Energy is a fundamental building block of all modern economies. As such, it should not be an overstatement to say that the availability—or lack—of energy has been a primary driver (or detractor) of growth. This is why it has been imperative for all nations, not just those in Asia, to secure stable sources of energy. With Japan’s current nuclear crisis and high oil prices causing concern, the topic has drawn recent attention. And as Asia's population continues to climb along with a rapidly expanding middle class, the region’s energy demands are also set to soar. China and India, in particular, are expected to develop ever greater appetites for energy sources, such as nuclear power—long considered crucial to Asia's growth.
According to BP’s Statistical Review of World Energy, Asia accounted for 36% of the world’s entire energy consumption in 2009. Astonishingly, China alone accounts for more than half of that, or a little less than 20% of the overall world consumption. The fast-growing economy has more than doubled its energy consumption during the past decade, nearly matching U.S. levels. India has also seen its consumption grow rapidly, overtaking Japan as the second-largest energy consumer in Asia. Both China and India have seen substantial growth in their automobile markets that boosts gasoline consumption, while the growing middle class have embraced modern lifestyles that include air conditioning, computers and electrical appliances.
Ever since the catastrophe at Japan’s Fukushima Daiichi nuclear plant, governments around the world have felt the pressure to reassess the safety of nuclear power and scrutinize alternatives.
According to a report by the International Atomic Energy Agency, two-thirds of nuclear plants under construction are located in Asia, with China and India leading the way. China recently postponed all new nuclear plant approvals (or about 40% of the world’s planned nuclear projects) but the country is still building nuclear reactors at a pace said to be faster than any other nation in the world. It has 13 nuclear reactors in operation and dozens more in the pipeline. Meanwhile, countries like South Korea and India each tap about 20 reactors to generate electricity. India is continuing to ramp up and recently signed a multi-billion dollar nuclear agreement with the U.S. According to the World Nuclear Association, South Korea meets 35% of its energy needs with nuclear power, and aims to increase that amount to 59% by 2030. Emerging nations in Southeast Asia are also following suit: Malaysia, Thailand and Indonesia are all forging ahead with scheduled nuclear plans.
In Indonesia, officials have earmarked US$8 billion for two nuclear reactors and the country has been training scientists since the 1980s in anticipation. Even as antinuclear activists protested in Jakarta, and news of radiation contamination around Japan’s northern waters continued to unfold, Indonesia’s National Nuclear Energy Agency recently announced that it has whittled down the number of bidders for a nuclear reactor feasibility study.
Elsewhere, Vietnam is also planning to “stay the course” on an agreement it signed with Japan in October, allowing Japan to build two nuclear reactors for Vietnam. The project, to be located in southern Vietnam, was established by a Japanese venture last year to help export Japan’s nuclear technology. Vietnam also struck an agreement with Russia’s state atomic energy firm earlier this year to build a separate reactor.
These plans, however, continue not without public scrutiny and objections. There have been some vocal protests—Malaysia’s former Prime Minister has rallied support for a non-nuclear energy policy, and some government officials in Thailand called for the abandonment of the nation’s nuclear plans.
Currently France, the U.S. and Japan account for more than half of the world's nuclear energy generating capacity, and so far, the nuclear component to global electricity production is relatively small at just 10% to 16% of the world's total energy supply. However, the Organisation for Economic Cooperation and Development (OECD) expects nuclear energy to account for 22% of the energy produced globally by 2050. It is too early to know exactly how Japan's crisis will affect the nuclear industry, but it is likely to face further opposition. Longer term, this may mean spikes in demand for oil and for liquefied natural gas (LNG) to replace lost nuclear capacity.
Liquefied Natural Gas
While it seems likely that the region’s dependency on oil will continue for many more years, natural gas is expected to play a larger role in the region’s energy needs. Asia’s top three producers of liquefied natural gas are Indonesia, Malaysia and Australia, and international energy companies have been focused on the development of natural-gas terminals along the coast of Australia—among the world’s largest exporters of LNG. (In 2009, Australia ranked as the world’s fourth-largest exporter of LNG. It is also the largest exporter of coal.)
In the famously populous nations of India and China, natural gas currently plays only a minor role in their the overall energy mix, accounting for just 7% and 3%, respectively, of total energy consumption in 2007, according to the OECD. However, the OECD projects those percentages to double by 2035.
