Asia's Energy Adequacy, Environmental Sustainability, and

31 Pages·2014·0.2 MB·English

ASIA’S ENERGY ADEQUACY,
ENVIRONMENTAL SUSTAINABILITY,
AND AFFORDABILITY:
AN OVERVIEW
Minsoo Lee, Donghyun Park, and Harry Saunders
ADB ECONOMICS
NO. 398
WORKING PAPER SERIES
June 2014
ASIAN DEVELOPMENT BANK
ADB Economics Working Paper Series
Asia’s Energy Adequacy, Environmental Sustainability,
and Affordability: An Overview
Minsoo Lee, Donghyun Park, and Minsoo Lee is Senior Economist at the Economics and
Research Department of the Asian Development Bank
Harry Saunders
(ADB). Donghyun Park is Principal Economist at the
No. 398 2014 Economics and Research Department, ADB. Harry Saunders
is Managing Director at Decision Processes Incorporated.
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CONTENTS
ABSTRACT
I. THE CHALLENGE 1

A. The Three Pillars of Asian Energy Security 1
B. The Magnitude of the Challenge 1
II. CONTAINING BURGEONING ENERGY DEMAND 4
A. Energy and Economic Growth 4
B. Energy Prices that Reflect True Costs 6
C. Gains from Green Innovation 8
III. TAPPING CLEANER ENERGY SUPPLY 13

