Study Urges Fast Transition Off Fossil Fuels for Asia’s Electricity Grids

It’s time for Asia—the region that British Columbia and Alberta are counting on as a future market for oil and gas exports—to reduce its reliance on fossil fuels and risk of stranded assets by embracing low-cost renewable energy options, the Institute for Energy Economics and Financial Analysis concludes in a new report.

“Inflexible contractual obligations with fossil fuel suppliers have locked in government energy expenditures, and outdated electricity grids are often not even equipped to incorporate low-cost renewables,” IEEFA writes, in a snapshot summary of a more detailed analysis for the Stanley Center for Peace and Security and climate think tank E3G. “But delaying the modernization of the power sector now means greater costs for displacement in the future. Renewable energy costs are steadily decreasing, while continued use of increasingly expensive fossil fuels endangers the environment and the global economy.”

While Asia accounted for 80% of the world’s coal-fired power generation in 2019, IEEFA adds, “countries in South and Southeast Asia can help achieve the global 1.5°C target of the Paris Agreement if they accurately assess the long-term risks of fossil fuel subsidies and dismantle barriers to investment in renewables.”

The study by IEEFA Energy Finance Analyst Sara Jane Ahmed concludes that the drivers for a faster regional transition off fossil fuels have already arrived.

“In the face of rapidly declining costs and technological advances in renewable energy and storage, reliance on fossil fuels makes less and less sense, particularly when they are subsidized and/or imported,” she writes. “The rapid pace of technological advancements and its impact on advancing the transition to a more sustainable, low-carbon economy means that electricity should no longer be expensive or subsidized in perpetuity.”

The COVID-19 pandemic reduced electricity demand across South and Southeast Asia by up to 40%, she says, and revealed weaknesses in the way the region’s energy markets are designed and financed. That experience points to the need for new planning practices “in light of evidence that too high a new fossil fuel mix results in system lock-in,” requiring power providers to favour traditional fossil resources over lower-cost renewables.

“Current, poorly-designed power market policies increase the plant life of underperforming fossil fuel assets with guaranteed contracts, translating to further costs in the form of higher electricity prices paid for by end users, write-offs by investors, non-performing loans for creditors, or subsidies/bailouts from government, which are ultimately paid for by taxpayers,” Ahmed adds. Countries can begin to extricate themselves from the problem by extending power sector subsidies only for start-up capital costs, rather than shoring up ongoing operating costs, and introducing a “displacement strategy” to get rid of uneconomic facilities before they become stranded assets.

Otherwise, she warns, “given that the project economics of fossil fuel plants deteriorate in the face of new cost-competitive technologies, a delay in the modernization of the power sector translates into higher costs for governments or investors and/or higher prices for end users.”

Ahmed lays out six pathways to reforming and modernizing the region’s electricity systems. They include:

• Boosting energy access and reliability for 370 million people in climate-vulnerable countries using distributed energy resources;

• Fostering a just transition to a resilient, cost-competitive electricity system;

• Changing the way the region procures electricity to drive a “cost-competitive energy transition”;

• Investing in a modernized grid;

• Using the “grid of the future” to reduce energy costs while increasing system resilience and reliability;

• Conducting national scenario analysis and feasibility work to better understand the potential for 50 or even 100% renewable energy grids across the region.