Because the emerging ones will focus on green
The analysis by Jan de Bruijn, Robeco's Emerging Markets client portfolio manager
To achieve the goal of the energy transition on a global scale, emerging markets will play a crucial role, given their growing global importance. Countries like China and India are still undergoing economic expansion and therefore still heavily dependent on fossil fuels. Being oil importers, they are interested in switching to renewable energies in order to no longer be dependent on energy and to become, at the same time, exporters of green energy components.
However, the energy transition will require significant economic restructuring, backed by more effective policy changes in countries that are heavily dependent on oil and gas. Companies that are part of the global supply chain now have a stronger motivation than ever to decarbonise their businesses by adopting renewable energy. This is having a real impact on the energy sector in many markets.
Making the energy sectors of China and India 'green'
China and India are the largest consumers of energy globally, becoming the most important markets in determining the success of the global drive for decarbonisation. Compared to many developed markets, where electricity demand has already peaked around 2007, these emerging regions will take longer to reach carbon neutrality.
In 2020, China pledged to limit its carbon emissions before 2030 and achieve carbon neutrality by 2060. More recently, India announced its commitment to zero emissions by 2070 at the United Nations conference on climate change (COP26) in Glasgow. The country had previously pledged to cut its emissions by more than 30% by 2030.
Considering that coal still constitutes between 60% and 70% of primary energy consumption today, in both countries, combining economic growth and reducing emissions will require significant investments in renewable energy, such as solar, wind and other low-carbon technologies.
On this front, China is already a world leader in renewable energy. It has managed to increase the share of non-fossil fuels in its primary energy consumption from just 6.8% in 2015 to 15% in 2020. The country now aims to further increase this percentage to 25% by 2030.
Some new wind and solar plants built in India and China are already cheaper than existing coal-fired power plants
The low-carbon transition is also financially feasible. The leveled cost of energy (LCOE) of wind and solar energy has dropped sharply over the past decade. These energy sources are already cheaper than new coal or gas power plants in most countries. In addition, some new wind and solar plants built in India and China are cheaper than existing coal-fired power plants.
Making the economy of oil exporters 'greener'
The energy transition will also require significant economic restructuring by those countries that depend on oil and gas for a significant portion of their economy, such as Russia and the Gulf countries (GCC). Saudi Arabia and Russia are the two largest oil and gas producers within the emerging market universe, each accounting for 12 to 13 percent of global oil production.
The reduction in the volumes of oil and gas available, paced by the decarbonisation of the global economy, will pose significant challenges to their economies in the long run. The recent Global Roadmap to Net Zero by 2050 report from the International Energy Agency (IEA) shows that global oil demand will have to decline from more than 90 million barrels per day to less than 25 million barrels per day by 2050.
Countries such as Saudi Arabia, Qatar and the United Arab Emirates (UAE) have established programs and drafted social and economic restructuring plans to diversify their economies and reduce their dependence on oil and gas. In terms of renewable energy contributions to the grid, the UAE has been the most aggressive: solar power generation capacity is expected to quadruple from current 2.1 gigawatts to 8.5 gigawatts by 2025.
This will represent approximately 94% of the country's renewable capacity. By 2050, 44% of electricity is expected to be generated from renewable sources. Most solar projects are funded by state-owned enterprises at a cost typically similar to the sovereign interest rate. Land and grid connections are offered free of charge to energy companies, which further strengthens the logic of renewables.
Meanwhile, Saudi Arabia has accepted the need for an energy transition, although raising funds will likely be an obstacle. Its National Transformation Program 2020 and Vision 2030 aim to six times the government's non-oil revenues and increase the share of natural gas and renewable energy to 50% of the total energy mix by 2030. These ambitious goals will require massive investments and It remains to be seen whether Saudi Arabia will be able to implement its plans.
Making global supply chains greener
The importance of emerging markets in the global supply chain has grown significantly over the past two decades. Companies in the more developed economies have historically focused on emissions related to their operations. However, pushed by stricter emissions-related reporting regulations, including Scope 3, more companies have begun to focus on their supply chain.
As a result, the imperatives of decarbonisation have become almost non-negotiable for many companies operating in emerging markets. According to a recent survey by Standard Chartered, supply chain emissions represent on average 73% of the total emissions of multinationals.
Multinationals are starting to implement their decarbonisation plans and their supply chain partners are forced to do the same. Apple, for example, announced last year its goal of becoming carbon neutral throughout its manufacturing supply chain and product lifecycle by 2030. Several programs have been designed accordingly, including the creation of a clean energy investment fund in China.
Emerging markets and developing countries are facing a double challenge. On the one hand, they are particularly vulnerable to climate change, not having the financial power to prevent or respond adequately to the impacts of climate change. On the other hand, a reliable and affordable energy supply is crucial for continuing socio-economic development.
Still, many of them are moving fast with their decarbonization plans as they become an increasingly important part of the global energy market. And technological innovation and cost reduction are expected to contribute to faster growth of renewable energy, along with innovative business and financing models that should promote clean and scalable energy solutions.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/perche-gli-emergenti-punteranno-sul-verde/ on Sun, 09 Jan 2022 06:17:36 +0000.