A. Expanding Renewables 13
B. Expanding Nonrenewables 17
IV. FOSTERING REGIONAL MARKET COLLABORATION 20

A. Integrating Electricity and Gas Delivery Systems 20
B. “Smart Grids” to Integrate Renewables 21
V. ASIA’S ENERGY CHALLENGE, REPRISED 22
REFERENCES 23
ABStrAct
The three pillars of Asian energy security are an adequate, reliable supply; environmental
sustainability; and affordable access for all. As Asians become more affluent, managing
demand by tackling outmoded subsidies so prices reflect true costs, exploring green
innovations in technology and prudent infrastructure design, and changing behavior
will be crucial to achieving security as will expanding both renewable and nonrenewable
sources in an environmentally sound and cost-effective manner. Without radical changes
to the region’s energy mix, oil consumption will double, natural gas consumption will
triple, and coal consumption will increase by 81%. This would double carbon dioxide
emissions to nearly 24 billion tons per year by 2035 which is more than the 22 billion tons
experts see as the maximum sustainable emissions for the whole world. To fully manage
demand and explore new sources, cooperative programs that integrate energy delivery
systems regionally must be implemented. Jointly promoting energy savings and security
does not require new technology or pose high costs, but it does require the political
will to cooperate and the confidence that makes cooperation possible. Cross-border
collaboration is technologically and commercially viable. What is missing is the political
commitment to cooperate in energy markets and to build the necessary infrastructure.
Keywords: Energy Security, Environmental Sustainability, Affordable Access, Economic
Growth, Regional Energy Market
JEL: Q3, Q4, Q5
Asia’s Energy Adequacy, Environmental Sustainability, and Affordability: An Overview 1
I. thE chAllEngE
A. the three Pillars of Asian Energy Security
Developing Asia’s spectacular economic emergence augurs a major realignment of the world economy.
Developing Asia’s gross domestic product (GDP) will more than quadruple from 2010 to 2035, and by
2050 the region will generate over half of global GDP. This promising vision of the 21st century is often
called the Asian Century. Past growth has dramatically improved Asian living standards lifting millions
out of poverty. Future growth will do the same, but crucially, can developing Asia secure the energy it
needs to fuel this dramatic economic expansion?
The question is not simply one of identifying where such energy will come from; rather, true
energy security for Asia rests on three foundational pillars: the adequacy and reliability of the physical
energy supply, environmental sustainability, and affordable access. This tripartite nature of the energy
challenge calls for a nearly herculean balancing act to avoid unsatisfactory trade-offs that weaken one or
more of the pillars and so defeat the Asian quest for energy security.
Asia needs an ample supply of clean, affordable energy to continue its rapid growth in the coming
decades. Conventional energy supplies in the region are insufficient to support the current pace of
growth as feeding this growth in the traditional way would lead to even greater dependence on imported
fuel. Yet forgoing expansion of the energy supply would require developing Asia to scale back its growth
ambitions. That is the challenge to shoring up the first pillar of energy security. As for the second pillar,
if the region continues its heavy reliance on fossil fuels, emissions will substantially damage global and
local environments. The third pillar is equally unnerving: As home to the majority of the world’s “energy
poor”—people who must rely on traditional energy sources—developing Asia must also expand access
and maintain affordability if growth is to benefit society as a whole.
Addressing this multiplex of issues requires a multipronged approach. The region must actively
contain its rising demand, aggressively explore new energy sources and technologies, and progressively
promote the regional integration of energy markets and infrastructure. Without a paradigm shift in
current energy supply and use, Asia will struggle to deliver the inclusive growth needed to lift millions of
its citizens out of poverty.
B. the Magnitude of the challenge
Adequacy and Reliability of the Physical Energy Supply
Securing adequate energy is daunting because Asia cannot rely solely on its endowment. The region
may well possess a quarter of the world’s coal reserves, but it has only 16% of conventional gas reserves
and 15% of technically recoverable oil and natural gas liquids. To bridge this gap, it will have to triple oil
imports by 2035, rendering it even more vulnerable to external energy price shocks.
Environmental Sustainability
Meeting developing Asia’s growing energy needs without radical shifts in the energy supply will result in
both local and global environmental deterioration; local air and water quality will suffer the consequences.
On its current energy path, which foresees substantial penetration of new and renewable energy supplies,
Asian emissions will soon swamp global targets. Without radical changes to the region’s energy mix, the
2 ADB Economics Working Paper Series no. 398
consumption of fossil fuels will climb doubling oil consumption and tripling natural gas consumption.
Even highly polluting coal consumption will rise by an astounding 81%. This would double carbon dioxide
(CO ) emissions to nearly 24 billion tons per year by 2035. Developing Asia alone would then emit
2
more than the 22 billion tons that climate change experts see as that year’s maximum sustainable CO
2
emissions for the whole world (Figure 1.1).
Figure 1.1: Projected Energy-related carbon Dioxide Emissions from Developing Asia
Energy
related
Developing Asia carbon dioxide emissions
carbon
dioxide IEA 450 scenario (world)
emissions
IEA current policies scenario (world)
(billion tons)
50
40
30
20
10
0
2010 2015 2020 2025 2030 2035
IEA = International Energy Agency.
Sources: ADB. 2013. Asian Development Outlook Manila; IEA. 2011c. World Energy Outlook 2011. Paris.
Affordability and Access
Securing an adequate physical energy supply and promoting environmental sustainability are difficult
enough, but achieving these goals at costs that enable practical access to energy for the Asian energy
poor at prices they can afford significantly compounds the challenge. For Asia, this is no small matter.
Asia has the unfortunate distinction of having most of the world’s energy poor. Energy poverty perpetuates
hunger by forcing women and children to spend hours gathering fuel that they could spend earning
incomes or studying. Nearly half of the world’s people without electricity live in Asia as do the majority of
people who rely on traditional fuels such as wood, charcoal, and dung. In 2010, 2.8 billion Asians—79%
of the world’s energy poor—relied on such traditional fuels which provide low-quality energy while often
destroying natural ecosystems (Figure 1.2).
Asia’s Energy Adequacy, Environmental Sustainability, and Affordability: An Overview 3
Figure 1.2: Asian Proportion of Energy Poor

