China has the largest carbon market in the world and Hong Kong can help connect it globally by establishing an Asia-focused carbon standard and developing a futures market. As a major carbon emitter, the power sector plays a crucial role in realizing the goal of carbon peaking and carbon neutrality. Although there has been a local expansion of wind and solar projects, this is limited due to the environment. It is possible that Hong Kong could create more opportunities for clean energy transition by buying energy from clean sources and supporting renewable energy businesses. Over the last 7 days, the Renewable Energy industry has dropped 1.3%, driven by a pullback from China Power International Development of 3.6%. The industry has fallen 5.1% in the last year. As for the next few years, earnings are expected to grow by 18% per annum.
What are the most urgent challenges for the sector over the next three years?
1. Cost of Transition
High capital costs associated with clean energy transition are a challenge to the oil and gas industry in Asia, particularly among smaller and emerging markets. Even in developed economies such as South Korea, cost can be a challenge slowing the pace of change.
2. Ongoing demand for fossil fuels
There is an ongoing and – especially in the case of China for example – a growing demand for fossil fuels in Asia. It was unlikely that the majority of local businesses would be able to accommodate a fall in the use of oil and gas in the next few years.
3. Lack of renewables infrastructure
Infrastructure transformation poses challenges in dealing with legacy liabilities as well as significant investment in ensuring electricity grids can store and transmit electricity generated from renewable resources.
Governments around the world have set targets for reducing carbon dioxide emissions. As economies make the move towards sustainable development, small and medium-sized enterprises (SMEs), the backbone of the world economy, are adjusting their supply chain strategies to help them embark on the road to zero carbon with a measurable carbon footprint.
Burning fossil fuels to feed our energy systems accounts for 75% of the world’s total greenhouse gas emissions. The transport and processing of oil and gas alone resulted in 5.1 billion tonnes of emissions in 2022, accounting for just under 15% of the total produced by the global energy sector.
Interestingly, in the year that the US goes to the polls to elect a new president, geopolitics could be a factor that potentially slows clean energy transition in the next few years.
Asia accounts for a large part of this, with China alone acting as the largest producer and consumer of energy in the world. Although coal accounts for the greatest share of the total energy supply in Asia (48%), oil is second with 23% and natural gas 11.6%. In terms of oil refining, Asia accounts for 38% of the global share.
However, in addition to being a big producer and consumer of fossil fuels, Asia also generates a significant amount of electricity from renewable resources. In 2021, the International Energy Agency (IEA) calculated that 23.5% of the region’s electricity was generated by hydro (13.7%), wind (5.6%) and solar (4.2%). This compares to just 11.8% of electricity generation by oil and gas combined.
China is a key player in many clean energy supply chains and both Japan and Korea have devised plans for decarbonisation.
Of course, Asia is a large continent with different needs, strengths, and drivers across markets, and different perceptions of challenges and opportunities. For example, when we asked our underwriters whether geopolitical issues might impact the transition to clean energy in the local oil and gas industries, our specialists in China said “probably, yes”, whereas in Thailand, Hong Kong, Taiwan, Japan, and Korea the response was, “not so much”.
The oil and gas industry could not shift to clean energy in the short term due to high costs and supply issues. The fact is, it is hard to build a business case for consuming more expensive electric energy from renewables if cheaper oil and gas are on tap.
More than 80% of Taiwan's electricity came from fossil fuels in 2022, making the country’s official pledge to achieve Net Zero by 2050 a big challenge. While there is still significant demand for oil, natural gas, and coal, the industry is increasingly facing pressure from the growth of renewable energy sources, as well as concerns over climate change and environmental impacts, with many companies and governments investing in carbon capture and storage technologies, as well as exploring alternative sources of energy.
Geographical issues do influence which energy sources are most commonly used by different countries in the region. For example, Japan's primary energy source is oil, amounting to about 36% of the country’s overall energy fuel mix, followed by coal (25%) and natural gas (21%). There is a local high dependency on fossil fuels, but this is partly due to the suspension of nuclear power plants since the earthquake in 2011. Domestic demand for oil is getting weaker due to a decreasing population and the growth in alternative energy sources. Meantime, the greenhouse gas emission target is 46% compared to the 2013 level, revised from 26% in April 2021.
1. Growing demand for sustainability
Consumer demand for environmental sustainability presents a good opportunity for long-term growth for industry players who invest in diversification. What’s more fossil fuels are a finite resource, which means diversification into renewables and other income streams is vital for business sustainability.
2. Repositioning role as energy companies
Some large oil and gas companies are set to make a switch to energy companies that supply a diverse range of energy services, particularly electricity.
3. Improved brand image
Oil and gas companies that pivot towards clean energy transition may benefit from an improved brand image and may be more likely to attract public and private capital from investors, especially those seeking to promote and support greater environmental and social responsibility.
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