Although Southeast Asian countries such as Vietnam, Thailand, Malaysia, Indonesia and Singapore have all committed to achieving net zero emissions or carbon neutrality by 2050, renewable power investment development is lagging due to inadequate policy and investment frameworks. This is despite the region’s strong resource potential.

A new joint report (the fourth and final report) by the IEA and Imperial College London examines the opportunities and barriers for scaling up renewable energy investment in the ASEAN (Association of Southeast Asian Nations) region. Although various regions have boosted the role of renewable power in national energy development plans, for the most part their economic development models remain based on fossil fuels; with a high reliance on coal-fired power plants, which account for more than 40% of power generation.

Regulatory barriers and incumbent interests continue to prioritise fossil generation over renewables. Despite the falling costs of renewable technologies around the world, ‘solar and wind project costs remain elevated in Southeast Asia due to lack of deployment scale and under-development of supply chains’, notes the report.

Renewable power investment in Southeast Asia has grown inconsistently. The region’s average annual capital expenditure of $10bn in solar photovoltaics (PV) and wind power over the past five years is amongst the lowest globally, and only exceeds Sub-Saharan Africa. What’s more, most of these investments were in one country – Vietnam. Furthermore, private capital investment accounted for only 60% of renewable investment in Southeast Asia compared to about 90% in advanced economies.

To meet sustainability ambitions in Southeast Asia, the report estimates the region will require at least $200bn by 2030, of which over three quarters would need to be devoted to clean energy. However, the IEA estimates that only $30bn was actually invested in this region over the last five years. With this investment gap in mind, the report covers the cost of capital dynamics in the region, as well as performance and risk characteristics.

Key suggested initiatives include improvements in energy efficiency, electrification of end-uses, and the deployment of low-emission fuels including bioenergy, hydrogen-based fuels and carbon capture and storage (CCS) technology.

Barriers and opportunities 
‘Attracting low-cost investment remains a major hurdle for development,’ says report co-author Mili Fomicov, a researcher at the Centre for Climate Finance and Investment, Imperial College London. The region is seen as being disproportionately affected by climate change. However, it is being starved of capital due to persistent development, operational and economic risks, with financing costs for solar PV and wind remaining relatively high in ASEAN member states. 

Attracting significant investment to meet many energy transition plans across the region will require better policy design and regulatory improvements. Fomicov cites policy incentives in Vietnam which have spurred a significant solar and wind roll-out over the past five years. However, the process has been characterised by ‘boom-and-bust’ deployment cycles and significant grid congestion.

The report identifies concrete steps to improve and mobilise the investment climate for renewable power in the ASEAN region. These include:

• Better data and transparency around project-level financial performance.
• Stronger regulatory frameworks concerning remuneration for renewables performance.
• More robust financial market frameworks for renewables and transition investments.
• An enhanced role for development finance institutions (DFIs) and blended finance, ie using capital from public sources to increase private investment.
• Greater access to risk hedging tools to address credit and currency risks for private investors.
• Improved power system connectivity across the region.

Although progress is being made in many of these areas, the report maintains that stronger efforts are required for the ASEAN region to shift towards a more sustainable energy pathway. ‘Our approach is very prescriptive about how renewable initiatives need to be scaled to attract capital on an ongoing basis versus ad hoc,’ says Fomicov.

Solar energy plant in Borneo rainforest
Photo: Adobe Stock

Rapid growth – powered by fossil fuels so far 
The gross domestic product (GDP) of ASEAN members is forecast to grow at a rate exceeding the majority of advanced and developing countries. According to the International Monetary Fund, regional GDP is expected to grow at an average rate of 6.2% to 2027. To date, fossil fuels have largely underpinned this economic growth model, with natural gas and coal accounting for 34% and 30% respectively of installed power capacity and 75% of the region’s total generation.

Rapid GDP growth creates an opportunity for acceleration of renewables investment. However, without a dramatic shift of domestic policies and planning, complemented by financial support from international investors, ASEAN’s rising electricity demand is likely to be met mainly by fossil fuels, according to the IEA.

Renewable power in the region currently accounts for about 25% of installed capacity and power generation (258 TWh annual average 2017–2021). Much of this is from hydropower, which accounts for about half of the installed renewables capacity and over two thirds of renewable electricity output. Vietnam accounts for the greatest renewable power deployment, where solar PV and wind surged from zero in 2017 to over 22 GW in 2021, spurred by the implementation of feed-in tariffs (FiT). Thailand has added over 3 GW of renewables capacity since 2017, followed by Indonesia (2.2 GW), the Philippines (1.3 GW) and Malaysia (0.9 GW).

