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Economy

Southeast Asia needs investment in energy innovation

Despite leaps in green technology, the region remains wedded to cheap coal

Giant excavators dig for brown coal at Germany's Garzweiler mine, which sits next to a power plant.   © AP

The last few years have been marked by spectacular advances for green energy generation. In 2015, $348 billion was invested in renewables, and total worldwide installed capacity overtook coal. In 2016, U.K. generation from wind was higher than coal for the first time. Meanwhile, the costs of solar power continued to tumble, with estimates suggesting a fall of at least 75% since 2008.

However, investment fell sharply in 2016, even though overall levels of investment need to triple to get anywhere near the targets set in international environmental agreements that followed the 2015 United Nations deal on climate change in Paris.

The dismaying reality is that the share of world energy generated from low-carbon primary sources has climbed by a single percentage point in the last 15 years, from 14% to 15%. All the talk of clean energy has made little difference. Many of the game-changing choices are still too hard and too expensive.

The failure of renewables to provide a meaningful replacement to coal is laid bare in Southeast Asia, where electricity demand is expected to grow by 80% in the next 25 years. Forecasts suggest that the proportion generated by burning coal may actually increase.

Over the next 10 years, non-hydro clean energy installations are forecast to double in Thailand, almost triple in the Philippines and grow by nearly nine times in Indonesia. But the share of the energy mix accounted for by coal is expected to expand over this shorter period as well.

In Vietnam alone, coal-fired generating capacity will grow by some 277% by 2025. Almost half of the new generating capacity across the 10 countries of the Association of Southeast Asian Nations (ASEAN) is expected to be coal-fired.

Why should this be the case? What is it that keeps Southeast Asia so wedded to coal? There is no lack of renewable energy resources. While average wind speeds in the region are generally too low to make utility-scale wind power feasible, abundant sunshine makes this untrue for solar power.

Solar has the ability to meet afternoon spikes in energy demand, displacing more expensive gas and oil-fired electricity. Wind power is also viable in some places, such as northern Luzon in the Philippines, southern Sulawesi in Indonesia, and eastern Vietnam; all enjoy wind speeds that could help replace some traditional thermal generation.

These renewable resources will compete against future oil or gas use. But the sun does not shine at night, batteries remain expensive, rising socio-economic sensitivity to electricity costs in developing economies is a real concern, and there is almost no active development of scalable wave or tidal power projects. Geothermal resources are available only in limited and specific locations.

The truth is that coal is cheap, particularly when compared to other available options. Even where countries have offered regulatory support to renewables in the form of feed-in tariffs that boost expected returns on wind and solar projects, many opportunities lie undeveloped.

Some environmental progress is possible, however. New coal-fired generating capacity can be made more efficient, so that emissions are reduced. Upgrading or replacing older coal boilers with modern ultra-supercritical boilers and high-specification air quality control systems can yield carbon dioxide reductions of 20% to 30% simply by cutting the amount of coal needed for each kilowatt hour of electricity.

Another approach has been to increase the use of natural gas, but the cost has confounded both investors, who are concerned about competition from coal, and policymakers, who must keep an eye on tariffs or risk social unrest. Gas infrastructure is also relatively poorly developed in much of Asia, creating a chicken and egg problem for the energy sector.

No silver bullet

Renewables, coal efficiency upgrades and natural gas can reduce emissions, or at least slow their growth. All are desirable in some future energy mix. But none is a silver bullet. Investment in existing forms of renewable energy may be desirable, but the core problem remains the limited options for materially reducing carbon dioxide emissions from baseload coal generation.

Consequently, there is an emerging realization that massive investment in innovation is required to find a new approach. The challenge is not just to improve the economics of current technologies. It is about finding cheaper, easily scalable, zero-carbon technologies that can provide reliable baseload power.

This was recognized in innovation commitments by 23 participating governments following the Paris conference. Each has pledged to double state-directed clean energy research and development investment by 2021. Alas, Indonesia is Southeast Asia's sole representative in the project, but the motivation for this push for research and development is simple.

Innovation is an indirect function of research and development and the availability of long-term financing. Private enterprise invests in innovation in the expectation of financial returns, but not to finance broader spill-over benefits for society as a whole -- what economists call positive externalities. Government funds are needed to bridge this gap.

For the policymakers of Southeast Asia, investment in global innovation may seem like something more suitable for richer or bigger countries such as the U.S., Japan, China and member states of the European Union. This is understandable, but it is short-sighted, not least because solutions developed for countries elsewhere may not work in Southeast Asia.

Fortunately, the region's policymakers can still explore regulatory innovation, finding new policies to support domestic investment in clean energy, while balancing local stakeholder sensitivities. Such policies could be dynamic, not static; revised and updated as the industry matures.

Feed-in tariffs could be designed to incentivize not only the best and lowest-cost opportunities, but also to encourage trials of new ideas. These tariffs can under-deliver if they are too stingy, but lose public support if too generous. The challenge is finding the right policy mix to deliver a sustainable energy transition at a sustainable cost.

Another approach is to start pricing carbon directly. It is difficult to conceive of successful decarbonization without at least some form of taxation or trading scheme for carbon. The opportunities and constraints on the adoption of low carbon technologies may simply be too diverse, and too geographically localized, for other approaches to level the playing field sufficiently.

The one thing that will not work is to expect Southeast Asia to stop seeking to develop, or to abandon attempts to use energy to enhance quality of life, move people out of poverty, create educational and commercial opportunities and become more connected to the rest of the world.

Thus far that has implied a continued reliance on cheap coal power. Now is the time to innovate, so that those same priorities can be served by investing in, and developing, low-carbon energy.

Mike Thomas is a founding partner of the Lantau Group, an energy consultancy in Hong Kong. Leo Lester is a principal at the company.

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