Asia Pacific’s Energy Transition Conundrum – Is Net Zero Possible?

Shirley Zhang and Lucy Cullen

2020 will be remembered as the year of the Covid-19 pandemic. The global crisis ripped through the socio-economic fabric of society causing untold suffering and upheaval. Yet, despite these challenges, governments have stepped up their climate ambitions with promises for national action coming thick and fast around the world. As discussions on Europe’s route to net zero progressed, China announced its carbon neutrality pledge in September 2020 followed shortly by Japan and South Korea, thus casting the net zero spotlight on Asia Pacific.

Like Covid-19, major global issues such as emissions reduction cannot be tackled single-handedly, and strong performance of one country or region is not enough. But net zero goals carry different meanings and implications around the world. In Asia Pacific, absolute carbon emission levels are currently about six times higher than that of the EU and the UK, and four times higher than the US. The scale of the challenge is obviously enormous in Asia Pacific, dwarfing other regions.

Diverse country profiles in Asia Pacific present a dizzying range of dilemmas

Asia Pacific has seen tremendous growth over the past two decades and many markets will continue to grow rapidly in decades ahead. But this growth relies heavily on fossil fuel usage, particularly coal. 52% of the region’s 2020 energy demand and over 70% of its emission footprint is coal-based, while Europe and the US rely more on oil and gas. Electrification will be key to accelerating the transition to renewables, but rising power demand will prolong Asia Pacific’s fossil fuel dependence for the next decade at least.

Before the end of the decade, Asia Pacific leaders must tackle some difficult decisions and balance economics, energy security and policy goals when defining individual country pathways. Priorities will differ depending on government type, economic systems, geography, and self-sufficiency levels of resource and capital. For emerging economies in South and Southeast Asia with robust economic growth, cheap reliable fuel is a critical prerequisite. Rapid decline in renewable costs continues to bring forward competition between renewables and fossil fuels, but intermittency issues remain. As a result, fossil fuels will stay dominant and emissions will continue rising in developing countries, unlikely to peak until the late 2040s. Nonetheless, their emission per capita levels will generally remain below developed economies.  

At the same time, new coal financing is increasingly scarce. A key concern for countries that have pledged net zero is if, and when, they can afford to phase out existing coal fleets without risking energy security, grid stability and rising retail power tariffs. All eyes are on Japan, which recently surprised the market with a more ambitious emission reduction target – a 46% cut by 2030 from 2013 levels. The country already bears the highest energy cost in this region with end-user tariffs double that of China and South Korea. Its aggressive plan to reduce both coal and LNG in the generation mix requires immediate action to boost controversial nuclear power from 6% today to 20-22% by 2030. In comparison, boosting renewables may be a more palatable alternative, but scalable long-duration storage must play an active role to allow higher penetration rates and ensure stable supply. 2030 is an extremely challenging timeframe to address the many elephants in the room.

Climate action demands well-coordinated and timely execution of policy and capital orders. In this regard, China’s command-and-control approach to combatting the pandemic offers the world hope that its net zero pledge, if followed through with similar efficacy, could be transformational in reshaping the world’s largest carbon emitter. Compared to its regional peers, China may have a better chance of achieving net zero goals should strong resolution coupled with central government coordination result in wholesale change across all levels of business and society.

Deep decarbonisation is a marathon, not a sprint

The political will to act must ultimately be matched by the availability and affordability of technological alternatives in the long march towards decarbonisation. Over the longer term, decarbonisation will be less constrained by cost or technology feasibility, but rather more concerned with how quickly and reliably technology can scale up.

In Asia Pacific, we expect average battery storage duration to increase from 2 hours today to 7-8 hours by 2050, improving grid flexibility in the process. The adoption of green hydrogen could also be a game changer for hard-to-decarbonise sectors like heavy industry and commercial transport.

But challenges remain. Is a 7-8-hour battery duration sufficient back-up for large-scale fossil fuel phase-out? Can hydrogen adoption overcome end-user demand uncertainty and develop robust supply chains to have a significant impact? Carbon capture and storage and carbon capture, utilisation and storage must also play a critical part in mitigating emissions. We expect carbon removal applications to shave off close to 500 million tonnes of CO2 emissions from coal and gas power generation by 2050. Yet, net zero by 2050 (or 2060) still appears too much of a stretch.

As Wood Mackenzie’s latest analysis of Asia Pacific energy and emissions shows, countries across the region will make material progress towards net zero but even Paris Agreement goals, to limit average global temperature gains to 2 degree Celsius above pre-industrial levels (Wood Mackenzie’s Accelerated Energy Transition 2 scenario (AET-2)), remain elusive, given timescales and the hurdles ahead. Perhaps unsurprisingly, more mature markets will blaze the trail to net zero, but for emerging economies peak emissions will be further off as leaders seek to maintain growth and development in a cleaner, more sustainable way.

Powering the transition in Asia Pacific is a unique challenge. The region has seen some nascent success, but more must be done. With such a broad spectrum of countries, climate efforts must simultaneously decarbonise and energise the world’s fastest growing economies. Significant policy and capital support will be called upon to build necessary supply chains, create future skills, and minimise social risks along the journey. And this will require stakeholders from public and private sectors, all countries and every level of society to collaborate, adapt and reimagine existing energy systems.

The net zero race is on and Asia Pacific has now joined the chase. But be prepared for a long ride.

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