Decarbonising power in Southeast Asia: A financial institution and regulator’s perspective

The crucial to align the worldwide power system with the 1.5°C purpose has by no means been extra compelling. August 2023 marked the most popular month on report, surpassing even the report set in July 2023 by a major margin. The frequency and severity of local weather change impacts are escalating, underscoring the pressing want for motion.

Based on the Worldwide Power Company (“IEA”), international carbon dioxide (CO2) emissions from the power sector reached a brand new report excessive of 37 billion tonnes (Gt) in 2022, 1% above their pre-pandemic degree, however are set to peak this decade.

DBS Financial institution CEO Piyush Gupta highlighted among the key challenges monetary establishments face on this transition of the power sector.

One vital problem, in keeping with Gupta, is the unproven economics of many new applied sciences. Whereas some sectors have fairly first rate Technology options, others lack viable choices. Options akin to hydrogen could maintain promise however are at the moment too far out to be sensible. Even the place Technology exists, the fee factors and economics of those new options typically don’t match these of fossil-based power sources or different subsectors.

Gupta famous, “When evaluating the price of photo voltaic manufacturing in areas with excessive photo voltaic efficiencies like China or India to areas with cloud cowl just like the tropics, the economics are usually not the identical”. Elements akin to the price of land, which might be substantial for tasks requiring massive areas, and the prices related to storage, intermittency, and grid upgrades additional complicate the financial viability of tasks.

In essence, many tasks are usually not straightforward to Finance based mostly solely on business viability.

Gupta was talking at a panel dialogue on the Singapore state investor Temasek’s annual sustainability-focused occasion, Ecosperity, from April 15 to 17.

The second problem recognized by Gupta is the requirement for associated infrastructure spending. Whereas a undertaking could also be initiated, if the mandatory investments in different infrastructure elements, such because the grid, are usually not made concurrently, the undertaking’s potential is compromised. For a monetary establishment, IT is subsequently important to contemplate the broader connectivity points and infrastructure wants past the undertaking itself to find out the viability of the funding.

The third problem Gupta cited is across the threat premiums a number of Asean international locations face that impression undertaking prices and viability. These threat premiums embrace sovereign threat and international alternate threat. Many international locations within the area are usually not thought-about funding grade, resulting in a sovereign threat premium. International alternate threat can also be a major concern, because the funding for these tasks is usually in US {dollars}, whereas income is realised in native foreign money. This disparity can lead to substantial monetary challenges.

Lastly, Gupta shared that undertaking Finance is influenced by the off-takers creditworthiness, notably within the power sector, the place political concerns can impression fee reliability. Regime modifications can introduce uncertainties relating to the off-taker’s dedication to fulfilling its contractual obligations, including one other layer of complexity to undertaking financing. These points collectively contribute to the complexity and challenges of financing infrastructure tasks within the area.

Nevertheless, whereas challenges exist, concerted efforts are underway to mitigate them, with ongoing improvement of options geared toward overcoming these obstacles.

Speaking to FinanceAsia on the sidelines of the occasion, Gupta emphasised an answer which he believes can have a major impression on the web zero journey. 

“Establishing a reputable and clear international carbon market is likely one of the key elements of a toolkit of options to deal with local weather change. A strong international carbon market is a chief car for the non-public sector to channel capital from developed to creating areas. This in flip has the propensity to create vital impression by serving to rising economies entry financing for sustainable improvement tasks that are wanted to speed up the transition to a low-carbon economic system,” Gupta stated. 

Based on Gupta, pursuing the adoption of cross-border and export markets additionally presents a considerable alternative. “These markets allow supply international locations to develop capability, scale, and Technology with out bearing the fee, as different international locations buy their energy,” he famous.

To place the carbon market in perspective demand for carbon credit might surge by 15 instances or extra by 2030 and as much as 100 instances by 2050. The marketplace for carbon credit might exceed $50 billion by 2030, contingent upon the profitable implementation of the Article 6 rulebook adopted at COP26 to control the use and buying and selling of carbon credit.

Singapore’s internet zero journey 

Singapore has established a goal of reaching internet zero emissions by 2050. With its power sector accounting for 40% of its emissions, Singapore goals to achieve net-zero emissions from this sector by the identical deadline. The nation intends to grasp this goal by importing clear power from the Asean area.

Ngiam Shih Chun, chief government, of the Power Market Authority (EMA) of Singapore, stated that whereas “Singapore has restricted renewable power sources, the nation can entry low-carbon electrical energy that’s ample within the area by connecting to regional energy grids. This additionally promotes the event of renewable power within the area and paves the way in which in realising the Asean Energy Grid imaginative and prescient.”

The nation has the goal set to import as much as 4 gigawatts (GW) of low-carbon electrical energy by 2035, making up round 30% of Singapore’s electrical energy provide then. In 2023, EMA granted conditional approvals to import as much as 4.2 GW of low-carbon electrical energy from Cambodia, Indonesia, and Vietnam. Firms are at the moment conducting feasibility research and securing regulatory approvals from supply and transit international locations.

“The tasks are commercially and technically viable and the partnership between the supply nation and Singapore is mutually helpful”, famous Chun.

Highlighting some challenges as Singapore takes steps in the direction of decarbonising IT’s power sector Chun talked about that these tasks are nonetheless pioneering, as cross-border power buying and selling is at the moment restricted, within the area. Their massive scale can also be one thing to remember, for instance, a 1,000-kilometer excessive voltage direct present cable from Vietnam. They’re subsequently going through regulatory challenges.

Nevertheless, as soon as cleared, they’re anticipated to speed up the event of cross-border buying and selling, in keeping with Chun.

The Laos-Thailand-Malaysia-Singapore energy undertaking, for instance, took years to barter however is now the primary profitable cross-border energy buying and selling initiative throughout 4 Southeast Asian (SEA) international locations. Discussions are underway to extend buying and selling quantity and allow multi-directional buying and selling. This progress aligns with the imaginative and prescient of the Asean energy grid, the place cross-border buying and selling turns into routine and advantages a number of SEA international locations.

One other step being taken within the nation is a nationwide hydrogen technique to stipulate pathways for adopting hydrogen within the energy sector, doubtlessly comprising as much as 50% of the power combine. Recognising the fee differential for brand spanking new applied sciences, Singapore is looking for “Pathfinder tasks”. As part of this initiative, Singapore is trying to work with the trade to experiment with and construct up capabilities in superior hydrogen applied sciences, and determine and tackle any technical, security, or regulatory points that will come up.

Chun shared that this phased method entails shut collaboration with the non-public sector and monetary establishments. Presently, the main target is on shortlisting consultants and conducting pre-field research, with funding secured to help these initiatives. The method goals to deal with the fee disparities related to new applied sciences and make sure the business viability and bankability of tasks.

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