renewables investment. High coal and gas prices have seen wholesale power tariffs increase by an average of 50% in Q1 compared to 2021 average, improving the economics of renewables compared to fossil fuels.
But we have yet to see upside in wind and solar installations forecasts. In fact, some markets are heading in the opposite direction for grid-connected renewables, with risks for developers and lenders increasing as IRRs are eroded by rising supply chain and financing costs, grid integration issues worsen, and regulators reduce incentives.
Australia is an obvious example. Australia’s energy market regulator AEMO had long been adamant that grid investments could support a doubling of renewables capacity out to 2030. Then the wholesale market ground to a halt last month, with the connection of new renewables put on hold (a week later AEMO announced that connections would restart, but subject to delays). Many would not have been surprised to see the AEMO recently confirming the importance of gas in supporting renewables in its 2022 Integrated System Plan (ISP).
And this isn’t only happening in Australia. In January, Vietnam's National Load Dispatch Centre announced that no new solar or wind projects would be connected to the grid this year. Vietnam’s draft power development plan now aims to keep the share of renewables flat through to 2030 due to grid constraints, increasing the need for coal and gas to meet booming power demand.
A pressing need for action
Asia’s current fallback on coal creates a major political headache for governments committed to 2030 emissions targets and longer-term net zero goals. It also risks a two-speed energy transition as some countries continue to rely on coal while others move faster, likely leading to geopolitical rifts and a fraying of agreed decarbonisation pathways.
This is a pessimistic outlook. Challenges around integrating renewables into grids can be overcome, CCS is advancing, low-carbon hydrogen has a future, and other new technologies will emerge. But the resilience of coal demand must be addressed quickly - the more the world overshoots its carbon budget, the more it will have to rely on carbon removals and less on mitigation. There is little time to waste.
APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.