Asia’s energy crisis and net zero – no turning back
Covid-19 made mincemeat of energy price forecasts. From the depths of the oil price crash in March 2020 to the surge in Asian spot gas prices to over US$50/mmbtu for the first time ever earlier this month, the pandemic has shredded predictions (and egos) as fast as they could be produced.
But while there’s little doubt that the strong pace of the post-pandemic demand recovery has been a feature of the surge in prices across a broad range of commodity prices, it is only a part of the story. After all, global energy markets aren’t today being rocked by a crisis in energy demand but rather are facing a crisis in energy supply. More specifically – and despite some claims we’re witnessing the first crisis caused by clean energy – by a crisis born of rising strains on fossil fuel supply.
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Structural underinvestment in hydrocarbons has been under way since the middle of the last decade as energy prices fell, bringing project returns down in tandem with a rising investor focus on ESG (specifically carbon). This is now showing itself in many forms: from US Lower 48 onshore producers prioritising debt reduction over investment despite rising oil prices, to a tightening global LNG market exacerbated by lean years of project sanctions between 2015 and 2017 as cash-strapped developers balked at high capital outlays and long payback periods. Meanwhile in China, the strict implementation of energy and environmental targets has curtailed domestic coal output and played a major part in its current power crisis.
Faced with the real risk of electricity shortages, much of Europe and Asia have turned to coal. China’s power sector will consume an additional 200 million tonnes of thermal coal this year, up over 10% on 2020 and forcing the government to urgently push for production ‘at all costs’. India’s coal-fired generation growth is at a comparable rate to China, while its domestic production is up 16% compared to last year. Across Southeast Asia, coal imports are expected to be up 13% year-on-year through H2 2021. Meanwhile, prices for 6000nar Newcastle coal have increased to over US$200/t since the start of October with trades at up to US$260/t.
This short-term boon for coal is causing consternation ahead of COP26 next week, yet is broadly understandable – no government would blithely allow the lights to go off. But in many countries across Asia, it also creates the real risk that policymakers, companies and the wider population come to see investment in coal not as a part of the crisis, but as the solution – when all else fails, turn to coal.
This needs addressing. Countries across Asia Pacific have been stepping up their net zero focus, with Australia the latest to announce a 2050 target. These goals are achievable, but the pace of change remains too slow. Massive investment in low-carbon energy is needed to not only meet future demand growth but to also tackle Asia’s coal addiction. Thermal coal demand needs to fall by over 70% by 2050 to reach 2 °C and over 87% to reach 1.5 °C. This requires political will and capital. Asia's major consumers – China, India and Indonesia – will need to commit to (and receive financial support for) more dramatic cuts.
Tightening fundamentals should keep commodity prices above the long-term average for much of this decade and provide the perfect incentive for green investment, including gas and LNG. Governments must ensure this happens.
The means, motivation and financing must exist for Asia to push for net zero. We estimate that globally there is something in the region of US$30 trillion ready to be deployed in fiscal stimulus. Crucially, the amount aimed at green financing, technology R&D and policy support has grown too. Up to as much as a third of new stimuli (depending upon how this is measured) announced since Q1 2020 could find a home in investment geared towards achieving carbon neutrality. Renewables will be a major part of this, but there is no realistic pathway to 2 °C or lower without huge spend on CCS and hydrogen. Asian governments, including China, are voicing support for Article 6 and meaningful carbon prices to drive this investment, though none has yet gone far enough. COP26 provides the perfect platform.
The current crisis is a reminder that reliable energy supply is critical to system and price stability. Coal has helped this time, but in future gas must play a central role. To achieve net zero, governments across Asia Pacific need to do more – not less – to stimulate gas investment if sufficient supply is to be developed to displace coal. Despite the region having significant undeveloped gas resources, only China’s gas output is set to rise in the near term due to NOC investment in shale and tight gas. Elsewhere spend is falling and new gas FIDs are stalling. The likes of Myanmar, Indonesia and Vietnam must work faster and harder to halt a terminal decline.
The short-term fallback on coal may also have positive consequences for decarbonisation across Asia. In China, the government has just taken the bold step to further liberalise power prices to help relieve the crisis, with the NDRC announcing last week that industrial and commercial customers will switch from regulated to market power prices. This will drive up coal demand as utilities are finally able to pass on higher coal costs to consumers. But this should also help dispel the myth that coal is China’s silver bullet. With coal prices up 150% compared to a year ago – equivalent to a 60% hike in coal power generation costs – consumers, not power generators, will now feel the pain of rising coal prices. This should provide impetus to China’s goal of peaking thermal coal demand before 2030.
Governments will do whatever is required to solve an immediate crisis in the lowest cost possible. That’s where we are today with coal. But many now have net zero targets and must show not just progress towards meeting these, but even more ambition. The current fallback on coal is likely temporary but needs renewed focus on decarbonisation to ensure it is. This won’t be the last energy crisis in Asia. Others will inevitably come, but it must be low-carbon energy that plays a bigger part in solving them.
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