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Under the Banyan Tree - The economics of going green in Asia
29 Plays2 years ago
Herald van der Linde is joined by Evan Li, Head of Asia Energy Transition Research, to discuss the opportunities and challenges of renewable energy in the region, where China is both the leading polluter and number one name in solar and wind.
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Transcript
Podcast Introduction and Series Overview
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Focus on Asia in Global Energy Transition
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Hello from Hong Kong and welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
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I'm Harold van der Linde, HSBC's Asian Equity Strategist, and on today's podcast we're going to bring you up to speed on Asia's role in the global renewable story.
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It's a pertinent time to talk about this, with the ongoing energy crisis, lots of regulatory changes, inflationary pressures, they're all big themes as we kick off 2023.
China's Role in Renewable Energy
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Not to mention mainland China's effort to cut back on coal, the most carbon-intensive power source on the whole planet.
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Joining me to help make sense of it all is Head of Asia Energy Transition Research, Evan Lee.
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Let's kick off the conversation right here, under the banyan tree.
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Let me first set the scene before we start.
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In previous podcasts we've spoken about energy transition and there's a couple of kind of long-term issues at play across the region.
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I would say first of all there is an increased focus on self-sufficiency in energy in general that is driven very often by geopolitical considerations.
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Of course there are climate considerations.
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We don't want industries that pollute so much anymore.
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And of course, then there are other issues such as, for example, the energy crisis that we see in
Market Performance and Carbon Neutrality Goals
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Europe.
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Now, meanwhile, Asia is home to two of the world's three highest producers of carbon dioxide emissions.
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China takes the top spot with more than 30%, followed by the US in second and India in third.
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And that sparked billions of dollars in investments in green energy across the region in recent years.
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But 2022 was a rough year, where the wind and solar names covered by AGBC underperformed the market by 53% and 24% respectively.
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To put that in context, the Hang Seng Index here in Hong Kong was down around 15% over the same period.
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Evan Lee joins me now here to discuss the outlook for Asian renewables in 2023, but also beyond.
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Evan, welcome to the podcast.
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Thank you, Harold, for having me.
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Let's focus on China first.
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What are China's stated goals over the next decade when it comes to energy transition?
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Yeah, so let's dial back two, three years ago, back in 2020, around September.
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China obviously has announced its first climate mandate, that is to peak its carbon emission by 2030, and also try to go for carbon neutrality by 2060.
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When we say carbon neutrality, essentially that means reducing carbon dioxide emission or greenhouse gas emission
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by switching energy from fossil fuel to renewables such as solar and wind or another way to do it is to either capture the carbon that goes out into the atmosphere or essentially plant more trees as a way to absorb carbon into the system.
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So the net is zero in a sense.
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Exactly.
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So basically, the goal for China is basically go for net zero emission on greenhouse
Challenges in China's Energy Strategy
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gas.
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So that's the long term story.
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But what is then the story in 2023?
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What's happening in 2023 in order for them to get there, in a sense?
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Yeah, so we do still believe that the climate goals remain unchanged.
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Just bear in mind that China has obviously announced a lot of policies to push for, and again, net zero since 2020.
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So we have gone through a big ride of policy push, government support, subsidies, repricing of energy.
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But one thing that we have to also understand is that is over the last year or so,
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Energy demand has been adjusted down because of a lot of other economic concerns.
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China obviously has gone through COVID.
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Just remember that.
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You mean there's less demand?
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Yes.
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Yes.
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And obviously with less demand on energy, the expectation on managing its curve to achieve carbon peaking has sort of been reshuffled in a way.
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And in fact, because the companies that are producing the equipment along the value chain of both wind and solar has faced certain bottlenecks, we do believe that China hasn't really been able to deliver the capacity or the insulation of wind and solar as it should in order to achieve the climate curve.
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But however, that is not very important because demand has also shrunk.
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Mm-hmm.
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So let's unpack this a little bit.
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So, yeah, the world has changed and people need to recalibrate their plans.
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So let's just look at the different industries here.
Solar Industry Dynamics in China
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First, the solar industry in China.
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What is the solar industry?
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Of course, it's panels.
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But how does that industry actually look like?
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What are the components of that industry?
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So most people would look at solar as like a solar module system that they put on top of the roof or in an industrial park or something like that.
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But the supply chain is quite complicated.
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So we will start from polysilicon at the very upstream.
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That is the raw material that they create out of sand that will be used to make something called wafers and turn into solar cells.
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With the solar cells, they would pack it together and they would add a sheet of solar glass right on top as a protection layer to form a solar module that eventually gets installed into a solar system that will be used by either commercial or consumer end users or even by the power utility companies that lay it out onto the ground to produce electricity.
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Yeah.
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So, OK, so those are the different components of the industries.
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In 2023, within solar in China, where are the bright spots and where are the challenges in that supply chain?
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So this becomes a little more tricky because the demand supply across the different subsets are not very even.
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In the past two years, we're faced with very tight supply of polysilicon.
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It takes about two years to create.
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So when China and every wells in the world is trying to lift their climate targets, creating strong need for solar, the supply in polysilicon had been very tight.
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from the last two to three years.
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But that issue is sort of resolved with China being very dominant in supply for polysilicon, which has obviously created a lot of new capacity over the last six to 12 months.
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So the prices will go down, I suspect.
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And in fact, prices have collapsed over the last few weeks in anticipation of new supply.
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So now the rest of the supply chain would actually benefit on a lower cost.
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And with the lower pricing on these solar modules, we do believe that demand will be created as well.
