Opportunities and Challenges for ASEAN’s New Energy Development

New energy cooperation between China and ASEAN has shifted from pure investment and trade to capacity-building cooperation, with the scope and depth expanding constantly

By Gu Baihe, Yu Donghui

The energy transition was a main topic of the latest G20 Summit in Bali. Since the beginning of the Russia-Ukraine conflict, a new energy crisis has spread around the world, and energy security has been thrust back to the focal point of all countries. More and more countries are beginning to reflect on the negative impact of fossil-fuel dependence. Green and low-carbon transformation has become a new impetus for countries to boost economic growth and achieve green recovery, with the development of new energy being a crucial link of this process.

Floating solar panels at the Sirindhorn Dam Hydro-Solar Farm run by the Electricity Generating Authority of Thailand in Ubon Ratchathani, Thailand. (JACK TAYLOR)

At present, ASEAN countries are gradually recovering from the COVID-19 pandemic. As one of the most dynamic regions in the world, a strong recovery of the region’s economy will be accompanied by a rising demand for energy. The International Energy Agency (IEA) stated in its report Southeast Asia Energy Outlook 2022 that “Southeast Asia’s reliance on fossil fuels to meet rising demand for energy is proving to be a significant vulnerability in today’s energy crisis.” The IEA also suggested countries in the region accelerate the transition to sustainable energy.

In the joint statement on climate change to the 27th Session of the Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC COP-27), ASEAN member states declared that the region as a whole had achieved 14.2 percent renewable energy share in the ASEAN total primary energy supply, and that the renewable energy share in installed power capacity reached 33.5 percent in 2020. Meanwhile, they urged developed countries to increase investment in sustainable and climate-resilient infrastructure, renewable energy, and emerging low-carbon energy and green alternative technologies such as low-carbon hydrogen energy-efficient devices and equipment.

Although ASEAN has plenty of incentives to develop new energy, acceleration of the process will require not only appropriate policy design, major financial support, a conducive market environment, a sound and fair transition route (Note: In the process of transition to a low-carbon economy, socioeconomic disruptions from fossil-fuel independence should be minimized while the benefits to workers, communities and consumers should be maximized), but also the capital, technology, and experience from international cooperation.

Bright Prospects

ASEAN is at a stage of rapid development in all aspects. In urbanization, for example, the proportion of population living in cities is projected to grow from less than 50 percent today to more than 60 percent by 2040, with demand for air conditioners alone increasing by 300 million units. That means the demand for energy will be higher. Filling the gap to meet the demand for energy is a central priority for ASEAN to develop energy technology.

With its rapid economic growth, ASEAN’s electricity demand has increased on average by a staggering 5.7 percent annually over the last 20 years, meaning that ASEAN’s electricity demand has grown by about a third every five years. The IEA forecasts that electricity consumption in the ASEAN region will grow at an average of 4 percent annually until 2040, by which time electricity consumption will be twice that of 2020. Price fluctuations on fossil fuels such as coal have exerted a serious impact on the ASEAN countries’ power systems that still depend on fossil fuels. To obtain low-cost energy supply continuously, ASEAN’s only option will be to develop new energy.

ASEAN countries are building more consensus on developing new energy. ASEAN as a whole and all ASEAN countries have set renewable energy development goals. By 2025, ASEAN countries will achieve 23 percent renewable energy share in their total primary energy supply. According to ASEAN Energy Center estimates, in a scenario where all regional countries fully meet their national energy efficiency and renewable energy targets, the region’s renewable energy share in installed power capacity will reach 37 percent by 2040. Solar photovoltaics (PV) will be the fastest growing source of electricity, with an annual growth rate of 10.4 percent.

The ASEAN region has great potential for the development and utilization of renewable energy resources. The region is blessed with the best hydropower development potential in the world, especially in Indonesia, Myanmar, and several countries in the lower reaches of the Mekong River. According to the Organization for Economic Cooperation and Development (OECD), Laos alone has an estimated hydropower potential of 26GW. The solar radiation in this region is also very strong, with an average of 1.5-2 MW/m2 annually, which is comparable to the radiation in China’s Ningxia and Xinjiang regions. The ASEAN region is also endowed with high-quality energy resources such as wind energy, geothermal energy, marine energy, biomass energy, and more, which promises the region bright prospects for renewable energy development.

In terms of the cost of energy use, the cost of renewable energy is falling around the world, and renewable energy has become the cheapest source of electricity in most ASEAN countries. The International Renewable Energy Agency (IRENA) estimates that the Levelized Cost of Energy (LCOE) of new utility-scale solar PV in Southeast Asia in 2021 was between US$0.05-0.075/kWh, which is already below the average price of fossil fuels in G20 countries. Lower energy prices and the potential economic and social benefits of new energy development have driven more and more ASEAN countries to take concrete action to promote the development of new energy.

Challenges Ahead

Although ASEAN has a strong desire to develop new energy, it faces many challenges moving forward considering the complex national conditions of its member states.

First, ASEAN’s energy supply still depends heavily on coal-based fossil fuels. The installed capacity of coal-fired power reached 89GW in 2019, which is expected to double to 163GW by 2040. In the context of the global clean energy transition, a hasty exit from coal-fired power generation will aggravate the risks for the power system and energy security in the ASEAN region. The decommissioning and transformation of young coal-fired power plants also cause problems that ASEAN has to face in the process of developing new energy. The coal-fired power generation units in ASEAN countries are relatively young, with the average age of the operating units at about 11 years. The clean energy transition will result in many of those units being decommissioned and transformed ahead of schedule, causing fairly high risk of stranded assets. According to a Carbon Tracker report, more than 70GW of coal-fired power plants are either planned or under construction in Southeast Asia, with US$124 billion of investment in coal-fired power at risk. With the phase-out of coal-fired power comes the risk for a fair transition, because a considerable amount of jobs along the coal industrial chain will be affected. Its impact on social stability will be a matter of concern. 

