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ENERGY

Renewables surge in China – the next frontier is storage

Without transmission, targets at risk

Kathy Fan | Chinese Mainland

In 2023, China accounted for more than half of the 510 gigawatts of renewable energy capacity newly installed worldwide. Investments in China's renewable energy market grew more than 34% year-on-year - including 670b+ yuan in solar power generation and 380b+ yuan in wind. To get a sense of how busy the space is: our Renewable Energy Team at KWM actively participated in over 160 renewable energy M&A projects for the year.

We’ve seen a rapid surge in investment in renewable energy projects aimed at enhancing the energy storage system and integrated solutions. This includes a cluster of projects integrating power sources, grids, loads and storage; electrochemical energy storage projects; and green electricity-to-hydrogen projects.

The surge is driven by the widespread adoption of innovative technologies and the government's steadfast commitment to building the nation's energy infrastructure and embracing diverse energy formats.

We expect energy storage technology will play a pivotal role in China's efforts to enhance its future green energy supply and investment levels in this sector will continue to soar.

In the upcoming year, we expect clean energy investment abroad by Chinese enterprises will continue to spread across major countries and regions, covering wind, photovoltaic and hydropower. This will assist locals in their low-carbon development.

Shirley Cheng | Australia

The renewables evolution is set to keep breaking records, in terms of capacity added and declining costs worldwide. Yet what we really need to see (or in truth, must achieve) in 2024 is investment in the grid and transmission infrastructure to support it.

The IEA predicted in its January report that the next five years will see more renewable capacity added than in the last century – most of it solar PV and wind.

But red tape, outdated policies and inadequate investment in grid infrastructure are hampering the transition. We need to see a mission for transmission – in the form of better regulations, innovation and accelerated projects.

“We need to see a mission for transmission – in the form of better regulations, innovation and accelerated projects.”

In Australia, there are positive signs – including the Australian Energy Regulator promising to ensure regulatory frameworks are ‘flexible and responsive’.

At a business level, we expect a trend towards smaller projects – across meters, precinct solutions, distribution and disaggregated solutions. Consolidation will come in time, but for the moment good things will come in small projects.

Cross-border connectivity critical to Singapore’s ‘import & innovate’ approach

Clean hydrogen projects slow - but supply-side policy could turn the tide

Michael Lawson | David Phua | Singapore

The city-state is set to emerge as a clean energy leader in the region and a hub for investment opportunities. The IEA will open a regional office in Singapore – only its second office globally.

For its own net zero transition, Singapore has signalled strong support for the COP28 outcomes. Innovation, imports and investments are key to its decarbonisation efforts at home, as it sources the low-carbon electricity it lacks the natural resources to produce. A concrete target is accelerating efforts: Singapore plans to import 4GW to meet 1/3 of its electricity demand by 2035.

“Singapore's energy import plans are clearing the way to nearer-term pathfinder projects - like connectivity with Thailand and Malaysia.”

Developments across the region will bring wide-ranging clean energy investment opportunities - an estimated US$7 trillion worth to move to a net zero economy, according to International Renewable Energy Agency (IRENA) estimates.

Infrastructure, storage (including battery energy) and transport will continue to attract funds. A hydrogen import terminal is still a decade or more away from being built (along with other hydrogen infrastructure), but the country has already established itself as a prominent Liquefied Natural Gas (LNG) trading hub and is well positioned to serve as a hub for the hydrogen supply chain.

A significant ongoing trend (and need) is the increasing cross-border connectivity among the ASEAN member states. A mix of those like the Philippines and Indonesia with the natural resources to produce renewable energy, and those like Singapore that need it. A compressive ASEAN power grid is an ambitious goal and faces a number of challenges - technical, commercial, economic and regulatory - which likely mean it is a long-term proposition. But Singapore's energy import plans are at least clearing a potential avenue to nearer-term pathfinder projects (for example, connectivity with Thailand and Malaysia) and may help to form a core for development of a much wider network over time.

Scott Gardiner | Hong Kong

We’ve seen remarkable innovation in the clean hydrogen space. From hydrogen-powered aircraft taking short-haul flights, to efforts to use the fuel to make crypto ‘greener’. Nations with limited capacity to generate renewable power have a strong appetite to source it – like Japan backing the world’s first liquified hydrogen carrier.