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That's good news, I guess, for the glassmakers as well, or it doesn't matter too much?
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Glassmakers will benefit, obviously, because they're a natural beneficiary when demand goes up.
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And especially for China that owns almost 90% of solar glass supply of the world, when demand goes up on lower costs of polysilicon from the upstream,
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solar glass would naturally benefit.
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Yeah, because people will buy more of these modules.
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Okay, so we know where the bright spots and the challenges are in solar and to keeping basically supply and demand across that food chain in Czech is a challenge.
Wind and Other Energy Sources in China
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Is that the same case in the wind industry in China as well?
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Wind is a little bit different.
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When we look at solar, we have to understand global demand and global supply, given China is very dominant across the chain.
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But when it comes to wind, it's going to be very domestic because whatever that's being produced in China mainly gets sold back to China.
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Export is not a very big story for the Chinese producers when it comes to wind equipment.
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That's really domestic markets.
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So Evan, we looked at solar, we looked at wind.
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There are some challenges here and there.
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What are some of the other industries that we should be looking at when it comes to energy transition in China?
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For sake of sufficient energy supply, China will invest further in coal and nuclear, mainly because renewable energy overall is still a small fraction of total electricity and energy supply for the country.
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How much is it, by the way, at the moment?
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Wind and solar alone combined is only about 12% of electricity supply in China, which is still quite small.
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So China itself is still very reliant on coal, which is fossil fuel.
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Because they still need energy.
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Exactly.
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Now, we now understand the challenges and sort of the bright spots in China a little bit and also what their policies
India's Climate Initiatives and Challenges
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are.
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I think in a second we're going to talk about what is happening in the rest of the region.
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So we're back again, Evan.
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We've spoken about China.
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We've seen that China has got some pretty ambitious goals, but that the supply and demand issues across these food chains is really making it difficult for these industries to meet those goals in the next couple of years or so.
00:09:51
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But let's now look at the rest of Asia.
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I think all countries in Asia have some renewable energy policy in place, but the big one I presume is India, right?
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And what is happening in India?
00:10:04
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India has definitely put out some very ambitious goals when it comes to climate, including net zero targets and policy support coming from incentives and government subsidies.
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I guess we have to look at it from a few ways.
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So first of all, many major markets are trying to set up their own value chain in solar, but China is already very dominant, very cost-efficient in producing solar equipments and solar modules.
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So without meaningful government incentives for the producers to set up their own factories in producing polysilicon solar cells and solar modules,
00:10:43
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We think it's going to be quite challenging for India to be a supplier of solar equipments.
00:10:49
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But when it comes to transitioning energy supply into renewables, India could be a big buyer of these solar components from producers like China.
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So the Indians have to buy solar equipment from the Chinese.
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And that goes against, I guess, the self-sufficiency that they're trying to look for.
00:11:09
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Is that correct?
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Potentially could be, but we'll have to see what kind of government subsidies that will be provided.
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What about wind?
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Are they big in wind as well?
00:11:18
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India has its own supply chain in wind.
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In fact, India has been quite good in producing wind turbines.
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And just like many other countries, as I've sort of mentioned, wind is actually quite domestic.
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We think India is actually quite self-sufficient.
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Okay.
00:11:33
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And I guess that helps them because, as you mentioned, on the solar side, they struggle because they will need to buy from China if they want to be competitive.
00:11:43
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Are there any other initiatives that India is putting in place as well?
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Are they big in nuclear or anything else?
Asian Reliance on Chinese Energy Components
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Nuclear is a part and there are other smaller types of renewable components.
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But overall, wind and solar combined is still quite a small mix.
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So India as a whole still has to import a lot of oil and gas.
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Okay.
00:12:05
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And is that the same story for the rest of Asia as well?
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Other countries in Asia?
00:12:09
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That's quite similar, I would say.
00:12:11
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Particularly in solar, the rest of the Asian countries are still going to be very reliant on Chinese supply of solar components.
00:12:21
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And for wind, they can get that from India or elsewhere?
00:12:24
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Wind, they will get it from India.
00:12:26
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China obviously is a big supplier of that.
00:12:29
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There are other international players that are providing equipment into the region.
00:12:33
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Many of the ASEAN, Southeast Asian countries are a big fan of these international brand names, which they would obviously cost more to buy, but there's a market there.
00:12:45
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Okay, well, we've spoken about renewables in the Asian region.
00:12:49
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Asia has some ambitious goals when it comes to energy transition.
00:12:53
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Renewables are growing, but it's still a small part or not a dominant part of overall energy supply yet.
00:13:00
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So Asia will continue to buy oil, gas and coal.
00:13:04
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What we then see is that in particular industries, there are all sorts of supply and demand micro issues at play, in particular, I would say in solar, but in wind as well.
00:13:13
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And because China is so dominant in solar, it actually means that all the other countries still rely on China for that particular supply of solar panels or glass or polysilicon.
00:13:23
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So it's a very complex story, this energy transition, and I suspect we're going to revisit this regularly under the banyan tree.
00:13:30
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Thank you, Evan.
00:13:31
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Thank you, Harold.
00:13:33
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And that's a wrap for this edition of Under the Banyan Tree.
00:13:36
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Thanks, as always, for joining us.
00:13:37
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We're going to take a break over the Chinese New Year.
00:13:39
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That's next week.
00:13:40
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But we'll be back the following week putting Asian markets and economics in context.
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Take care.
00:13:46
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Till then.
00:13:47
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Thank you for joining us at HSBC Global Viewpoint.
00:13:50
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We hope you enjoyed the discussion.
00:13:52
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