The recent slump in oil prices represents a unique opportunity for Southeast Asia to move towards energy price transparency by cutting expensive subsidy programmes which have been around for decades.
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The current global cost of subsidizing energy consumption, mainly in developing economies is US$500 billion a year, the Paris-based International Energy Agency (IEA) estimates. This can be reduced to $400 billion, thanks to cheaper oil, leaving governments with the choice of continuing subsidies or dismantling these very costly programs for the sake of national budgets and economic fairness.
This then could be the perfect time to deal with subsidies and at the same time put a price on carbon, the IEA said.
“The collapse in oil prices is a stimulus for consumers around the world,” said Maria van der Hoeven, the IEA’s executive director, at the UN Climate Change conference in Lima last year. Leaders should respond with some sort of tax on carbon emissions or by cutting incentives for hydrocarbon production, she added.
She called this a “golden opportunity” for world leaders to put a price on carbon emissions since cheaper fuel makes the move less risky politically. Global oil prices have tumbled almost 60 percent since June, hitting five-year lows of under $50 per barrel.
“We’re putting $550 billion into fossil fuel subsidies,” she said. “Use this opportunity to phase them out!”
Stark Choice for Southeast Asia
The choice is particularly important for Southeast Asia’s high growth and fuel-dependent economies.
Energy demand from Asean’s (Association of Southeast Asian Nations) 600 million inhabitants has risen two and a half times since 1990 and is now equivalent to three-quarter of the energy demand of India.
Indonesia alone spent US$29.2 billion in 2013 to make fossil fuels cheaper for final consumers while total subsidies from three other Asean countries - Vietnam, Thailand and Malaysia – amounted to over US$10 billion for 2013, according to IEA’s World Energy Report.
The electricity support schemes have required subsidies of power generation fuels to keep state-owned utilities financially viable. In 2012, the US$51 billion spent by Asean countries in subsidising fossil fuels was equivalent to 11% of all general government budgets in the region, contributing to discal deficits in countries like Malaysia and Indonesia.
The difference between market and subsidised prices, which accounted for 2.16 per cent of the gross domestic product in Asean-5, has contributed to major imbalances in many countries and inhibited utilities from investing in new technologies and capacity building.
Vietnam, amongst others, has electricity prices capped and differentiated for different users (the energy-intensive heavy industries being the most subsidised). More than US$2.5 billion is spent yearly to subsidise electricity prices from national utility EVN, distorting any competitive advantage renewable energy sources could have in a country with plenty of sun and wind resources.
Indonesia, under its new President, has just started to slash its fuel subsidies but is still artificially reducing the price of 60-75 million tonnes annually of coal used in its 12 GW of coal-fired power plants. Malaysia announced in November it will abolish subsidies for gasoline and diesel from December as falling oil prices provide Prime Minister Najib Razak the opportunity to end a decades-old policy of cheap fuel.
Meanwhile, Thailand spent US$6.8 billion in 2012 in fossil fuel consumption support schemes, second only to Indonesia, according to IEA records, and it remains to be seen when it will start to cut its costly policy.
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Indonesia alone spent US$29.2 billion in 2013 to make fossil fuels cheaper for final consumers while total subsidies from three other Asean countries - Vietnam, Thailand and Malaysia – amounted to over US$10 billion for 2013, according to IEA’s World Energy Report.
Of course, low income earners in these countries have to be protected against wild fluctuations in fuel prices, but pricing fuel accurately? is crucial for the future of renewable energy and reduction in emissions of greenhouse gases.
Wind is the cheapest
In a landmark study by Edward Douglas from Armstrong Asset Management - “Renewable energy is cheaper than imported gas and oil” - energy generation from renewable sources in Southeast Asia could be cheaper than from imported fossil fuels, but subsidies for fossil fuels distorted the picture.
The current plunge of oil prices will be one of the very last chances to implement true energy price policies around Southeast Asia and enable renewables to compete directly with non-subsidised fuels. It is the right time for governments to resist the temptation to subsidise oil and to let market forces play out for energy in Southeast Asia.
At The Blue Circle, we are convinced that despite the current glut of oil, fossil fuels will eventually run out.
Recent economic weaknesses in China, Europe and Japan, coupled with market share war amongst oil producers, have pushed fuel prices to unexpected lows which may not last long before world economic growth resumes.
In that environment, wind energy, though not evenly distributed in the region, might be the cheapest to tap into and one of the easiest renewable sources to deploy.
According to an EU analysis released in October last year, for every megawatt hour (MW/h) of electricity generated within EU, onshore wind costs roughly €105 per MW/h, compared to gas and coal which can cost up to around €164 and €233 per MW/h, respectively when the costs of ‘external’ factors like air quality, human toxicity and climate change are taken into account.
As these costs are dependent on the wind resource, the case of each Southeast Asia country might be different, but bringing back energy price transparency by phasing out fossil fuel subisidies will only enhance renewable power competitiveness in a low-carbon future.
Olivier Duguet is the Chief Executive Officer of The Blue Circle, a Singapore-based company which focuses on developing wind and solar energy projects in Thailand, Vietnam and Cambodia. This article was written exclusively for Eco-Business.
