While China has understandably been the focus of global attention, energy markets all across Asia are in a state of rapid transformation. New energy plans in India and Indonesia alone in the past two months highlight the diversity of approaches.
While there is no one-size-fits-all solution, countries resisting the inevitable global shift to lower-cost domestic renewable energy are likely to be caught out.
When it comes to renewable energy, India’s target is to build 275 gigawatts of renewable energy by 2027. To put this in context, India’s current installed capacity for the whole energy sector is 344GW.
It’s hard to overestimate the ambition of this undertaking for a nation of more than 1.3 billion people. It would, after all, see renewables more than double market share to 44% of total capacity..
Partly, of course, this has been driven by necessity. India’s cities are so polluted by burning coal that the toll on lives and health is intolerable.
Nevertheless, four years after it was first launched, India’s energy transformation plan remains firmly on track, exceeding the expectations of even the more optimistic advocates of renewables.
What’s striking in the National Electricity Plan 2018 (NEP) is that renewables are now clearly acknowledged as the low-cost source of new electricity capacity, even despite abundant supplies of domestic coal.
This is underpinned by the continued rapid drop in the cost of wind and solar, with tariffs down by 50% since the start of 2016.
Serious consequences for coal
Compared with the draft plan released only two years ago, the latest incarnation removes a further 11GW of the fossil fuel and also acknowledges that coal-power-sector overcapacity is a key problem, with utilization rates forecast to reach a two-decade low of just 55% by 2022.
A total of 48GW of end-of-life, heavily polluting thermal plants will be closed over the coming decade and many more retrofitted and re-engineered to cope with the demands of a much more variable demand profile.
Additionally, Coal Minister Piyush Goyal also talks about the need for recalibrating coal plants to reduce reliance on imported coal.
The NEP 2018 forecasts thermal coal imports by 2021-22 for utilities to fall to just 50 million metric tons per annum and then flatline until 2027, a dramatically lower level than anticipated by the International Energy Agency.
This makes basic economic common sense given that high-priced imported coal can be replaced by the domestic industry.
While doubling down on renewables is creating tangible benefits for India including electricity deflation, countries in Southeast Asia are treading the path more slowly.
While plentiful domestic coal resources mean Indonesia is partially insulated from international coal-price volatility and foreign-currency exposure, the country’s reliance on coal has robbed it of strategic flexibility just as technology breakthroughs are accelerating the promise of renewables.
‘Same old’ in Indonesia
The current tariffs of Indonesia’s national power company PLN fail to cover its costs, which has led to operating losses averaging US$2.1 billion annually over the past four years.
Unlike India, Indonesia’s policy approach is to push for more of the same.
In its recently released Electricity Supply Business Plan (RUPTL), while PLN cut 5GW of coal expansions, it also removed 6.7GW of renewables. The energy operator is perilously out of step with global trends in electricity generation as it seeks an infusion of more than $1 billion from international bond markets to finance its largely coal-based expansion.
As the latest move by HSBC to end coal finance illustrates, bond markets are already wary. Holding a longer-term view, they are fully aware of the stranded asset potential for fossil-fuel investments as the economics continue to shift in favor of clean energy.
It will be interesting to see how hard it is for Indonesia to raise the money it hopes to.
The warning signs are already there. As ratings agency S&P noted in late 2017, “If the forces of change (demand-side responses, technology advances such as storage, distributed generation, and efficiency gains for alternative generation sources) are here to stay, then it makes sense to make smaller capital bets to plan for a more dynamic future.
“It is increasingly possible that laggards in this regard – those with a higher-than-average proportion of generation in less efficient coal plants or with relatively unattractive emissions profiles – could be in a more vulnerable position than their forward-looking peers in the future.”
Other countries in Southeast Asia, including Vietnam, Thailand and the Philippines, are also on the brink of energy expansion that will require them to choose a pathway.
Despite heavy subsidies and the highest-priced electricity in the Association of Southeast Asian Nations region, the Philippines retains an expensive import coal pipeline of more than 10GW, largely supported by foreign government capital subsidies that are anything but free.
Change has happened faster than anticipated. There, as in India, the costs of new solar and wind facilities are now below those of coal and other fossil fuels.
Policy reform is required, and of course this will create turbulence as incumbents lose out and new industry shakes up the market.
But India has shown that ambitiously shifting to renewable energy is feasible, driving down costs of power almost as effectively as it reduces air pollution.
While every country has a unique set of circumstances, there is a greater economic case for embracing the forces of change than resisting them.