Game Changers in Asia's Energy and Power Markets
On March 20–22, NBR convened the 2012 Pacific Energy Summit in Hanoi, Vietnam, to discuss market and policy solutions for “Innovative Generation: Powering a Prosperous Asia.” NBR asked Mikkal Herberg—Research Director for NBR’s Energy Security Program, Senior Lecturer at the University of California–San Diego, and a Summit speaker—to explain the key themes that defined discussions. As the world’s most dynamic economic region, Asia is attempting to expand electricity access and ensure energy security without compromising the environment. Mr. Herberg describes specific obstacles that lie ahead, as well as new opportunities that have emerged to help Asia make a shift toward abundant, reliable, and cleaner energy.
The 2012 Pacific Energy Summit brings power generation to the fore among a number of competing energy issues. Why is power generation of critical importance today?
Asia has experienced 25 years of profound, strong economic growth. In that process, as economies modernize, particularly in developing Asian countries such as China, India, and in Southeast Asia, demand for electricity grows at a very high rate—in fact, faster generally than growth of total energy demand and often faster than economic growth.
At the same time that electricity demand has risen, countries are having difficulty putting in place enough power-generation capacity and infrastructure for transmission. As a result, there is a big risk in many countries throughout Southeast Asia, and China and India, that shortages of electricity could seriously undermine economic growth.
Adding to these challenges, Asia is trying to move toward a cleaner energy mix, particularly in electricity generation, where a lot of coal is used, as well as extend the benefits of electricity to rural areas. This is critical to reducing poverty and giving people a higher standard of living more broadly.
So Asia is confronting all these issues at the same time, which presents an enormous and daunting challenge.
What are the recent key geopolitical events that define the global energy market today and the energy outlook for Asia?
Four major elements are reshaping the current energy outlook for Asia. First is the growing risk of rising oil prices in a very tight global oil market and the very limited capacity to produce oil globally, alongside gradually rising demand. As oil demand has begun to recover from the effects of the Great Recession, oil production capacity in OPEC and elsewhere in the world remains very limited. Oil prices are rising due to the lack of production capacity, lack of investment, and political instability in key exporting regions. Rising oil prices are a major threat to Asia’s economic prosperity.
Second, there is a revolution of global gas markets, due to the enormous new supplies coming from the United States through shale gas development, and potentially shale gas coming from many other places such as Australia, China, and elsewhere. This could literally revolutionize the global gas supply, leading to what many people are talking about: the “golden age of gas.” Gas is cleaner burning than oil or coal, so it’s an important fuel for the future. So this is good news.
Third is the status of coal, which continues to be the most important fuel for power generation both globally and in Asia. Growth in coal consumption has been faster than other primary fuels in recent years, but at the same time it is the most carbon-intensive and environmentally damaging. As governments seek to meet booming electricity demand, there is enormous pressure to use every fuel available. The natural default fuel is coal, which is low-cost and domestically available, thus making it difficult to move away from as a fuel. Yet it’s the most problematic fuel environmentally.
The fourth big change is the Fukushima nuclear disaster in Japan. The disaster has created a national energy crisis in Japan, which has effectively lost 30% of its electricity supply as it has gradually shut down virtually all its nuclear power plants. It’s not clear when these power plants will restart, due to safety concerns and the regulatory reforms that will be needed. Replacing nuclear supplies has meant a big jump in natural gas, coal, and oil imports to generate electricity. This demand surge for liquefied natural gas (LNG), as well as coal and oil, is tightening already tight Asian energy markets.
Coal and oil remain dominant in Asia’s fuel mix. What are the current trends that define these fuel markets, and what are the short- and long-term implications for Asia’s predicted rise in power demand?
Asia does use a lot of coal for power generation. Roughly 60% of Asia’s electricity is fueled by coal, compared to the worldwide average of 40%. In China and India, coal use dominates the fuel spectrum. Over the last decade, from 2000 to 2010, Asia accounted for the entire net global increase in coal consumption. Coal is vital to Asian energy security.
In China, 80% of electricity is fueled by coal, and in India it’s 70%. Indonesia is also a large consumer of coal. The International Energy Agency (IEA) forecasts that over the next twenty years, 80% of global coal-demand growth will come from China and India alone, and Asia as a whole will account for 90%.
So Asia is the primary coal market globally, driven largely by growth in electricity demand. While the use of other fuels—natural gas, renewables, hydro, and nuclear—is growing rapidly in Asia, coal use will continue to rise.
This situation has profound environmental implications. Asia needs to find ways to slow the rise in coal consumption and mitigate its environmental impacts. There is no reasonable scenario in which coal use won’t increase significantly. That means that we’ll need to accelerate development of carbon capture and storage technologies, or CCS, speed up the use of more high-efficiency turbine technology, and expand co-generation power stations that simultaneously generate electricity and then reuse waste heat—along with other forms of much more efficient power generation. The goal needs to be to reduce the amount of coal needed to generate a given amount of electricity.
How would you characterize the challenge that policymakers face in determining what energy sources to invest in for the future? What factors should they prioritize when determining their fuel mix and investment goals?
Asia’s energy policymakers increasingly recognize the need to expand other electricity sources and are moving toward a growing reliance on a range of cleaner fuel choices and technologies. They need to mobilize every available resource and accelerate investment in these new supplies. That is the key investment challenge.
One good choice for the future is natural gas, which is increasingly available due to new supplies coming online across Asia and globally. On average, gas is 40%–45% less carbon-intensive than coal, and it has fewer other air pollutants. Nuclear generation also needs to be promoted, despite the new concerns following the Fukushima disaster. Renewables also are part of the solution to boost supplies of cleaner fuels, as will be added hydroelectric power.