In China, the central government is promoting natural gas as a preferred energy source, and officials have set ambitious targets for increasing the share of natural gas to its overall energy usage. China currently depends on fossil fuels for nearly all its energy but officials have set aggressive targets for renewable sources of energy.
Demand for natural gas is also growing in South Korea where deregulation in the electric power sector also continues to advance. Given these deregulation moves, the country's electricity producers will be able to contract directly with global LNG suppliers, stimulating further growth in natural gas demand for the electric power sector.
As economies grow and incomes rise, it is inevitable that total energy consumption will rise along with it. However, current concerns over how China and India will deal with their growing demand for power may be excessive; historical evidence shows that a country’s energy usage as a percentage of its GDP declines as economies evolve. Higher income levels mean higher prices can be charged for the same product while the energy needed to produce such a product remains roughly the same.
The chart below compares overall energy consumption per US$1 million of GDP for Asia’s top energy consumers as well as some developed economies outside the region. Countries with higher per capita GDPs (starting with the U.S.) go from left to right, and the higher the bar, the less energy-efficient a country may be considered. At a glance, it seems that the efficiency of power consumption is lower in emerging countries. Though that is likely true on the margins, it is highly unlikely that power generation equipment in China is five times less efficient than that of developed countries. It is more a function of income and price levels, which will naturally rise as these economies grow. Additionally, the emergence of less energy-intense service industries will also facilitate improvements in energy consumption per unit of GDP.
Still, higher penetration of energy-efficient technologies will also be needed to stem the growth in total energy consumption. One such technology is a type of residential air conditioning that uses an inverter—an electrical device that converts direct current to alternating current, and controls the flow of electricity at the same time. On average, inverter-mounted air conditioning equipment can reduce power consumption by 30%. These technologies come at a cost to the consumer and hence adoption rates remain low in emerging markets where incomes are still low. However, emerging countries have the most to gain from these technologies as energy comprises a larger portion of input costs. There is much room for improvement in this area in the U.S., which has been egregiously slow to adopt energy-saving technologies.
There are always calls for “alternative” sources of energy given the requirements for energy by growing economies, environmental concerns over fossil fuels and the fear that nuclear energy induces. These alternatives include wind, sea and solar power. For the most part, these remain marginal sources of power as technology has not yet allowed these power sources to be efficient or stable enough to be a viable alternative in terms of costs. Most people consider the term “alternative energy” to refer to renewable power sources with no undesired consequences. Alternative “clean energy,” as defined by the World Bank, is “non-carbohydrate energy that does not produce carbon dioxide when generated,” including such sources as nuclear, geothermal, hydropower, wind and solar power. In China and India, these alternatives account for 3% of energy use compared to 11% in the U.S. and 13% in Germany—but much of this is nuclear power, according to World Bank data. Many people will argue that such statements ignore the huge environmental costs that must be borne if the region proceeds with its current focus on “dirtier” energy sources. That may be. But in terms of the calculations made by businessmen, politicians and consumers, who are still willing to trade a bit of environmental spoiling for higher incomes, these alternative energies only seem to “make sense” when oil prices spike. Thus, they have proven to be quite cyclical.
As yet, there is no sign of the Asian region curtailing its CO2 emissions, even as higher income countries such as the U.S. and European nations have managed to stabilize levels of emissions and, in some cases, reverse them. It seems likely that Asia will continue for some time to trade off environment for wealth. Nevertheless, the danger here is in taking too short-term a view, both for investors and policymakers.
How Asia—especially China and India—shapes its energy policy will have global consequences. Fortunately, alternative energy sources are very much a part of China’s energy policy. According to the Global Wind Energy Council, China more than doubled its wind generation capacity from about 12 gigawatts in 2008 to about 25 gigawatts at the end of 2009, making it the world’s largest wind market. Smaller amounts have been added in India, Japan, South Korea and Taiwan. This has given rise to opportunities to invest in the suppliers of technology and manufacturers of wind power generation systems in Asia, where some domestic companies are emerging—often with implicit or explicit government backing to challenge the big multinational players. In solar power, the industry is perhaps more fragmented—with solar panels threatening to go the way of silicon wafers in terms of commoditization. That still leaves room for dominant players to emerge should they have a technological advantage or cost advantage that is driven by scale. So far, such consolidation has yet to occur. However, higher prices for oil and coal should support greater demand for these alternatives. And business and policy decisions made throughout Asia over the next several years will be crucial in shifting the marginal energy mix toward renewables.
Matthews International Capital Management, LLC
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