Wu: Six Questions on Asia’s Energy Transition

By Justin Wu
Head of Asia-Pacific 
Bloomberg New Energy Finance

Two years ago, when Bloomberg New Energy Finance held its first APAC Future of Energy Summit in Shanghai, the theme was the three “T”s – trade, technology and transition. On November 28-29, when we hold our latest Summit in the world’s most populous city, those three will still be vital, but some of the most urgent discussion will be about six “Q”s.

In the space of those two years, the energy transition has moved into full swing in Asia, with power markets liberalizing, renewable energy integration a topic of heated debate and governments forced to legislate the right energy mix in order to balance environmental and security concerns. In clean energy, Asia-Pacific is about to record its fifth successive year of substantially out-investing both the Americas and Europe, Middle East and Africa.

This rapid progress is leading people to ask some uncomfortable questions about the next phase. These include the six “Q”s below, encompassing everything from rates of return in the “belt and road initiative”, to the form of electrification in developing economies, from the location of future battery manufacturing, to the pain of moving away from combustion vehicles, from how to design markets to ensure grid stability, to whether Asia could experience a natural gas revolution.

Energy Politics and Trade

Asia’s trading economies have long sought opportunities abroad. Japanese companies began exporting their products not long after the country had rebuilt its economy after World War II. They were later joined by firms from other rapidly industrializing economies such as South Korea, Taiwan and, finally, China. What began as exploiting a competitive advantage to sell lower-cost and, gradually, better-quality products to overseas consumers soon evolved to other forms of foreign direct investment, which included acquiring assets, relocating manufacturing facilities to lower-cost locations and, more recently, acquiring foreign companies and technology.

This progression – from the selling of mass manufactured goods to the acquiring of assets, companies and technologies – is now being played out in the energy sector as well. Nowhere is this more apparent than in China’s ambitious “belt and road initiative”, a sprawling plan to invest over $1 trillion in energy and infrastructure in more than 50 developing markets across most of the Eurasian continent and East Africa. The idea has recently gained further prominence following an elaborate forum in Beijing in May 2017 attended by 29 heads of state including Russian President Vladimir Putin and International Monetary Fund Managing Director Christine Lagarde. At the end of the event, 30 countries signed a communique pledging to support trade openness and promote greater connectivity between nations – the language could not be starker against the rising tide of economic nationalism in parts of the West.

As of the end of 2016, China had already directly invested more than $14.5 billion in these countries, a third of which went into energy projects. The country’s two national policy banks, the China Development Bank and the Export-Import Bank of China, announced in May this year special lending schemes worth more than $55 billion to support this initiative. With a focus on developing countries from which the vast majority of future global energy demand growth will come, China’s priorities through this initiative could fundamentally transform the future of the world’s energy landscape.

However, an ambition this vast and encompassing is not without its flaws. India, a recipient country on the “belt” and a geopolitical competitor, boycotted the forum in protest when the China-Pakistan Economic Corridor, named a marquee program of the initiative, included projects in the disputed Kashmir region. “Connectivity projects must be pursued in a manner that respects the sovereignty and territorial integrity [of countries],” the Indian government said in a written statement.

But a more immediate question (our first “Q”) is whether these projects will generate reasonable returns for Chinese investors and lenders, who are also eager to seek growth opportunities abroad as domestic energy demand slows. Data on this are very sparse at the moment but, in conversations with BNEF, China’s overseas investors have listed hazards that would be familiar to any power sector investor – off-taker risk, currency fluctuations, supply chain disruptions, shortage of experienced labor. No wonder many Chinese energy investors actually prefer the more developed markets of Western Europe, North America or Australia. When it comes to overseas investment, politics will have to come second to returns.

At the BNEF APAC Summit, we will examine China’s ambitions through our plenary session on overseas investment, and in-depth during the breakout sessions on a range of target markets such as India, Sub-Saharan Africa, Australia, and Vietnam. We will also host a luncheon on multilateral banks, with speakers from the Asian Infrastructure Investment Bank, the Asian Development Bank, and the Silk Road Fund.

Another question is exactly what energy projects are being built in these countries. Chinese companies are developing nearly 25GW of coal power projects in these emerging markets, even as coal projects continue to be canceled at home due to environmental concerns. China’s national oil companies have invested more than $200 billion in these countries, mostly in oil and gas infrastructure designed to help boost exports of these fossil fuels to China. As a government-backed initiative, at a time when state-owned energy companies (the vast majority of them involved in coal or oil-related businesses) face a slowdown at home, overseas investment offers a way out to potential new markets.

Chinese firms are also not alone in their overseas ambitions: Japan’s electric utilities currently own 17GW of generating capacity abroad, a number they are planning to triple to 50GW by 2030. Falling electricity demand and growing competition due to retail liberalization are pushing Japanese utilities to seek better returns elsewhere. Most of this has been in the rapidly developing markets of Southeast Asia, with Thailand accounting for nearly a quarter of all investment so far. But like the Chinese firms, fossil fuels also feature heavily in Japan’s overseas investment, and 73% of the 17GW is gas generation. Japanese utilities, equipment makers, and banks are also not shy about exporting or financing “clean coal” technologies to emerging markets.

