Opportunities and Challenges of Belt and Road Overseas Investment in the Power Sector under the Paris Agreement — Vietnam, Indonesia and Pakistan

2019-12-11, by Greenovation Hub,

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The 2015 Paris Agreement aims to keep the increase in global average temperature to well below 2°C above pre-industrial levels and to limit the increase to 1.5°C, and to make finance flows in line with a pathway towards low greenhouse gas emissions and climate-resilient development. To achieve these goals, countries have developed and submitted Nationally Determined Contributions (NDCs) and proposed plans for domestic actions and international cooperation. Starting in 2023, the Paris Agreement will require countries to conduct a Global Stock take every five years to review progress in global climate action, which will provide reference for countries to develop new and more ambitious NDCs. International cooperation could play a critical role in promoting the decarbonization of the global economy and the implementation of the Agreement’s targets. In the context of the “Belt and Road” Initiative (BRI) launched by China in 2013, green, and low-carbon foreign investments to host countries in line with their climate targets will be key for China and the host countries to successfully create a “community with a shared destiny for humankind” and achieve the Sustainable Development Goals.

Asia plays an increasingly important role in addressing global climate change and in achieving poverty eradication and sustainable development goals. First, six of the ten countries most affected by climate change are in Asia, including Vietnam and Pakistan. Climate change has also exacerbated air pollution in Asian countries, creating more public health risks. Second, most Asian countries are still “developing” and “underdeveloped” countries. In these countries, electrification levels and per capita electricity consumption are still far below the world’s average. At the same time, industrialization and urbanization also makes Asia the fastest growing region for global carbon emissions. Chinese investment through the Belt and Road Initiative in the Asian power sector is thus increasingly significant in scope.

This study examines the impact of NDCs on the development of the power industry. By using Vietnam, Indonesia, and Pakistan as examples, it aims to identify power investment baselines consistent with climate goals. This study also analyzes key areas for action to bridge the gap for reaching the 2°C target and provides a reference for Chinese policymakers and investors to formulate a low-carbon power investment plan consistent with long-term climate goals under the Paris Agreement for Belt and Road investments.

The study finds that the power sectors of Vietnam, Indonesia and Pakistan still face challenges. Firstly, Indonesia and Pakistan are facing serious power shortages. The national electrification level is less than 75%, mainly concentrating in regions with high economic growth rate. Serious power shortage in Pakistan has become a major bottleneck of its economic development. Secondly, Vietnam, Indonesia and Pakistan rely on coal power as the main source of increased capacity to meet their increasing power demand, which may increase the carbon intensity of the power sector. Despite the huge potential of renewable energy resources, Vietnam, Indonesia and Pakistan are still in the early stage of developing renewable energies. Namely, renewable energy accounts for less than 1% of the total power generation. Lastly, power grid infrastructure still needs improvement with high transmission loss rate, which hinders the power sectors’ development. As an archipelago country, grid network in Indonesia is divided into eight interconnected networks and more than 600 independent grids. Pakistan has high transmission loss rate. In 2013, the transmission and distribution loss rate is 17%, far behind the world’s average.

Three nations’ NDCs have all set non-conditional or conditional carbon emission reduction targets, with policies and measures to implement these targets. Vietnam and Indonesia have demonstrated plans for energy transition and power development. Vietnam’s NDC estimates that the country will meet its major power needs through coal, hydropower, and natural gas in the near future, with these sources to be gradually replaced by renewable energy. Indonesia plans to implement its NDC through improving energy efficiency, transforming energy consumption patterns, and development of renewable energy. The Pakistan NDC has only set a conditional target of a 20% reduction in its 2030 projected greenhouse gas emissions compared with BAU, in the condition of receiving international support of US$40 billion. Pakistan does not clarify the proportion of responsibility from each sector. The cornerstone of its NDC is the Pakistan 2025 Vision, adopted in 2014. The Vision proposes that by 2025, installed capacity of new power generation should reach 25GW and total installed capacity will reach 45GW, which is equivalent to doubling its existing installed capacity.

The China-Pakistan Economic Corridor (CPEC) is the flagship project for the Belt and Road Initiative. If Pakistan does not intend to phase out existing units in the future, the new targets proposed in the Vision 2025 will be mainly reached from installations that are part of the CPEC as well as China-Pakistan nuclear power cooperation projects which were initiated before CPEC. From the perspective of solving the power supply gap, new capacity in the country is too focused on coal-fired power projects. At present, the installed coal power capacity of CPEC projects under construction or planned to be built exceeds the installed capacity needed to solve the urgent shortage of electricity, which may lead to reduced operating hours caused by oversupply. The dominance of coal-fired power projects in the CPEC could lock Pakistan into a path of high-carbon emissions for the next 30-40 years. At the same time, with the improvement of future climate policies and environmental standards, the subcritical units may need to apply CCS technology or face early retirement, which would cause Chinese investors to suffer financial and reputational losses. From the perspective of energy security, new coal-fired power plants will still need to import coal, and so are not conducive to reducing the country’s dependence on imported energy. Lastly, water shortages will exacerbate competition between water and coal, further increasing the risk of coal-fired projects.

