How to finance the energy transition in Asia

The recent global energy dynamics have stimulated a rethink of the future of energy security and energy transition equations. There is greater recognition of building resilience, as different regions are required to deal with energy transition in a localized and resource availability context, with countries being at different starting points from the perspective of affordability, availability, localization, and readiness.

A just transition may not be so just when supply chain access is finite due to limited manufacturing capacities, which does not match with increasing demand. From the current energy mix to pricing, to the availability of raw materials, these factors will determine the pace at which regions can transition. The recent experience of the fragility of energy economics and the complexity of dealing with supply chains - further augmented by high oil, gas and LNG prices in 2022 - has compelled countries to rethink transition quicker than what was anticipated, and create resilience.

Asia is a significant energy consumer and will be the fastest-growing region for electricity consumption over a ten-year forecast period. The Asian energy mix is greatly reliant on fossil fuels with 70% of Asia’s energy currently produced from coal. In addition to climate and affordability considerations, jobs and economic growth in energy transition are strong imperatives for countries to double down on their clean energy commitments.

How Asia will achieve this will be a subject of significant debate this week at Future Energy Asia, taking place in Bangkok from 17-19 May, which will be a forum for the continent’s energy leaders to set the agenda for the energy transition in Asia.

China, India, Japan and South Korea combined will lead the bulk of investment into renewable energy in the Asian region in the next ten years, installing a new solar capacity of 577 GW and wind capacity of 408 GW.

The Middle East will have its own trajectory for energy transition, where hydrogen too will play a key role. The GCC is endowed with significant resources that can enable the region to effectively move from its position as a key hydrocarbon producer, to a leader in energy transition. Key partnerships, such as that between ADNOC and TAQA, with a shared commitment to produce clean energy, are evidence of the demonstrable developments in the region. Saudi Arabia, under its Vision 2030, launched its National Renewable Energy Program (NREP), a strategic initiative, to increase the Kingdom's share of renewable energy production and help fulfil its obligations towards reducing carbon dioxide emissions.

A major support for energy transition is that many countries that need to change their energy mix are endowed with the prerequisites of an abundant natural capital of land, sun and wind. Many Asian countries including Pakistan, Sri Lanka, India, Thailand, the Philippines, Malaysia, Saudi Arabia, the UAE, and Oman have higher than average solar potential. At the same time, countries like Japan, South Korea, China, and India rank significantly high in the number of climate-change mitigation-related patents and research.

To enable the energy transition, investment is required in how energy is consumed to how energy is produced. This is in areas such as generation, building supply chains, materials & manufacturing capacities, EV infrastructure, storage, energy R&D and innovation, and energy efficiency. Indeed, to achieve a practical decarbonisation pathway, it’s also essential that enough investment is made in grid and transmission systems. As was found by the International Energy Agency, to achieve 2050 net-zero emissions, tripling annual investments to $4 trillion by 2030 will be required.

The table below illustrates the areas where transition investments are needed to enable sufficient climate action by 2030:

The magnitude of energy transition investment is significant and requires serious attention both from providers of public and private capital, investing in the energy ecosystem and related technologies. The $130 trillion commitment made through the Glasgow Financial Alliance for Net Zero (GFANZ) is undoubtedly an important step, but it’s important that alongside these commitments higher proportions of investment go to emerging markets, where they are greatly needed.

There are some immediate and actionable steps required for Asia’s energy transition. First among them is augmenting the supply chains and manufacturing functions: The current global supply chains and manufacturing capacities are not sufficient to achieve 2050 net zero scenarios, hence a huge amount of investment must go into this area. In addition, managing the materials for energy transition is also crucial, alongside recycling and re-use, hence financing these programs is integral.

Fossil fuel phase-out undoubtedly requires specific attention, especially in financing the retirement of fossil fuel projects. Asian Development Bank’s Energy Transition Mechanism is an effective program for supporting countries to do this: for example, under this mechanism, Indonesia is accelerating the retirement of Cirebon-1, a 660-megawatt plant owned by CEP in West Java.

Other valuable initiatives include the repurposing of assets as an effective way to reuse materials, saving both time and costs in comparison to the creation of new infrastructure projects. This is essential for a faster and more affordable transition. The Climate Investment Fund’s ReACT Accelerating Coal Transition Program provides useful guidance and tools on repurposing coal assets, mines and power plants providing quicker solutions to addressing energy security, achieving a just transition and allaying stranded asset concerns, in addition to financing solutions for public and private capital required for transition.

More must be done: De-risking projects and countries is key. This can be done by implementing practical solutions, like providing transparency around renewable auctions. In Pakistan, the renewable energy program that has been rolled out by the government for fuel replacement is using a competitive auction method. It is worth noting that the country has been a net importer of almost 60% of its energy needs, which has hurt energy affordability and energy security. A demonstration of successful energy auctions was done through the RenovAr program in Argentina, with the announcement of four successful competitive international public tenders that resulted in the mobilization of $7 billion and almost 5 GW across 154 new renewable energy projects.

Asia must take advantage of the latest in green innovation. Investment in technology, from storage to innovation, is greatly needed to achieve the intelligent deployment of transition projects and to plan for complex energy scenarios. It’s also important to create a guarantees mechanism and frameworks to lower the cost of capital, in some cases by sovereigns, and by international guarantee providers like Guarantco, MIGA, etc. The removal of regulatory and policy hurdles also remains important to attract private capital towards energy transition.

It is critical to leverage the strength of financial institutions in the energy transition, as they are the biggest capital allocators in economies. This includes building the capacity of local financial institutions as they are the closest to any project in any market, and will be the first providers of funds while having greater visibility of their markets. It is also important for financial bodies to be conscious of the indirect impact of banking regulations and fiduciary duties towards their balance sheet and should endeavour to create green tools and policies, which can have a huge impact on energy transition.

We must create the building blocks to scale voluntary carbon markets, strengthening them and increasing their position as a key financial lever. Finally, there is a basic logic to encouraging the energy transition – energy innovation and efficiency is a great business opportunity that increasingly cannot be ignored.