Despite enthusiastic championing, limitations including production costs and storage cast a long shadow. Costs are coming down, especially following the landmark Inflation Reduction Act in the US with its incentivising tax credits. Yet they remain relatively high.

Projects aren’t moving as fast as they need to. Only 3% of the 360+GW of electrolyser projects in the IEA’s hydrogen database have reached financial close or are under construction. Obtaining permits & grid connections are among the big challenges faced by projects.

Will that change in 2024? The IEA has revised down its predictions for hydrogen uptake as part of the net zero journey. In its report on renewables for 2023 – released in January 2024 – the IEA flagged the need for more supply-side policy.

For all of the uncertain and unpromising data, the Year of the Dragon should see an increase in projects. This is because there is one outlier globally that defied the downgrade in projections: Chinese Mainland. China is expected to have more than 24GW of hydrogen by 2028.

Clean hydrogen production is a logical path for China with its abundance of solar and wind power – the IEA expects solar PV to produce 60% of hydrogen by 2028, followed by onshore wind (40%).

Efforts elsewhere include Australia’s Hydrogen Headstart Initiative, pumping AUD$2 billion into flagship projects. The Australian government is also backing the development of hydrogen hubs.

The fate of this fuel of the future will rely on more than the ingenuity of innovators - supportive regulations and policies are critical.

ESG

Carbon markets beckon growth and environmental responsibility

Momentum builds in Hong Kong – bracing for global shifts

Molly Su | Chinese Mainland

Landmark developments in the lead-up to the Year of the Dragon signify a comprehensive approach towards bolstering China's carbon market. Theses changes - across both the voluntary and the compliance markets - set the scene for significant growth in carbon trading and underlying green activity.

On January 22, 2024, Beijing witnessed the launch of the National Market for Voluntary Greenhouse Gas Emission Reduction Trading (National CCER Market), marking a significant milestone in China's environmental efforts. Vice Premier Ding Xuexiang presided over the ceremony, highlighting the event's importance.

The market experienced substantial activity on its opening day, with the Beijing Green Exchange reporting a trading volume of 375,315 tons of carbon credits, valued at approximately RMB 23.8 million.

“The Beijing Green Exchange reported a trading volume of 375,315 tons of carbon credits on day one.”

Efforts to expand the national carbon market are underway, with industries such as cement and aluminium poised for inclusion, promising enhanced accuracy and transparency in emission data.

Advancements in regulatory frameworks were also made with the issuance of the Interim Regulations on Carbon Emission Trading Management by the State Council on February 4, 2024, effective from May 1, 2024. This legislation represents a pivotal step in defining carbon emission rights and establishing a cohesive regulatory environment.

These significant shifts reflect a commitment to sustainable growth and environmental responsibility in the Year of Dragon.

Richard Mazzochi | Hong Kong

During the Year of the Dragon, we need to build momentum to facilitate APAC’s transition to a sustainable economy. This is multifaceted but mobilising the capital required is an essential part of any transition plan.

Across APAC, businesses need to prepare for the impact of climate initiatives with global reach (such as Europe’s Carbon Border Adjustment Mechanism and the expansion of the European Emissions Trading Scheme to shipping).

They must prepare for the proliferation of rules and regulations around the world relating to climate change mitigation (in particular greenhouse gas emissions reduction).

We expect integrity (of transition plans, climate policies and offsets) and climate-related disclosure will continue to be major themes as we navigate a new regime in which ESG ratings, ESG regulatory requirements and ESG demands of suppliers/investors impact the ability of businesses to compete and access funding.

The transition also brings significant opportunities for APAC, not least through:

(i) the expansion of China’s carbon markets

(ii) Hong Kong’s development as regional hub for onshore/offshore carbon trading

(iii) the expansion of Singapore’s meta-registry for voluntary carbon markets

(iv) the landmass required to develop high-integrity climate mitigation projects, and

(v) world leading capability in batteries, solar, wind and hydrogen.

The drive for consistent finance standards

John Shum | Singapore

Transition finance is the buzz word in 2024 - we will not only hear more about it, but we will see policies and standards evolve to take it into consideration.

