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Asia-Pacific's Energy Transition Will Be Long-Drawn-Out

SINGAPORE (S&P Global Ratings) April 20, 2021--Energy transition is firmly underway in Asia-Pacific (APAC), but the pace and degree varies across markets. That's according to a chartbook-style report S&P Global Ratings published today, titled "Energy Transition In Asia-Pacific: A Marathon, Not a Sprint". The following are the key takeaways:

Demand for coal will remain sticky, even as renewables rise.  With more than 60% of electricity generation from fossil-fuel-based plants and growing power demand, coal will remain highly relevant in large markets in APAC such as China and India for the next one to three decades. Even though absolute demand for coal will rise, in relative terms the share of coal in the generation mix should trend down towards 40% by 2040. Wind and solar will likely grow faster than other fuel, given policy support, market preference, and technology/cost breakthrough. Cost of energy from renewable sources and cost-efficient storage solutions will be crucial for greater use of renewables. Growing environmental, social, governance risks for fossil fuel companies and an increasing global consensus for climate action could speed up the transition.

Coal emissions will continue to increase.  Coal-fired capacities are relatively young and provide the base load in most Asian countries; A vast majority of the plants will not retire until 2040. New coal plants are still under construction in some markets. Coal generation and emissions will therefore rise. Transition away from coal in APAC will lag the trends observed in the U.S and Europe (U.S.: currently about 25% from coal) by a few decades. 2030 may be the key inflection point, when even APAC markets will stop adding new coal plants, accelerating energy transition.

China may under-promise but over-deliver, while India may over-promise and under-deliver.  China has set near-term energy and climate-related targets till 2025; these should be achievable even at the current pace. The country has set more ambitious long-term targets, with carbon net emissions to peak before 2030, and reach zero by 2060. In contrast, India is set to miss its 2022 emission targets due to delay in rollout of new capacity additions and the imposition of duties on imported panels. India targets 450 gigawatt power from renewables by 2030, accounting for 60% of its capacity.

Carbon policies are still evolving in most APAC markets.  Most markets have supportive policies for renewables but limited policies to discourage use of coal. Carbon pricing may evolve (such as China's emission trading system), and help speed up transition. The lack of clear long-term federal policies in Australia have hit investments. Meanwhile, subsidized electricity prices and policy requirement for renewables' costs to be 85% of the current grid prices is a big hindrance in Indonesia.

Funding access and cost differentiation are likely to widen.  Funding is shrinking for fossil-fuel companies and costs are rising. Meanwhile, a rush for green finance is enabling renewable energy companies to raise funds at attractive prices. Importantly, there is a need for a mix of solutions, including energy savings and transition financing, to allow coal-fired generation to get cleaner before a long-term clean baseload solution is implemented. As per industry estimates, China will need to invest US$9 trillion for energy transition by 2060, India will have US$500 billion investments in renewables over the next decade, and Indonesia will invest US$41 billion over the next five years.

Credit impact will be mixed.  Cash flows of regulated utilities may benefit from protected returns, even though policy transition risks cannot be ignored. However, network investments will need to increase to support uptake of renewables and reduce risk of curtailment. For the unregulated segment, new carbon policies could hurt fossil-fuel companies and is already resulting in significant consolidation among China's coal miners. Renewable energy providers may strengthen their business profile, but leverage will likely stay high due to elevated capital expenditure. Cash flow pain is likely for Australian integrated generation companies and retailers because renewables have curbed power prices.

RELATED RESEARCH

This report does not constitute a rating action.

The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@spglobal.com. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.

Primary Credit Analysts:Abhishek Dangra, FRM, Singapore + 65 6216 1121;
abhishek.dangra@spglobal.com
Parvathy Iyer, Melbourne + 61 3 9631 2034;
parvathy.iyer@spglobal.com
Gloria Lu, CFA, FRM, Hong Kong + 852 2533 3596;
gloria.lu@spglobal.com
Secondary Contact:Richard M Langberg, Hong Kong + 852 2533 3516;
Richard.Langberg@spglobal.com
Research Assistants:Liying Wong, Singapore
Rick Yoon, Hong Kong

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