Explores Green Financing Mechanisms to Accelerate Energy Transition in Emerging Economies

T20 Side-Event Virtual Workshop, 20 July 2022: As a growing number of countries deepen their net-zero commitments and move forward with the next key steps in energy transition, the issue of green financing has emerged in the energy transition discussion. Financing is of particular concern for emerging economies where low-carbon technologies are mostly in the early stages of development. Crucial access to financing for advanced technologies such as battery storage, hydrogen, ammonia, direct air capture (DAC), and carbon, capture, utilisation, and storage (CCUS) holds the key to fully unlocking the energy transition journey in the developing world.

As the 2022 Global20 (G20) Chair, Indonesia has made carbon neutrality a top priority with accelerated energy transition at the centre of its global push. The G20’s makeup of the developed and developing worlds makes it a strategic platform to discuss decarbonisation initiatives. The Economic Research Institute for ASEAN and East Asia (ERIA) – the secretariat of the Asia CCUS Network (ACN) – co-organised a Think Tank20 (T20) event on 20 July 2022 to explore realistic green financing schemes for emerging economies. The event also sought to provide research-based policy recommendations and input for G20 leaders on the topic of climate change and energy transition. The Institute of Economic and Social Research Faculty of Economics and Business, University of Indonesia (LPEM-FEB UI) also co-organised the webinar entitled 'Emerging Economies towards Net Zero Emission: Challenges and Opportunities on Technology Innovation and Financing.'

The event moderator, Dr Alin Halimatussadiah, Department of Economics, LPEM-FEB UI, opened the event by stating how technology and financing are ‘very timely and important issues’ during a time when countries are progressing towards their climate targets. In her Opening Remarks, Ms Moekti Handajani Soejachmoen, Lead Co-Chair of the T20-Task Force 3: Governing Climate Target, Energy Transition, and environmental Protection expressed her hope for the webinar to facilitate the realisation of net zero emissions in emerging economies. Carbon neutrality is a goal set by all countries – in keeping with the Paris Agreement – and it is also ‘part of the development process of any country.’ Given the additional challenges the developing world faces in its journey to a carbon-free future, the T20 discussion highlights the benefits of international collaboration toward the effective reduction of greenhouse gas (GHG).

Ms Luh Nyoman Puspa Dewi, Energy Conservation Director, Ministry of Energy and Mineral Resources (MEMR) Indonesia was the first to deliver her Keynote Speech regarding Indonesia’s strategies for carbon neutrality. A main goal for the Indonesian government is ti ensure 23% of new and renewable energy (NRE) sources become part of the national energy mix by 2025. Currently, Indonesia is turning to energy sources including geothermal, wind, solar, hydroelectricity, bioenergy, and renewable energy (RE). Accelerating the share of NRE sources in the energy mix will require $55.2 billion in investments and this ambitious target underscores the need for cooperation and stakeholder engagement.

Indonesia’s energy transition target has been set for the years 2025, 2035, and 2050 through various strategies that harness a multitude of decarbonisation technologies and innovations. In 2025, the country is looking to slash emissions by 198 million tonnes of carbon dioxide (CO2) followed by 475 million tonnes of CO2 by 2035, and lastly, 956 million tonnes of CO2 by mid-century. Several domestic and international climate financing options are also available for Indonesia to achieve its ambitious climate goals including the Global Green Sukuk, SDG Indonesia One, and Green Climate Fund – several funding facilities are overseen by Indonesia’s Ministry of Finance. ‘Policy support, infrastructure, funding, and research and development (R&D) and technology’ would additionally facilitate the Indonesian government in meeting its objectives. Ms Puspa Dewi asserted that Indonesia is ‘confident’ in fulfilling its ambitions, especially because ‘energy transition absolutely requires real action.’ She explained, ‘Without adequate investment and solid commitment from our international partners, the level of achievement will not be as successful or as well-planned.’