Expect to see a softening of the stigma attached to financing projects that are not purely ‘green’, but do help with the holistic decarbonisation by enabling a transition and ensuring the risks of finding alternate non-mainstream finance are avoided.

Singapore’s taxonomy launched at the end of 2023 will help to attract finance – a world-first for its inclusion of transition projects. A ‘traffic light’ system applies to green, transition and ineligible activities sector-wide. This should help investors to take a longer term outlook.

“Updated standards, greater economic incentives and government involvement to bring together key players are all on the wish list for 2024.”

Other signs include HSBC clarifying its commitment to transition finance.

Adaptation finance – widely agreed at COP28 as something critically needed to help countries at all development stages to adapt – may take longer. The US$100b annual funding goal remains a lofty ambition.

The wish list for the Year of the Dragon includes updated standards, greater economic incentives and government involvement to bring together key players.

ESG increasingly front of mind for businesses (naturally...)

Claire Rogers | Australia

We’re seeing increasing demands from clients for ESG-related advice, both in relation to the challenges business is facing and the opportunities they are identifying.

Demands are evolving in type and intensity. Mandatory reporting requirements come into play in Australia this year, the energy transition presents continuing challenges, and carbon markets are expanding across the region. And then there is the ever-present spectre of climate litigation.

An emerging area to watch this year is natural capital. There is a fast-approaching global focus on natural capital - and a chance for Australia to lead.

“We’re seeing increasing demands from clients for ESG-related advice.”

The world’s first Nature Repair Market is under way in Australia, after the passage of bills to establish the framework in December 2023. The operational rules are a work in progress, but now is the time for companies to consider the role of natural capital. How does their business impact on nature and diversity? What opportunities are there to capitalise on projects?

This will help to invigorate investments in nature restoration and will operate alongside the carbon market.

It also highlights how ESG is expanding in scope - and regulatory frameworks along with it. Yet it also shows that despite inherent challenges, these changes bring opportunities.

We’ll need the confidence and intelligence of the Dragon to navigate the path ahead.

Risky business as climate disputes, supply chains and greenwashing heat up

Edwina Kwan | Australia

For many businesses, climate governance is already a priority. In the Year of the Dragon, expect to see climate issues escalate in importance in boardrooms and at annual general meetings. We expect boards and shareholders to show particular concern relating to greenwashing and supply chain risks.

In the ever-evolving climate litigation space, we predict heightened activity by regulators. In the Year of the Rabbit (2023), several new proceedings were instituted and a number of significant decisions were handed down in Australia and abroad, as well as in international courts and tribunals. Compelling data shows the trend: between 2017 and 2022 climate change disputes grew in number by 2.5 times, according to the United Nations Environmental Programme’s (UNEP) 2023 Global Climate Change Litigation Report. The US leads the tally (1,522 or 70% of all disputes observed), followed by Australia (127 disputes) and the UK (79 cases). The focus on climate litigation is showing no signs of abating.

In the greenwashing space, the EU’s ban on misleading market statements on sustainability sets a high watermark. In Australia, we expect regulators to keep focusing on greenwashing and to turn their attention to ‘bluewashing’: misleading and deceptive statements in relation to social objectives. This could cause some companies to play down their green ambitions – ‘greenhushing’.

When it comes to supply chains, there are increasing pressures on a number of fronts including Scope 3 emissions, modern slavery requirements and nature and biodiversity impacts. Emerging technologies are set to bring valuable help in verifying and managing supply chains.

Businesses must keenly monitor, manage and - most importantly - take tangible action on climate risk and ESG governance issues.

DATA & TECH

Watershed year for cybersecurity, data utilisation and generative AI in China

As funds seek opportunities, fintechs that adapt and innovate can benefit

Susan Ning | Chinese Mainland

In 2024, China's cybersecurity and data compliance will undergo rigorous reform, especially within the virtual assets industry.

This follows significant strides made already in the Year of the Rabbit, as China shifts to a ‘2.0’ era in cybersecurity and data compliance. China also made notable headway in artificial intelligence (AI) regulation in 2023, especially with the implementation of a dual filing system for AI service providers, recording algorithms and models separately. This all underscores the need for companies to remain vigilant and adaptive to the changing regulatory landscape.

