The imperative to align the global energy system with the 1.5°C goal has never been more compelling. August 2023 marked the hottest month on record, surpassing even the record set in July 2023 by a significant margin. The frequency and severity of climate change impacts are escalating, underscoring the urgent need for action.
According to the International Energy Agency (“IEA”), global carbon dioxide (CO2) emissions from the energy sector reached a new record high of 37 billion tonnes (Gt) in 2022, 1% above their pre-pandemic level, but are set to peak this decade.
DBS Bank CEO Piyush Gupta highlighted some of the key challenges financial institutions face in this transition of the energy sector.
One significant challenge, according to Gupta, is the unproven economics of many new technologies. While some sectors have reasonably decent technology solutions, others lack viable options. Solutions such as hydrogen may hold promise, but are currently too far out to be practical. Even where technology exists, the cost points and economics of these new solutions often do not match those of fossil-based energy sources or other subsectors.
Gupta noted, “When comparing the cost of solar production in regions with high solar efficiencies like China or India to regions with cloud cover like the tropics, the economics are not the same”. Factors such as the cost of land, which can be substantial for projects requiring large areas, and the costs associated with storage, intermittency, and grid upgrades further complicate the economic viability of projects.
In essence, many projects are not easy to finance based solely on commercial viability.
Gupta was speaking at a panel discussion at the Singapore state investor Temasek’s annual sustainability-focused event, Ecosperity Week, from April 15 to 17.
The second issue identified by Gupta is the requirement for related infrastructure spending. While a project may be initiated, if the necessary investments in other infrastructure components, such as the grid, are not made concurrently, the project's potential is compromised. For a financial institution, it is therefore essential to consider the broader connectivity issues and infrastructure needs beyond the project itself to determine the viability of the investment.
The third challenge Gupta cited is around the risk premiums several Asean countries face that impact project costs and viability. These risk premiums include sovereign risk and foreign exchange risk. Many countries in the region are not considered investment grade, leading to a sovereign risk premium. Foreign exchange risk is also a significant concern, as the funding for these projects is often in US dollars, while revenue is realised in local currency. This disparity can result in substantial financial challenges.
Lastly, Gupta shared that project finance is influenced by the off-takers creditworthiness, particularly in the energy sector, where political considerations can impact payment reliability. Regime changes can introduce uncertainties regarding the off-taker's commitment to fulfilling its contractual obligations, adding another layer of complexity to project financing. These issues collectively contribute to the complexity and challenges of financing infrastructure projects in the region.
However, while challenges exist, concerted efforts are underway to mitigate them, with ongoing development of solutions aimed at overcoming these obstacles.
Talking to FinanceAsia on the sidelines of the event, Gupta emphasised a solution which he believes can have a significant impact on the net zero journey.
“Establishing a credible and transparent global carbon market is one of the key components of a toolkit of solutions to address climate change. A robust global carbon market is a prime vehicle for the private sector to channel capital from developed to developing regions. This in turn has the propensity to create significant impact by helping emerging economies access financing for sustainable development projects which are needed to accelerate the transition to a low-carbon economy," Gupta said.
According to Gupta, pursuing the adoption of cross-border and export markets also offers a substantial opportunity. “These markets enable source countries to develop capacity, scale, and technology without bearing the cost, as other countries purchase their power,” he noted.
To put the carbon market in perspective demand for carbon credits could surge by 15 times or more by 2030 and up to 100 times by 2050. The market for carbon credits could exceed $50 billion by 2030, contingent upon the successful implementation of the Article 6 rulebook adopted at COP26 to govern the use and trading of carbon credits.
Singapore’s net zero journey
Singapore has established a target of achieving net zero emissions by 2050. With its energy sector accounting for 40% of its emissions, Singapore aims to attain net-zero emissions from this sector by the same deadline. The country intends to realise this objective by importing clean energy from the Asean region.
Ngiam Shih Chun, chief executive, Energy Market Authority (EMA) of Singapore, said that while “Singapore has limited renewable energy resources, the country can access low-carbon electricity that is abundant in the region by connecting to regional power grids. This also promotes the development of renewable energy in the region and paves the way in realising the Asean Power Grid vision.”
The country has the target set to import up to 4 gigawatts (GW) of low-carbon electricity by 2035, making up around 30% of Singapore’s electricity supply then. In 2023, EMA granted conditional approvals to import up to 4.2 GW of low-carbon electricity from Cambodia, Indonesia, and Vietnam. Companies are currently conducting feasibility studies and securing regulatory approvals from source and transit countries.
“The projects are commercially and technically viable and the partnership between the source country and Singapore is mutually beneficial”, noted Chun.
Highlighting some challenges as Singapore takes steps towards decarbonising it’s energy sector Chun mentioned that these projects are still pioneering, as cross-border energy trading is currently limited, in the region. Their large scale is also something to keep in mind, for example, a 1,000-kilometer high voltage direct current cable from Vietnam. They are therefore facing regulatory challenges.
However, once cleared, they are expected to accelerate the development of cross-border trading, according to Chun.
The Laos-Thailand-Malaysia-Singapore power project, for example, took years to negotiate but is now the first successful cross-border power trading initiative across four Southeast Asian (SEA) countries. Discussions are underway to increase trading volume and enable multi-directional trading. This progress aligns with the vision of the Asean power grid, where cross-border trading becomes routine and benefits multiple SEA countries.
Another step being taken in the country is a national hydrogen strategy to outline pathways for adopting hydrogen in the power sector, potentially comprising up to 50% of the energy mix. Recognising the cost differential for new technologies, Singapore is seeking “Pathfinder projects”. As a part of this initiative, Singapore is looking to work with the industry to experiment with and build up capabilities in advanced hydrogen technologies, and identify and address any technical, safety, or regulatory issues that may arise.
Chun shared that this phased approach involves close collaboration with the private sector and financial institutions. Currently, the focus is on shortlisting consultants and conducting pre-field studies, with funding secured to support these initiatives. The approach aims to address the cost disparities associated with new technologies and ensure the commercial viability and bankability of projects.
