Kaho Yu lists four enabling factors that could help ASEAN to drive its renewable energy transition.
The ASEAN region, one of the fastest-growing energy and power markets in the world, has witnessed a surge in renewable energy investments. The International Energy Agency forecasts that energy demand in the ASEAN region will grow by as much as 60% by 2040, where coal will continue to play a major role in the energy mix. The urgent need to mitigate climate change and reduce dependence on fossil fuels has prompted an increase in renewable energy investments in the region. This shift can be attributed to four enabling factors driving the renewable energy landscape while regulators and investors navigate various opportunities and challenges in pursuit of a sustainable future.
Understanding Cost Dynamics
Rapid advancements in renewable energy technology have led to reduced costs, enhanced efficiency, and improved grid integration within the ASEAN region. By 2030, renewables are projected to be 15% cheaper than fossil fuels, making them increasingly attractive to investors. The abundance of natural resources, such as solar, wind, and hydro, further bolsters the feasibility of additional renewable energy projects. Moreover, the overall trend indicates growing competitiveness between renewable and fossil fuel technologies. Consequently, in the long run, coal, combined with carbon capture and storage (CCS) technology, is expected to struggle to compete against renewables due to the significant generation costs associated with CCS technology.
Nevertheless, renewables and storage currently cost a premium compared to the power generated from fossil fuels. This disparity is due to construction cost differentials, land and renewable resource availability, as well as regulatory and permitting requirements. Moreover, renewables deployed near demand centres tend to be more expensive and the technologies required to support decarbonisation while maintaining grid reliability are costly. However, the necessity for infrastructure upgrades has become an attractive proposition for international investment in ASEAN renewable energy development.
The Role of Policy: Domestic, Regional and International Initiatives
Domestic policies and targets in ASEAN countries have generated robust market signals for investment in renewables. Many of these countries have established ambitious renewable energy targets and implemented supporting policies, including feed-in tariffs, tax incentives, export restrictions, and public financing schemes. Following discussions at the 2021 United Nations Climate Change Conference (COP26), five major Southeast Asian nations announced carbon neutrality targets for 2050 or later, alongside plans to phase out coal. These measures are expected to equip ASEAN countries with the means to scale up and redirect investments toward renewables and new energy technologies.
Furthermore, regional and international cooperation plays a crucial role in accelerating renewable energy investments. For instance, the ASEAN Power Grid is designed to facilitate the integration and cross-border trade of electricity generated from renewable sources, thereby encouraging investment in renewable energy projects. Other regional cooperation frameworks, such as the ASEAN Plan of Action for Energy Cooperation, promote collaboration in research and development, technology transfer, and capacity building, which are appealing to investors. In addressing challenges such as limitations in financial resources and technical capacity, ASEAN countries are also leveraging on international support from various organisations and bilateral assistance from developed nations.
Carbon Pricing to Drive Investments in Renewables
The expeditious development of carbon pricing instruments in the ASEAN region has significant potential to encourage greater investment in renewable energy. By increasing the cost of using fossil fuels, these instruments incentivise businesses to transition to cleaner energy sources over the long term. Carbon pricing mechanisms, such as carbon taxes, emissions trading systems (ETS), and carbon border tariffs, oblige carbon-intensive industries to account for the external costs associated with greenhouse gas emissions. The internalisation of these costs levels the playing field, accelerating the transition to renewable energy sources such as wind and solar by rendering them more competitive with coal and other fossil fuels.
Crucially, the implementation of carbon pricing policies sends a definitive signal to the market that governments are committed to reducing greenhouse gas emissions and transitioning towards a low-carbon economy. This commitment encourages investors to redirect capital towards renewable energy projects and capacity building. Furthermore, revenue generated from carbon pricing instruments can be strategically reinvested into renewable energy initiatives, as well as environmental and sustainability projects, further bolstering the growth of the clean energy sector.
Geopolitics as a Catalyst
The Ukraine crisis has catalysed Southeast Asian renewable and power markets, expediting the widespread adoption of renewables alongside fossil fuel. The energy market fluctuations during the crisis have not dampened demand growth in Southeast and South Asia. Instead, they have prompted the adoption of a ‘Coal + Gas + Renewables’ strategy. It is essential for ASEAN countries to increase the share of renewable sources in power generation as part of their strategy to ensure energy security and sustainability.
The most recent energy crisis has led to the emergence of a stable renewable power market as a more favourable destination for investments than the volatile oil market. The skyrocketing spot prices of fossil fuels during the Ukraine crisis rendered renewables comparatively more cost-effective. ASEAN countries have emerged as an alternative market for investors trying to diversify from markets impacted by US–China trade tensions. Although supply chain disruptions due to COVID-19 restrictions reversed the declining trend in the cost of renewable power generation in 2020 and 2021, supply chain bottlenecks for renewables began to ease in 2022, driving new generation from wind and solar power.
Navigating Profitability Challenges for Investors
The ASEAN renewable energy market has witnessed a substantial influx of investments in recent years. However, this growth presents several challenges for investors. First, investors with increased exposure to renewable markets face greater price volatility and escalating system costs, as regulators are introducing market reforms to accelerate the energy transition. Second, the associated costs of renewable energy, including equipment supply chain disruptions, inadequate grid integration, import tariffs, and regional policy disparity, are rising. Third, factors such as curtailment, price cannibalisation, and policy or contract adjustments are introducing new uncertainties and additional barriers to profitability.
In response, investors must reassess their financial strategies to achieve the desired return on investment. This process entails a thorough evaluation of their risk profiles, considering the multitude of uncertainties that may affect their projects’ profitability. A comprehensive understanding of these risks and the diverse markets within the ASEAN region is crucial in making informed decisions and effectively managing the various risks that could undermine energy transitions.
Given ASEAN’s current reliance on fossil fuels, proponents of renewable energies have a long journey ahead before renewables become the dominant source of energy in the region. The future of renewable energies in the ASEAN region depends heavily on investment in projects that can amplify the usage of renewables, such as cross-border grid integration and green hydrogen. As the region moves towards a more sustainable energy future, it is essential for ASEAN countries to capitalise on the opportunities presented by renewable energy investments while diligently managing the risks associated with geopolitical competition.
This is an adapted version of an article from ASEANFocus Issue 1/2023 published in March 2023. Download the full issue here.
Kaho Yu is Head of Energy and Resources Research, Verisk Maplecroft. The views expressed are the author's own.