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07 Jan 2014

Energy choices for Asia

by Ronald Man, Economist, HSBC, and Wai-Shin Chan, Climate Change Strategist, HSBC

Energy choices for Asia  (Getty Images/PhotoTalk)

To fuel expansion energy consumption will need to rise, mostly in China, India and Indonesia

Energy is the lifeblood of economic growth. It keeps factories and offices running, ports and airports humming and shopping malls in business. Asia’s extraordinary growth story has given the power-hungry manufacturing sector a starring role. The region’s energy consumption is now twice US levels. And there are no signs that the expansion of this appetite for energy will slow.

At the same time, a heavy dependence on carbon fuels means Asia's rise has been breathtaking in more ways than one. Just ask anyone who has experienced the air pollution in Beijing or Shanghai recently.

While the global slowdown has weighed on the region since 2010, growth stabilised last year and the region is well positioned for a gradual, but meaningful, recovery. Asia's GDP is likely to grow by roughly 65 per cent by 2020. To fuel this expansion, primary energy consumption will need to increase by almost 60 per cent, most of it in China, India and Indonesia.

Asia needs to use cleaner fuels and improve its energy mix without undermining the competitiveness of exports

However, the price could be high. It is clear that Asia needs to use cleaner fuels and improve its energy mix without undermining the competitiveness of exports. Difficult choices lie ahead. For example, generous and poorly targeted electricity subsidies have lowered costs to unsustainable levels and given people little incentive to consume less. This places a huge burden on government budgets.

While some efforts have been made to phase out subsidies, with fuel and electricity price hikes in the Philippines and Indonesia, progress has been delayed by strong public resistance.

Moreover, pressure is building on governments to introduce policies that will raise energy efficiency and protect themselves from vulnerability to external shocks. In the case of carbon fuels, Asia is more vulnerable than France and Russia. Hong Kong, Singapore and Taiwan are particularly exposed, given that they have no natural resources and satisfy almost all their energy needs with carbon fuels.

Even economies that do have natural carbon resources may feel the heat. India, while rich in coal reserves, continues to suffer power shortages as state-owned producers fail to meet production targets.

Nuclear power will always remain an option. The Fukushima disaster in March 2011 spooked Asia. However, if the shift to renewable energy is too slow and fuel prices rise, some economies may have no alternative but to embrace nuclear power.

Reducing carbon levels is also essential for hitting climate change targets.If we want to keep growing but don't want to choke in the process, we've got to improve energy efficiency and use less carbon fuel. Governments can do this by setting national energy or carbon intensity targets and encouraging more non-carbon energy sources.

The pressures are not just domestic. As the US starts producing massive amounts of so-called "shale gas" that used to be uneconomical to access and Asia remains dependent on carbon fuels, US industry is likely to benefit most. This will weigh on Asia's competitiveness and trade. If Asia's production costs rise by 10 per cent against those of US competitors, Asia's export growth could slow to 1 per cent by 2020.

Carbon constraints around the world should also tighten in light of the need to "decarbonise". This means industries will be affected not only by their own carbon policies, but by those of the countries they export to.

Asia's policymakers have some serious work ahead of them – making sure they have enough energy to power that all-important growth while keeping one eye on the costs of doing so and another on the smoggy skies above them.

The article originally appeared in the South China Morning Post on 3 January 2014.
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