Energy transition in Southeast Asia: Current trends
Notably in Southeast Asia, there's a growing emphasis on renewable energy sources, such as solar and wind power, driven by both environmental concerns and the region's abundant natural resources. However, key challenges lie ahead for the Association of Southeast Asian Nations' (ASEAN) journey to net zero over the next five years. Infrastructure development, regulatory frameworks, and investment constraints pose significant hurdles. Managing director of Markland Infrastructure Asia, Allard Nooy, joins Reed Smith's Matthew Gorman and Joyce Fong, to share their insights and vision for the future of ASEAN's energy landscape by 2030.
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Intro: Hello, everyone and welcome to Energy Explored. This podcast covers the challenges of achieving a carbon neutral global economy, cutting emissions of gasses and pollutants and setting up new energy systems. Join Reed Smith lawyers and guest speakers as they shed light on the most important trends in emissions control and new fuels. Tune in as we follow the ever evolving journey through the transition of energy.
Joyce: Hello and thank you for joining us on this podcast. I'm delighted to be chatting with Allard Nooy and Matthew Gorman today about the energy transition in Southeast Asia. For the benefit of our listeners Allard is a senior advisor at RPS. He has extensive experience in strategic planning, directing growth, developing financing and implementing major renewable energy and infrastructure projects in Asia-Pacific. Matthew is a partner, Reed Smith. He is a seasoned corporate finance lawyer with extensive experience of cross-border transactions in Europe and Asia. His experience spans a range of industry sectors, including energy and natural resources with a focus on infrastructure and renewables. Allard and Matthew, from your long experience in Southeast Asia, are there any uniquely Asian or Asian energy trends which you have observed?
Allard: Well, first and foremost, energy demand in ASEAN is the total final energy consumption or TFEC abbreviated, we should recognize that projection is to reach 473 million tons of oil equivalent or MTOE and that's by 2025 and 1.2 million by 2050. So fossil fuels are projected to continue to dominate the regional energy demand with oil still making up the largest share of TFE through 2050. Industry and transportation shares are projected to remain the largest energy consuming sectors. Their shares in TFEC will grow by 3.8% and 3.6% respectively. Cooking and cooling appliances will remain the largest energy consumption in the residential space making up about 82% of the sector's demand by 2050. Secondly, on the energy demand side of the house, this is expected to grow fourth-fold from 650 million TOEC in 2020 to about 2.6 million by 2050. Oil, natural gas and coal are forecasted to continue to dominate an ASEAN’s energy supply accounting for about 88% of the total primary energy supply in 2050 leaving renewables at just 12%. Now with out significant discoveries or addition to existing production infrastructure and with the expected rate of utilization of fossil fuels ASEAN is projected to become a net importer of natural gas by the mid of this century and of coal by 2040.
Matthew: You know from a from a trend perspective and from an ASEAN perspective, I think one of the things that people need to understand is that, you know, one of the challenges across pretty much most of ASEAN is that demand for energy is still growing significantly. I mean, even even in, you know, a number of places across the region, you know, having a reliable or even any electricity supply is still a challenge. Uh and therefore, you know what ASEAN or a lot of large parts of ASEAN are trying to, to achieve and to against the context of the of net zero targets is actually, you know, just coping with that, you know, huge demand that's still, you know, happening as a result of many of these, you know, countries being on a on a development, you know curve that still has a long way to go, you know, as a result of which it's, it's it's a bit of a sort of, you know, balancing act which, which, which the government, regional governments have to, to balance of kind of, you know, satisfying that growing demand, whilst at the same time, you know, achieving a mix which is more in accord with global targets.
Allard: Yeah, and Matt just to add to that, there is a direct correlation between GDP growth per capita and energy consumption and with the ongoing urbanization in particularly in emerging markets in ASEAN, this will continue to drive energy demand.
Joyce: So based on these trends. What do you see as the key challenges to ASEAN'S journey to net zero over the next five years?
