Sustainability in the Asian Century - 4th Issue

Welcome back to the fourth issue of my newsletter on sustainability in Asia. Each month, this newsletter brings you news about this rapidly developing aspect of Asian economies. I sum up the most important developments and make a deep dive into one sustainability topic.

The focus of this issue is energy transition, and in particular, green hydrogen. You will find more on:

1.??????Regional specifics of energy transition

2.??????Case study: China’s energy policy

3.??????Deep dive: green hydrogen

4.??????Case study: Japan as hydrogen champion

5.??????Green hydrogen deals across Asia

6.??????Financial context: Sustainable finance overview

One of the topics that is likely to dominate the sustainability discussion in 2023, both in Asia and globally, is energy transition. The need to balance emissions reduction with energy security and affordability has become one of greatest quests on the way to meeting carbon commitments. McKinsey[1] has mapped a near-term global as well as region-specific transition agenda.

In the coming decade, the global pace of installing renewable energy capacity would have to triple, from 180 GW annually at present, to 520 GW. Africa, India, and the Middle East are most in need of speeding up. But if governments make an effort to meet their commitments, there is still a lot of room on the market for solar and wind even in regions such as the EU, the US, or China.

Some countries are better equipped than others to face the challenges and reap the opportunities associated with transition. Reliance on energy imports and emission-intensive industries, access to favorable natural resources, and financial resources are the three dimensions in which the level of difficulty of transition can be estimated.

Case study: China’s energy policy

China is a major force in the global energy market. It is the largest oil net importer[2] but also a major investor in renewable facilities abroad. China’s energy policy, including its decarbonization plans, is discussed on the China Global podcast.[3]

Most Recently, during Xi Jinping’s visit to Saudi Arabia, China′s biggest oil supplier, Chinese companies signed a number of deals related to clean energy infrastructure projects.[4] For example, China's nuclear power giant China General Nuclear Power Corp made a deal with Saudi AlJomaih to develop solar, wind and thermal energy projects with the total capacity of 10 GW in Saudi Arabia, Laos, Bangladesh and Azerbaijan.

At the same time, Sinopecand Saudi Aramco signed a deal to build a refinery with the capacity to process 16 million tons of crude per year and an ethylene integrated cracking facility to produce 1.5 million tons of petrochemical products a year, with the earliest production date slated for 2025. This is a good example of “getting the new before discarding the old,” a phrase Chinese government uses to sum up its net-zero transition strategy.

Deep dive: Green hydrogen

Huge investments across APAC in green hydrogen – i.e., hydrogen produced using renewable energy – show growing confidence in its potential as a solution for sectors which are hard to electrify, such as steel or cement production. Another important use case of green hydrogen is production of ammonia, a key ingredient for fertilizers.

Hydrogen can be also used as fuel for internal combustion engines (ICE), or in EVs powered by fuel-cells, producing zero carbon emissions. Compared with hydrogen-powered vehicles, however, pure EVs have much higher energy efficiency and due to decreasing costs, increasing energy density and the recharging speed of batteries, most manufacturers have opted for purely electric cars. Despite that, hydrogen is most often considered an alternative for heavy-duty vehicles or ships, due to the longer range and much faster refueling of hydrogen engines.

Currently, 95% of hydrogen on the market is “grey hydrogen” produced by steam reforming natural gas. With the use of renewables, not only does carbon-intensity drop, but so does the price. With sufficient infrastructure in place, the International Renewable Agency[5] expects the price of production to drop from USD 3─8 per kg today to USD 0.70 by 2050.