Prof Jun Arima, Senior Policy Fellow, ERIA and Co-Chair of TF3 centred his Keynote Speech on global low carbon energy transition. A crucial message of Prof Arima’s presentation is how carbon neutrality pathways must be adapted to consider each country’s situation and are of relevance to their national situation. Based on research conducted by ERIA and the Institute of Energy Economics, Japan, carbon neutrality by 2050 does not appear to be practical or feasible for ASEAN Member-States (AMS) as they are estimated to become carbon-free between 2050 – 2065. Southeast Asia’s future energy profile will see a significant role of natural gas in 2030 – 2040 and the longer term, technologies including CCUS and co-firing with ammonia or hydrogen are poised to play a vital role in decarbonising the fossil-fuel-based power sector.

A major hindrance behind emerging economies’ switch from coal to natural gas that has recently emerged is the conflict in Ukraine which has caused natural gas prices to surge. Declining liquified natural gas (LNG) surplus capacity could potentially intensify competition between Asian and European countries leading to higher LNG prices. Both circumstances will negatively affect Asia’s decarbonisation efforts. ASEAN countries must remain focused on ensuring the availability, accessibility, and affordability of energy supply despite the current ongoing global energy crisis. Southeast Asia’s pursuit of a carbon-free region will require AMS ‘to explore a variety of options and utilise all fuels and technologies’ while striking a ‘balance between energy security and environmental sustainability.’

The T20 webinar featured two presentation sessions on energy technology perspectives and energy financing followed by a panel discussion. The first session kicked off with Mr Akira Yasugi, P.E. Engineering manager, I&C and Electrical Engineering Team, Power Plant Engineering Group, Mitsubishi Heavy Industries, Ltd and his presentation on battery electric storage. Mr Yasugi featured some of his company’s previous works in the sector, namely the EMS/SCADA System and the BESS Optimal Operation System. Mr Yasugi shared how the company’s 840-megawatt Intermountain Power Project in the US is the world’s largest industry green hydrogen production and storage facility. Mitsubishi Power is also developing the Takasago Hydrogen Park which will use hydrogen to generate electricity and is scheduled to start demonstration operations in 2023.

Mr Jitendra Roychoudhury, King Abdullah Petroleum Studies and Research Center (KAPSARC), Riyadh, Saudi Arabia followed up with his presentation on hydrogen and ammonia. Mr Roychoudhury began his speech stipulating that ‘hydrogen and ammonia are critical enablers of the energy transition to the net zero emissions ambition.’ He mentioned seven primary challenges which must be resolved to fully unleash the power of hydrogen and ammonia in decarbonisation. The challenges are:

1. Financing the energy transition; A net zero economy will require massive investment thus determining investment vehicles to attract investors and private capital will be crucial to support initial public funding.

2. Cooperation and collaboration frameworks; Strategic partnerships enable the exchange of ideas on climate, geopolitical, finance, and trade issues as well as sharing best practices.

3. Infrastructure, namely repurposing the old and investing in new infrastructure; Energy transition necessitates deep investments into multiple infrastructure sectors.

4. Regulations and policies; A regulation or policy must be fair and inclusive to assist in the development of global trade in hydrogen and ammonia.

5. Building capacity and capabilities; Upskilling initiatives must cover human resources, R&D, and technology adaptation because the transition to carbon neutrality presents a set of complex challenges.

6. Increasing divergence between the global north and the global south; There is a wide range of approaches to reaching net zero and multiple approaches could address the need for enhanced international cooperation and collaboration.

Dr Takashi Kamijo, Chief Engineer/License Technology Director, Decarbonization Business Department, Mitsubishi Heavy Industries Engineering, Ltd. focused his presentation on carbon capture technology. His company has developed the KM CDR Process that can capture up to 98% or more of CO2 from combustion gas. Globally, there are 14 CO2 capture plants which use this technology while another three are under development in Bangladesh, Russia, and Japan. Dr Kamija explained how Mitsubishi Heavy Industries’ Petra Nova Project in the US is the world’s largest CO2 capture plant with the ability to remove 90% of CO2. The company will also use their innovation in the UK to develop the Drax BECCS Project which is slated to become the world’s largest carbon capture project, the world’s first negative emissions project, and the UK’s first carbon capture project at scale. Dr Kamija stipulated the company’s plans to further apply the KM CDR Process to other facilities which exhaust a significant amount of carbon emissions.

