Current energy crisis is a ‘net positive’ for the climate says former MAS chief

As central banks brace for sustained inflationary pressures from renewed tensions in the Strait of Hormuz threatening to keep energy prices elevated, a former Monetary Authority of Singapore (MAS) chief is calling the energy crisis “a net positive” for the climate.

“Increasingly, the energy security agenda and the climate agenda are converging,” said Ravi Menon, who is currently the ambassador for climate action and senior advisor to Singapore’s National Climate Change Secretariat.

“You see this in Asia – the sun that shines on your land, the rivers that flow in your country, the wind that blows on your seashore. Those are yours. It can’t be disrupted by war elsewhere, it can’t be disrupted by closures of chokepoints”.

“This is a conversation I hear in many parts of south-east Asia and countries like India, which have realised their huge reliance on imported fossil fuel,” Menon said during the Bloomberg Sustainable Business Summit on 22 July.

Menon, who was previously the managing director of MAS, cited the example of China, which has almost twice as much wind and solar capacity under construction as the rest of the world combined. While it’s still building coal fired power plants, China is “moving away from imported liquid fossil fuels, either LNG or oil, into renewables… and as energy security backup, coal,” said Menon.

China is relying on coal less, he added.

“The capacity is there, [but] the consumption of electricity generated from that coal fleet has been declining steadily. Almost all the new demand is being met by new renewables capacity. India is now trying to do the same thing on a massive scale,” Menon said.

Meanwhile, the fuel crisis linked to the war in Iran has led to a surge in electric vehicle (EV) adoption across Asia.

China’s EV exports hit a record US$9.2bn in May due to soaring demand in south-east Asia, led by Thailand and the Philippines.

“The queues outside petrol stations across Asia have driven home the point that it is just not tenable to pay so much more for private transportation. So I think the take-up in EVs… is likely going to escalate”.

More investments needed in grids and storage

Menon noted that outdated grid infrastructure and intermittency problems continue to stand in the way of scaling renewables in the south-east Asia region. But they also present new investment opportunities.

“Our grids, even in advanced economies, are not built for renewables. So there will be major infrastructure investments that are necessary. And let’s face it, renewables always have intermittency problems. To have the baseload electricity supplied on the same scale, you will need battery storage”.

In June, a second fund under the MAS-led blended finance initiative Financing Asia’s Transition Partnership, or FAST-P, raised US$250mn to support investments in grid modernisation and other energy transition infrastructure projects, such as energy storage, to accelerate the displacement of fossil fuels across the region.

MAS and the Private Infrastructure Development Group (PIDG) – which is funded by the governments of Australia, Canada, the Netherlands, Sweden, Switzerland and the United Kingdom – were the catalytic capital providers for the first close.

PIDG’s GuarantCo is providing a guarantee for the fund’s mezzanine financing structure – the layer that sits between first loss equity and senior debt – to enhance its risk-return profile and crowd in additional commercial investment. Meanwhile, Singapore bank DBS is providing a US$210m senior financing facility to the fund, which is managed by infrastructure credit financing platform Clifford Capital.

In May, the first FAST-P fund, known as the Green Investment Partnership, secured US$800mn in its second close and started deploying US$128mn to four energy transition projects in Asia.

New blended finance platform for adaptation

Menon revealed that Singapore is currently working with banks on a new blended finance initiative for climate adaptation, ahead of assuming Asean chairmanship next year.

Adaptation projects are currently severely underfunded compared to mitigation, as they are harder to monetise and lack standardised measurements of impact.

“Unlike mitigation, where every effort can be measured against a tonne of greenhouse gas emissions reduced or removed from the atmosphere, in the adaptation space, the outcomes are very varied,” said Menon. “How do you compare the benefits of a seawall that reduces flood risk with the benefits of cooling solutions that protect labour productivity during heatwaves?”

Given the varied outcomes, he suggested looking at the downstream effects of adaptation solutions that people are willing to pay for, such as impacts on water and food supplies or air quality.

The new blended finance platform will, however, only look at adaptation projects that can generate bankable revenue streams, said Menon. While projects for the public good, like seawalls, will be outside of its scope, investments into crops that are more resilient against drought, floods and increased salinity, which would increase yields and revenues for farmers, could be considered, he said.

Menon said that it would be similar to FAST-P in concept and that it is currently gauging the risk appetite of banks and other financiers for the new initiative.

“There is interest that has been quite heartwarming and we look forward to seeing more progress on the front next year”.

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