Second, a lack of stable power industry policies and a fairly low level of electricity market liberalization are also important factors restraining the development of new energy. Indonesia possesses the second largest geothermal resources in the world and has been actively developing geothermal energy. However, its geothermal price subsidies have been revised more than five times since 2008. Such frequent policy revisions have kept many investors on edge. The overall level of electricity market liberalization in most ASEAN countries is still relatively low. The power industry and the coal industry form a close community of interest, restraining the flexibility of the market.

In addition, most ASEAN countries do not have a high capacity for clean technology innovation and their technological research and development remains at a low level. ASEAN’s own talent output cannot meet the needs for current large-scale development of new energy, resulting in a large gap in technology and talents. 

ASEAN has actively carried out regional power grid cooperation projects such as the ASEAN Power Grid to balance power demand among various countries and maximize use of renewable energy. However, power infrastructure in most ASEAN countries is weak. Indonesia, for example, is “a country of thousands of islands,” with a divided power grid. The geography makes it difficult to consume and utilize new energy on a large scale.

Finally, ASEAN faces a huge funding gap for the development of new energy. According to research conducted by the ASEAN Energy Center, Vietnam has the largest new energy investment among ASEAN countries. However, its investment is only a third that of Chile, which ranks 20th in the world. The region’s weak financial and capital markets combined with extremely limited experience in green financing pose challenges for the development of new energy.

International Cooperation

Economic vitality and soaring energy demand have brought many opportunities. Almost every country is actively seeking cooperation with ASEAN on new energy development. 

In recent years, the model of international cooperation with ASEAN has diversified to include financing and technical programs. For example, the German Corporation for International Cooperation (GIZ) implemented the Vietnam Energy Support Program (ESP), providing the country with investment of about 6.9 million euros from 2014 to 2018. The Green Prosperity Indonesia program from the U.S. Agency for International Development (USAID) invested more than US$300 million to support Indonesia’s energy transition, and the Clean Power Asia program from USAID invested more than US$750 million in the Southeast Asian region.

At COP27, the Asian Development Bank announced US$150 billion investment in green projects in Southeast Asia “to achieve a prosperous, inclusive, resilient, and sustainable Asia and the Pacific.” Today, Thailand is working hard on the upcoming Renewable Energy Week, Electric Vehicle Week and other events to create more opportunities for international cooperation. So far, more than 52 countries have become involved in relevant activities. The growing momentum for international cooperation has made the region one of the most dynamic in the world for the development of new energy.

In September 2021, Chinese President Xi Jinping announced that China would not build any new coal-fired power projects overseas. The same year, China released the “Qingdao Initiative for Belt and Road Green Energy Cooperation,” which mentioned that in the future, green energy cooperation between China and Southeast Asia will become the focus of regional energy cooperation.

On January 1, 2022, the Regional Comprehensive Economic Partnership (RCEP) agreement, signed by 15 Asia-Pacific countries including 10 ASEAN member states as well as China, Japan, South Korea, Australia, and New Zealand, entered into force. It will undoubtedly create broader prospects for cooperation between China and ASEAN.

At the Nineteenth ASEAN Ministers on Energy Meeting Plus Three (China, Japan, South Korea) (19th AMEM+3) in September 2022, China, South Korea, Japan, and ASEAN announced further cooperation in the renewable energy sector. A joint statement released after the meeting stated that “The Meeting welcomed the on-going project between the ASEAN Center for Energy (ACE) and the China Energy Technology and Economics Research Institute (CETERI), supported by the ASEAN China Cooperation Fund (ACCF) on ‘The Innovative Solar PV Utilisation to Support the Green Economic Recovery in ASEAN’ which aims to provide development conditions, prospects, and model of solar PV(+) for scaling up solar PV development in ASEAN.” This means that the new energy cooperation between China and ASEAN has evolved from pure investment and trade to capacity-building cooperation, with the scope and depth of cooperation being expanded constantly. 

China will continue to enhance new energy cooperation with ASEAN by making optimal use of its financial and technological advantages and sharing its best experiences. ASEAN has identified energy as an important sector of its post-pandemic economic recovery, and new energy will provide important opportunities for ASEAN to achieve balanced economic, social, and environmental development. China should actively conduct dialogue and consultation with ASEAN countries, share with them experience in low-carbon power transformation and development (for example, experience in photovoltaic, wind power, electric vehicle development, and policy considerations for the orderly phase-out of coal), and provide plans tailored to local conditions. It should carry out cooperation with ASEAN countries in clean energy technologies and funds. While considering the actual conditions of ASEAN countries, it should promote clean transformation of existing coal-fired generating units, enhance cooperation in renewable energy technologies, smart grids, distributed energy systems, and energy storage technologies, and formulate international standards. China will also actively support power grid upgrade in Southeast Asian countries and promote transnational power grid connectivity.

Under the current circumstances with unprecedented challenges to the security, stability and smooth operation of the global industrial chain and supply chain, China and ASEAN could strengthen cooperation on key mineral resources and clean energy industry development to ensure the security and stability of the supply chain, build a green supply chain, and provide effective solutions for regional and global low-carbon energy transformation.

(Gu Baihe and Yu Donghui are associate researchers at the Institute of Science and Technology and strategic consultants at the Chinese Academy of Sciences.)

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