Dr Ziqiu Xue, CO2 Storage Research Group Leader, Chief Researcher Research Institute of Innovative Technology for the Earth (RITE) talked about existing carbon storage innovations. Several components that must be met to achieve commercial CO2 storage, including safety, environment, policies, public acceptance, and regulations, therefore, cooperation between multiple parties is required. Dr Xue underscored the safety aspect of CO2 storage site development, explaining that the injection phase is the riskiest step, however, the post-injection period will follow with decreased risks. ASEAN must also be aware that stakeholders often demand answers on resolving CO2 leakage or seepage at offshore storage sites. Ultimately, proper and adequate risk assessment and management processes can help reduce uncertainties in addition to ‘mitigating risks to manageable levels.’

As the fifth speaker, Mr Ryohei Numaguchi, PhD, Researcher, Energy System Research Department, Corporate Technology Division, Kawasaki Heavy Industry, Ltd shared insights on DAC which ‘is a new concept of CO2 capture.’ Although DAC is relatively new, a growing number of start-up companies have demonstrated this technology. Kawasaki Heavy Industry had the support of Japan’s Ministry of Environment when it began a technical demonstration of DAC in 2019 and continued for three years. The company is now moving forward in developing a DAC system combined with carbon storage to realise negative emissions. Mr Numaguchi stipulated that financial support is necessary for DAC, specifically for the demo stage, as more work must be carried out to show the technology’s potential for negative emissions.

Prof Frank Jotzo, Professor, Crawford School of Public Policy, Australian National University and Director, Centre for Climate and Energy Policy was the first speaker in the second presentation session regarding energy financing. In line with the conveyed messages by other speakers, Prof Jotzo stated that ‘enormous amounts of capital investments need to be made’ to reach net zero. Citing a report from the International Energy Agency, investments to support climate financing will need to double or quadruple the current level thus financing effort needs to be greatly scaled up. The finance gap in Southeast Asia is massive, requiring 5-12 times more capital investment than current flows. To scale up and reduce the finance gap, the role of governments, private funders, stable policy frameworks, and public investment must be streamlined to give investors the confidence to put their money into green technologies. Prof Jotzo cautioned governments to not ‘squander the money on propping up industries that will no longer deliver economic benefit in the long run.’

To solidify the push for increased climate financing, Prof Jotzo offered three suggestions. Firstly, the G20 should make a clear commitment to open trade and investment for clean energy and clean industrial systems as it can go a long way to encourage investors, particularly during a time of economic nationalism. Secondly, create an international green bank – such as Australia’s Clean Energy Finance Corporation – as it has proven successful to unlock private sector investments. Lastly, the G20 is encouraged to launch a forum ‘for best practice action on energy transition’ to help governments form more effective policies and supportive regulatory settings to unlock the needed investments.

Ms Yukimi Shimura, Director, Planning & Development Department, Sustainable Business Division, MUFG Bank, Ltd. offered her industry insights regarding private finance for clean energy technologies. For financiers, a major obstacle to green technologies is the lack of track record, especially with first-of-its-kind innovation. As such, there is a lack of understanding concerning the risks and the party that will bear those risks. In addition, first-of-its-kind technologies typically do not have a viable business model which is a significant hurdle, given that financiers must know the revenue streams. The lack of government policies in reaching net zero is another stark concern raised by Ms Shimura.

Despite the drawbacks, Ms Shimura reassured the audience that MUFJ Bank has financed new technologies, as evidenced in the bank’s $75 million loan to a California-based company in 2021 for the construction of hydrogen fuel stations. Ms Shimura explained, ‘As we gain confidence in the tech and operations, we wanted to gain further expertise in the hydrogen business, especially for the creation of the hydrogen value chain.’ Ms Shimura also shared that in MUFJ Bank’s bid to enhance its understanding of new technologies, it engages in discussions with clients starting as early as the feasibility and R&D phases. These measures are for the bank ‘to make the unknown known’ hence facilitating the decision-making process on whether to move ahead with investing.