The overseas ambitions of East Asian firms are about energy access and bringing development to these markets. But in many ways, they are bringing the energy system of yesterday to these countries – centralized fossil fuels generation coupled with high-voltage transmission grids. A key question (and our second “Q”) is whether electrification in these developing countries will take this same course, or will it follow a far more distributed path involving micro-grids and small-scale generation?

Battle of the Batteries

Back in 2005, the top 10 solar manufacturers in the world were a diverse bunch. Their manufacturing capacity was only a fraction of what today’s top 10 can produce, and they hailed from Japan, Spain and Germany – with only one from China. In 2017, all 10 of the world’s leading solar manufacturers are Chinese and 80% of the world’s modules are made by Chinese firms, who are now the most technologically advanced and efficient in the world. The rest have all become a distant memory. The 28% experience curve – the decrease in the cost of a solar PV module for every doubling of its production capacity – is almost entirely thanks to China’s manufacturing prowess. This is perhaps the most important number in energy today, one that enables us to talk about everything else in the clean energy transition, from changing utility models to distributed energy, to solving the world’s climate crisis, to forecasting a future dominated by solar energy.

At the APAC Summit this year, we want to pose a very simple question (our third “Q”). Will we see the same thing happen to battery manufacturing as we saw in solar manufacturing a decade ago? Just over half of today’s lithium-ion battery cell manufacturing capacity is in China, with the rest mainly in Korea, Japan and the U.S. Amongst the top 10 suppliers today, South Korea’s LG Chem still holds the pole position in terms of commissioned manufacturing capacity, followed closely by China’s BYD. With the pending transfer of AESC from Nissan and NEC to Beijing-headquartered private-equity firm GSR Capital for about $1 billion in December 2017, half of the world’s top 10 lithium-ion battery cell suppliers will be Chinese-owned.

The next four years will only see Chinese dominance in batteries increase. By 2021, global lithium-ion cell manufacturing capacity is expected to double and Chinese firms will own 76% of it. Despite the ambitious announced capacity increases from LG Chem and the Tesla Gigafactory, Chinese expansion will easily overtake all of this, driven by nearly five dozen government-approved lithium-ion battery manufacturers and many more emerging firms in an extremely competitive market. We will hear from some of these emerging Chinese players about their future plans in the Wednesday afternoon session on battery manufacturing.

The fate of batteries is closely tied to that of electric vehicles (EVs), which are expected to become the leading source of demand for lithium-ion battery packs in the next few years, overtaking consumer electronics. China became the world’s largest EV market in 2016, selling nearly twice the number of new electric vehicles as the second-placed U.S. Most Chinese battery manufacturers have focused on the domestic EV and the much smaller stationary energy storage markets, and government policy has helped them capture them at the expense of foreign competitors.

The transition towards batteries and electric vehicles also raises some existential questions for Asia’s economies. Together, they amount to our fourth “Q”. Could China, a country not known globally for its automobiles, become a leader in this space in the future? Could BYD, BAIC or Geely become the next GM, BMW or Toyota? What about Japanese automakers that have built manufacturing bases in Southeast Asia – would a transition away from internal combustion engines undermine those economies? And what about India, which wants to lessen its dependence on imported Middle Eastern oil by adopting electric vehicles. Would it trade Iranian oil for Chinese batteries? We will hear from some of China’s EV manufacturers on Tuesday morning in our session on “Electric vehicles: the home field advantage”.

The growth of EVs, though, is not only tied to individual consumer behavior but also to that of new technologies and platforms such as autonomous driving and ride-hailing apps. Well known is Uber’s exit from China in 2016, when it decided to sell its China operations to rival Didi Chuxing, after a brief but costly battle that had reportedly cost Uber at least $2 billion. Uber is now locked in another battle with GrabTaxi Holdings, Southeast Asia’s dominant ride-hailing company, in a region that is now the world’s fourth-largest internet market with just over half of its 640 million citizens online. BNEF formed a new “Intelligent Mobility” team at the beginning of 2017 to look at how increasingly electrified, shared and connected platforms will impact the future of mobility. At the Summit, we will present the latest research findings from this group and also hear from Asia’s leading mobility companies.

Should We Call Elon?

For some parts of the Asia-Pacific region, the energy transition is no longer just a theory. The Australian energy system has seen a growing penetration of renewables in the past few years, but a major blackout in South Australia last year has brought the security and reliability of the whole power system into question. In July, a consortium consisting of French renewable energy company Neoen and Tesla won a government-backed tender to build the world’s largest lithium-ion battery in South Australia. In a headline-grabbing move, Tesla CEO Elon Musk promised to build the battery in 100 days or offer it free – BNEF estimates that the system could cost as much as $100 million and, even at that cost, will not come close to solving South Australia’s problems, caused by peak demand significantly exceeding firm power capacity.

