Asia’s renewables need massive grid investment

Across Asia Pacific, the rapid increase in wind and solar installations is dramatically altering the power mix and helping reduce carbon emissions. But this much-needed growth in capacity is already being challenged by transmission and distribution grids ill-suited for both the intermittency of renewables and the location of new projects often far from traditional load centres.

The result is a rising inability of national grids – designed to deliver power from large coal, nuclear and gas plants – to support the level of renewables needed to come close to putting the region on a pathway to net zero. In many instances, Asia’s power market operators face no alternative but to leave solar, wind and storage capacity stuck in transmission grid interconnection queues.

How are the region’s governments and companies addressing this? How much will it cost? And who is going to pay for the grid investment needed to ensure reliable renewable power supply? I spoke to Alex Whitworth, Wood Mackenzie’s Head of APAC Power and Renewables research.

How urgent is the situation?

The challenges facing grids and storage are rapidly climbing up the energy agenda. Over the past decade, Asia’s wind and solar capacity has grown from 10% of grid peak loads to over 50% this year, leaving grid systems and storage everywhere struggling to keep up. Across the region, grids and the policies that govern them require a complete redesign to support the expansion of renewables.

And with another US$1.6 trillion going into wind and solar projects over the next decade expected to push this figure above 100%, the issue grows more urgent by the day.

How is this playing out in Asia’s power markets?

Let’s take Vietnam as a salient example. At first glance, the country looks a posterchild for clean energy investment. Including hydro, Vietnam has Asia’s highest share of renewables in its power generation mix and ranks second lowest across the region for share of power generated from fossil fuels.

Yet in January 2022, Vietnam’s National Load Dispatch Centre announced it would not approve any new wind or solar projects through the rest of the year and lowered expectations for more solar development over the current decade. The reason? Like many markets adding huge renewables capacity over a short time frame, Vietnam had run up against the challenge of grid constraints.

This has resulted in some Vietnamese solar projects facing up to 50% curtailment. Project revenues have also been hit as power purchase agreements (PPAs) do not guarantee power offtake by state grid operator EVN. And Vietnam is far from alone in this challenge

Where are we today with grid investment in Asia?

There is an unprecedented boom in wind and solar investments happening across the region, driven by high power prices and the relatively low cost of renewables. The challenge with capital-intensive grid investments is that the economics work best with utilisation rates of 60% or higher. But for most renewables projects this number is in the range of 15-30%, which can easily double transmission line costs per kilowatt-hour.

With the share of intermittent renewables expected to jump to 100% over the next decade, it is easy to foresee huge challenges for the region’s power systems. While developers are comfortable with some level of curtailment, typically 3-5% with sufficient levels of grid investment, we estimate that average curtailment could move beyond 10% into the 2030s.

How much will the grid, storage and backup requirements cost?

Putting an accurate figure on Asia Pacific’s grid and storage investment isn’t easy. Much will depend on the pace of demand and renewables capacity growth, government support policies, and the cost of key metals such as steel, copper and aluminium required to build out grids. A conservative estimate could easily surpass US$2 trillion in the next decade just for transmission and distribution lines.

Energy storage investment would come on top of this and our current outlook for 10-year grid-connected energy storage investment is around US$400 billion in Asia Pacific, with 75% going to pumped-hydro and 25% to batteries. This is certainly less storage than needed: this figure would provide only enough to store less than a fifth of intermittent renewables capacity by 2030 for a couple of hours.

Who will pay for this?

The vast majority of Asia Pacific’s transmission grids remain state-owned, putting the investment burden on governments. But many will struggle to fund the required levels of new capacity alone, particularly as much of the existing capital stock to move power from fossil fuel-fired plants remains relatively young. To meet the huge costs associated with future grid investment, governments must to look to support from the private sector.

Consequently, we are now witnessing system costs across the region being pushed by the grid and policymakers onto renewable developers and end-users. This will likely put upward pressure on project costs and power prices as grid investment expands. Governments could lessen the burden through supportive PPAs, as well as by lowering the cost of capital for renewables. Increasing carbon costs will also be supportive of future grid investments.

Are there alternative routes to decarbonisation using existing power grids?

Decarbonising power supply doesn’t mean renewables alone. But we are less optimistic on options that would be better placed to utilise existing grid infrastructure. Both fossil fuel plants utilising CCS and clean fuels like blue and green hydrogen/ammonia remain at a premium to gas power through to 2050. This will vary by market, with offshore wind and distributed solar backed up by batteries and gas turbines already becoming competitive in some markets today, including China.

Asia Pacific isn’t alone in facing grid challenges to support its expansion of renewables. But as with all power markets around the globe, solutions come with an exceptional price tag.