The final speaker of the second presentation session was Ms Kikuko Shinchi, Senior Researcher, Climate Change Solution Group, Sustainability Division, Mitsubishi Research Institute, Inc who offered her take on carbon credit. While there have been numerous developments in carbon credit schemes worldwide, including through CCUS, the Paris Agreement makes no specific reference to CCUS in the Paris Rulebook. While the rulebook remains under development, the Japanese government and 17 partner countries started the ‘Joint Crediting Mechanism’ which will serve as a pilot project for the Article 6.2 programme on cooperative approach. For emerging economies, Ms Shinchi believes that CO2-enhanced oil recovery could be the necessary technology for decarbonisation even though countries and regions with advanced CCS projects are moving away from this method. She raised possible concerns over CO2 leakage management and double crediting schemes which she looks forward to seeing further developments on.

Ms Halimatussadiah posed several questions during the Panel Discussion to strengthen the dialogue on the crucial challenges to deploy green technologies in addition to feasible suggestions. On the topic of reducing the cost of technologies, Mr Roychoudhury explained that more cooperative and collaborative frameworks will be key to exchanging information on technology and investment mechanisms. He warns that cooperation in the energy sector will be particularly challenging as a result of slowing growth in the West and the Ukraine conflict which paves the way to increasing economic competition and resource nationalisation. Striking a balance between remaining outward-looking and safeguarding energy security and a robust supply chain will be essential, otherwise, the world ‘could easily slip into a situation where we become more carbonated than we were historically.’

To reduce the cost of CCS technology, Dr Xue’s recommendation was to find a site that is close to an emission source which helps to reduce transportation expenditures. Moreover, selecting a site with the right seal characteristics – high permeability and porosity – will reduce storage costs. For Mr Numaguchi, advancing the systems and materials of CO2 capture for DAC can lower costs, however, he emphasised that the bigger problem is demonstrating the potential of DAC in achieving net zero emissions. He underlined how companies engaged in DAC need financial support to carry out further demonstration projects.

Ms Halimatussadiah raised a question on barriers that hinder investment in decarbonisation innovation which was addressed by Prof Jotzo and Ms Shimuri. For Prof Jotzo, the lack of policies on new technologies is of primary concern considering that investors, companies, and markets expect regulations that provide financial benefits to zero carbon innovation. With insufficient policy instruments, it is difficult for investors to assess their investment viability and predictability. Ms Shimuri concurred, especially on the predictability factor as it helps ‘to understand what the minimum cash flow could be, especially in a market where there is a high fluctuation in the revenue stream.’ Ms Shimuri stated that blended finance has become increasingly popular and is an opportunity that MUFJ Bank is interested in pursuing.

The final question for the panellists was on the roles and expectations of governments and international or regional partnerships in advancing green tech. Prof Jotzo stressed the significance of upholding international cooperation on energy transition or climate change action as it affects investment flows. ‘We will want and need to see international capital flows and very large funds for clean energy sector investment,’ he added. Prof Jotzo advised that the G20 create an agreement that would foster international capital flows for low carbon investments. Prof Arima highlighted the need for countries to recognise the diverse pathways toward carbon neutrality, particularly in the developing world. ‘We need to make it absolutely clear that there is no single pathway, and the pathway could be different,’ he asserted. According to Prof Arima, it is ‘first, low carbon future then a zero-carbon future.’ From a financiers’ perspective, Ms Shimura called for governments to issue development pathways to carbon neutrality, recognising that ‘every country has their pace moving towards net zero.’ Nevertheless, financial institutions require guidance from governments on multiple aspects before providing finance. ‘We really need that guidance from the G20 governments as well,’ she concluded.

The Closing Remark was delivered by Mr Toru Furuichi, Director General for Research and Policy Design Administration, ERIA who thanked the speakers and participants for their active roles throughout the crucial dialogue exchange. Mr Furuichi spoke on the difficulties of climate financing, namely in emerging economies, and how it slows down the shift to greener, low-carbon fuels and technologies. As such, governments must reduce existing risks to attract investors and raise the necessary capital to implement clean energy sector projects. Mr Furuichi called for enhanced efforts ‘to formulate the counter measures of financing bottlenecks of each technology cluster and to elaborate some financing mechanisms.’ Mr Furuichi ended his speech by sharing his hope that ERIA and its networks and stakeholders can continue contributing to Indonesia’s G20 presidency, especially in energy transition dialogues.