Q&A: A new energy policy to accelerate Asia’s energy transition

Article | 10 November 2020

ADB’s Energy Sector Group Chief Yongping Zhai outlines the rationale behind updating the policy to help the bank’s members develop sustainable and resilient energy systems that foster economic growth.

The Asian Development Bank (ADB) aims to help its developing member countries (DMCs) provide reliable, adequate, and affordable energy for inclusive growth through a comprehensive energy policy that ensures social, economic, and environmental sustainability.

Yongping Zhai
Yongping Zhai, Chief of the Energy Sector Group, ADB

The current energy policy, which was approved in June 2009, rests on three pillars:

  • promoting energy efficiency and renewable energy;
  • maximizing access to energy for all; and
  • promoting energy sector reform, capacity building, and governance.

The policy has been instrumental in guiding $42.5 billion in energy sector support across all DMCs from 2009 to 2019. This has enabled them to build much-needed basic energy infrastructure helping achieve universal access to affordable energy, enhance supply reliability, and improve energy security.

But given the fundamental changes in the energy sector, the ongoing global energy transformation, and rising concerns over climate change, ADB is now updating its energy policy with a new version expected to be considered by the Board of Directors in the fourth quarter of 2021. ADB’s Energy Sector Group Chief Yongping Zhai explains the rationale and process of updating the policy.

1. Why is ADB updating its energy policy?

There have been many and fundamental changes since ADB approved its existing policy more than a decade ago. Most significantly, the Paris Agreement was adopted at COP 21 in 2015, bringing together all nations to combat climate change with enhanced support for developing countries.

The central goal of the Paris Agreement is to strengthen the global response to climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels, and to pursue efforts to limit the increase to 1.5 degrees. The Paris Agreement requires all countries to put forward and continually strengthen their best efforts through nationally determined contributions (NDCs).

ADB’s Independent Evaluation Department conducted a comprehensive evaluation of the current energy policy and its implementation during 2009–2019. The evaluation concluded that although the 2009 energy policy was relevant during the period, it no longer adequately aligns with the global consensus on climate change, the ongoing global transformation of the energy sector, recent changes in DMC energy strategies, or ADB’s institutional priorities under Strategy 2030.

There has also been significant progress in technology development in the past decade, during which the levelized cost of electricity of renewable energy declined dramatically. Between 2010 and 2019, the cost of photovoltaics declined by 82%, onshore wind by 40%, and offshore wind by 29%, according to the International Renewable Energy Agency. Photovoltaics and wind are becoming more competitive while it is more expensive to build new coal-fired power plants in many countries.

In addition, emerging technologies such as energy storage, smart grids, hydrogen, carbon capture and storage, and the internet of things are maturing to support renewable energy integration into the grid and distributed energy systems. There have also been remarkable improvements on the demand-side in end-use equipment energy efficiency.

All of this means we must assess the current energy policy through the prism of these developments and prepare new strategic directions to meet the needs of developing countries in Asia and the Pacific.

2. How will the new energy policy fit into ADB’s long term strategy?

In July 2018, ADB adopted a new long-term strategy to respond effectively to the region’s changing needs. Strategy 2030 focuses on eradicating extreme poverty and achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific. The strategy identified seven priorities: addressing remaining poverty and reducing inequalities; accelerating progress in gender equality; tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability; making cities more livable; promoting rural development and food security; strengthening governance and institutional capacity; and fostering regional cooperation and integration.

The new energy policy will guide ADB’s energy sector operations, aiming to help members develop sustainable and resilient energy systems which foster economic growth and provide secure and affordable modern energy services. ADB energy sector operations will support the seven operational priorities through innovative cross-sectoral approaches, including solar pumps for irrigation, green jobs for women, renewable energy for clinics and schools, electric vehicles for transport, energy efficient water supply systems, and smart buildings in cities, among others.

Regional integration in the energy sector will be further enhanced through ongoing subregional platforms and initiatives such as the Greater Mekong Subregion Economic Cooperation Program, the Central Asia Regional Economic Cooperation Program, and the South Asia Subregional Economic Cooperation. ADB will also support deployment of advanced technologies to help the region “build back better” and foster a green recovery from COVID-19.

3. What will be the new policy’s stance on fossil fuels and coal in particular?

The low-carbon energy transition will be a big challenge in Asia because most countries have depended on fossil fuels for a long time—and coal in particular.

