Photo: Wood Mackenzie

‘Disorderly’ energy transition looms with rising coal demand and high gas prices, says WoodMac

In the midst of the current geopolitical crisis and increasing energy security concerns, Wood Mackenzie, an energy intelligence group, has pointed out that Asia’s decarbonisation ambition does not match reality, as coal demand risks becoming stickier while gas prices stay high and renewable plans stall.

While COP26 was seen as a way of creating the mechanisms to make the energy transition possible, after Russia’s attack on Ukraine, the outlook for the supply, demand and price of hydrocarbons is changing all the time. As a result, the global stage is set for a rewriting of energy trade flows and with coal currently more resilient, further advancing the energy transition could be more expensive and potentially prove more carbon-intensive.

In lieu of this, the energy trilemma of security, sustainability, and affordability is weighing heavily on business leaders’ minds. As the impact of supply disruptions and price shocks in Pakistan and Sri Lanka have recently shown, governments that fail to act decisively can soon end up on the street, according to Wood Mackenzie.

The energy intelligence group has pointed out that many governments are accelerating decarbonisation plans in response as shown by the recently formulated REPowerEU Plan, which aims to increase the EU’s renewables target to 45 per cent by 2030; President Biden’s US Defense Production Act to boost domestic solar panel manufacturing; and the expectation that Asia Pacific countries will invest $1.8 trillion in renewables over the next decade.

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However, Wood Mackenzie explains that none of this can obscure the reality that the energy crisis has forced many countries back to coal to keep the lights on, which is abundantly clear in the Asia Pacific. Regional coal demand is proving resilient even at high prices, particularly in those markets able to ramp up production of cheap domestic resources, such as China and India. The company elaborated that Indonesian coal output hit a record high last month while Australian exports climbed to their highest level this year.

The energy intelligence provider believes that there is an increasing risk of coal rivalling gas for the role of the transition fuel in emerging Asian economies due to soaring LNG prices and Europe outcompeting Asia for LNG supply. Currently, even mature markets such as Australia and Japan are running their coal-fired power generation hard.

Wood Mackenzie highlights that this does not mean governments across the region are abandoning emissions targets, although, resilient Asian coal demand poses the risk of nudging up emissions or at least resulting in emissions failing to fall fast enough at the time when governments need to push harder to decarbonise. “Without action, a disorderly energy transition across Asia Pacific is looming,” says WoodMac.

Coal still reigns supreme in Asia

Wood Mackenzie outlines that stratospheric LNG prices and increasing competition with the EU are weighing on Asian LNG demand and supporting coal consumption across the region. If Europe goes all out for LNG to replace Russian pipeline gas by the end-2023, Asian demand could be down by over 40 Mtpa by the middle of the decade in which case coal would pick up most of the slack, not renewables, based on the firm’s research.

At the moment, much attention is inevitably focused on China since even with recent Covid lockdowns, it is expected to post positive power demand growth in the second quarter of 2022 and recover to 5 per cent growth for the full year of 2022.

Despite China’s huge investment in renewables it would be a mistake to sugar-coat the environmental impact of meeting this demand, since, the country still produces around 60 per cent of its power from coal and domestic coal production is receiving strong government support to help prevent a repeat of last summer’s power brownouts and reduce dependence on expensive LNG, states Wood Mackenzie.

A similar story is visible across the Asia Pacific, which still gets 56 per cent of its power from coal in regards to its highly competitive energy and manufacturing costs, and the trend of power demand moving to the region’s more coal-intensive markets.

Renewables: the struggle is real in Asia

Based on the energy intelligence group’s assessment, there is an upside, as the region will see massive investment in renewables over the next decade with China accounting for 60 per cent of the $1.8 trillion which is anticipated to be spent but has set the unambitious target of meeting “at least half” of incremental power demand growth with renewables in the 2020-25 period. Regardless of existing demand, Wood Mackenzie underlines that even the growth in Asian power consumption over the next five years cannot be met by renewables alone.

The energy intelligence player forecasts that there should be obvious upside to the region’s renewables investment. With high coal and gas prices, wholesale power tariffs saw an increase by an average of 50 per cent in the first quarter compared to 2021 average, improving the economics of renewables compared to fossil fuels.

However, an upside in wind and solar installations forecasts is yet to be seen as some markets are heading in the opposite direction for grid-connected renewables, with risks for developers and lenders increasing as IRRs are eroded by rising supply chain and financing costs, grid integration issues worsen, and regulators reduce incentives.

Wood Mackenzie lists Australia as an obvious example as the country’s energy market regulator AEMO had long been adamant that grid investments could support a doubling of renewables capacity out to 2030 but after the wholesale market ground to a halt last month, the connection of new renewables got put on hold.

A week later AEMO announced that connections would restart, but this will be subject to delays, thus, the energy market firm informed that many would not have been surprised to see the AEMO recently confirming the importance of gas in supporting renewables in its 2022 Integrated System Plan (ISP).

Moreover, Wood Mackenzie reports that this is not only happening in Australia as Vietnam’s National Load Dispatch Centre announced in January that no new solar or wind projects would be connected to the grid this year. The country’s draft power development plan now aims to keep the share of renewables flat through to 2030 due to grid constraints, increasing the need for coal and gas to meet booming power demand.

Fallback on coal invokes two-speed energy transition

As disclosed by Wood Mackenzie, Asia’s current fallback on coal creates a “major political headache” for governments committed to 2030 emissions targets and longer-term net-zero goals, risking a two-speed energy transition as some countries continue to rely on coal while others move faster, likely leading to geopolitical rifts and a fraying of agreed decarbonisation pathways.

While this is a pessimistic outlook, the energy intelligence provider outlines that challenges around integrating renewables into grids can be overcome, as CCS is advancing, low-carbon hydrogen has a future, and other new technologies will emerge.

To make this happen, Wood Mackenzie concludes that the resilience of coal demand must be addressed quickly, since the more the world overshoots its carbon budget, the more it will have to rely on carbon removals and less on mitigation, thus, “there is little time to waste.”