Allard: So with regards to installed capacity and power generation, not just in the next five years, but up to 2050 which is for a number of ASEAN countries uh forecasted to be net zero or at least that's what they committed to during the last couple of COPs. Um It is forecasted that we will have about 960 gigawatt of installed capacity and this is expected to be a three-fold increase from the 2020 level. In 2020 renewables installed capacity amounted to 97 gigawatts. By 2025, the renewable installed capacity is expected to reach 35% and the installed capacity should not be confused with dispatch capacity. As many renewable energy technologies are still intermittent including solar and wind. Whereas most of the hydro geothermal are providing base load capacity. Despite fossil fuels remaining dominant ASEAN is on track to achieve its regional targets. And in order to complement the intermittent renewable energy assets, batteries will play an important role as they can be used to provide stored power during midday, peak hours overnight periods, and other times when solar and wind generation are reduced. Batteries will be crucial in enabling higher penetration of renewable energy and maintaining the power grid stability. The region is expected to require roughly 26 gigawatt of battery capacity to store about 1100 gigawatt hour of electricity by 2050.
Matthew: So I, I think, you know, there are, there are, there are two sort of areas I see as being important. One is the sort of the framework if you like from a regulatory perspective, where I think a lot can still be done uh across the region you know, for regulatory perspective to make investment into um the, the, you know, the, the construction and operation of renewable energy projects a more efficient process and one that can be implemented uh more easily, you know, across in different countries. The second is more the practical perspective of ensuring that the grid you know, can cope with and access a lot of the projects that people would like to build across the region. I think there's no shortage of interest, you know, both from domestically and from international investors and developers to build these projects. But one of the biggest issues I think that a lot of them have is with grid connectivity, either being not readily available in the place where the projects could be built or alternatively, you know, not up to, you know, the grid, not having the capacity to handle, but the generation, the power that's generated you know, when it, when it, when it comes online. And so I think those, you know, those two things really are are key challenges which I think have to be addressed by, by regional governments.
Allard: Yeah, and that just to add to that, I mean, what would really help is enabling legislation for the private sector to be able to invest in transmission and distribution networks, which is in a number of jurisdictions still not feasible.
Matthew: That's right and, and also, you know, you one shouldn't forget that with, in particular, you know, if we're looking regionally, you know, Indonesia and the Philippines are, you know, the disparate, you know, archipelago with a lot of challenges to make this happen. I mean, it's ok, you know, on the main, uh you know, the main islands like Java and Sumatra, et cetera. But beyond that, you know, there are some really difficult issues to to cope with, which is why as Allard mentioned earlier in some of these places, batteries will be very important in ensuring, you know, the stability of supply on the ground.
Joyce: You've touched on this briefly already. But can you please elaborate on what changes need to happen to make the goal of net zero more achievable in ASEAN?
Allard: Well, firstly, attainment of electrical vehicles and deployment targets will be absolutely crucial to reduce carbon footprints. And national policies are projected to lead to an EV share of about 2.5% of passenger road transportation by 2025 and close to 10% by 2050. In the commercial sector, electricity will deliver most of the energy demand approximately 75%. And of that about 24% of the demand will be from officers followed by retail hospitals, hotels, et cetera. In my view, efforts need to be stepped up to improve the data quality and to ensure that energy savings can be properly overseen, measured and managed in the commercial sector. Uh Because that will drive basically the reduction of co two footprints and all these goals cannot be achieved without financing including considerable commitment from the private sector. Between ’21 and 2030, the annual investment requirement in the energy sector alone varies from anywhere between 17 to 34 billion USD. And as per the seventh ASEAN energy outlook projection illustrates four scenarios. Two of these scenarios follow a declining trend between 2031 and 2040, reaches the highest value of 31 billion for the baseline scenario uh between 2041 and 2050. As the region expands new builds to meet higher energy demand and annual power investments ranging from anywhere between 25 to 42 billion dollars. Without new policies, projects, electricity generation requirements to grow at an average rate of about 4.3% per year. With national and regional energy efficiency policies in place, the growth rate is reduced to a more achievable factor of anywhere between 2.3 to 3.7% per year. But energy efficiency improvement projects will require significant financing.
Matthew: Yeah. And I think, you know, one of the things that's that's very evident Allard I think you would agree you know, is that the there is a huge amount of capital, uh international capital, you know, available and interested in investing in regional power production projects uh of all of all shapes and sizes. Uh and you know, including on the, on the renewable side, hydrogen, et cetera. I think, you know, one of the things that I would suggest would help to unlock more of that capital is if uh you know, some of the regional governments in ASEAN were to be a little bit more brave with respect to taking in that, you know, creating a regulatory framework or enhancing the regulatory framework such that, you know, that capital becomes easier to invest. I mean, it's always a delicate balance, one appreciates, you know, for governments, you know, with important, you know, strategic assets such as power generation uh that, you know, obviously foreign involvement in the sector can be a challenge and, and, and it will always raise issues. But nonetheless, I think there is a large amount of scope there for some of this capital to be um you know, to be drawn down if that's the right phrase if the regulations were made a little bit easier across the region to enable that.
