Energy transition in EM: accelerating change

Emerging economies may have lagged their developed peers in reducing fossil fuel use. But there are benefits to being a later mover.

The developing world now has a wealth of cost-effective low-carbon technologies at its disposal; by deploying clean tech judiciously, emerging nations can leapfrog their richer counterparts. Adoption is already advancing at pace. Whether it is carbon capture or renewable-powered steam cracking, hydrogen or solar photovoltaics, low-carbon solutions are increasingly attracting capital from businesses based in the emerging world. This is particularly critical for companies reliant on coal, in hard-to-abate industries such as cement, steel and petrochemicals.

Should this trend continue – as we believe it will – investing in the sustainable transition of emerging economies will become an increasingly compelling opportunity in the long term.

Emerging market equities are sure to become part of the sustainable investment universe, attracting a new group of investors to the asset class.

Shaping the green transition

China is the most high-profile example of EM’s decarbonisation efforts.

The country is likely to meet its 2030 goal of peaking carbon emissions as early as this year. It has already become the world’s top financier of green technologies from solar panels and wind turbines to electric vehicle (EV) batteries, shifting its industrial structure away from emission-heavy manufacturing in the process. Cementing its world-leading position in renewables, China connected the world's biggest solar plant to the grid in northwestern Xinjiang in June. The 5-gigawatt (GW) solar farm in a desert will generate about 6.09 billion kilowatt hours (kWh) of electricity each year, enough to meet the electricity needs of a country the size of Papua New Guinea.

Other emerging market powerhouses are also embracing the sun. India’s Bhadla Solar Park, located in a remote desert in Rajastan, has capacity of 2.7GW, which represents just over 3 per cent of India’s total solar capacity. The facility is helping India reduce greenhouse gas emissions by an estimated 4 million tons of CO2 equivalent per year. The UAE is developing what it hopes to be the world’s largest single-site solar park with a capacity of 5GW by 2030. China and the rest of emerging Asia are the world’s biggest spenders on green tech relative to fossil fuel in the world after Europe (see Fig. 1), clearly demonstrating their commitment to transition their economies.

Cracking the decarbonisation nut

The biggest climate hurdle for emerging markets remains decarbonisation of so-called “hard-to-abate” sectors.

Together, industries such as cement, steel and chemicals represent nearly 70 per cent of global direct industrial CO2 emissions. Among them, top steel and cement producers are located in emerging economies such as China and India.¹

But we find evidence that emerging market companies are embracing innovative solutions to tackle this problem. Saudi Arabia Basic Industries (SABIC), jointly with UK and German chemical companies, launched in April the world’s first demonstration plant for large-scale electrically heated steam cracking furnaces. Steam crackers play a central role in the production of basic chemicals and require a significant amount of energy to break down hydrocarbons into olefins and aromatics. According to SABIC, the new technology that uses electricity from renewable sources has the potential to reduce CO2 emissions of one of the most energy-intensive production processes in the chemical industry by at least 90 per cent compared with technologies commonly used today.

As part of its ambition to produce net-zero steel by 2045, India’s Tata Steel will replace blast furnaces in the UK with a new and more ecological electric arc version by 2027 in a transformation that will reduce CO2 emissions in its UK operations by 5 million tonnes per year and UK country emissions by roughly 1.5 per cent.²

Others are also tapping into advanced emission reduction technologies, such as Carbon Capture and Storage (CCS) technologies, also considered necessary for the decarbonisation of hard-to-abate sectors. Two thirds of total CO2capture in the world takes place in developing economies. Malaysia, for example, is building out three major offshore CCS hubs in a 10-year project; Saudi Arabia is building one of the largest CCS facilities in the world.

EM Inc in transition

Emerging markets are not only ramping up the adoption of established clean tech. They are also investing in and leading other low-carbon solutions.

China’s EV leader BYD is a good example of how an EM-grown company has grabbed market share from international rivals and broken into Europe and other developed markets. India’s Adani Energy Solutions is also planning to grow its smart meter business globally. Taiwan’s Wiwynn offers liquid cooling technology for cloud applications, such as AI and machine learning, cutting energy use by reducing the use of fans and air conditioning in data centres.

Take ENN Energy. One of China’s top energy distributors is accelerating investments in natural gas, a less carbon-intensive fossil energy which can play a role as a transition fuel. Coal-to-gas switching is one way to tackle hard-to-abate emissions in the power sector in what can be highly coal-dependent emerging economies.

Kazakh uranium miner Kazatomprom is capitalising on growing interest in nuclear power as a source of low carbon energy. Such recognition – backed by global initiatives such as Atoms4NetZero -- and geopolitical concerns have sent global uranium prices to a 17-year high earlier this year after a 100 per cent gain in 2023. All this should reinforce the position of Kazatomprom as the world’s largest uranium producer.

Turkey also offers an encouraging case of EM clean energy transition.

Over 40 per cent of electricity production in Turkey is now based on renewables, a ratio that is expected to reach 54 per cent over the next decade. Year-to-date sales of EV account for more than 20 per cent of automobile sales in Turkey, up from less than 5 per cent in 2021 – but there’s significant room to grow given that the penetration rate for EV and hybrid vehicles in Europe stands at just 18 per cent.³

Turkish companies are also expanding in the green tech sector. Take Sabanci, one of the country’s largest industrial conglomerates. Its subsidiary has acquired 100 per cent of the shares of Oriana Solar, a US-based solar power plant facility, with an investment comprising 232 MW of solar energy and 60 MW of energy storage. Another group company Esarj installed more than 1,300 total high speed EV charging stations covering all 81 cities of Turkey by end-2023, increasing the market share to 33 per cent to become the country’s biggest provider. Sabanci’s other investment includes wind power generation, waste heat recovery, hydrogen and sustainable insulation and building materials.

EM in transition

Emerging markets are already home to around 85 per cent of the world's population and are expected to represent some 60 per cent of global GDP by 2050. Their headline emissions are sure to grow in the coming years.

But this is precisely why the world cannot get to net zero without their help. Encouragingly, emerging companies are playing an important role in the transition by harnessing a range of innovative solutions. Emerging markets have the benefit to leapfrog towards greener technologies to meet their growing electricity demand. Indeed, they are in a unique position to learn from the past experiences of developed markets and accelerating the change.