Significant shift in global energy balance toward Asia Pacific
Since 2000, energy demand (including electricity, oil and natural gas) has ballooned in Asia. According to statistics from the International Energy Agency (IEA), Chinese energy demand is now higher than that of the US, where in 2000 it was less than half.
Such growth rates are also reaffirmed by other industry sources. According to the annual BP Statistical Review of World Energy, the 20-year growth rates in electricity generation (a proxy for demand) has been 6.8 per cent p.a. in Asia Pacific ex Japan (to 2017). This is approximately 13 times faster than what we have seen in the US, and eight times faster than in Europe.
Electricity access still has room to grow
While many developed countries in the Asia Pacific region have 100 per cent access to electricity (e.g. Australia, New Zealand, Singapore, Hong Kong), not all emerging countries do.
Indeed, in India, the World Bank estimates that as many as 178 million people still lacked access to the power grid in 2018.
The trend remains positive. By 2030, it is expected that even small developing countries like Myanmar, Laos and Cambodia will be largely electrified.
In our view, increased connections to gas and power grids, combined with high population growth rates and rising income levels, will lead to continued significant growth in demand for energy across the region. The IEA expects that by 2040, China alone will use almost twice the energy of the US.
Electric growth in the Philippines
A key country which highlights the growth potential of power demand in the region is the Philippines. The country has seen rapid economic development and population growth over the last 20 years, resulting in robust power generation growth of 4.2 per cent p.a., significantly exceeding developed markets such as the US and Europe mentioned earlier.
The stellar growth rates do not appear to be slowing, with Manila Electric Company, a Philippine power distributor, reporting a 5 per cent growth in power sales for the year ending June 2019 for the main Luzon grid in the Philippines.
Given a sizeable portion of the Philippine population are still not yet connected to the power grid, further robust growth can be expected.
Investment needed to avoid blackouts
The strength in regional demand requires a large investment by governments and corporations to help satisfy this demand.
Failure to invest and expand generation capacity in high growth markets could lead to power outages, “load shedding” and blackouts. Examples of intermittent power outages have been seen in the Philippines this year.
Power outages have even been seen in developed markets such as Australia, after a period of low investment appetite for new generation capacity due to government policy uncertainty. A significant event occurred in South Australia in 2016 when supply was interrupted by storm damage.
India has mammoth energy requirements
Meeting incremental demand requirements across Asia is no mean feat, especially in large and rapidly growing markets like India. Growth rates can hide the size of the challenge.
For example, assuming India’s power generation and population continues to grow at the approximately 5 per cent p.a. rate of the last 20 years, the yearly capacity requirement (based on its peak demand) is an additional 8,000 megawatts per year. That is around the size of adding four Hoover Dams to the system every year.
Significant opportunity for real asset owners
As a result of the strong demand, the investment requirement throughout Asia is significant. The IEA estimates a required spend of US$2.7 trillion out to 2040 to satisfy energy requirements.
This spend can and should provide many opportunities for listed real asset companies to participate. Funding for fulfilling the demand across the energy supply chain can’t be met by governments alone. Indeed, the IEA suggests that “mobilising investment on this scale will require significant participation from the private sector and international financial institutions”.
Investing across the energy spectrum
While demand growth is expected to be somewhat lower in developed Asia-Pacific countries due to existing high levels of electrification, the growth opportunity is much higher than other developed regions. For example, companies such as AGL Energy and Ausnet Services (Australia), CLP Holdings (Hong Kong) and Contact Energy (New Zealand) also offer attractive exposures to rising power demand supported by notable levels of population growth. We also have exposure to energy through oil and natural gas pipeline companies APA Group (Australia) and Petronas Gas (Malaysia).
We continue to monitor the market for opportunities that leverage the power demand trend, and we believe the most exciting prospects globally rest in the Asia-Pacific region.
Daniel Fitzgerald, portfolio manager, Martin Currie Australia
