Southeast Asia is making the green shift as many companies have pledged to adopt new energies, with ASEAN targeting an integration of 23 per cent renewables in its energy mix by 2025.
Aside from renewables adoption, we are already seeing shifts away from coal as the traditional cheap power source in Southeast Asia’s energy sector. In lieu of full adoption of renewables, LNG is a viable, less carbon-intensive transition fuel. Singapore is pumping in billions to become a key regional Liquefied Natural Gas (LNG) bunkering and chemicals hub, while neighbouring Malaysia’s state-owned Petronas is expanding its LNG portfolio and scaling up investments in hydrogen as a fuel of the future.
Over in Indonesia, the world’s largest producer of biofuels is stepping up efforts in developing renewable fuels that can better meet Environmental, Social, and Corporate Governance (ESG) and green energy targets. Philippines-based Ayala Corporation, has also announced it will fully divest from coal by 2030, and place greater emphasis on its green portfolio. It now runs wind farms, solar parks, and geothermal plants across the region, from the Philippines and Vietnam to Indonesia.
While this switch to cleaner fuels may bring added costs and complexities, it will also create many opportunities, holding much greater potential value in the mid to long term for Southeast Asian energy companies. According to a 2021 Oil and Gas Reinvention Index study by Accenture, reinvention across the “5Cs” of competitiveness, carbon, connectivity, customers and culture can create up to US$500 billion in value annually by 2023.
Sustainability is no longer a choice
Energy companies are recognising that doing business sustainably and moving to net-zero carbon is not just the “right thing to do” (which, let’s face it, is a weak motivator for action) but rather the only way to thrive and maintain relevance, especially in light of the recent court ruling in the Hague ordering Shell to slash its greenhouse gas emissions and investor action-forcing Chevron and Exxon Mobil to do more on climate change. The message that legislators and investors are sending to the energy sector is “if you don’t do more for climate change, we will make you”. Pivoting to clean energy and embedding sustainability into businesses is turning out to be absolutely essential to doing business in a carbon-sensitive era, from raising capital to avoiding carbon penalties.
Going green to stay in the black
Making the transition to cleaner energy will not be easy for Southeast Asia given the abundance of coal – there is the momentum that comes with the pipeline of already-funded coal-fired power plants, not to mention the ones that are already in construction and are slated to come online in the coming years. There is no getting around the fact that renewables are still more expensive than coal-fired generation – even more so when one considers the grid upgrades and energy storage solutions that must come with increasing renewables generation in the system.
The leap will be even more challenging for oil and gas companies for whom power generation is already a major step-out from a business that is used to large, chunky, on-off investments in mega projects which yield very attractive returns. Renewables are the exact opposite of that – numerous small investments in small projects that bring much lower returns than that which oil and gas companies are used to. Pivoting to green for oil and gas companies is not a simple matter of just switching investment focus to renewables – it means a whole new investment machine, with an agile investment decision and risk-management approach geared towards a much larger volume of deals than these companies are traditionally used to. Even operations will radically change – building and maintaining renewables such as solar farms tend to require construction and maintenance capabilities which favour high volume and low complexity, again, the exact opposite requirement from building and maintaining few and highly complex oil and gas assets.
Yet, oil and gas companies do not have much choice these days but to make these profound changes to the way they do business and operate as many banks in the global capital markets formalise their coal exit policies and re-channel funds to sustainable financing. Moving towards sustainable energy will be the way forward – money makes the world go round and when lenders speak, companies better listen.
On a regional level, the Asian Development Bank in May 2021 announced its commitment to halting financing for new coal projects as well as for coal, oil and gas exploration, and extraction in its updated draft energy policy.
Three of Singapore’s top banks – OCBC, UOB, and DBS – have dropped coal, announcing in 2019 that they will cease financing new coal plants. Similarly, Malaysia’s Maybank recently stopped financing for all new coal activities.
In 2018, private equity funds invested more than US$6 billion in sustainability assets in Southeast Asia, making up 41 per cent of deal value compared with 1 per cent in 2010.
In fact, it seems that investors cannot find renewables projects to invest in fast enough – to the benefit of clean energy operators. Singapore-based Cleantech Solar was able to secure a US$75 million loan from Dutch bank ING Group in June 2020 to finance its expansion across Southeast Asia. Cleantech, which also counts Shell among its investors, will use the funding to help build over 500 megawatts of solar projects. It is the largest green loan in Asia Pacific to date in the commercial and industrial renewables sector.
As technology continues to rapidly reduce the cost of renewable energy, returns from clean energy investments will rise, another motivation for energy companies to make the switch.
Good things come in threes
Even though coal will be around for a while still in Southeast Asia, the time for energy companies here to pivot is really now. Change takes time. And nobody wants to be the laggard.
Figure: Three areas of change that energy companies should consider, Accenture Energy decarbonization A-Z report
And change also doesn’t have to happen all at once. Energy companies can start by cleaning the core - minimising emissions from their existing operations. There is much that can be done here, and this benefits the bottom-line too. Emissions tend to be tied to power usage – and by working to monitor and reduce emissions, one tends to make power usage more efficient. This helps to reduce operational cost.
But transformation doesn’t stop there. Energy companies can accelerate their transition by moving investments into the new energy space, targeting technologies which are already in, or on the cusp of widespread implementation, such as solar, wind energy and electric vehicles. Almost every oil and gas company these days has a “new energy” arm – the question is how to make such outfits successful. As mentioned previously, this takes an entirely new way of doing business. Transforming the corporate investment decision process and building new capabilities are twin pillars of change that will drive this aspect of change.
Finally, energy companies should also look to extend the frontier – make educated bets on new technologies and business concepts for the future. Many were caught off-guard in this transition. Does it not make sense to be prepared for the next transition?
So how can companies start on this journey? It all starts with setting targets – not just for carbon emissions but ESG in general (we often forget that sustainability is more than just about carbon) - and tracking them. In the words of one of the greatest baseball pitchers in the history of the game, “you can’t hit what you can’t see”. Without monitoring ESG performance, how can one address them?
Meeting sustainability goals must infuse throughout the entire company, rather than just be a bolt-on solution. This is why oil and gas companies which have tasked a “new energy” unit to increase renewables footprints rarely succeed. Moving towards a more sustainable business is just that – transforming the entire company to move into a new way of doing business, not just a portion. This is a profound exercise which involves infusing KPIs, business performance metrics and overall strategy with sustainability. Trying to move to sustainability otherwise is like a bodybuilder trying to get in shape for a competition by doing only bicep curls all the time!
There is much at stake in the energy transition – much to gain and much to lose if players do not change. But rather than just jump blindly into the unknown, how can energy companies approach the most significant disruption they have ever faced? Find out in our next post.
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