Without access to electricity Dependent on traditional fuelsa
Asia Rest of the world
21%
50% 50%
79%
a The traditional fuels category includes all types of solid fuels and kerosene, not just biomass.
Notes: Electrification numbers for Asia taken from 2012 Rapid Assessment and Gap Analyses and United Nations
Development Programme Energy Country Briefs supplemented with World Bank population data for 2011.
Global electrification and solid fuels numbers for non-Asian countries were taken from International Energy
Agency (2011a).
Sources: IEA 2012a. Golden Rules for a Golden Age of Gas: World Energy Outlook Special Report on Unconventional Gas. Paris.
Affordable access to modern energy is shockingly deficient in Asia. In 2010, some 18% of
Asians—628 million individuals—had no electricity. In that year, the percentage of the population
continent-wide without electricity that relied on biomass for cooking was higher in Africa than in Asia,
but some Asian countries such as Bangladesh approached the African average (IEA 2012a).
Energy is a basic human need. It is required to heat, cool, prepare, and preserve food; to provide light; to
communicate; and to operate modern conveniences as well as to enable the delivery of social services
like education, health, and recreation. Expanding access to energy for Asia’s legions of energy poor is
an urgent priority because the failure to do so will perpetuate substantial public health hazards. Yet
traditional fuels like kerosene, fuelwood, dung, charcoal, and coal still supply much of the energy used in
Asia.
Summary
Asia’s energy challenge is formidable, but it is very far from hopeless. Instead, bold and decisive action on
three fronts—actively containing rising demand, aggressively exploring new sources and technologies,
and progressively promoting the regional integration of energy markets and infrastructure—holds the
promise of an Asian Century solidly afoot the three pillars of Asian energy security. We explore each of
these in the following sections.
4 ADB Economics Working Paper Series no. 398
II. cOntAInIng BurgEOnIng EnErgy DEMAnD
Economic growth of the magnitude foreseen for developing Asia requires abundant new energy supplies,
but while the link is strong and robust, energy use and economic growth are not immutably locked
together.
A. Energy and Economic growth
In 2010, Asia contributed 28% of global GDP and accounted for 34% of world energy consumption. If
Asia follows the expected growth trajectory, by 2050 its per capita GDP will reach Europe’s current level,
and its share of global GDP will nearly double to 52%, making about 3 billion additional Asians affluent
(ADB 2011). Asia will already account for 44% of global GDP by 2035. This economic expansion will
require huge amounts of energy (Figure 1.3).
Figure 1.3: Developing Asia’s Share of gross Domestic Product and
Primary Energy consumption, 2010–2035
2010 2035
Asia
28% Asia
Rest of GDP 44% Rest of
the world the World
72% 56%
Rest of
Energy Use Asia the World
51%
“Baseline” 49%
Asia
34%
Rest of
the world
66%
Energy Use Rest of
Asia the World
“Less
56% 44%
Optimistic”
GDP = gross domestic product.
Sources: International Energy Agency. 2012a. Golden Rules for a Golden Age of Gas:
World Energy Outlook Special Report on Unconventional Gas. Paris.; Authors’ calculations.
Asia’s Energy Adequacy, Environmental Sustainability, and Affordability: An Overview 5
The link between economic value created (GDP) and the energy used by firms and households
depends on a complex host of factors. Forecasts of energy use must comprehend all these factors,
but a common if less than ideal approach is to project likely changes in energy intensity—changes in
the physical energy used to generate each unit of GDP—as a summary measure intended to capture
the combined trends of all the determining drivers. Assumptions on the evolution of energy intensity
do, however, have significant effects on forecast demand. For example, if Asia’s energy intensity trend
follows its expected path, the region’s share of global energy use is projected to increase to 51% by 2035
(Figure 1.3 baseline).
This is a conservative estimate reflecting an optimistic projection of energy intensity trends. The
baseline model used in this study endogenously projects energy intensity declining by 3.2% per year on
average over the forecast horizon. This would bring energy intensity in 2035 down to 45% of its 2010
value—an improvement by more than half. This compares with the historical trend from 1990 to 2000
of 2.47% improvement per year that is used in the less optimistic scenario. If energy intensity follows its
historical trend, Asia’s share of world energy consumption would be as high as 56% by 2035 (Figure 1.3
less optimistic).
The resulting uncertainty is large. Figure 1.4 shows the growth of energy consumption under the
two scenarios.

Figure 1.4: Sensitivity of Energy consumption to Projected Energy Intensity, 2010–2035
Mtoe
Asian energy consumption (historical Intensity trend)
12,000
Asian energy consumption (forecast trend)
9,000
6,000
3,000
2010 2015 2020 2025 2030 2035
MToe = million tons of oil equivalent.
Source: Authors’ calculations.
Critically, Asia’s energy consumption is projected to double from 2010 to 2035 even under
the optimistic baseline scenario despite the projected improvement in energy intensity trends. Energy
consumption will increase despite substantial improvements in energy efficiency because of sharply
increased per capita GDP. While Asia’s population is forecast to grow only modestly by 0.7% annually,
Asians will drive more and use air conditioning more as they become more affluent.