Chairman and CEO
The Institute of Energy Economics, Japan
-The View from Asia-
Message for June 2022
The next G7 Summit Meeting will be held from June 26 to 28 in Germany. The central theme will certainly be Ukraine and energy will be a very important related topic. As the growth center of the world, Asia has a great stake in the energy issues and their impacts, but most of the Asian countries will not be present at the Summit. In this regard, I believe that it is important to understand the viewpoints of the Asian countries. (For the purpose of this message, I am focusing on South East Asia and South Asia.)
With the rising prices of energy commodities, it would be natural for Asian countries to accelerate the introduction of energy efficiency technologies and renewable energies. The West (the advanced economies) should assist the Asian countries not only because theinitial investment cost of these technologies is significant, but also because it would address the global climate concerns and reduce our dependence on Russian energies.
Considering the strong economic growth in the region and related increase in energy demand, it would be unrealistic to expectthe Asian countries to depend solely on energy efficiency and their limited renewable energy resources in the foreseeable future.
As the result, they are facing the choice between coal and natural gas/LNG while their main strategy is to switch from coal to gas to reduce CO2 emission. Despite, IEA’s recentenergy outlook for South East Asia that projects a 40% increase in gas demand by 2030, several advanced economies, including multilateral financial organizations, have decided not to support any investment in gas related infrastructure. The recent high price of LNG has even made the Asian countries question the economic viability of using more LNG.
On the other hand, some Asian countries can rely on significant domestic coal production. The price of coal is also rising but remain relatively cheaper than LNG. Consequently, it is expected that Asia’s default choice would be the continuous and possibly expanded use of coal despitecertainly being bad for the global climate.
Then what should the G7 members do? I believe that the G7 members should help the Asian countries make the transition from coal to gas rather than restricting the financing for such a transition. Financing for gas fired power plants and other gas-related supply chain including LNG receiving infrastructure should be provided. In fact, some participants in the Asia Green Growth Partnership Ministerial Meeting/Public-Private Forum, held on April 25, stressed the need for support for gas fired power plants and LNG infrastructure in Asia.
As the fleet of coal fired power plants in Asia is quite young, the average vintage being just 10 years old, the economics simply lead to an extended use of coal fired power plants. With the relative cheaper price of coal, the Asian countries might be tempted to utilize coalfired power plants to their maximum level. We still need to find ways to reduce CO2 emissions while they continue to use their young coal fired power plants. In this regard, assisting them to cofire biomass with coal, to be followed by the cofiring of ammonia with coal, would be the pragmatic policy.
I understand that there are people in the advanced economies who are concerned that these policies might lead to a locked-in CO2 emitting infrastructure. But we can lower the CO2 emission from the gas fired power plants in the mid-term by cofiring gas with ammonia or hydrogen and, eventually, the power plants could be turned into 100% ammonia/hydrogen fired power plants, realizing full decarbonization in the long run. CCUS can also be put into place in the future to decarbonize the power plants. Similarly, the existing coal fired power plants could reduce CO2 emissions during their operation period by cofiring with biomass/ammonia and, eventually, be retired after completing their depreciation period.
We must also be sensitive to the views of Asian countries, beyond economics. We must win their hearts and minds to fully participate in our decarbonization efforts and in our “De-Russianization efforts”. The switch from coal to gas in the US and Europe has been a most important means to reduce CO2 emissions. To now deprive the Asian countries of this approach might be viewed as a “double standard”.
The Asian countries are also closely watching the recent responses to the war in Ukraine by the West. Germany is constructingits first LNG receiving terminals with public financial support, the UK is restarting the development of North Sea gas & oil fields, and the US is expanding the production of shale gas coupled with the EXIM financing for an LNG exporting terminal. These responses are necessary and legitimate considering the need to reduce our dependence on Russian energies. Denying financing for gas related projects in Asian countries while pursuing these projects in the West could be viewed as another “double standard”.
Assisting Asian countries in these aspects could help the G7 members as well. As we try to develop non-Russian gas & LNG sources, the mid-term challenge in the advanced economies is to reduce demand for gas & LNG with the introduction of energy efficient technologies and renewable energies. This prospect could be discouraging for today’s necessary investment for non-Russian gas & LNG. Investing in the Asian LNG infrastructure would provide future demand for LNG when the demand in the G7 countries should decline. The newly developed non-Russian gas & LNG could be used to produce ammonia and hydrogen to be cofired in Asia in the future.
As geopolitics will be a major consideration at the G7 Summit Meeting, we need to investigate the geopolitical implications as well. The restriction of financing for gas & LNG infrastructure in Asia could push those countries toward China which will be happy to provide the financing and technology for LNG. For some time, the West has been concerned about the influence of China with its involvement in strategicinfrastructure through the BRI (the Belt and Road Initiative). Restricting financing for the necessary energy infrastructure in Asia by the West would heighten those concerns.
The G7 Summit cannot achieve its energy related objectives without the support and cooperation of the Asian countries. Understanding the views of the Asian countries and addressing their legitimate concerns would be essential to gain their support and cooperation. Most of them will not be present at the Summit. But we should not forget their increasingly greater influence on the global climate as well as on the global energy market. The challenges we are facing are so complex that we need to pursue multiple paths, not a single path.
The challenges are so difficult, especially for Asia, that we need to address them over time in multiple stages rather than trying to resolve them all in a single step.
I sincerely hope that the G7 Summit could produce directions and policy initiatives which are fully consistent with these considerations.