But the drama involving Musk did eventually spur a national conversation about system design and the role of energy storage in stabilizing intermittent renewables. This helped lead the Australian government to propose a plan that would include obligating electricity retailers to secure enough dispatchable and low-emission generation to meet the country’s energy goals. In other words, a regulatory intervention that forces the country’s largest utilities to build intermittent renewables responsibly and a potential template for other countries to follow in the future. Our Australia team will be at the Summit to discuss with a panel of Australian regulators how this plan may solve the challenge of renewable energy integration.

In August, another blackout, this time in Taiwan, affected 80% of its population and led to the resignation of its economy minister and a public apology by President Tsai Ing-wen. Local press featured headlines along the lines of “Should we call Elon?” as the Tsai administration expressed interest in exploring power grid stability options with Tesla. Short it may be in terms of words, but it opens up a huge topic, and is our fifth “Q”.

The question here is about market design. Regulators are trying to find a more cost-efficient way to deliver electricity to consumers, to allow more renewable energy into the system without using more subsidies or causing the entire system to become unstable.

A number of sessions at the APAC Summit will address these issues from different angles. Two sessions on Day 2 will look at the impact of ongoing market reforms in a number of countries on power retailing. In the morning, we will look at emerging business models for this in China and in the afternoon we will discuss corporate renewable energy procurement, and whether regulatory changes will finally allow this to happen in Asia. Another session on the afternoon of Day 2 will tackle the topic of renewable energy credits and alternative ways to subsidize wind and solar, as Asian countries move beyond feed-in tariffs. Finally, on the afternoon of Day 1, we will host a plenary on new utility business models – Asian utilities that are impacted by these ongoing reforms will certainly offer a different perspective than a discussion on utility strategies in Europe.

Beyond the headlines, the Taiwan outage also touched on one other issue impacting the energy transition in Asia – the fate of nuclear power. Since the Fukushima disaster of 2011, public opinion in Asia has shifted against nuclear and a growing number of governments have made shutting down reactors a political priority. Tsai’s government had pledged to make Taiwan nuclear-free by 2025, replacing it with renewables and gas – the blackout raised some questions about whether this was too soon but did not sway public opinion away from the goal itself.

In May 2017, the election of President Moon Jae-in in South Korea landed another blow to Asia’s already uncertain future with nuclear energy. Moon has pledged to work out a roadmap to phase out nuclear in Korea by 2040 while pushing renewable energy, EVs and gas in order to lower emissions and tackle growing concerns over local air pollution. And finally, just in the past week, Prime Minister Shinzo Abe of Japan was re-elected in a landslide. One of the few things that set him apart from his chief rivals, led by Tokyo Governor Yuriko Koike, were the nuclear restarts – he wanted them to continue while she wanted them phased out entirely. Despite Abe’s victory, nuclear restarts remain at a snail’s pace in Japan and the country is gradually seeing an increase in coal and gas generation.

Asia’s growing unease with nuclear energy will be addressed during a session on the afternoon of Day 1 of our Summit. But one would be mistaken to believe that Asian governments are increasingly siding with public opinion against nuclear only due to Fukushima – another reason is the growth of a cleaner and cheaper alternative, LNG.

Demand for LNG will grow by 8.8% in 2017, the largest year-on-year growth since the 2011 Fukushima disaster. Asian countries are all importing more LNG – in the first half of 2017, demand in Japan was up 6% from last year, in China it was up 38%, and in South Korea up 20%. Despite the uptick, LNG will remain oversupplied well into the next decade, resulting in more favorable prices and flexible contracts. An abundance of cheaper and more flexible LNG from allied countries such as the U.S. or Australia has partially undermined the energy security argument for nuclear amongst Asia’s major energy importers. The lower emissions of gas power is also viewed as an attractive option to replace coal.

This brings us to our final and perhaps most important “Q” – could Asia experience a natural gas revolution? Would LNG enable this to happen? We have invited the chairman of JERA, one of the world’s largest LNG buyers, to join us for a plenary session with other gas buyers and sellers to discuss the outlook for LNG in Asia.

Asia is now very much a part of the energy transition. Governments, firms, and customers in the region are living within it and debating its implications every bit as much as those in other parts of the world. At the APAC Summit, we hope to bring you the perspective of not only those living within it but also those driving Asia’s transition. We look forward to welcoming you there on November 28-29.

Learn more about BNEF’s upcoming Future of Energy APAC Summit on November 28-29 in Shanghai.

About Bloomberg New Energy Finance

Bloomberg New Energy Finance (BNEF) is an industry research firm focused on helping energy professionals generate opportunities. With a team of experts spread across six continents, BNEF provides independent analysis and insight, enabling decision-makers to navigate change in an evolving energy economy.
 
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