Allard: That's correct. And, and it's all about identifying these risks and, and trying to mitigate them to a certain extent, there have been some positive developments, however. I mean, Vietnam, for instance, doesn't have any restrictions on foreign direct investment ownership in energy projects. The Philippines in its recent changes, the DOE has made recent changes to remove the cap of foreign direct investment ownership in particularly in the renewable energy sector which was kept previously at 40%. And and that will encourage investors uh to, to basically come in and take majority stakes in these large scale renewable energy projects.
Joyce: Given what we've just discussed, what do you think ASEAN'S energy landscape would look like in 2030?
Allard: Well, I expect that the targets that ASEAN and its individual member states have committed to during the past few COPs will result in a significant increase in investments in different areas. And this is to one reduce greenhouse gasses and two increase the renewable energy generation capacities. However, without new policies, ASEAN'S greenhouse gas emissions are projected to reach somewhere between 3.5 million tons of CO2 footprint equivalent by 2030. This is nearly doubling the 1.8 million metric tons of CO2 footprint equivalent in 2020. And greenhouse gas emissions are protected to come primarily from the power sector uh for roughly about 60% the transportation sector and the industrial sector. So overall improvements in these sectors would considerably reduce ASEAN'S greenhouse gas emissions.
Matthew: Yes. And as I mean, as we said earlier, you know, the fact that, you know, energy demand is is growing significantly across the region as, as, as economies continue to grow strongly, particularly compared with the west in general. Uh you know, then, then obviously the challenge is, is, is how we, how we address that growth and demand at the same time trying to meet the targets that have been uh that have been set in terms of, you know, the energy transition and, and, and net zero goals. I mean, just to pick up on one of Allard’s points, I mean, just from the transportation alone, I mean, obviously increased globalization and, and increasing middle class and and and and lower, you know, lower income levels across the region mean, for example, just obvious things like travel, you know, I mean, if you look at things like Lion Air and Air Asia and the boom that they've gone through over the last decade or so, I mean, that's only set to continue. So how we, you know, address those transportation costs and the related emissions obviously key key thing to consider.
Joyce: So there is currently a lot of buzz around solar wind and hydrogen, which of these do you see as more critical to the future for clean energy in ASEAN?
Allard: These renewable energy sources reduces the reliance on fossil fuels, obviously and are contributing to the energy security affordability and sustainability. But let me first touch on each of these three renewable energy sub sectors. Solar PV efficiency is fairly low. It's currently at around 23%. And it all depends on how much sunlight a solar PV panel absorbs and converts that into usable electricity. The advantages are clear in my view and uh and include that it is inexhaustible. It's environmentally friendly, has low operating cost and can be operated independently from the grid, particularly on archipelago such as the Philippines and Indonesia, whereby outlying islands can have its own independent grid as well as commercial and industrial rooftop solutions. Largely it is scalable. However, for utility scale solar projects it requires of obviously a lot of land. The source is intermittent, similar to wind and wind power turbines harnesses the kinetic energy to wind to generate electricity and currently has an efficiency rate of up to 50%. That is due to technology improvements over time, bigger turbine sizes and higher efficiency. The typical lifespan of a wind turbine is around 20 years uh with routine maintenance every six months, but wind in certain areas is abundant and power projects have relatively low operating costs as they are scalable and have a lower use of water in comparison to solar. And water usage for solar is obviously cleaning the panels as they absorb. The initial investment per megawatt installed capacity is fairly high and like solar, the energy generation is intermittent. There is potentially some environmental impacts on these projects uh particularly on, on birds and bats as well as noise and and shading impacts to people who are living in these areas where these wind power projects are being install. And lastly green hydrogen uh which is basically a process of splitting water H2 and oxygen O2 through an electrolyzer process, but it requires to be powered by renewable energy otherwise you can't go green and then you're landing up with any other color than green. The production generates uh zero carbon emissions as uh the only by-product is oxygen and even that air can be captured. The advantages include that it is most environmentally friendly, can provide energy storage and there is a global demand for hydrogen. It will be of great assistance to decarbonize hard debate industry including steel, fertilizer, downstream oil and gas, as well as the transportation sector. The cost of production of green hydrogen however, is still very high and there are some safety concerns as the gas is highly flammable. But the expectation is that with further technology improvements, capital costs or Capex will come down for all these three renewable uh sub sectors in in the future. And that's all to do with technology improvement and increasing efficiency. I think that both incentive programs like the carrot or the stick model, including carbon taxes will further help to increase the uptake in this sector.