Coal has historically played an important role for many Asian countries, providing affordable energy to develop their economies and enable universal energy access. In 2018, coal generated almost 60% of electricity in Asia and it plays an outsized role in the bigger countries, generating 66.5% of all energy produced in the People’s Republic of China, 73.5% in India, 56.4% in Indonesia, 44.6% in Malaysia, and 52.1% in the Philippines. Coal-fired power stations often have a lifespan of more than 30 years while the average age of the Asian coal fleet is about 12 years. This means that phasing out coal will be a complex and enduring process.

On the other hand, it is impossible for any country to rely on a single source for affordable, reliable, sustainable, and modern energy in the near-term. Therefore, a well-balanced energy mix with an increasing share of renewable energy will be necessary for the foreseeable future in most Asian countries.

ADB will support its DMCs to reduce their dependence on coal and eventually phase out coal power generation. This will be done by setting standards and requirements such as emission intensities and minimum efficiency levels, while introducing low-carbon and climate-resilient technologies including carbon capture and storage.

The updated policy will provide guidance and screening criteria on the use of fossil fuels to ensure no conflict with the broader international goals to which ADB and its DMCs subscribe.

4. What are ADB’s guiding principles as it updates the policy?

We will consider four dimensions: the policy commitments of our developing members (for example, their NDCs under Paris agreement); social and environmental safeguards; the availability of new technologies; and the economic and financial dimension.

In line with the Paris Agreement, all countries have committed to reduce their greenhouse gas emissions. In the IEA’s “sustainable development scenario,” if all countries in Asia and the Pacific pursue a low-carbon transition more aggressively, the share of coal power generation will fall to 25% by 2030, dropping to 10% by 2040. ADB is committed to supporting its DMCs to meet the Sustainable Development Goals (SDGs) and comply with the Paris Agreement through finance, policy dialogue, technical assistance, and knowledge sharing.

Capacity building will be key to helping DMCs design policies, establish the mechanisms necessary, and reform the energy sector to accelerate the energy transition.

Second, ADB’s operations in the energy sector should be designed to ensure continued protection of people and the environment in an increasingly crowded and polluted Asia and the Pacific. When dams or transmission lines are built, environmental damage should be mitigated; people affected should be compensated or moved to ensure their livelihoods are restored. In this regard, ADB is also reviewing its safeguards policy which will be consistent with the new energy policy.  

Third, ADB will focus on assessing new technologies that can support energy policies effectively on the ground. In the past, the focus has been on the supply-side but there are also significant opportunities to reduce emissions on the demand-side. The energy sector can also benefit from artificial intelligence which can, for example, create smart cities where buildings and transport systems use the minimum amounts of energy for the same level of comfort, mobility, and service. ADB is working on a study to identify new technologies that can help our DMCs meet their long-term climate commitments.

Finally, even the best policy and the most advanced technologies must make economic and financial sense. The future of renewables depends on market maturity and their cost competitiveness relative to conventional sources. Appropriate carbon pricing and regulations can scale up the use of technological innovation. Policy makers, regulators, investors, financiers, and other stakeholders must also innovate business models, financing instruments, and procurement methods.

5. Is there a consultation process?

Yes, a series of stakeholder consultations will be held as part of the process. These include with ADB members, development partners, international organizations, energy policy and technology experts, civil society organizations, and the public.

The objective is to understand the energy needs of our DMCs and assess policy options to meet the Paris Agreement and the SDG 2030 Agenda, among others. Stakeholder engagement is also key to reflecting the ongoing transformation of global energy systems with innovative technologies for enhanced environmental sustainability, social inclusion, and business models. Engaging stakeholders is essential to reflecting the operational priorities of Strategy 2030, and the policies of other multilateral development banks.

Right now we are seeking views, advice, and inputs on the following questions, among others:

  1. What emerging new technologies and innovations in the next 5-10 years may be game changers for meeting energy access and climate goals?
  2. What cross sectoral issues (for example, the energy-water-transport nexus) should be considered in the new policy directions?
  3. Which needs and priorities of developing countries in Asia and the Pacific require more support and assistance from ADB?
  4. What is the long-term impact of COVID-19 on the energy sector and what should our response be?

Everyone is welcome to provide inputs and suggestions here.