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Asia needs it Sputnik moment in New Energy

Halting the pandemic and rebuilding economies are the most urgent goals for the immediate future. Wood Mackenzie estimates that almost US$20 trillion – equivalent to a quarter of global GDP – will go towards stimulus packages, public health spending and delivering a vaccine over the next 12-18 months alone. But while the response to Covid-19 may have temporarily knocked climate change off the front page, addressing the planet’s rate of warming remains our greatest challenge. Efforts towards global recovery and decarbonisation must be mutually compatible.

This theme will be central to Wood Mackenzie’s upcoming APAC Energy & Commodities Summit on 19-20 October. At the summit, my colleague Prakash Sharma, Asia Pacific Head of Markets & Transitions, will chair a deep-dive session entitled ‘New Energy, New Generation’ to debate the future of Asia’s energy transition.

The world has been turned upside down since last year’s Summit. What does this mean for the energy transition in Asia?

An already tough job just became even more difficult. The urgent need to rebuild risks slowing the pace of investment in green initiatives as stimulus is channelled elsewhere. But at the same time, we are now also expecting escalating risks to future energy supply. Hydrocarbons currently supply a whopping 90% of Asia’s energy demand and without a major acceleration in zero-carbon investment, consumption won’t peak until 2036. Admittedly, this has been good news in 2020 as oil and gas prices tumbled, but while the pandemic has put a small dent in Asia’s hydrocarbon demand trajectory, it has clobbered the outlook for investment in global supply.

Onstream oil and gas supply is depleting fast. The world needs around 50% more new supply by 2040 to meet its energy needs and Asia’s import dependency is rising fast as domestic reserves decline. As investors seek higher returns and call for accountability around ESG, capital is drifting away from hydrocarbons just as Asian demand begins to recover.

Who is most at risk?

For the developing economies of Asia, the disconnect between their demand outlooks and the collapse in hydrocarbon investment is of most concern. Security of supply has never been more important, particularly for countries in Southeast Asia and markets such as India, Pakistan and Bangladesh, which all face declining domestic output and rising oil and gas import bills.

China’s hydrocarbon imports are also rising, and its increasingly strident ‘go it alone’ energy security policies reflect this. The mature energy demand profiles of Japan and South Korea help cushion the impact in these markets to some extent, but supply risk remains, nonetheless.

What can Asian markets do to reduce supply risk?

Amid the wreckage of the pandemic, there is a tremendous opportunity for Asia’s Sputnik moment on decarbonisation. The rising risk to future supply should be the catalyst for change.

Power generation and transportation are key sectors. In power, Asia could see US$1.5 trillion of investment over the coming decade, and I expect solar and wind will make up two-thirds of this. For this to happen, investment sentiment must continue to swing away from the previous reliance on low-cost coal towards a more sustainable and greener future.

The rollout of electrification in transport will also be critical. Electric vehicles, e-bikes and, through the longer term, the use of green hydrogen in trucking can help reduce Asia’s oil import dependency, air pollution and carbon emissions.

What is required to see this happen?

Policy, innovation and investment. Asia needs to become a leader in new technology, not a follower. Across the energy space, Asia has historically followed trends set elsewhere. Japan was an LNG pioneer, but overall gas penetration remains very low across Asia (making up only 11% of primary energy supply versus 35% in the US and 26% in Europe). Renewables’ current share of Asia’s power generation mix is still below the world average, and less than half the level in Europe.

To be a leader in decarbonisation, Asian governments and companies must look to achieve first-mover advantage in nascent technologies. We are seeing some baby steps towards this. Japan and South Korea are working to create future hydrogen societies; China is aiming to be a world leader in carbon capture, use and storage; rising investment in technologies for green manufacturing and recycling could establish a circular economy in Asia; and reducing food waste has become the goal of China’s ‘clean plate’ campaign.

What risk to Asia’s energy transition keeps you awake at night?

Firstly, let me make the point that the pandemic hasn’t totally derailed the energy transition and there is no doubt that some areas have accelerated through the crisis. Renewables investment is outpacing oil and gas, battery storage technology continues to bring down costs and right now green hydrogen is about as hot as it gets.

But across Asia, I worry most about policy action. Not enough stimulus funding is flowing into green initiatives. With the focus now on jumpstarting economies, will there be enough attention paid to new industries and initiatives that may not yet be cost competitive? Concerns over future hydrocarbon supply should be incentivising capital into new technologies across Asia – policy, innovation and investment have never been more crucial to decarbonise and energise at the same time.

Source: Wood Mackenzie

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