Opportunities for enhanced low-carbon transition

Three nations have potential for accelerated low carbon transition. After submitting their NDCs, Vietnam, Indonesia and Pakistan all adjusted their national energy development plan, to accelerate the low carbon transition of the power sector. Vietnam approved the revision version of the PDP VII (2011-2020) in March, 2016. The revised plan lowered electricity demand growth expectations and encouraged the use of renewable energy sources such as solar, biomass, and geothermal energy to generate electricity. Indonesia’s National Electricity Development Master Plan (RUKN), and the PLN Power Supply Business Plan (RUPTL) have both increased their new energy and renewable energy targets in the total energy mix by 2025 from 23% to 25%. In April, 2019, Pakistan also raised its 2030 targets for renewable energy generation which includes wind power, solar power, small hydro-power, and biomass.

Vietnam

The Vietnamese power system still has room to accelerate its low-carbon transformation. First, by increasing energy efficiency it will reduce the scale of its new power demand and its carbon emissions. Second, Vietnam has great potential for renewable energy development. With the improvement of renewable energy power generation technology and the decline of investment costs, renewable energy power generation could replace coal power and become the main form of power generation.

Indonesia

Due to the low level of current coal-fired power technology, the adoption of high-efficiency low-emissions technology and efficient operation and maintenance levels will help reduce the demand for new installed coal power capacity and will slow down carbon emissions growth in the power sector. Additionally, the development prospects for renewable energy are broad, and distributed renewable energy can improve the power supply capacity of its independent power grid and solve power shortage problems.

Pakistan

Faced with strong electricity demand, a significant power supply gap, and backward grid infrastructure, the focusareas for a low-carbon transformation for Pakistan are improving power generation efficiency, stopping the construction of new coal-fired power plants, and developing renewable energy.The development of renewable energy, especially small-scale renewable energy, could help solve the problem of powershortages, promote the diversified development of power sources, reduce dependence on imported energy, and improve national energy security.

Conclusion

Countries along the Belt and Road are highly vulnerable to climate change, and the impacts of climate change and related natural disasters on the power infrastructure of host countries cannot be ignored when making investment decisions.

The governments of Vietnam, Indonesia, and Pakistan, in their NDCs, national power planning, and international cooperation, all plan to meet the increasing demand for electricity through the addition of large-scale coal-fired power plants and plant upgrades. Improving the efficiency of coal-fired power generation and optimizing technical levels will be trends in the future. In addition, new power projects need to take into account the size and site requirements for future application of CCS/CCUS technology.

Renewable energy generation in Vietnam, Indonesia, and Pakistan is still in the primary stage, but its future development potential is significant. After developing their NDCs, Vietnam, Indonesia, and Pakistan all upgraded or developed new renewable energy generation targets.

Energy efficiency improvements and smart grids are the trends of the future. Improving energy efficiency will help reduce the installed capacity of coal-fired power by 2030 and will mitigate the lock-in effects of coal power. In order to meet the needs of energy access, a clean energy transformation, and the goal of increasing the share of renewables in energy generation, developing countries must develop smart grids to promote clean, low-carbon energy for all.

This report makes the following recommendations for Belt and Road green power investment:

In the implementation of the Belt and Road Initiative, investment strategy should be closely aligned with the long-term climate goals outlined in the Paris Agreement, and the mitigation and adaptation of climate change should be included in the strategic planning of all BRI cooperation. 

Based on China’s experience and lessons in mechanism building, policy planning, finance, and technology development for low-carbon development, China should work with developing countries along the BRI to explore the path of sustainable development, implement the long-term goals of the Paris Agreement, and build a “Green” Silk Road. 

1. As NDC targets are the starting point for countries to implement the long-term goals of the Paris Agreement, investment planning of the BRI should use NDCs as a baseline for decision making. First, BRI investments should be in line with the development path required for the 2°C goals of the Agreement. Second, Chinese investors need to understand the impacts that the country’s implementation of the Paris Agreement and their NDC could have on the development of the power industry. They must evaluate new generating capacity to avoid financial and reputation losses due to climate and environmental standards. In addition, Chinese investors need to fully identify and manage the risks of climate change to the local power infrastructure that they invest in, and incorporate these risks in the project feasibility assessment system.

2. For countries mainly relying on coal, oil, and gas for power supply, such as Vietnam, Indonesia, and Pakistan, investment planning and strategies should focus on promoting the development and utilization of renewable energy, which could help increase electrification, promote the diversified development of power sources, and strengthen energy security. As a major developing country of renewable energy, China should regard renewable energy as a key cooperation area for Belt and Road power investment and promote the “going global” of China’s strategic new industries. For developing countries with a large population lacking electricity, the development of distributed renewable energy can help promote energy access and eliminate poverty.

3.   Although Vietnam, Indonesia, and Pakistan are planning to increase their coal-fired power capacity at a large scale, China’s BRI investment should be selective about new coal projects, ensuring the use of high-efficiency, low-emissions technologies. In addition, new projects should incorporate CCS/CCUS technology into the feasibility assessment to minimize increases in carbon emissions from any new coal-fired plants.

4.   Investments in improving energy efficiency, especially in Indonesia and Pakistan, have the greatest potential for energy efficiency improvement, and with significant the environmental and climate benefits are significant. China has made remarkable progresses in energy conservation and emissions reduction in the power sector. In the course of foreign investment, technology and energy efficiency improvements should be extended to developing countries to help them achieve industrialization, urbanization, and a green economy with lower energy consumption.

5.   China should help develop grid infrastructure in Vietnam, Indonesia, and Pakistan based on country-specific situations. China leads the world in the scale of investment, technological innovation, and application in the construction of distributed energy and smart grids. Financial institutions and enterprises participating in out-bound investment should promote distributed energy and smart grids that are driven by clean energy.