Southeast Asia is at the forefront of a global energy market transformation which is outpacing even the most ambitious predictions.
In the last few days, a report from analyst Wood Mackenzie stated the ASEAN nations will need to double their energy capacity in the next 20 years, at a cost of more than US$500 billion. Woodmac also concluded that half of the new ASEAN capacity will come from renewables, a very different profile to what energy markets were assuming only a few short years ago.
The Woodmac forecast for this region is unexpected, and highlights that ASEAN have the opportunity to both learn from the successes and failures of other parts of the world which are further down the energy transition path, and at the same time leverage the enormous cost deflation achieved in renewables in the last two years.
In Europe, the rise of cheap renewable energy has combined with falling electricity demand thanks to the impact of energy efficiency to pull down wholesale electricity prices to unprecedented lows, causing financial pain for utilities that have delayed their transition from fossil fuels to renewables.
Over the 2010-2016 period, European utilities have made US$150 billion in asset write-downs. Investors from Goldman Sachs and UBS have been warning for years that coal has reached retirement age and that solar will become the ‘default technology of the future’.
Similar trends have been apparent now for some time in China and more recently in India, where drives to install both thermal and renewable capacity concurrently have seen coal-fired power station utilization rates drop to 47% and 56% respectively in 2016. This is despite electricity demand growing in these countries.
While some utilities like Italy’s Enel and US’ NextEra are world leaders in positioning themselves for electricity systems dominated by renewables, there are many examples of utilities suffering significant shareholder value destruction as a result of resisting the inevitable or belatedly making their transition.
Once Germany’s biggest utility, E.On’s belated response was to spin off its struggling coal, gas and hydro generation assets into a separate company. Germany’s RWE has been impacted in the same way. By failing to re-focusing their businesses towards renewables sooner, these major players have suffered significant continuing reductions in shareholder value compared to Italy’s Enel which made its strategic move earlier.
In Australia, where thermal power is being progressively replaced by a growing base of renewable energy plants, AGL appears to be another utility leader. Even despite continuing policy uncertainty, into 2017, Australia is seeing an A$11bn wave of renewable infrastructure project investments. In accepting a future dominated by a succession of end-of-life coal fired power plant closures and one in which expensive domestic gas is no longer an option as a transition fuel, the company is working to ensure the closure of its last coal-fired power stations ahead of target.
In fast developing countries like India, increasing electricity demand means the large coal-fired generation fleet cannot be quickly abandoned. However the global energy transition backed by the biggest financial players has not gone unnoticed by state utility NTPC which is becoming a key linchpin of the Modi government’s emerging leadership in renewable energy. This transformation is economically logical given that, as of 2017, solar is cheaper than existing coal-fired power generation.
A key economic imperative is that renewables are deflationary. The equation is simple. Technology gains and economies of scale have seen renewable generation consistently outbid fossil fuel-based generation in an ever-wider number of markets from Brazil and Mexico, to Dubai and South Africa.
While countries including Indonesia, Vietnam and Myanmar currently face the offer of relatively cheap international export credit agency (ECA) finance for thermal power, this is effectively a manufacturing and engineering capacity fire-sale, with China, Japan and South Korea seizing a final opportunity to offload old technology produced by domestic manufacturers even as it becomes completely obsolete.
But around the world, the biggest financial institutions such as the Norwegian Sovereign Wealth Fund, the Bank of England, Blackrock, Deutsche Bank, CalSTARS, JP Morgan Chase, Macquarie Group, Swiss Re, plus AXA and SCOR of France have all come out in support of a renewable transition and/or changed investment policies to avoid stranded asset risk and expand low emissions investment capacity.
Notably, BlackRock, the world’s largest asset manager, stated this year that “coal is dead.”
Put simply, electricity utilities need to accelerate their path towards renewable energy to avoid the financial risks and shareholder value erosion incurred by being a late mover.
This is the clear global lesson and it’s one which should be heeded by the fast-growing nations of Southeast Asia, because the decisions they take now will have repercussions for decades to come, delaying the inevitable transition to a more sustainable, lower cost energy system, and missing out on strong investment flows and job creation in industries of the future.
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