The green hydrogen market could be worth USD 1 trillion by 2050 according to Goldman Sachs[6] (it is USD 126 billion today). According to the Hydrogen Council, four major Asian economies ─ China, India, Japan and South Korea – combined, will account for 43% (285 million tons ) of the world's hydrogen demand by 2050.[7] Regions with high renewable potential, would be able to produce green hydrogen twice as cheaply as for instance the EU or Japan or Korea, which makes them more likely to import it from elsewhere.[8]

Such development depends on the pace of transition of the whole energy system and price of electricity (for example, the prices of green hydrogen shot up to USD 16.8 in the US this July, due to a heatwave resulting in an energy shortage).[9] Hydrogen use in mobility is also conditioned by government investment in the refueling infrastructure and market take-up, which for now remains far from certain.[10]

Case Study: Japan as hydrogen champion

The hydrogen leader in Asia has traditionally been Japan.[11] In 2017, it was the first country to adopt a national hydrogen framework.[12] In 2019, during its G20 presidency, it commissioned a report on the future of hydrogen by the IEA.[13] Toyota and Honda presented the first mass-produced hydrogen fuel cell car models in 2015. Despite the rest of the world opting for electric battery vehicles, Japan has not given up plans for hydrogen-powered mobility[14] but the success of such plans seems uncertain for now[15] .

Last year, five Japanese automotive manufacturers (Kawasaki,?Subaru, Toyota,?Mazda?and?Yamaha) jointly announced that they will work together to diversify solutions toward challenging carbon neutrality besides electric mobility, expanding fuel options for internal combustion engines.[16] Toyota′s CEO, Akio Toyoda has been the most vocal about alternatives to electric battery vehicles.[17]

Japan is very active also in overseas cooperation. Just in the past month, Japan and the EU signed a Memorandum of Cooperation to spur innovation and develop an international hydrogen market. In the private sector, Toyota Motor and Thai conglomerate Charoen Pokphand announced a trial for producing hydrogen using biogas from agricultural waste.[18 ] At the COP27, Japan engaged in discussion with Saudi Aramco to establish a supply line for blue hydrogen[19] (produced from methane like grey hydrogen, but with carbon capture minimizing emissions).

Green hydrogen deals across Asia

Besides Japan, there were a vast array of green hydrogen deals announced across Asia towards the end of 2022.[20] Many of them involve big oil companies, showing major steps in their efforts to diversify from fossil fuels.

British Petroleum has become the largest shareholder (owning 40%) in the Asian Renewable Energy Hub based in Australia, planning to produce up to 1.6 million tons of green hydrogen per year. That would account for 10% market share (!).

Indonesia’s largest oil company Pertamina together with the American company Chevron, and the Keppel Corporation, a government-affiliated Singaporean conglomerate, are conducting a feasibility study for a 40,000-ton green hydrogen plant powered by electricity obtained from geothermal power in Sumatra.[21]

China is the world's largest hydrogen consumer. It is aiming to take the lead in green hydrogen production. Earlier in 2022, China announced its hydrogen plan for the next five years, aiming to produce 200,000 tons of green hydrogen per year by 2025.[22]

In December, the largest state-owned oil refiner, Sinopec, started construction of a massive, 20,000 tons-per-year green hydrogen plant in Xinjiang province. The plant, powered by a 300 MW solar station, shall start operation already in June 2023. Sinopec Group also plans to build 1,000 hydrogen filling stations by 2025.[23]

Sustainable Finance Overview

This issue of the newsletter is about energy, but finance is always the other side of the same coin. One particularly interesting analysis of the sustainable finance landscape in the ASEAN should not escape our attention.[24] The World Bank describes the situation in “the ASEAN-5,” namely Indonesia, Malaysia, Philippines, Thailand, and Vietnam. The report focuses on sustainable debt, rather than equity and the ESG scoring of companies.

The report argues that the sustainable debt market, despite having grown significantly over the past five years, still remains relatively small and is currently unable to meet developing countries’ investments needs.

Sustainable debt still accounts for a mere 2.5% of total debt, so there is ample untapped potential. Singapore or South Korea are the leaders, but most Asian economies are already on a par, for example, with the eastern half of the EU, or the USA.

Among the ASEAN-5, the government has a substantial presence in sustainable debt markets in Indonesia, whereas corporations account for the bulk of the issuances in Malaysia, the Philippines, and Vietnam.

Social debt has increased since the outset of the COVID-19 pandemic but green debt still accounts for the largest share of sustainable debt. Malaysia and the Philippines are regional leaders in sustainable finance, while Vietnam consistently lags behind.?