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Credit FAQ: Credit FAQ: The Renewables Race: How Quickly Can Asia-Pacific Shake Off Coal?

Total energy demand continues to outpace clean energy supply. This has prompted investor questions about the phasing-out of coal and whether renewables can fill the breach.

Here we address questions that emerged from the S&P Global Ratings webinar, "Asia-Pacific Infrastructure Conference 2023: The Energy Transition and Infrastructure Investments In 2023: New Year, Same Obstacles?"

Energy Breakdown

In Asia-Pacific, what is the contribution of fossil fuels versus renewable energy contribution?

Renewables account for 11% of electricity generation in Asia-Pacific, according to Dan Klein, head of Future Energy Pathways at S&P Global Commodity Insights. That's slightly behind the global figure of 12%.

Overall, renewables account for 7% of primary energy supply globally, but that rises to 14% with hydro generation.

Chart 1

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In China, 7% of primary energy comes from renewables. For South Asia, the figure is 11%, and for Southeast Asia, 5%.

Total energy demand continues to grow faster than clean energy supply, and that includes nuclear, hydro and other non-emitting resources. Emissions continue to increase each year (see "Asia-Pacific's Different Pathways To Energy Transition," March 30, 2023). A young coal fleet—except in Australia--will delay incentives to retire coal plants early in Asia-Pacific.

Chart 2

image

How is the development of renewable power progressing in China?

Growth is strong, but fossil fuels remain the main power source and will be so for the next two decades. China has added more than 100 gigawatts (GW) of wind and solar capacity annually over the past three years.

In 2023, new additions will reach 160GW, according to estimates from China's National Energy Administration. This implies nearly 30% of annual growth over 10 years. This will bring non-hydro renewable capacity to about 920GW by the end of 2023.

Chart 3

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Chart 4

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China aims for cumulative capacity of wind and solar of at least 1,200GW by 2030. The country will reach this level in three years instead of seven if it maintains its annual pace of addition. At the end of 2022, renewables, including hydro, accounted for almost 50%. It's about 47% for total power capacity and about 32% of power generation.

The major renewable developers are state-owned independent power producers (IPPs). By leveraging their state-owned enterprise background, they retain strong refinancing ability to fund their capital expenditure needs.

How fast is the transition occurring in India and Indonesia?

In India, the private sector is leading the energy transition. Renewable capacity has outpaced coal over the past couple of years, but coal will remain relevant because of the growth in demand for power. The key challenge is intermittency. Reaching an inflection point will require technological advances and cost breakthroughs.

In Indonesia, on the other hand, it is harder to introduce renewables into the mix because of that fact that coal is cheaper and electricity prices are subsidized. The country's energy transition hinges on government policy, determining who will pay to support the transition, and whether technological advances such as carbon capture are viable.

What is the state of the transition in Australia?

In 2022, renewable power contributed about 35% of total energy supplied in the Australian market and fossil fuels about 55%. Australia's coal plants are becoming increasingly unviable with lower prices.

Over the next five to 10 years, the government aims to ensure that about 8GW of coal-fired generation is out of the grid by 2030.

In September of last year, Australia enacted its targets on reducing greenhouse gas emissions by 43% from 2005 levels by 2030; it also set a net zero target by 2050. This includes a goal of having more than 82% penetration of renewables by 2030.

Concerns about energy security have led to several state governments to consider ways to fast-track investment in renewable projects. In its recent budget, the federal government pledged about A$25 billion toward the development of clean energy and A$20 billion for developing all the networks within Australia.

Another barrier is financing. While there is capital available, projects face long delays because of the amount of transmission build-out needed as well as the time required for approvals and connection to the grid.

The question remains whether Australia will have to rethink the mooted closure of several coal plants by 2030 to have a backup.

image

New Technologies

What new technologies are being developed for the transition?

Battery storage, pump storage, hydrogen, and carbon capture and sequestration (CCUS) are among the key technologies.

To what extent are these technologies gaining traction in China?

In China, the government has mandated that developers of renewable energy projects install power storage facilities to match 10%-20% of power generation capacity, with a usage duration of about two hours, starting in 2023. However, unit development costs for wind and solar projects will probably increase by about 10% as a result.

Government compensation for these facilities is limited, which means developers have no incentive to invest in them unless forced to.

Pump storage remains the dominant storage technology, mainly developed by the two grid companies; the government expects capacity to reach about 88GW by 2030.

The government expects batteries to reach 30GW by 2025. The potential investment by IPPs and grid companies in these facilities could reach about Chinese renminbi (RMB) 20 billion over the next three years.

Other technologies such as hydrogen are in their infancy, with trial application on public transport. The government's promotion of natural gas as a type of clean energy suggests the application of green hydrogen as a production material in China may take longer.

To what extent are these technologies gaining traction in India?

Existing technology is still crucial. Greenfield sites use existing infrastructure--wind turbines with solar panels--to increase capacity use by up to 50%.

Pump storage is considered effective, mostly for existing sites close to solar and wind capacities; while new tenders in India for providing peak power around the clock could lead to greater adoption of battery technology. Offshore wind has potential if it is combined with solar, and could help balance out the grid.

Green hydrogen has potential but for it to be viable the cost must halve. CCUS is at the pilot project stage, and not yet viable on an industrial scale.

What can Asia-Pacific learn from other markets such as Europe?

