Chairman’s Message

In this month’s Chairman’s Message, I would like to share with you the discussions in Davos, to which I was invited during the week of January 20th. There were so many discussions in Davos that I can only cover mostly energy related topics. The following are solely my takeaways from Davos, and I am quite sure that some of you who attended may have different views.

<Main Points>

Realism is gaining momentum, with increasing acceptance of natural gas.

Nuclear is making a solid comeback.

Renewable energy is accelerating, but intermittency is becoming an issue.

The grid is receiving attention, with permitting being a major impediment.

The hydrogen bubble is gone, focus has shifted to how to materialize hydrogen.

Financing for EMDM is too narrow and insufficient.

CBAM is facing criticism for being inconsistent with “Just Transition”.

1. Realism is gaining momentum, with increasing acceptance of natural gas

President Trump made an online speech on the final evening in Davos. As expected, he stressed how the US should be utilizing its oil and gas resources, even endorsing the use of coal to generate power.
　While President Trump may be on the extreme side, his return to office must have created space to allow more discussions about fossil fuels, particularly natural gas. Many participants argued natural gas will be necessary to support strong economic growth and rising living standards in emerging economies, especially in Asia. It was also argued that natural gas is also crucial for stabilizing the power system, dealing with the intermittency of renewable power generation, and helping the transition from coal.
　Some stressed that the core issue is the emissions, not the type of fuel used. They argued fossil fuels can be decarbonized using CCUS and by producing blue hydrogen from natural gas.

2. Nuclear is making a solid comeback

There was a renewed interest in nuclear power. One session on nuclear was fully booked, and I could only participate as a standby. The declaration by like-minded countries to triple the capacity of nuclear power by 2050, announced at COP 28, has surely helped this renewed interest. Growing concerns about energy security, increasing demand for 24/7 power, the need to lower costs, and reducing CO2 emissions have strengthened the case for nuclear power.
　However, to turn this interest into reality, several challenges must be addressed. Participants stressed the need to develop a financing framework for nuclear power and rebuild experience in construction, especially after years of suspension of new projects in the West following the Fukushima nuclear accident. It was also highlighted that deploying a series of nuclear reactors, rather than just deploying a single nuclear reactor, will be necessary to lower costs.

3. Renewable energy is accelerating, but intermittency is becoming an issue

Renewable energy was emphasized by almost every participant. However, as more renewable energy sources are deployed, the issue of intermittency is becoming more serious. To ensure stability of the power system, the importance of dispatchable power, including thermal generation, was pointed out. One head of an industrial company argued that there should be an optimal level of renewable energy penetration, significantly short of 100%, to maintain power system reliability.

4. The grid is receiving attention, with permitting being a major impediment

More people seem to recognize that the grid is becoming a bottleneck for the energy transition and for the supply of power to users. Among various challenges for development of the grid, permitting is cited as the most urgent impediment.
　President Trump appears to understand this problem. He stated that he will issue permits promptly, utilizing his emergency authority, to construct new power plants next to industrial customers to avoid the need to construct new transmission lines.

5. The hydrogen bubble is gone, focus has shifted to how to materialize hydrogen

One participant commented that the “Hydrogen Bubble” is over. That person was right in pointing out that offtakes are still modest and costs are too high. The enthusiasm surrounding hydrogen in the past few years has certainly weakened.
　On the other hand, there were many players seriously discussing how we can materialize the potential of hydrogen. In addition to policy measures, cross-industry collaboration and international cooperation were discussed. Developing broader applications at multiple stages for deployment was discussed, along with the need to develop the necessary supporting infrastructure.
　My sense is that the loss of the bubble is not necessarily a bad thing. The players are now seriously engaged in a realistic discussion on how to realize the potential. The consensus was that achieving scale is necessary to drive down costs, and this can only be achieved through international cooperation and cross-industry collaboration. The broader application of hydrogen will be developed in multiple stages, and it is important to materialize the first stage of applications such as co-firing for power generation and industrial heat production. It was also argued that effective policies combining government support and regulation are required to kick-start market development.

6. Financing for EMDM is too narrow and insufficient

At COP 29, it was pledged that at least $300 billion per year be transferred from advanced economies and others to Emerging Markets and Developing Markets (EMDM) by 2035.
　It was natural to have several sessions covering the financing of energy transition, especially for EMDM. I believe that there were strong arguments that the financing provided through MDBs (Multilateral Development Banks) and through JETP (Just Energy Transition Partnership) are too narrow and strict to meet the needs of emerging markets. Emerging markets need economic growth and rising living standards, which lead to greater energy demand. For Asia, in particular, natural gas/LNG was argued to be absolutely necessary to meet energy demand growth. Asia also requires improvements in energy efficiency in conventional energy use. However, financing by MDBs and the international financial community remains very limited for anything related to fossil fuels, including natural gas/LNG.
　It was also pointed out that financing by MDBs has a limited impact on the early retirement of coal fired power plants. Preferential loans may help retire old coal fired power plants but not the young ones which are prevalent in Asia. Grant payment or carbon credit allocation for the early retirement of younger coal fired power plants are necessary if we want to see real results.
　High cost of capital was cited as a major impediment in financing especially to the Developing Economies. This is by no means an easy question. As several interesting ideas were discussed, I would like to revisit this issue further in my Message in the coming months.

7. CBAM is facing criticism for being inconsistent with “Just Transition”

The EU will gradually implement CBAM (Carbon Border Adjustment Mechanism) starting in January 2026. After then, imports covered by CBAM will be subject to de facto tariffs based on the carbon content multiplied by the difference between the EU ETS carbon pricing level and the carbon pricing level of the exporting country. Originally, five sectors were covered: steel, cement, aluminum, fertilizer, and power. Now the list has been expanded to cover hydrogen and downstream steel products such as bolts and screws, with chemical products also under consideration. The coverage is clearly expanding.
　While the objective of preventing carbon leakage was not necessarily challenged, the impact on trade and on the economic growth of the Global South was highlighted. Participants from the Global South strongly criticized the imposition of EU carbon pricing, arguing that they should not bear costs for a problem that they did not create. The response was that CBAM is consistent with WTO rules and does not distort trade. As the response was rather legalistic, I felt that it was not very persuasive against the strong and sharp criticism from the Global South.
　As this year’s G20 will be hosted by South Africa, the first time that G20 is held on the African Continent, “Just Transition” will certainly be a major theme. Just Transition is not only about access to energy, but about economic growth through trade. I expect CBAM will be scrutinized in this context. I hope that sound discussions will take place to strike an appropriate balance among climate change, trade, and development policies.
　As I noted at the beginning of this message, I could not possibly cover all sessions in Davos. Even among those of you who attended the same sessions, I am quite sure that you may have had different impressions. The above are solely my own takeaways. I hope that this month’s Message could help many of those who did not participate in Davos to have a glimpse of some of the discussions that took place this year. I also hope that this month’s Message could provide possibly different perspectives to those of you who participated.