It’s generally true that other choices tend to be somewhat higher on the cost curve. For electricity generation, many countries have systems that are either government-controlled monopolies or where investors face challenges in achieving a reasonable return on investment. So how can governments incentivize new investment? How can they incentivize new energy sources that are cleaner?
What specific opportunities have you identified to mobilize the resources necessary for adequate power generation, while addressing environmental concerns?
There are opportunities, and among them are a series of important domestic policy reforms to the electricity market that should be considered by governments across the Asia-Pacific in order to mobilize new supplies of electricity.
Across the region, governments are beginning to move away from the old, unresponsive state monopolies toward a more competitive, innovative approach to electricity markets. A key element of this is to “unbundle” the state utility and to break it into its three natural industry components: generation, transmission, and distribution. This setup creates opportunities to introduce competition and attract private capital or private-public partnerships to invest in new electricity supplies.
A second critical issue is price reform. Across developing areas of Asia, power prices tend to be subsidized and held very low by the government in order to support social stability, providing electricity service to the poor, and to sustain competitive export industries. But artificially low electricity prices seriously undermine the ability to reinvest in new electricity-generation capacity. This leads to chronic shortages and unreliable electricity supplies. Price reform is clearly a sensitive issue—because it means paying more for electricity— but governments need to move toward price levels that reflect the true cost of producing, transmitting, and distributing electricity. Otherwise, subsidies drain revenue from budgets that should be used for more important health, education, and social purposes. Pricing reform is critical.
Another opportunity is addressing the demand side by promoting improved efficiency in electricity use. In addition to more realistic prices for electricity, there are potential regulatory programs that drive industry and consumers toward more efficient use. Currently, a lot of programs are being developed in China and elsewhere, such as building- and appliance-efficiency standards, promoting benchmarking for efficiency-performance measures, and encouraging and deploying best practices among industry players. This can be done through government incentives for industry and companies to install energy-efficient equipment and for consumers to use more efficient heating and cooling.
In short, there is enormous scope for improving efficiency that can go along with more rational pricing of electricity and the unbundling of the electricity industry, allowing more private investment and greater competition in the marketplace.
Last year’s Pacific Energy Summit in Jakarta focused on natural gas and the role it could play in meeting energy security and environmental challenges. Some participants predicted that we are entering the “golden age of gas.” In your view, does this prediction hold true? What has changed over the past year?
We seem to be headed for enormous growth in the use of natural gas globally and particularly in Asia. Relatively, Asia uses less gas in its energy mix than the rest of the world, so there is a lot of room to grow the use of natural gas in electricity generation.
The golden age of natural gas will be driven by rising supplies and policies to encourage a shift toward gas. Additionally, Asia’s policymakers increasingly recognize the potential of natural gas to scale up to meet large-scale use, much more so than renewables. In the past, natural gas was considered an expensive fuel with limited availability, but this view is changing with shale gas development and growing supplies of LNG for Asia, and globally as well. There are enormous gas developments coming on in Australia, Southeast Asia, the Persian Gulf, and Africa.
The surge of gas supply coming from North America is also feeding this growth. Three years ago, most analysts estimated that North America would be importing gas due to its declining production capacity. But new technology developed to access gas in these tight shale formations has revolutionized the scale of gas available in North America. So it looks increasingly that the United States will be exporting gas in the form of LNG, and these supplies could easily go to Asia now that the Panama Canal is expanding. The hope is that rising natural gas use will increasingly displace coal in Asia, moving the region toward a much cleaner fossil fuel.
Participants at the 2011 Summit also highlighted significant obstacles to bringing about the golden age of gas, including the perception of gas as a premium fuel and the “tyranny of distance.” Has there been progress on these fronts?
While there are clear opportunities for more LNG use in Asian countries, Asia’s existing system of LNG pricing remains a barrier. Asia’s LNG prices are generally linked by contract to oil prices. Relatively high and rising oil prices make LNG quite expensive relative to other regions. For Asia to move faster toward LNG use, it would be helpful to develop a more market-sensitive pricing system that encourages gas use. Nevertheless, production and shipping of LNG is fundamentally relatively costly due to long maritime distances and the high costs of LNG facilities and shipping. To support the growing use of LNG in Asia, pricing will need to recognize the cost of development as well as the need for competitiveness.
How must we re-imagine power generation to make it more accessible for all? What role do you see the Pacific Energy Summit playing in this process?
In my view, we need to re-imagine a market that is more competitive and more dynamic, and one that draws new, more environmentally sensitive fuels into the electricity generation mix. We need new investments in more efficient transmission grids—ultimately toward smart-grid technology to move electricity—and the ability to extend electricity to benefit rural populations, through distributed-energy and small renewable-energy projects, such as small hydroelectric.
It is clear that Asia will be moving toward cleaner fuels, such as natural gas or renewables. The question is whether it will be fast enough. I think nuclear must play a bigger role despite the emotional fallout from Fukushima. We have to acknowledge that “safe nuclear” is not an oxymoron and that without nuclear, demand for fossil fuels will be almost unsustainable. We also need an active policy environment that can accelerate the development and deployment of renewables and use coal for electricity in an environmentally responsible way.
The Pacific Energy Summit can help promote an exchange of ideas and successful experiences across the Asia-Pacific region and crystallize new ideas for regional energy policymakers, while suggesting ways they can move toward a different, cleaner, and more sustainable electricity energy mix. Policymakers can develop greater confidence in the availability of new supplies and the kinds of policies needed to introduce more competition and draw investments, and move toward more renewable supplies. They can learn from other countries’ experiences; this will also hopefully give them the confidence that the fuels will be available and that the supply is sustainable.
Mikkal Herberg is Research Director for NBR’s Energy Security Program and Senior Lecturer at the University of California–San Diego
This interview was conducted by Jacqueline Koch, Senior Media Relations Coordinator at NBR.