China could observe how other markets apply pricing mechanisms and regulation. That's particularly because China's power market is undergoing various market-based reforms and less government-set pricing across the supply-demand side.

There is also much to learn in how other markets deal with disruption of power supply and achieving a balance in supply and demand. Mature markets also offer lessons in the construction of smart grids and real-time feedback systems.

In India, some renewable developers are partnering with international technology players, particularly for battery solutions.

Developers are also exploring green hydrogen, electrolyzers and other capacities as they see such technology as a complementary business offering.

Regulation

How do energy security regulations and funding rank in order of importance?

Intermittency and the cost of energy are the key challenges for renewables. The cost of thermal energy depends heavily on commodity prices. There is a direct correlation between commodity prices and the cost of energy at times of uncertainty--such as now, where there are geopolitical tensions and market disruptions.

Storage is another key consideration. In the case of coal, you can either use it or store it. For renewable energy, it's an external component. Whereas the cost of energy of solar and wind is already in grid parity in most countries, the cost of storage is not. That's where regulation plays a big role.

Moreover, the cost of carbon is yet to be priced in. That could be a potential downside financially.

On the other hand, if regulation is supportive--and we are seeing that in India, for instance--funding channels open.

In the case of China, are energy security considerations dampening or accelerating transition?

Energy security is a key issue China must deal with. But this will not derail its long-term energy position goals. The country is the world's largest power producer and has had a high reliance on coal in its energy structure.

So adapting policy will be crucial throughout the long-term transition. And over the next couple of years, China may still face relatively tight power supply and demand as renewables ramp up.

Recently approved coal-fired stations suggest regulation will continue to prioritize energy security in the long-term transition.

More than half of China's power production was coal-fired as of last year despite the gradual increase in the contribution of renewables.

To tackle the intermittency of the fast-growing renewables and the transmission bottlenecks, China has outlined ambitious investment plans for renewable capacity grade assets and storage facilities over the coming years.

Are regulations a hindrance or an enabler?

In China, regulations are driving the transition. Market-oriented reform is an indispensable supporting factor. Key regulations include more flexibility in fuel cost pass-through and tariff setting.

A growing percentage of the market has power trading and incentives to facilitate renewable power consumption. Regulation and funding move in tandem, and China's vast energy transition goals will need a large amount of financing over the longer term.

Elsewhere in Asia-Pacific, regulation has helped accelerate the adoption of solar power. It's the fastest technology to go from development to construction to operation.

In the case of offshore wind, it is still in its infancy so requires support, particularly in Taiwan and Japan where there is no pre-existing supply chain.

On the financing side, regulation across Asia-Pacific has also helped investors to adopt practices to ensure investments flow into the rightful areas for the energy transition. ASEAN has established a green bond framework.

In Singapore and the Philippines, for instance, there are minimum requirements for a fund to carry an environmental, social, and governance label. India this year debuted a green bond at the sovereign level. China in 2022 revised its green bond principles, so that they are almost aligned with International Capital Market Association.

Funding

What are the funding needs for storage, grid, and hydrogen?

In China, the total investment could easily reach RMB6 trillion-RMB7 trillion under the 14th Five-Year Plan (2021-2025). The International Energy Agency estimates China will account for one-third of the global power consumption in 2025 when solar and wind electricity generation will double from 2020 in the country.

During this time, continued spending in renewable capacity installations, mainly in the form of mega-sized renewable bases, could top RMB2 trillion (see "China's Renewable Developers Can Tackle Spiraling Debt And Capex," April 18, 2023).

We will also see stepped-up investment in pumped storage, another RMB1.5 trillion of additional spending. And about RMB3 trillion in grid investment. This does not include spending for battery storage, hydrogen and others, which will be relatively smaller.

In Australia, the Australian Energy Market Operator estimates A$28 billion of investment is required in the transmission networks alone and about A$13 billion of investment in renewables by 2026.

In the case of hydrogen, the cost has yet to be determined because it may take about 10 years to get established. The economics and use must be clear. If the transition to hydrogen is successful with support from government, it will eventually attract funding.

Similarly, offshore wind is yet to be tested in Australia. Once this renewable is economically viable, it should proceed, but it will be the last cab off the rank.

What risks do such investments pose?

The main risk is the scale of investment needed to make new technologies viable. Interest costs are materially higher than they were two to three years ago. So how do companies adjust in this new environment? How can they ensure they have the funding ability not only to refinance but also to meet these capital investments?

Government help can also be a double-edged sword. In China, delays in government subsidies have caused a drag on state-owned IPPs and a liquidity crunch for several private renewables developers. This has caused somewhat of a consolidation in the sector whereby state-owned enterprises have acquired some private developers.

At the same time, state-owned enterprises still enjoy funding advantages in both cost and access, which is hugely supportive to their enormous investment needs.

Writer: Lex Hall

Related Research

This report does not constitute a rating action.

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
Apple Li, CPA, Hong Kong + 852 2533 3512;
apple.li@spglobal.com
Laura C Li, CFA, Hong Kong + 852 2533 3583;
laura.li@spglobal.com
Secondary Contacts:Richard Timbs, Sydney + 61 2 9255 9824;
richard.timbs@spglobal.com
Christopher Yip, Hong Kong + 852 2533 3593;
christopher.yip@spglobal.com

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