Matthew: Yeah, I mean, I think Joyce that the three source energy sources that we've we've mentioned there, you know, all have a part to play for sure in the transition. I think for me solar I think Allard mentions the commercial industrial C&I, you know, I think one of the key things there is going back to the point one of the points we made earlier was around regulation is that I think C&I in in large part can actually be developed by the private sector with limited government involvement and therefore, I think has there's an ability there to, to, you know, for the private sector to push that through that. That said, obviously, one of the key things I think and which is a challenge in some jurisdictions in the region is the ability to sell that power back to the grid, uh or excess power to the grid. Because obviously that makes makes these projects commercially more attractive to the parties that are developing them. I think on wind, I think particularly offshore, I think that's still very nascent in the region. if you compare it to say Europe, the US and in even North Asia, Taiwan, Korea, Japan, where there's a lot of offshore wind, uh you know, projects obviously already developed. I think that's a big area where one would hope to see more, more progress in the region, particularly, for example, as Allard mentioned in the Philippines, where I think the the reduction in the um the cap on on foreign ownership limits, uh you know, makes, makes those projects potentially a lot more attractive you know, because obviously they do require I mean offshore is obviously the wind is obviously a much more Capex intensive process so uh project. So I think, yeah, great, great opportunity there. And then I think on hydrogen as Allard mentioned, um you know, I think some of those really heavy industries, steel, uh and the like, you know, are, are definitely areas where a lot of, you know, it's going to take a lot to basically reduce the carbon footprints of those industries. And and and hydrogen probably is one of the key ways that that can be done, albeit that obviously, as as Allard already said is, you know, it's more Capex intensive and obviously it's slightly more challenging from a safety and security perspective.
Allard: Yeah, just on C&I rooftop solar Matt, I mean, you made a very, very good point. It is all to do with regulations and whether uh there is a regulation which provides for net metering, which is basically the ability to self use, but if you have spare capacity and particularly in industries which usually don't work over the weekend, you are then able to sell that back into the grid, but it requires the right programs and and the right regulations.
Joyce: This has been a most interesting discussion. I have some parting questions for the two of you. Allard, what opportunities and challenges does the transition to clean energy bring for the banking and finance industry in ASEAN?
Allard: Um I think that the banking and the financing sectors have a great challenge ahead of them and will need to change their focus. Some lenders and financiers have already made a good start in establishing an ESG department and have made commitments to no longer finance new coal fired power projects. The challenge is is that these institutions still have thermal power and CO2 emitted projects on their books and like the oil and gas industry, there is pressure from shareholders on profitability. On a positive note, there are developments in the private equity and private credit space where these funds have much greater focus on climate and impact. So there will be peer pressure going forward and this will hopefully have a positive impact on the industry.
Joyce: Thank you Allard. And for you, Matt, what opportunities and challenges does the transition bring for the legal industry?
Matthew: Well, I think the the main thing for me, Joyce is as, as we've, as we've already discussed in, in, in some respects is, is, is the regulatory environment. I think it's a, I guess a a responsibility of the legal profession to help uh regional regulators to develop regulatory frameworks or enhance those frameworks to the extent that they're already there in a manner which allows all the various stakeholders to bring these projects that we've been talking about to fruition in an efficient and productive manner. Such that, you know, all of the stakeholders can effectively enjoy, you know, the benefits of, of implementing these projects, whether they be investors, consumers, uh regulators, uh professionals involved in the process.
Joyce: Thank you, Matt. Allard, Matt. It's been a pleasure. Thank you for the interesting insights and I'm sure our listeners will have plenty to take away from this podcast.
Allard: Thanks, Joyce. It's been a great pleasure.
Matthew: Thanks. Thanks, Joyce. Thanks Allard.
Outro: Energy Explored is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's energy and natural resources practice, please email [email protected]. You can find our podcast on Spotify, Apple Podcasts, Google Podcasts, Stitcher and reedsmith.com and our social media accounts at Reed Smith LLP on LinkedIn, Facebook and Twitter.
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