‘Given the GDP growth, there is clearly an opportunity for acceleration of renewable investments,’ says Fomicov.

ASEAN power market structure 
The ASEAN countries are in various stages of market liberalisation when it comes to scaling up and integrating renewables. There are competitive wholesale power markets in Singapore and the Philippines, where power generation is primarily privatised and the transmission and distribution sectors are unbundled from the generation sector. Market liberalisation has partially progressed in Vietnam and Malaysia. But a significant portion of generation is still contracted under long-term power purchase agreements (PPAs) with the state-owned incumbent utilities. Most other power markets in ASEAN are not liberalised.

An important driver for clean energy investments is the evolution of a supportive regulatory framework and government plans. Several ASEAN countries have put forth ambitious plans and initiated government-backed investment schemes to accelerate the transition towards clean energy.

Cambodia’s Power Development Plan foresees two thirds of its energy coming from renewables by 2030. Malaysia aims for renewables to account for 40% of power by 2035. Singapore plans to boost solar power by up to 1.5 GW by 2025 and recently adopted a net zero emissions target by 2050.

Vietnam has one of the best wind resources in Southeast Asia with an estimated potential of 311 GW, according to the IEA. However, Vietnam’s Power Development Plan 8 still sees fossil fuels remaining as the backbone of its economic development in the medium term.

Indonesia plans net zero emissions by 2060. Malaysia plans to become carbon neutral by 2050, and to stop building coal plants. Singapore plans net zero emissions by 2050. Thailand’s latest power expansion plan favours natural gas to reduce dependency on coal and suggests a net zero emissions target of 2065.

Structural and regulatory barriers are seen as persistent challenges to the energy transition from fossil fuels. Higher costs also represent another barrier, as the capital expenditure (capex) required for utility-scale solar PV and wind projects remain significantly higher in Indonesia, for example, than in China or India. The supply chains are also under-developed in the ASEAN region, amid high domestic content requirements.

ASEAN renewable power investment 
Given the need for ASEAN countries to invest at least $200bn to accelerate the energy transition, there is concern by the IEA that ‘investment momentum for renewables has been inconsistent, with insufficient policy signals to support the development of robust project pipelines’.

With only three years left to reach regional interim renewables targets, which envisage renewables to account for 35% of power capacity by 2025, accelerating renewable power and associated infrastructure is critical.

Annual average energy investment in Southeast Asia between 2016 and 2020 was around $70bn, with those for clean energy below $30bn a year, according to the IEA. Of that, average annual capex’ of $10bn in solar PV and wind energy over the past five years were amongst the lowest globally.

The report identifies ‘a worrying trend’ when it comes to investments in clean energy in this region. Namely, for every dollar invested in renewable power capacity in Southeast Asia, another dollar was invested in unabated fossil fuels.

Bloomberg New Energy Finance estimates that investment in new solar and wind projects shrank 29% lower than in 2020, to $15bn in 2021, primarily due to the decrease in Vietnam’s solar market since the expiry of its FiT scheme at the end of 2020, amid much lower activity in the rest of the region. However, Vietnam’s wind capacity reached a record high in 2021, with a 60% increase in wind finance of $8bn.

‘A worrying trend … for every dollar invested in renewable power capacity in Southeast Asia, another dollar was invested in unabated fossil fuels.’ – IEA

Data quality 
One of the key challenges for renewables development in the ASEAN region is the lack of sufficient data and transparency when it comes to emerging markets.

‘This is one of the reasons that investors don’t want to go into ASEAN countries,’ suggests Fomicov. ‘Another is related to structural and regulatory barriers – for all investments in the region, not just renewables. There’s a lot of uncertainty over renewable policies and different investment frameworks, which impact the increasing role of renewables in power development plans. You don’t have something prescriptive (ie year-on-year), as in some other regions. That’s a big hurdle.’

Not to mention the reliance on fossil fuel-based electricity that currently dominates ASEAN countries. Commonly, the excuse for reliance on coal is given as concerns about energy security and uncertainties related to operating under a different power model. These factors certainly contribute to the region’s slow progress on the road to net zero.

Looking forward, Fomicov and the IEA are convinced that the ASEAN region has strong renewable resource potential. She hopes the report will help convince investors how attractive the ASEAN region can be from a performance and economic perspective, ‘with expected IRRs [internal rate of returns], profitability and performance metrics that speak for themselves’.