Renewables versus conventional fuels in Asia’s growth markets

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In a new report, Wood Mackenzie highlights trends that will shape Asia Pacific’s power and renewables markets this decade.

Asia Pacific’s wind and solar installed base produced an estimated 790 TWh of electricity in 2019, enough to displace coal-fired power plants that would emit 700 million tonnes of carbon dioxide per year. China has been the biggest driver of renewable power growth globally and produces about two-thirds of Asia Pacific’s wind and solar output.

Wood Mackenzie research director Alex Whitworth said: “Despite the massive growth of renewables in the past decade, Asia Pacific markets have relied mainly on conventional power technologies to meet new power demand, with over 80 percent of new power output coming from coal, gas, nuclear and hydro.

“As we look to the 2020s, a key question will be whether renewable power can further displace conventional fuels to supply incremental demand in growing Asian markets.”

China has key role

China has dominated the supply chain, as well as the installation of solar photovoltaics, with over 200 GW installed in the last decade. Both government support and innovative strategies, such as setting up one-stop ‘industrial ecosystems’ for solar, have played a role.

Whitworth said: “The past decade has seen the maturation of Chinese manufacturing and construction capability for both renewable and conventional power technology. At the beginning of the 2010s, international developers and original equipment manufacturers (OEMs) were still clamouring to increase market share in China’s booming power market, but by 2019 even with a massive market of over 100 GW of new build, foreign companies have largely been marginalised by Chinese competitors.”

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As the domestic market looks set to slow down in the 2020s, we expect Chinese manufacturers to put more emphasis on overseas market strategy and on developing products and partnerships for overseas markets.

“The question is how fast will we see Chinese companies move out of their domestic market,” Whitworth added.

Geopolitics as game-changer?

Counterintuitively, geopolitical tensions may have a positive impact on power markets in Asia in the 2020s. The US-China trade war is creating investment opportunities in the rest of Asia, particularly Southeast Asia. Both Chinese and US solar module manufacturers have moved into the region in recent years due to tariffs levied on Chinese products.

The trade war and increasing barriers to Chinese companies in developed markets have also pushed China to double down on its Belt and Road Initiative which targets infrastructure investments and trade with developing countries in Asia and Africa. At the same time, green investors from Europe and the US are scouring the region for solar and wind assets and related business opportunities.

Whitworth said: “As a lack of investment and financing has been a consistent challenge for developing nations, these trends have so far been positive for the economic development of the region. Expect financing and development options to increase for developing countries in the 2020s as US, Europe, China, and Japan compete for market and influence.”

Renewables face more exposure to market forces

The falling cost of renewables in recent years has been a double-edged sword in the short term. It not only greatly increased deployment of wind and solar, but also forced governments to cut subsidies. This will continue in the 2020s, with the impact of market forces a key uncertainty.

Many governments in Asia Pacific prioritise lowering power prices over other goals and still rely heavily on fossil fuels to support economic growth. In 2019, new gas supply contributed to spot LNG prices in Asia falling by over 30 percent. Coal prices also fell dramatically. These trends have a major impact on the competitiveness of renewable power, and indirectly on policy decisions made by regional governments.

Whitworth said: “These uncertainties should contribute to a levelling off of new wind and solar capacity additions in Asia in the next few years, and some fairly exciting debate about how the market will develop beyond that. One thing is sure: now that renewables investments have become mainstream, expect that they will experience increased exposure to government policy shocks and price shocks in the 2020s.”

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