Keeping The Lights on in Southeast Asia
Growing up in the North of England, I saw with my own eyes the UK experiencing a major energy transition over the last few decades, emerging from a state monopoly system where the majority of electricity was produced by coal and nuclear by one company and distributed through a centralized electricity system.
In the 1990s the British electricity industry was privatized and the lifting of a moratorium on the use of natural gas for power generation saw the development of gas combined cycle generation. Renewable energy was generally seen as non-commercial or incompatible with the grid due to its intermittent nature, such as with wind and solar.
Finally, in the last two decades, after a slow start, significant progress has been made with the uptake of renewable energy.
Overall, renewable energy accounted for around 25% of all electricity generated in the UK last year, more than is generated from either coal or nuclear. In fact, solar power alone produced more electricity than coal across the whole of May this year. Coal, which drove the UK’s industrial revolution, is down below 1960s consumption levels and falling. With this drop in coal use, greenhouse gas emissions are falling, energy security through diversification is improved and the renewables industry is alive and kicking and employing over 100,000 people.
If we now look at SE Asia, my new home, it’s clear that the transition towards a more diverse and lower carbon-intensive energy system can take place much, much quicker and far far cheaper than it did in the UK.
Why, you may ask?
Well, there are three main reasons:
Soaring Energy Demand
Firstly, fuel energy demand is expected to rise by 80 per cent by 2035 according to the International Energy Agency. For the power sector, the need for huge amounts of new generation capacity provides a unique opportunity to install new, cleaner options without redundancy of existing power plants.
Today, 20% of people in Asia still do not have access to electricity and rather than just expensively expand the centralized grid networks to reach them, smaller clean energy options such as solar represent a cost effective solution particularly in rural and off-grid locations.
Climate Finance
Secondly, significant amounts of climate finance are being raised for both climate mitigation, such as clean energy as well as for adaptation measures to help countries adapt to changes in the climate – for example in agriculture, coastal resources or disaster risk management.
The Paris Agreement, a landmark global agreement to combat climate change was agreed in December last year by 195 countries. I think it’s an amazing feat that 195 countries could agree on anything, now what remains is all about the IMPLEMENTATION.
Recently, on the 22nd April, more than 170 country representatives (including heads of state) descended on New York for one mammoth signing ceremony. This agreement can provide the long term commitment from Governments and ratchet up private sector action through clear signals to markets and investors, highlighting that low-carbon growth future is now.
Apart from unlocking much needed climate finance, these commitments will be vital to design a new economic architecture and restructure global energy systems to limit the increase in global average temperature rise to below 2 ˚C.
Already considerable finance is flowing into clean energy, in fact investments into renewables increased to 367 billion US dollars last year smashing all previous records. Green Bond issuance is also transforming the debt market availability for clean energy. According to HSBC, we can expect to see the issuance of more than 80 billion US dollars of green bonds this year, compared to 41 billion US dollars last year.
However, is this enough to meet ambitious temperature targets?
The IEA estimates that we will need at least USD 5 trillion by 2020 for Clean energy. Where will this money come from?
Well, to start, a lot of the finance currently earmarked for fossil fuel energy options can be better deployed to help meet these climate goals.
Already we see financiers becoming ever more reluctant to bankroll coal. In fact the OECD countries, which include US, Europe, Japan, Australia, Canada and South Korea have agreed new rules that will drastically impact their financing of coal power in the future. Building coal plants today means that the investment in a number of years may have to be completely written off and the assets stranded. This is the situation we are currently facing in Europe.
Global subsidies for fossil fuels and nuclear power remain high despite reform efforts. The exact level of subsides is unknown; estimates range from 544 billion US dollars (World Bank) to 1.9 trillion US dollars per year (International Monetary Fund), depending on how “subsidy“ is defined and calculated. In Asia, the figure alone was about USD 850 billion or 7.6% of GDP in 2013 alone.
Whatever the number, the fact is that subsidies for fossil fuels and nuclear power are significantly higher than financial support for clean energy.
Creating a level playing field can lead to a more efficient allocation of financial resources, reflecting the true cost of energy generation and leading to a far more diverse energy mix that can withstand changes in global fuel prices.
Similarly, embracing market mechanisms that price-in the impact on climate change and the environment will be crucial. Market mechanisms such as emissions trading and carbon taxes are spreading rapidly and by next year some 4 billion people in China, South Korea, California, Quebec, New Zealand and Europe to name a few will be covered by carbon pricing initiatives.
Regional schemes are likely to be developed and more cooperation will be needed between countries to make markets function efficiently. Putting a price on emissions in some way will be crucial for meeting global climate change goals.
Clean Energy Wins on Reliability and Cost
The third reason why the energy transition in SE Asia can take place far more quickly and cheaply than the UK is that clean energy technologies have become much more reliable and far cheaper.
The cost reductions and performance improvements are well documented, wind costs having fallen by 50% since 2009, and solar PV module costs by 80% since 2008.
South East Asia is an excellent position to reap the benefits of these cost reductions and innovation that have been achieved already around the world. The success of these new power generation technologies, however, requires smarter systems and integration technologies in order for grid systems to become far more active in regulating changes in supply and demand on a short term basis.
Balancing the grid will be crucial for the successful integration of more diverse energy sources. To do this cost effectively there is a need for some market reform in the region.
When I started my career in renewable energy in the 1990s, I remember hearing the arguments from the incumbent UK power industry at the time that the “lights would go out” as we increase the amount of intermittent renewable energy.
More than 15 years on we still see these headlines even though there has not been so much of a flicker caused by insufficient capacity.
Really, the lights have not gone out and market liberalization has so far been able handle balancing.
Overall, there is a huge opportunity for Asia and for South East Asia in particular to meet its goals of providing long term, reliable, cost-effective, and sustainable energy for its growing populations and economies. Harnessing the vast renewable resources, flexible power generation and demand and integrating them all cost effectively and reliably into existing energy systems will be crucial.
A clear roadmap by Governments of where they want to be is needed, with support via long term Government policies, including the tools to implement these policies such as budget, regulation, and institutional resources right down to the local level. Managing this energy transition over the next decade or two will be far from easy and will need all of the collective efforts and resources of everyone.
We will need a lot of finance, a lot of technology, a lot of policies, and above all a lot of energy!
