Renewables offer energy security for Asia as West Asia conflict continues: Report

The war between Israel-US and Iran has once again exposed the fragile foundations of Asia’s energy security. Crude oil and liquefied natural gas (LNG) prices surged by 51% and 77% respectively in less than two weeks, according to a report by Institute for Energy Economics and Financial Analysis (IEEFA). For Asia, the fossil fuel import dependence is proving to be costly.

The Strait of Hormuz remains a critical choke point, with over 80% of the crude oil and LNG passing through it destined for Asian markets. For nations like Pakistan, Japan, and the Philippines—which source over 90% of their crude oil from the Persian Gulf—the current conflict presents a direct threat to macroeconomic stability.

This vulnerability is exacerbated by a lack of infrastructure. Most Asian countries lack significant underground gas storage, leaving them immediately exposed to spot price spikes, found the report. For example, while Japan maintains petroleum reserves for 254 days, Vietnam has less than 20. When prices go haywire, emerging economies suffer most, often paying double for less fuel, as seen in the aftermath of the 2022 Ukraine crisis.

According to the report, if the war continues, increased energy prices would spill over into core economic indicators like inflation, interest rates, trade balances, and gross domestic product (GDP) growth. This can potentially impact a country’s growth. While budgetary measures like fossil fuel subsidies and monetary tightening can provide short-term relief, the longer-term consequences are worrying. 

Fiscal strain

The report found that the crisis triggers a vicious feedback loop. Rising energy prices, denominated in dollars, lead to local currency depreciation, making imports even more expensive in domestic terms. This inflationary pressure forces governments into making difficult choices. 

Subsidies and tax cuts, while providing short-term relief, can create massive budget deficits, while monetary tightening by central banks may raise interest rates to curb inflation, indirectly increasing the cost of debt for households and businesses.

The report points out that fiscal and monetary interventions are merely temporary palliatives. The only permanent solution is a rapid pivot to renewable energy.

The economic argument is now overwhelming. At current LNG prices, the levelized cost of electricity (LCOE) from gas-fired power is 3-4 times higher than the global average for solar and wind, found the report. In many Asian markets, gas is now uncompetitive even when compared to solar plus storage.

Furthermore, a push for renewables can avoid fuel costs. The report estimates that every 1 gigawatt (GW) of solar capacity can replace 0.16 million tonnes of LNG annually, saving USD3 billion over a 25-year plant life. Unlike volatile gas prices, which fluctuate based on geopolitical whims, solar and wind provide a zero-marginal-cost alternative that stabilizes long-term power prices.

“At the current prices of gas, we are looking at an LCOE of gas of about $130 per megawatt hour. Now, if you look at the global average for solar and for wind, that's about $40. We've also found that even at 20% higher gas prices from last year, not 50% which we have now, in most countries in Asia, the LCOE for solar and storage together is competitive economically versus the LCOE of gas. So the argument that gas is needed for firm power and renewables is variable no longer holds true, especially at current gas prices. So, we think that Asian economies, Asian policymakers, really have every incentive at this point in time to accelerate the move towards renewables, to bring forward their plans, and to make more ambitious plans, to switch to renewables. It’s a matter of economic security,” said Ramnath N Iyer, Sustainable Finance Lead of Asia, IEEFA.