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Renewables in Asia Pacific

Published by , Editorial Assistant
Energy Global,

Wood Mackenzie’s Vice Chair Gavin Thompson: There’s no doubt the greatest buzz I get working in the Asia Pacific energy sector is the sheer scale of what we deal with. From populations to economies, demand growth to investment needs, the numbers are just huge. But while this all brings tremendous opportunities, it also means major challenges. Unquestionably, the most pressing of these is how does the region move rapidly towards a pathway to decarbonisation in line with Paris Agreement goals, while ensuring continued economic growth and competitiveness?

A recent report published by Wood Mackenzie expects the region to make up two-thirds of global power demand growth through to 2040. Or to put it another way, electricity demand growth in Asia Pacific over the next 20 years will be greater than the entire European power market today. I’d argue it’s no exaggeration to say that how the Asia Pacific power market develops over this time will broadly determine the success or failure of the energy transition for the global power system. I did say that Asia is all about scale!

It’s (almost) all about the costs

As I’ve said before, to understand the future, follow the money today. And it’s no different with renewables. To achieve rapid growth in Asia Pacific, renewables must be low cost and so to understand the competitiveness of renewables versus coal and gas, my colleagues took the Levelised Cost of Electricity (LCOE) approach. LCOE is a standard power industry metric used to measure the total cost of generation averaged per megawatt-hour over project lifetime and indicates the revenue required for each megawatt-hour to cover all costs and reasonable profits.

Despite outstanding efforts to reduce renewables costs across the region, progress to-date is not enough. In fact, Asia Pacific’s share of share of wind and solar in the power mix is below the global average, and less than half that seen in Europe. Why? Economics and a lack of supportive policies are the usual suspects.

Look at the chart below. While the levelised cost of solar and wind across Asia Pacific has fallen dramatically, at the regional level there remains an average renewable cost premium over coal-fired power averaging 29% in 2019 (though down from a whopping 164% in 2010).


Of course, at the individual market level the story is more nuanced. Leading the pack in regional renewables competitiveness is India, with solar power costs at a 14% discount to coal-fired generation. Australia comes in second with a cost premium of only 3% for renewables over coal. Sitting at the opposite end of the scale is Japan, where we currently see a renewable cost premium above 100% of coal generation costs.

The future of renewables in APAC – the scalability challenge

For renewables growth to happen on a massive scale, costs must be reduced further. As the chart above clearly shows, although solar costs have collapsed in the past 10 years (solar PV costs have fallen by nearly 40% across Asia Pacific over the past three years, compared with only 10% for wind), the rate of improvement is notably slower going forwards.

But they are continuing to fall, and at a pace that is outstripping coal costs (even without factoring in future carbon taxes, which I believe surely must come). I asked my colleague Alex Whitworth, who heads our renewables research in Asia, what this means and he got straight to the point: “Asia Pacific is on the cusp of a new age of cost-competitive renewable power.”

With solar and wind costs expected to keep falling by an average of 3% annually between 2020–2040, Alex and his team believe the renewable cost premium over coal-fired power will be history in most Asia Pacific countries before the end of the next decade, with wind and solar costs averaging a 17% discount to fossil fuel-based power by 2030. I’d define the future challenge as one of scalability – cost reductions will ensure renewables compete, but capacity still needs to be financed, built and operated on a massive scale.

Additional challenges lie ahead

While cost competitiveness of power generation is critical to the future growth of renewables in Asia Pacific, it is not the end of the story. As renewables penetration increases and government subsidies are reduced, renewable power will need to overcome new challenges to compete with conventional fuels. Critical amongst these is curtailment, caused when the grid is unable to use all power generated by wind or solar (usually around midday for solar, and during winter evenings for wind power when power demand is low).

Curtailment levels in Asia Pacific are already rising with higher renewable penetration, adding an estimated 6% to renewables generation costs in 2018. This directly impacts project cashflow and leads to underperforming investments.

An additional problem seen in wholesale power markets is renewable price ‘cannibalisation’ when multiple wind or solar operators compete in certain regions, causing them to receive much lower prices on average than dispatchable power units. As a result, a cost discount is needed to compete with fossil fuels.

Of course there are challenges, the scale of what lies ahead makes this inevitable. But they can be overcome, and the role of storage will clearly be critical here. But I can’t help being optimistic about the role of renewables in Asia Pacific as the region strives to achieve sustainable, low carbon economic growth. And as with all major challenges, they present massive opportunities too.

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