Driving economic transformation through net zero investments

Asia’s Pivotal Role in the Global Energy Transition

By Judith Lee and William Chang
Published September 22, 2023 | 5 min read

In recent years, the world has witnessed an accelerated transition towards cleaner energy systems and reduced emissions. Despite oil, natural gas, and coal remaining the primary sources of energy demand, significant investments are being channeled into reducing present and future greenhouse gas emissions. This transformation presents both a challenge and an opportunity for Asian governments, corporations, and investors. The question is what role will Asian investors play within the global context, with respect to the Transition, and which Asian countries will be the most active?


Focus on Asia

Taking cues from developed nations, the majority of Asian countries have declared their commitment to achieving net zero emissions, with staggered deadlines that reflect each nation's unique standing, capability, and domestic considerations.

To put this into perspective, the world generated 36.8 billion tonnes [1] of carbon emissions in 2022, and it’s estimated that more than half [2] of that came from Asia.

Advanced OECD economies like Japan and South Korea have set their sights on 2050, whilst others, such as China—the world’s largest emitter [3] — have targeted 2060. Meanwhile, some Southeast Asian countries like Thailand and Indonesia have marked their decarbonization goals for 2070. Many leading Asian corporates have aligned their net-zero targets with their respective national deadlines, though some trail-blazing companies are setting even more ambitious internal goals than their national deadlines.


Hydrogen front and centre

As the global push towards sustainable energy intensifies, the role of hydrogen as a clean energy source is rapidly coming to the fore. The world, including Asia, will require hydrogen to decarbonize diverse sectors, from power generation and transportation to industrial processes.

Industry players are diligently working on research and development around cost-efficient methods for hydrogen production, transportation, storage, and end use. While hydrogen offers a clean energy alternative, its storage and transportation due to low volumetric density present major challenges. Alternative methods under evaluation include liquefied hydrogen and liquid organic hydrogen carriers/methylcyclohexane (LOHC/MCH). In the meantime, many Asian companies favour the use of ammonia, which combines hydrogen production with nitrogen. The infrastructure to store and transport ammonia, a chemical substance widely used to produce fertilizers, is already established, offering a potentially practical solution.


Asian leaders setting the pace

Within Asia, Japan and South Korea are the fastest movers with respect to the energy transition. The motivation behind their swift movement is twofold: the drive towards a clean energy future and the lack of indigenous resources for cost-effective production of hydrogen domestically. These countries' corporate activities and supportive government policies underscore their commitment to the transition.

The Japanese government's revised Basic Hydrogen Strategy in June 2023 now calls for Japan's hydrogen supply to grow sixfold, from the current level of 2 million metric tons per annum (MMTPA) to around 12 MMTPA by 2040, eventually reaching 20 MMTPA by 2050. A total investment of over US$100 billion is expected over the next 15 years to bolster hydrogen supply, with the Japanese government and the private sector expected to contribute approximately even shares. Similarly, the South Korean government has implemented comparable hydrogen policies and targets.

In the long term, Japan is positioning itself as a top player in the hydrogen space, reminiscent of its pivotal role in establishing the liquified natural gas (LNG) industry in the second half of the twentieth century. The country aims to develop large-scale, cross-border hydrogen and ammonia projects, with production anticipated from resource-rich regions such as Australia, the Middle East, and North America.


Landscape of innovation and investment

With all eyes on Asia, leading players from the oil and gas, power and utilities, and other adjacent sectors are pioneering this transition, establishing collaborative partnerships and innovative strategies.

These stakeholders are investing heavily in research and development on new technologies, conducting pilot and demonstration projects both in Japan and overseas, and evaluating early-stage, potentially large-scale supply projects. Several of these activities are ground-breaking in their approach and execution.

An example is the Japanese energy company JERA's upcoming trial of ammonia co-firing at its Hekinan coal-fired plant, near Nagoya. JERA is set to use a 20% ammonia mixture for its co-firing, a first-of-its-kind initiative globally.

Over the past few years, numerous Asian companies, including Japanese trading houses, have undergone extensive reorganization. They've established new business units to reflect the current focus on energy transition priorities, including dedicated teams to develop hydrogen and carbon capture, utilization, and storage (CCUS), and more. Some of these next-generation energy business groups are staffed with over a hundred employees, as seen with Mitsubishi Corp.


