Trading Electricity: A Key Driver for Decarbonisation in Asia
Trading Electricity: A Key Driver for Decarbonisation in Asia
Trading electricity is emerging as a pivotal force in Asia's journey towards decarbonisation. As countries across the region strive to meet ambitious net-zero targets, the exchange of clean energy across borders has an influence on the pace of the energy transition. This shift away from fossil fuels towards renewable sources like wind power is reshaping the energy landscape, presenting both challenges and opportunities for sustainability and climate change mitigation efforts.
The rise of electricity trading in Asia is closely linked to technological advancements and improved grid interconnections. These developments are enabling the seamless flow of clean energy between nations, fostering a more sustainable and interconnected energy future. As this article will explore, key markets are driving this transformation, overcoming barriers to regional electricity trading, and leveraging innovations to accelerate the shift towards a low-carbon economy. The growing importance of initiatives like the Greater South East Net Zero Hub highlights the collaborative approach needed to tackle the complex challenge of decarbonisation in the region.
Understanding Electricity Trading Mechanisms in Asia
Electricity trading mechanisms in Asia are evolving rapidly as countries strive to meet ambitious net-zero targets and accelerate the energy transition. These mechanisms play a crucial role in facilitating the exchange of clean energy across borders, promoting sustainability, and mitigating climate change. The region has witnessed a significant shift towards more sophisticated trading structures, enabling the seamless flow of renewable energy between nations.
Spot Markets
Spot markets have emerged as a key component of electricity trading in Asia, allowing for day-ahead and real-time transactions. These markets have an influence on the pace of decarbonisation by providing a platform for trading surplus renewable energy. In China, for instance, spot trading has shown striking results in encouraging the consumption of new energy sources. During the past four years of inter-regional and inter-provincial spot trading in surplus renewable energy, there has been a reduction of more than 23 terawatt-hours (TWh) in curtailment of electricity from renewables.
The West Inner Mongolia power grid, which covers more than half of installed generating capacity in the Inner Mongolia Autonomous Region, launched a spot market in June 2022. This market does not differentiate between coal-fired units and new energy sources, creating a level playing field for clean energy. Spot trading is particularly well-suited to the volatility and unpredictability of renewable energy sources, as it operates on shorter cycles and more frequent transactions compared to medium- to long-term markets.
Futures and Derivatives
Futures and derivatives markets are gaining traction in Asia, offering traders the ability to lock in certainty and manage risk. These financial instruments enable generators to secure revenue and retailers to lock in margins. The Asia-Pacific (APAC) derivatives markets are dynamic and complex, with each region having its own unique story to tell.
In recent years, more global benchmarks have emerged in the East. Some China-listed futures contracts, such as wood pulp and petrochemicals, serve as primary global benchmarks for hedgers. Singapore and Malaysia have also established themselves as key price discovery centres for iron ore and palm oil, respectively. This shift highlights the growing importance of Asian benchmarks in global economic activity.
Power Purchase Agreements
Power Purchase Agreements (PPAs) have been a critical component in funding the build-out of Southeast Asian power systems over the past thirty years. However, their rigid terms have limited system flexibility. PPAs are now evolving to support the development of renewables and storage assets, as well as to accommodate the changing dynamics of power markets.
In China, the state-owned Beijing Power Exchange is encouraging energy generators to strike deals that commit customers to buying a certain amount of green power over multi-year periods. These PPAs, ranging from 5-25 years, represent a significant step towards liberalising China's power sector. They provide predictability to both buyers and sellers, allowing generators to sell the bulk of their capacity in one contract and use spot markets for the rest.
As Asia continues to progress towards its decarbonisation goals, these electricity trading mechanisms will play an increasingly important role in shaping the region's energy landscape. By facilitating the exchange of clean energy and promoting market-based solutions, these mechanisms are driving the transition towards a more sustainable and interconnected energy future.
Key Markets Driving Decarbonisation through Trading
Several key markets in Asia are leading the charge in driving decarbonisation through innovative trading mechanisms. These markets are playing a crucial role in accelerating the energy transition and promoting sustainability across the region.
