What do the commitments made by Japan and Vietnam at COP26 signal for investors?

The commitments made by countries across Asia at COP26 provide investors, developers and renewable off-takers with key insights into the future energy mix and investment opportunities in the region.

The Asia-Pacific region is a powerhouse of economic growth, and with that growth comes an increasing demand for energy. How the region responds to the challenges discussed at COP26 will therefore have a huge impact on the attainment of global climate goals. To understand the opportunities presented by the energy transition in the region, there is no substitute for local knowledge. To this end, Baringa provides regular power market reports on countries across the region, providing investors, developers and renewables purchasers with the insights they need to make informed decisions.

Below, we look at the commitments made by two countries in the region, Japan and Vietnam, at the recent COP26 in Glasgow and the opportunities that their pledges may open up for investors.

Japan’s commitments

At a glance

• Ambitious offshore wind targets offer investment opportunities

• As a result of factors unique to Japan (limited land, mountainous terrain, regions prone to extreme weather conditions) the country can’t rely solely on renewables. As such, Japan is having to consider a range of generation options including nuclear, LNG and hydrogen, requiring plant development, retrofitting and CCGT makers to pivot to cleaner fuels

In-depth analysis

Japan’s Prime Minister Fumio Kishida of the Liberal Democratic Party took office in early October 2021, before going on to win the general election on October 31^st – the opening day of COP26. No administration can have had less preparation time, and this may have been reflected in the country’s conservative climate commitments. But they also reflect difficult realities for Japan when it comes to decarbonising its economy.

Japan signalled its political will to be part of the solution, pledging to strive towards net-zero by 2050 (with an interim reduction in greenhouse gas emissions of 46% by 2030 from 2013 levels). In addition, the country’s recently released 6^th Strategic Energy Plan sees a significantly increased role for renewables in the energy mix. The country has pledged that renewables will account for 36-38% of its energy mix by 2030 – signalling a clear opportunity for investors. However, exactly how Japan will achieve this is unclear.

Japan’s offshore wind programme is particularly aggressive, targeting between 30-45GW by 2040, and reflects the limited opportunities available for large-scale onshore renewable installations in a densely populated country with mountainous terrain. This capacity constraint is one of the reasons that renewables are expensive in the country. Others include the high price of land and construction costs for solar, as well as higher standards due to earthquakes, tsunamis and typhoons. For offshore wind, the deep seabed requires more expensive methods such as floating offshore wind.  

One alternative is nuclear, which the country has targeted to account for around 20% of the energy mix by 2030. However, this would involve turning on a large number of nuclear plants across the country, which seems unlikely given the hostility towards this form of energy in the wake of Fukushima, and the fact that local governments have the final say.

As a result, Japan has no easy alternatives to thermal power generation. While prior to COP26 it committed to phasing out 100 older and inefficient coal power plants, these represent a small proportion of the country’s coal generation capacity, and coal would still constitute almost 20% of the energy mix even after these plants are decommissioned. It was no accident that Japan did not sign the Global Coal to Clean Power Transition Statement at COP26.

Consequently, Japan’s latest pledges focus on the decarbonization of thermal generation through the conversion of existing gas ‘combined cycle gas turbines’ to use hydrogen and for existing coal units to co-fire ammonia. This is a move that is accommodating to the needs of large Japanese equipment makers, which could pivot their businesses to retrofitted thermal plants using hydrogen turbines for instance. To support this, the country has earmarked USD $100m to convert plants into zero-emission thermal power as part of the Asia Energy Transition Initiative announced in May 2021.

Finally, Japan has signed the Global Methane Pledge at COP26, which calls for a global cut of 30% in methane emissions. However, the pledge is collective rather than country specific. The fact is, without significant nuclear investment, Japan will need new gas plants to provide dispatchable generation in the short-term – assets that risk becoming stranded in a net-zero world.

Vietnam’s commitments

At a glance

• LNG and renewable generation back on the table as coal is sidelined.

• Government task force to explore obstacles to attracting investment capital

• Doubling of renewables will require market solutions to overcome curtailment from network and connectivity constraints.

In-depth analysis

One of the more surprising commitments made by an Asian country in Glasgow was Vietnam’s reversal of its recent position on coal (which may have been precipitated by China’s refusal to finance the fuel in the future). By signing the Global Coal to Clean Power Transition Statement, it committed to phasing out coal generation by the 2040s. This is a stark shift from Vietnam’s Power Development Plan 8 (‘PDP8’), where coal remained prominent alongside a strong push for gas-fired generation.

While the sudden U-turn on coal may raise issues of credibility and confidence, there is currently much demand among international investors for viable renewable projects in the country, and the government’s designation of a special working group to tackle obstacles to investment is an encouraging sign that investors’ considerations are being taken seriously.

Given the political importance of securing supply for economic development during the period of coal decommissioning, replacement technologies are likely to include gas-fired generation alongside a faster renewable build-out. This will require process transparency, off-taker credibility, and long-term revenue certainty, in order to be investable.

Also at COP26, Vietnam committed to net-zero by 2050 with a planned doubling of installed renewable capacity by 2030 (from ~17GW VRE to ~31-38GW). For the country, which is a net importer of coal and LNG, payback on such renewables investment in the form of a positive current account balance is a further incentive. Indeed, Vietnam has form when it comes to renewables installations. Generous and time limited feed-in-tariff schemes have seen a huge adoption of rooftop solar, propelling the country to a regional solar leader and among the top 15 countries globally for solar capacity. However, this rapid adoption has also led to significant network congestion and connection issues. With the latest renewable targets, those challenges will only increase.

The ambition to fully decarbonize the economy will also require a sustainable CO2 abatement strategy. This could be via carbon price (as in South Korea) or renewable certificates and corporate targets (as in Taiwan), to incentivize the wider economy decarbonization and provide financial support to renewables.

Contact us for more insight into the local power market dynamics across Asia-Pacific, to learn about our power market reports covering 8 countries in APAC or to discuss transaction advisory support in the region.