Rise of renewable energies in Asia Pacific
Physical climate risks such as rising sea levels, droughts, floods and wildfires are credit negative for most rated sovereigns, particularly emerging markets in SubSaharan Africa, Asia Pacific and the Caribbean, according to Moody’s Investors Service.
From a sovereign credit perspective, weaker economic activity due to increasingly frequent climate related events will weigh on fiscal revenue and may lead to an increase in transfer payments and welfare expenditures, particularly in the event of climate shocks.
Many countries are exposed to at least one climate hazard, with emerging markets generally more likely to face multiple challenges than advanced economies, it said in it May 7 report.
“Sovereigns in Asia Pacific stand out for their exposure to flood risk – highest for Cambodia, the Philippines and Thailand. Exposure to heat stress is widespread among emerging markets. Advanced economies tend to be more exposed to rising sea levels, with Hong Kong, Singapore, Denmark and the Netherlands most at risk.
“Over time, repeated climaterelated natural disasters can weigh on investment, productivity growth and economic strength, which can weaken a sovereign’s credit profile,” said Steffen Dyck, Moody’s vice president and senior credit officer.
“There is also a large gap between financing needs for climate-adaptation measures and low-cost funding sources. This threatens the credit profiles of sovereigns which are highly exposed to physical climate risk, especially those with already low fiscal strength.”
Thus, parallel with ESG’s growing interest is renewable energy (RE) which is also fast gaining traction, as it is expected to make up 69 per cent of the global capacity mix by 2050 from more than 30 per cent currently, according to BloombergNEF and International Energy Agency (IEA).
Researchers with Kenanga Investment Bank Bhd (Kenanga Research) believed the new reform will be led by wind and
solar energy which would make up 56 per cent by 2050 (from circa 10 per cent) currently, while traditional gas and coal appear to have already peaked in 2020.
“Geographically, the Asia Pacific region is poised to lead investments in new capacity over the next 30 years, with the rest of APAC (which excludes China and India) expecting US$1.9 trillion to be invested,” it said in a RE thematic report.
“Locally, Malaysia is targeting a 20 per cent RE ratio by 2025 while the Association of Southeast Asian Nations (Asean) ministers have set a target of 35 per cent RE in installed power capacity by 2025.
“Based on the Malaysian Generation Development Plan 2019, the electricity demand is expected to grow at 1.8 per cent per annum over the next 11 years with 9,321MW of new capacity required to meet demand growth.
“As such, the increase demand will be led by rising supply of RE to 23 per cent – from about two per cent in 2020 – by 2025, while thermal capacity share will reduce to 70 per cent (from 82 per cent), which would result in an estimated annual system cost of RM35.2 billion in 2020 to RM45.4 billion in 2030.”
Sunny days for solar, but gone with the wind
It comes as no surprise that the shift from environmentally exhaustive gas and coal energy is largely a result of declining RE cost over the years, Kenanga Research said.
Globally, unsubsidised cost of solar photovoltaic (PV) and wind has already become cheaper than conventional technologies with similar generation profiles, such as gas peakers and gas combined cycles.
“However, there are some instances where the capital cost of certain RE technologies, namely solar PV (crystalline utility scale) and solar PV “thin film utility scale) have converged with conventional technologies, which coupled with the improvements in operational efficiency, have led to the convergence of Levelised Cost of Energy (LCOE) in respective technologies,” it highlighted.
“Solar cost in particular has decreased as a result of improved technology which include higher wattage panels to 550W in 2021 (from 245W in 2016), leading to lower per watt cost whereby the Balance of Plant, EPC and the cost of project development are spread over more power generated.”
Meanwhile, AC inverters (compared to DC) have better ability to detect faults and optimise outputs.
This should seal the deal for most countries to shift to solar
generation as it is one of the cheapest and most scalable ways to meet RE generation targets, while other less competitive energy sources are expected to be phased out.
An unusual observation made by Kenanga Research was wind energy being the less popular RE choice due to infrastructure and complex supply chain.
“World turbine price trends have also been on the decline due to oversupply, and competition as oil and gas companies compete for more market share,” it said. “Bigger turbines which translate to more energy and floating wind are expected to be the future for wind energy.
“However, this segment remains challenging due to grid limitations to offshore locations, while larger turbines require stronger foundations.
“If these concerns are addressed, wind would be an interesting option for Malaysian engineering companies or companies with steel making capabilities and shipping partners to improve the value chain.”
Bigger pockets for energy storage
A key criteria to help improve energy efficiency is declining energy storage cost. For viability, Kenanga Research saw that energy storage is particularly important for intermittent energy generations like solar which only occurs during sunlight hours, and wind which is dependent on weather conditions.
As such, effective battery storage is vital to harness the energy to be stored for future use when needed.
“In the past, without affordable and effective energy storage capacities, RE was highly dependent on weather conditions and could not produce enough power to meet peak energy demand.
“Going forward, energy storage prices are projected to trend steeply downwards by as much as 65 per cent to US$73 per kWH by 2030 (from US$208 in 2018) due to technology and design advancements, as well as better economies of scale,” it estimated.
“On this front, China is taking the mantel as the manufacturing leader and is expected to dominate the growing supply of lithium cell plants at 68 per cent of global demand by 2025, followed by Europe (17 per cent) and the US (seven per cent).”
Malaysia’s RE journey
Going forward, local solar players may see increased overseas contribution given limited barriers to entry to penetrate international markets and a competitive local environment.
“In order for Malaysia to meet its 20 per cent RE capacity mix target by 2025, it would have to develop 2,758MW of new RE capacities, of which the bulk will consist of solar of 2,172MW and 1,586MW of non-solar which is a sizeable amount for growth,” the research firm gathered
“However, local bids such as the recent LSS bids have been highly competitive, going as low as RM0.177pkWH which is lower than gas-based power generation cost of RM0.23pkWH and the reference price of LSS2 of RM0.32pkWH.”
Given that Malaysia is not facing an acute shortage of electricity supply and RE demand is mostly based on local government targets, it said international markets may prove to be more profitable given the necessitated commitment for increased energy supply.