China's Emissions Trading Scheme
China's national emissions trading system (ETS), launched in 2017 and officially operational since 2021, has emerged as a pivotal force in the country's efforts to reduce carbon emissions. As the world's largest emissions trading programme, it covers nearly 45% of China's CO2 emissions, focusing primarily on the power sector. The ETS has introduced a carbon price in China and has the potential to play a significant role in the country's transition to carbon neutrality.
However, the impact of the ETS on CO2 emissions has been limited thus far. Factors contributing to this include a generous supply of allowances, lack of a hard cap on emissions, and limited trading liquidity. The system currently operates using intensity-based targets, which may limit its effectiveness in achieving absolute emissions reductions. Despite these challenges, the ETS has improved emissions data collection and raised awareness of the cost of carbon emissions among regulated entities.
Japan's Electricity Market Reform
Japan has made significant strides in reforming its domestic electricity and natural gas markets to promote decarbonisation. The country has embarked on major reforms to develop a more efficient, resilient, and sustainable energy system. These efforts have led to a continuous decline in energy-related CO2 emissions since their peak in 2013, thanks to the expansion of renewable energy, the restart of some nuclear power plants, and energy efficiency gains.
A key development in Japan's electricity market reform is the introduction of the "Long-Term Decarbonization Power Source Auction" scheduled to start in January 2024. This auction will provide a 20-year fixed revenue for newly developed power sources that contribute to the decarbonisation of the Japanese power industry, including battery energy storage systems. This initiative is expected to have a significant impact on the financials and business models of clean energy projects in Japan.
South Korea's Renewable Energy Certificate Market
South Korea has implemented a Renewable Portfolio Standard (RPS) programme since 2012 to promote renewable electricity production. The Renewable Energy Certificate (REC) market operates under this programme, providing flexibility for mandatory electricity power companies to meet their renewable energy obligations. However, high fluctuations in REC spot market prices have negatively affected investment in renewable power plants.
To address these challenges, South Korea has introduced new policies to enable companies to buy renewables and meet their RE100 targets. These include a Green Premium offered by the state-run electric utility KEPCO, renewable energy certificates, self-generation, equity investments, and third-party corporate Power Purchase Agreements (PPAs). The government has also launched a K-RE100 programme to support Korean SMEs in voluntarily purchasing renewables.
These key markets are driving decarbonisation through trading by implementing innovative mechanisms and policies. As they continue to evolve and address challenges, they have the potential to significantly accelerate the energy transition and promote sustainability across Asia.
Technological Advancements Enabling Clean Energy Trading
Smart Grids and Digitalisation
The energy transition and the push towards net-zero targets have led to significant advancements in smart grid technologies and digitalisation. These innovations have an influence on the pace of decarbonisation by enabling more efficient trading of clean energy. Smart grids use digital technologies, sensors, and software to better match the supply and demand of electricity in real-time, minimising costs and maintaining grid stability.
Investment in smart grids has shown remarkable growth, with grid-related digital infrastructure investment increasing by approximately 7% in 2022 compared to the previous year. The distribution sector accounts for around 75% of all investment in grid-related digital infrastructure, focusing on the rollout of smart metres and the automation of substations, feeders, lines, and transformers.
Several major economies have announced substantial funding to modernise and digitalise their electricity grids. For instance, the European Commission expects about EUR 584 billion (USD 633 billion) of investments in the European electricity grid by 2030, with EUR 170 billion dedicated to digitalisation. Similarly, China plans to invest USD 442 billion in modernising and expanding its power grids over the 2021-2025 period.
Energy Storage Solutions
Energy storage has emerged as a crucial enabler in driving the global energy transition. It ensures round-the-clock power regardless of weather conditions, addressing the intermittency challenge of renewable energy sources. Battery energy storage systems (BESS) have gained prominence as a common technology for grid-level storage.
China has been leading in this area, with its gross energy storage capacity addition reaching 22GW in 2023. India has also set ambitious targets, aiming for 34GW of battery storage by 2030, primarily to power the electric vehicle sector. Australia, facing a predicted doubling of electricity demand in the next decade, has targeted 50GW of new storage capacity to achieve its net-zero goals.