For companies operating in China, the Year of the Dragon will bring substantial policy changes. The rollout of Regulations on Network Data Security Management will bolster the existing legal framework. Businesses must embed genuine, effective cybersecurity and data compliance measures.

“Key breakthroughs are expected in data utilisation policies, especially innovative industrial policies in free trade zones (ports).”

This involves crafting internal compliance mechanisms that are both responsive and resilient, capable of withstanding the scrutiny of evolving regulations.

Key breakthroughs are expected in data utilisation policies, especially innovative industrial policies in free trade zones (ports). The National Data Bureau released its ‘Data Element X’ Three-Year Action Plan (2024-2026) at the end year of 2023. The overall objectives include forming a “relatively perfect ecology of the data industry”, significantly improving the “quality and efficiency of data products and services” and increasing the average annual growth rate of the data industry by over 20%. This serves as a starting point to explore data and release beneficial policies at the national level. Compliance data will become a key element in the data element market, and the more compliance data is generated and held, the more data value and industrial value can be created.

For businesses operating in China, adopting a perspective that 'compliance creates value' can empower companies to proactively seize new opportunities. As China advances its data industry and digital economy, seizing the opportunity to enhance cybersecurity and data compliance will position companies at the forefront of this transformative era.

Safety and responsibility the aim of the Gen AI regulation game

Nicola Yeomans | Singapore

Fintech companies in the Asia-Pacific weathered the ‘funding winter’ throughout 2022/23 by switching to survival mode: attract new capital or restructure. Despite persisting uncertainty in global geopolitics, we expect conditions will warm in the Year of the Dragon.

Southeast Asia is a strong contender for funds in need of a home. This is not only due to its dramatic growth phase. The Asia Pacific region has the most comparatively preferably regulatory settings globally, according to a World Economic Forum report on the Future of Global Fintech released in January 2024.

Fintech companies that took decisive action to restructure and refine operations in Singapore and beyond are poised to capture new growth as macroeconomic pressures recede. Investors may need these same structural changes for future investment rounds. Fintechs should get ahead of this emerging trend, including by:

• Reorganising capital tables (investments record) to better reflect the contributions of shareholders to the company's growth. This has proved critical for some new investments.
  

• Refining partnerships to clear the way for unencumbered new investments. Early-stage fintech firms should consider renegotiating or exiting partnerships with established financial entities when the fine print doesn't match the reality.
  

• Streamlining product offerings as a more viable path to profitability than unchecked expansion. The APAC region saw many fintechs trimming services, shedding non-performing business lines to focus on core offerings. We anticipate it may lead to more successful fintech mergers and acquisitions.
  

• Diversifying capital sources to allow growth without excessive equity dilution. Throughout the past year, many fintechs turned to debt and alternative forms of private credit to fuel their working capital needs – a trend likely to continue in 2024.
  

We are watching these shifts and advising fintechs to ensure they keep pace with the next wave of opportunity.

Financial stability the aim as regulators foster vibrant crypto sector

Bryony Evans | Australia

Just over a year has passed since the launch of ChatGPT - and Generative AI has entered lexicons and workplaces. Regulators worldwide are playing catch-up with staggering developments.

In Australia, the federal government spent the second half of 2023 undertaking extensive consultation on ways to mitigate emerging risks. The overarching aim is to ensure the development and deployment of AI is responsible and safe.

In 2024 we expect to see concrete outcomes start to emerge. This is likely to focus on plugging gaps in existing legislation in key areas. This includes addressing eSafety, corporate governance, privacy and automated decision-making.

“Governments pledged to work together to ensure human-centric, trustworthy and responsible AI that is safe.”

We also expect voluntary standards and codes ahead of the next federal election (some time before September 2025).

An expert advisory body will form part of the package, based on the government’s interim response. But it could go further: it’s weighing up mandatory safeguards for developers in high-risk settings.

Australia is not alone in prioritising AI regulation. As 2023 closed, it was one of 28 governments that signed the Bletchley declaration at the AI Safety Summit hosted by the UK. Promoting a pro-innovation and proportionate approach, the signatory governments - the UK, US and EU among them - pledged to “work together in an inclusive manner to ensure human-centric, trustworthy and responsible AI that is safe, and supports the good of all through existing international fora and other relevant initiatives, to promote cooperation to address the broad range of risks posed by AI”.

