Trade Finance TV: Asia’s journey to net zero

Clarissa Dann: I’m Clarissa Dann and you’re watching Trade Finance TV.

Please welcome Alex Whitworth, Matt Moodey, and my co-presenter Katharine Morton. As Asia increases renewable energy output and transitions away from fossil fuels, what’s the impact on trade and project finance?

So the recent Black Swan events, have they put back progress? What do you think?

Matthew Moodey: Firstly, I would say it’s not just emerging markets that are suffering with the current events. I think it’s all markets. And I think the Black Swan events are really just highlighting some underlying global trends. Climate change is becoming more prevalent. Secondly, the war in Ukraine highlighted the importance of energy security and also that certain European countries have been powering themselves over decades with access to cheap hydrocarbons. And then supply chain shortages really highlighted that supply chain security was an important topic. These are momentous changes in the world and the response from politicians, industry, etc. would drive economies and the lives of people for decades to come.

Alex Whitworth: Yeah, there are many consumers and countries that are suffering, especially those that are importing liquefied natural gas. But overall, the high prices that we see in the global market are having a positive effect on renewables investment in Asia-Pacific because prices are so high now of coal and gas that renewables are looking very attractive and we see a huge market opening up. We’re going into a golden age of renewables investment in Asia Pacific.

Clarissa Dann: So which countries are standing out in this? Who is ahead of the game?

Alex Whitworth: Well surprisingly, China is really leading the pack, actually for both wind and solar. But every single country out there is looking at renewables, partly for economic reasons, partly for energy security and also for environmental.

Katharine Morton: But Matt, what about the picture outside of China?

Matthew Moodey: Yeah, I think if we break Asia-Pacific outside of China into two sort of areas, one is the more developed markets are Australia and Japan where the pipeline is very strong for renewables. I think the emerging markets of Asia-Pacific seem to be a little bit more stuck and it’s stuck at sort of investment levels back in 2015.

Clarissa Dann: One of the themes that came out of COP27 was that developed economies should support emerging ones with financing to help them get to their targets. Are you seeing this playing out at all?

Alex Whitworth: The story of renewables growth is not driven by age. What’s happened in the last five years is the economics of solar and wind power have become cheaper than gas probably four or five years ago and cheaper than coal a couple of years ago in many major markets like Australia, India and China. So that’s what’s driving it. And the question is an important one, especially for the very poorer markets. But at the moment we see economics driving the energy transition in Asia.

Katharine Morton: What about grid stability in Asia? You’re talking about renewables becoming cheaper, but how do we look at grid stability generally?

Matthew Moodey: What we’ve seen in the developed markets such as Australia, where renewables are now making up greater than 20% portion of the power generation. You run into problems around grid stability and also meeting demand at the appropriate time of the day. Renewable energy zones in Australia is a very hot topic and associated infrastructure. So I think there’s a point that you reach in terms of renewables on the supply side that you need to think about investment in other parts of infrastructure. There’s probably some lessons there for emerging markets as they start catching up.

Clarissa Dann: Alex, intermittency. That’s all part of it, isn’t it? How’s that been dealt with?

Alex Whitworth: Absolutely. Solar panels and wind turbines are only half the story. About half the investment in power sector goes into the grid. And at the moment, we don’t see enough investment going into the grid or into battery storage. Australia’s leading in terms of share of renewables with over 20%, but the share of the peak load is already hitting 60% or more in Australia and that’s causing a lot of problems. And we’ve seen similar problems in Vietnam with the renewables investment slowing down because the grid can’t keep up.

Katharine Morton: So green hydrogen has become an important topic of conversation. What are the next steps in Asia?

Alex Whitworth: There’s a huge amount of interest in green hydrogen as well as blue hydrogen in Asia-Pacific, and a lot of it’s driven by the Japanese market. Japan has set aggressive carbon targets for 2030 and it’s looking very difficult for Japan to reach those. One of the ways Japan is trying to reach those targets is by offsetting gas and coal in the power sector using green hydrogen and green ammonia and other low carbon fuels.

We’ve talked to some of our clients, including Jera, and they are investing in pilot projects, looking at how to cope fire green ammonia or blue ammonia inside a coal plant to reduce the carbon emissions. The economics are very challenging, but they’re still moving ahead with that.

Matthew Moodey: For green hydrogen to become a significant portion of the power mix. We really need to see these complete industrialized projects of significant scale. But I think there’s a number of factors that are sort of holding that back. That includes the cost of producing green hydrogen still is very high and 2 to 3 times the cost of blue hydrogen. We’ve got issues around transportation, how to transport it. There’s only one or two ships globally that can actually do that. Now do we transport pure hydrogen or do we turn it into a vector before we transport it, such as ammonia? And then, as Alex was mentioning, there’s the whole topic of upgrading the power production sites as well. So some of the forecasts I’ve seen is that green hydrogen is still going to make up a very small portion of the power by 2030, but hopefully a bigger portion beyond.

Clarissa Dann: Would that suggest that the appetite for financing those projects is a little muted?

Matthew Moodey: Well, it’s sort of similar to 15 to 20 years ago when LNG projects were starting out. It really requires some type of government to government approach and multidecade type up takes in order to support the financing, or some type of ECA or government support to support the projects. And I don’t think we know the answer to that yet.

Alex Whitworth: I think there’s a lot of uncertainty on the costs. And last year, a lot of people had expected the cost of renewables that are used to make green hydrogen or green ammonia cost to be coming down. But what we’ve seen with the supply chain bottlenecks is the cost of solar and the cost of wind is going up. And so that’s throwing a spanner in the works.

Developers and also end users have to be very careful about locking in high prices of green hydrogen when in the longer term we’re expecting costs to come down. But today the costs are relatively high.

Clarissa Dann: How do you see it in terms of Asia moving further towards these cleaner energy targets? How does 2023 look to you right now?

Matthew Moodey: What we saw was obviously a supply side shock where, because of the Ukraine war that took a lot of supply out of the system and you really just can’t simply build supply that quickly. You know, you can’t suddenly go build either renewable farms or for that matter, go build new hydrocarbon sort of sites as well.

So I think the high cost of generation that we’re seeing will continue because we’ve had under-investing in oil and gas for the last couple of years. I think there will be a scramble and a push to see higher investment in renewables and the payback for that supply side coming on line will probably be 3 to 4 years away from now.

Alex Whitworth: For China, I’m cautiously optimistic that China’s taken a turn. It’s opening up, moving away from its zero-covid policies. We could see a relative recovery in China’s economy, and that’s actually going to make the energy crisis potentially worse or longer if China does recover. So that’s a challenge. But from the power and renewables sectors point of view, that’s creating more opportunities for investment. And as we’ve already mentioned, a lot of business going into wind and solar in Asia to displace fossil fuels or to replace fossil fuels.

Clarissa Dann: I would like to thank Alex and Matt for their insights today. I’d like to thank Katharine, my co-presenter, and of course, all of you for watching. For our episodes, please go to TRADEFINANCETV.NET, like and subscribe on LinkedIn.

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Published on January 17, 2023