The decreasing costs of battery storage technology, down 75% from a decade ago, have given a boost to these ambitious targets. However, capital costs of battery storage systems remain relatively high, necessitating further reductions in the next five to ten years to make storage a more feasible solution with proper revenue streams available to developers.
Blockchain in Energy Trading
Blockchain technology has the potential to transform the energy sector, particularly in the realm of clean energy trading. It offers unique solutions for renewable energy distribution and has the potential to improve efficiencies for utility providers by tracking the chain of custody for grid materials.
The main benefits of blockchain in the energy sector include reduced costs, enhanced environmental sustainability, and increased transparency for stakeholders while not compromising privacy. Companies looking to implement blockchain technology into wholesale electricity distribution focus on connecting end-users directly with the grid, potentially reducing consumer bills by around 40%.
Blockchain-enabled applications in energy trading have the potential to address several inefficiencies in the current system. These include the removal or reduction of frictional costs, facilitation of regulatory reporting requirements, standardisation of data formats across multiple organisations, and reduction of credit risk and transacting capital requirements.
As the energy sector continues to evolve, these technological advancements will play a crucial role in enabling more efficient and sustainable clean energy trading, driving the transition towards a low-carbon economy.
Overcoming Barriers to Regional Electricity Trading
Regional electricity trading has an influence on the pace of decarbonisation in Asia, but several obstacles need to be addressed to fully realise its potential. Harmonising regulations, improving cross-border infrastructure, and building trust and cooperation are crucial steps in overcoming these barriers and advancing the energy transition.
Harmonising Regulations
To facilitate seamless trading electricity across borders, countries must align their regulatory frameworks. This involves standardising grid codes, developing a unified wheeling charge methodology, and establishing provisions for third-party access to domestic grids. The Greater Mekong Subregion (GMS) effort has made progress in this area, developing draught harmonised grid codes and a wheeling methodology that could serve as a starting point for the broader Asian region.
Improving Cross-Border Infrastructure
Enhancing the physical infrastructure for cross-border electricity trading is essential to support the flow of clean energy between nations. This includes modernising and expanding power grids, as well as investing in smart grid technologies and digitalisation. China, for instance, plans to invest $442 billion in modernising and expanding its power grids over the 2021-2025 period, which could have significant implications for regional trading.
Building Trust and Cooperation
Fostering trust and cooperation among participating countries is crucial for the success of regional electricity trading initiatives. The ASEAN Power Grid (APG) programme aims to expand regional multilateral electricity trading, strengthen grid resilience, and promote clean energy integration. However, the absence of China, a major regional power, poses a significant obstacle to ASEAN's endeavours to establish an integrated regional power grid system.
To address this challenge, ASEAN must balance Chinese influence in the region by strengthening regulations of existing regional institutions such as the Mekong River Commission (MRC). Additionally, bilateral collaboration with the Chinese government could help maximise the proposed benefits of instituting a regional grid system.
By focusing on these key areas, Asian countries can work towards overcoming the barriers to regional electricity trading, ultimately driving the transition towards a low-carbon economy and supporting the achievement of net-zero targets across the region.
Conclusion
The journey towards decarbonisation in Asia is gaining momentum, with electricity trading emerging as a key driver. This shift has a significant influence on the pace of the energy transition, reshaping the power landscape across the region. Technological advancements, improved grid interconnections, and innovative trading mechanisms are paving the way for a more sustainable and interconnected energy future. These developments are crucial to support the growing adoption of renewable energy sources and to meet ambitious net-zero targets.
As we look ahead, overcoming barriers to regional electricity trading will be essential to fully harness its potential. This includes harmonising regulations, improving cross-border infrastructure, and building trust among participating countries. By focusing on these areas, Asian nations can work together to accelerate the transition towards a low-carbon economy. The future of clean energy in Asia looks promising, with initiatives like the Greater South East Net Zero Hub highlighting the collaborative approach needed to tackle the complex challenge of decarbonisation in the region.
