Asia has large potential to accelerate energy transition

28 October 2020 Consultancy.asia

Once positioned as a driver of fossil fuel demand over the next two decades, Asia has pivoted towards favouring a transition towards a greener future. A new Boston Consulting Group (BCG) report elaborates.

The trend has been clear for a number of years now: As Europe and North America continue their drive towards low-carbon green energy, a maturing energy market in Asia would sustain global fossil fuel demand in decades to come. While good news for oil companies, this scenario would defeat the broader purpose of clean energy – to cut global emissions and fight climate change.

According to Boston Consulting Group experts, Covid-19 might just come to the rescue, purely from an energy perspective. Necessity is the mother of invention, and crisis has historically proved a catalyst for innovation. In fact, much of Europe and North America’s current green energy dominance can be traced back to the financial crisis of 2008.

Green stimulus measures after the 2008 financial crisis

Senior Director at BCG’s Centre for Energy Impact (CEI) in Washington Alex Dewar explained: “At that time, multiple governments implemented green stimulus programs, reasoning that a greater commitment to renewable energy development could jolt economic development in the short run while providing long-term competitive benefits.”

“These policy measures aimed at advancing energy transitions were not motivated entirely by concerns about climate change. In large part, US and European governments directed stimulus spending toward renewables to generate new domestic construction, installation, and manufacturing jobs.”

The plans proved effective, and how. The economic recovery has been plain for everyone to see, while these markets now find themselves in the driver’s seat of the global renewable energy landscape. Tens of billions of dollars in private investments have flown into solar energy projects in the US, while Europe has managed to grow its wind energy capacity by 1000 % since 2009.

Regions with the potential to accelerate energy transitions

Asia’s green energy market

A decade down the line from the financial crisis, BCG expects Covid-19 to have a similar impact on Asia’s green energy market. As it stands, Asia’s renewable energy market is far from dormant. In fact, Asia-Pacific as a whole drew nearly $115 billion in renewable investments back in 2016, and is expected to draw up to $250 billion more in the lead up to 2025.

At the same time, vast populations, infrastructure gaps and inadequate regulatory enablers kept the region far from being a low-carbon energy market per se. For many, the Covid-19 crisis will only make matters worse, as governments have a plethora of immediate healthcare, employment and economic issues to prioritise over long-term energy competitiveness.

For BCG, the opposite holds true. The consulting firm examined the aftermath of Covid-19 in 35 key markets around the world to find that conditions in Europe, Northeast Asia, and Southeast Asia have panned out to enable a substantial renewable drive.

Asian economies stand to gain the most from an energy transition

Factors such as the immediate impact of Covid-19 on health, society and the economy; the financial capacity to respond to these challenges; the incentive structure for a transition to renewables; and the details of stimulus packages were all taken into consideration for the assessment. In Asia, all factors point to a greener future.

The decisive response to the health crisis in countries such as China and South Korea not only allowed these economies to reopen faster, but also left more time and headspace to plan a long-term economic recovery. The damage incurred in the mean time was absorbed by the strong economic fundamentals in these countries – high borrowing capacity, strong corporate bond ratings, etc.

Asia's energy transition

“As a result of these advantages, governments and energy sector actors can more freely invest in innovation and growth strategies,” noted fellow CEI Senior Director Rebecca Fitz. Some of the region’s energy transition leaders – Japan and China for instance – are driving forward, enticed by the long-term benefits of a transition to cleaner energy.

Fitz explained: “Many Asian economies have much to gain from facilitating swifter energy transitions. For one thing, their energy intensity – the amount of energy consumed per unit of economic output – is on the high end, largely because manufacturing is such a substantial segment of their economies, especially in China, South Korea, and Vietnam.”

“To meet their energy needs, these countries generally depend on fossil-fuel imports to a greater extent than do countries in many other regions. As a result, any shift toward domestically produced renewable energy would simultaneously improve their energy efficiency and strengthen their economies’ balance of payments.”

A focus on electric vehicles in Asia

Helping things along is the fact that generating renewable energy in key Asian markets is now cost competitive with anywhere in the world, which does wonders for feasibility. All these factors appear to be manifesting themselves in Asia’s Covid-19 response. BCG reports that $600 billion has been committed around the world for “green” government stimulus measures – $200 billion in China and $60 billion in South Korea.

Interestingly, these economies appear to be tracing their own course of energy transition. Central to the stimulus packages in both countries is the move to electric vehicles (EVs). Already a booming EV market, China’s stimulus package is channeling funds into bumping up its EV charging infrastructure by 50%. South Korea has also set aside funds for production of EVs and batteries. And these are just the highlights from a whole set of measures.

According to the researchers, these measures – combined with a broader focus on green stimulus – are likely to affect the boom in demand for fossil fuels in Asia that was expected to sustain oil demand in decades to come. “Indeed, our analysis indicates that the policies adopted in China and South Korea alone in the wake of Covid-19 could reduce oil demand by up to 3 million barrels per day in 2040,” noted Dewar. This is amid a dent in natural gas demand as well, in light of the rise of wind and solar alternatives.