Japan seeks 'realistic' energy transition with ASEAN with cleaner fuels

Japan is set to agree with the Association of Southeast Asian Nations on a framework that pursues "realistic" energy transition with cleaner fossil fuels during a ministerial-level meeting in late June, when Tokyo will propose a package of actions, including a $10 billion public finance for LNG projects.

The cooperation framework will be agreed during an extraordinary meeting between Japan's Ministry of Economy, Trade and Industry and ASEAN's energy ministers, a METI source told S&P Global Platts.

The move will come at a time when Japan intends to seek a "realistic transition" for energy with ASEAN, a group of 10 economies in Southeast Asia with a high dependency on coal, through jointly formulating a path for decarbonization with sustainable economic growth, the source said.

The latest development follows METI's signing of a memorandum of cooperation with the Asian Development Bank in February to enhance efforts to focus renewable energy, and other technologies that will facilitate the transition to low carbon energy in Southeast Asia. The ASEAN members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

In the upcoming meeting, METI will propose a package of actions, which include helping ASEAN countries formulate their individual roadmaps for energy transition, with an outcome from the regional outlook of the Economic Research Institute for ASEAN and East Asia, or ERIA, the source said.

METI will also propose Japan's guidelines for climate transition finance to be used as an idea for ASEAN's transition finance, following its formation in May, the source said.

The guideline, which is consistent with the International Capital Market Association's climate transition finance handbook, not only looks at companies' individual projects that need finance, but also their "transition strategy" and credibility for decarbonization.

Japan will also offer to provide $10 billion in finance to help the countries introduce LNG as a low carbon emissions fuel, renewables should the regional projects meet the transition finance guidelines, the source said.

Japan's formation of the climate transition finance guidelines paves the way for helping companies secure finance they need for the 2050 carbon neutrality target as well as possible implications when securing funds for new LNG projects in Southeast Asia.

LNG headwind

Public financial institutions such as the ADB and the World Bank Group's International Finance Corp have been instrumental in building LNG production as well as import and distribution infrastructure in emerging Asian countries, whose low credit ratings prevent access to commercial finance.

This may change with the ADB recently issuing a draft energy policy to support the low carbon transition in Asia Pacific, which will guide its funding strategy in the coming years.

The draft policy is currently seeking industry feedback, but contains a major policy shift where the ADB "will not finance any coal mining, oil and natural gas field exploration, drilling or extraction activities."

It says it may finance natural gas projects "including gas transmission and distribution pipelines, LNG terminals, storage facilities, gas-fired power plants, natural gas for heating and cooking" only if they meet specific conditions such as providing energy to those currently without energy access, switching to a more modern means of energy like cooking gas to replace biomass, and gas-fired power to provide last-mile electricity.

The gas projects must demonstrate that there is no substitute after considering the social cost of carbon, for instance gas-fired power should be comparable to renewables plus storage. The projects must use the best technology, there should be a net reduction in grid emissions by replacing diesel, or coal power, and demonstrate alignment with long term carbon neutrality.

In April, the World Bank published a report saying LNG is likely to play a limited role in the decarbonization of shipping, and recommended that "countries should avoid new public policy that supports LNG as a bunker fuel, reconsider existing policy support, and continue to regulate methane emissions."

Some examples of Asian LNG projects supported by public finance are Indonesia's Tangguh LNG, Jawa-1 LNG-to-power project in Indonesia, India's Dahej LNG terminal expansion, Pakistan and Bangladesh's first LNG receiving terminals, and several others.

In Vietnam, new deputy prime minister Le Van Thanh has asked the Ministry of Industry and Trade to review the draft power development plan over 2021-2030 with a vision to 2045 (PDP VIII) and re-submit to the prime minister for approval by June 15, according to a government statement on May 3.

Under the draft's base scenario, Vietnam will require LNG imports for power generation amid expected shortage of domestically produced natural gas in years ahead. It will develop 4.1 GW of LNG power by 2025, from none currently, which will be raised to 18.1 GW by 2030, 37.1 GW by 2035, 48.8 GW by 2040 and 58.6 GW by 2045.