What Asian investors are seeking

Analogous to the logic behind the global LNG trade, regions with superior hydrocarbon or renewable resources are poised to become major exporters of hydrogen and ammonia in the future. Asian investors are actively reviewing opportunities to acquire equity interests, or secure product off-takes from these projects.

Several Northeast Asian investors have exhibited geographical inclinations. For instance, ENEOS is focusing on green hydrogen projects from Australia, distinguishing itself by studying all three hydrogen carrier technologies simultaneously via various projects and feasibility studies. Itochu had previously turned to Russia for potential ammonia supply opportunities, but Western sanctions imposed amid the Ukraine conflict now render this increasingly unlikely. INPEX, POSCO, and PTTEP are considering options in the Middle East. As well, due to financial incentives introduced under the Inflation Reduction Act of 2022, Asian investors may find opportunities in the U.S. increasingly compelling.

What’s more, Western Canada, with its abundant natural gas resources and locational advantages, has surfaced as a key potential blue hydrogen and ammonia supply market. Companies such as Itochu Corp, Petronas/Gentari, Mitsubishi Corp, and Kansai Electric Power have publicly announced projects and feasibility studies, with production facilities planned in Alberta's Industrial Heartland and shipping to East Asia via British Columbia tide-water. Other Asian organizations may be evaluating similar Western Canadian projects on a preliminary basis.

In Eastern Canada, proposed onshore wind-powered green hydrogen projects, despite a perceived focus towards exports into Europe, have nonetheless attracted Asian investment capital. Recently, Korea's SK Ecoplant announced a minority equity investment into Project Nujio'qonik, developed by World Energy on the west coast of Newfoundland and Labrador, in May 2023. Construction engineering company Ecoplant is likely seeking to secure sizeable engineering, procurement, and construction (EPC) contracts associated with this project.

Closely related to hydrogen, CCUS represents an additional area of interest for Asian energy transition investors. Carbon capture units could, in principle, be installed on any industrial plant where it makes engineering and cost sense, with applications extending beyond blue hydrogen and ammonia projects to thermal power plants, oil refineries, and steel and cement production. A relevant transaction to highlight, is the US$318 million Series E financing round for Svante, a leading Canadian carbon capture technology developer, in December 2022. This Series E round, in addition to solid global investor interest from a wide institutional pool, also saw participation from Temasek, the Singaporean sovereign wealth fund, who was already an existing investor in Svante from previous financing rounds.

Another important piece of the energy transition puzzle are bio-fuels, seen as a smart way to decarbonize the transportation sector (road vehicles, maritime vessels, aircrafts). The Japanese Ministry of Economy, Trade, and Industry (METI) has earlier this year extended the Japanese bio-fuel mandate for another five years, to run from FY2023 through to FY2027. The most important change is that METI now allows the use of U.S. corn-based ethanol, in addition to Brazilian sugarcane ethanol, for purposes of diversification of bio-ethanol sources. In addition, METI is planning to issue a new requirement that 10% of all aviation fuels for international flights flying out of Japanese airports use sustainable aviation fuels (SAF), by the year 2030.

Despite some uncertainties around technology maturity, on the demand side, it’s clear — Asia's energy capitals will require hydrogen and ammonia molecules, CCUS, and bio-fuels in order to decarbonize various sectors and achieve their net zero goals. A concerted and collaborative effort from Asian governments, corporations, and investors can accelerate the pace of this transition, turning challenges into opportunities. It entails setting ambitious targets, cultivating innovative technologies, forming strategic partnerships to combine complementary skill-sets and expertise, and not hesitating in taking intelligent, calculated risks.

[1] https://www.iea.org/news/global-co2-emissions-rose-less-than-initially-feared-in-2022-as-clean-energy-growth-offset-much-of-the-impact-of-greater-coal-and-oil-use

[2] https://ourworldindata.org/annual-co2-emissions#:~:text=Asia%20is%20by%20far%20the,than%20the%20world%20average%2C%20however.

[3] https://rhg.com/research/chinas-emissions-surpass-developed-countries/

Our Experts

Judith Lee
Judith Lee
Head of Global Investment Banking, Asia
William Chang
William Chang
Vice-President, Global Investment Banking, Asia

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