For the EU, this means the AI Act, which is in motion. In the US, it’s all about voluntary codes of conduct.

In the Year of the Dragon, all businesses must look at how they engage with AI – both the risks and the opportunities. Australia’s AI Ethics Principles are a good starting point for companies grappling with what a ‘safe and responsible’ deployment means.

Minny Siu | Hong Kong

There is growing global momentum towards regulating crypto assets. In Hong Kong SAR, the government has committed to fostering a vibrant sector and ecosystem for virtual assets, following ongoing efforts to regulate the industry.

We anticipate a year of legislative and regulatory reforms for the stablecoins and virtual assets industry.

A new licensing and regulatory framework for fiat-referenced stablecoins was proposed in a consultation paper released by the Hong Kong Monetary Authority (HKMA) and Financial Services and the Treasury Bureau (FSTB) in December 2023. These are crypto assets that aim to maintain a stable value relative to one or more fiat currencies. The objective is for entities issuing such stablecoins to obtain a license from the HKMA. This aims to tackle concerns related to monetary policy, financial stability, and investor protection associated with fiat-referenced stablecoins, while promoting responsible development in Hong Kong's virtual asset market.

This is in line with a trend of global regulators actively exploring ways to strike a balance between fostering innovation and addressing potential risks of stablecoins. That includes risks to financial stability, consumer protection and the overall integrity of the financial system.

This increasing focus on stablecoins from financial systemic risk perspectives followed the November 2020 release of Bank for International Settlements (BIS) Working Papers on ’Stablecoins: risks, potential and regulations’.

There are also legislative proposals to introduce a licensing regime for providers of over-the-counter spot trading services of virtual assets (VA OTC business). The Government of Hong Kong SAR launched a two-month public consultation on 8 February 2024. Under the proposed licensing regime for VA OTC business, any person conducting a business in providing services of spot trade of any virtual assets for money in Hong Kong SAR is required to be licensed by the Commissioner of Customs and Excise, irrespective of whether the services are provided through a physical outlet and/or other platforms.

Investments in data centres & fibre surge - but regulatory barriers remain

Daryl Cox | Australia | wider APAC

Digital infrastructure will accelerate as an investment priority across Asia in 2024. It hits a sweet spot for investors in the current challenging economic conditions: resilient demand and growth potential, underpinned by long term revenue-generating contracts.

Data centres will continue to be the focus, driven by cloud and AI workloads as well as growing broadband penetration across the region – with an increasing focus on sustainability and a drive to leverage renewable energy sources.

“Expect to see fibre spinoffs by telcos across Asia in 2024 – particularly in Indonesia - while subsea fibre investment surges.

However, global investors are also becoming increasingly comfortable with fibre as an asset class, needed to carry data between nations, data centres and users. Expect to see fibre spinoffs by telcos across Asia in 2024 – particularly in Indonesia - while subsea fibre investment surges.

With geopolitical tensions entrenching in the region, new subsea cable hubs are emerging in India, Australia, the Philippines and Indonesia, to supplement Singapore. However, investors remain concerned by the regulatory barriers and a lack of regulatory consistency across the region. To attract investment, governments and regulators need to coordinate and provide the right regulatory conditions, rather than focus on protectionism, regulatory capture or revenue generation.

GLOBAL TRADE

Diplomacy and adaptability will ensure trade solutions take centre stage

David Olsson | Hong Kong

As Asia strides into the auspicious Year of the Dragon, the confluence of pivotal elections, economic dynamism, geopolitical balancing acts and changing global supply chains will define its trajectory in the year ahead.

The positive momentum in the Australia-China relationship will continue. Expect to see further diplomatic and economic engagement to address remaining trade issues. We anticipate a renewed focus on initiatives to address the climate crisis and core areas of engagement around education, food and agribusiness, health and energy.

“Proactive adaptation and astute strategic manoeuvring are imperative in navigating the challenges and opportunities in the year ahead.”

For businesses, industry associations and governments, proactive adaptation and astute strategic manoeuvring are imperative in navigating the challenges and opportunities in the year ahead.

Welcome to the crossroads of change and opportunity!

Read our insights on these complex and rapidly evolving areas on our website