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Investment in Clean Energy in ASEAN Countries: Prospects and Challenges

31 October 2023

The primary goal of the energy transition is to reduce pollution by shifting to clean energy, which is critical for energy security, sustainability, and long-term development. On the other hand, the dependency on energy imports makes shifting to clean energy economically insecure. Thus, there is a need to increase the potential of renewable and clean energy production in every country. However, to fund the accelerated transition to renewable energy, huge new investments and the mobilisation of private capital are required.

In recent years, the global and regional landscape for energy financing has changed with the emergence of new sources of financing, such as climate finance and carbon markets, as well as new instruments, such as green bonds and risk mitigation strategies. Energy entrepreneurs, project developers, investors, and financing institutions can benefit from these innovations. However, investment in clean energy, such as solar, wind, bio-energy, hydropower, and geothermal, as well as energy efficiency initiatives, necessitates a thorough understanding of the risks, uncertainties, and challenges associated with financing on both the supply and demand sides. These initiatives differ significantly from conventional energy initiatives.

Risks and challenges may vary not only by project type, but also by country. The optimal combination of financing tools, risk mitigation strategies, funding sources, and business models must be selected for the effective financing of each clean energy project. Therefore, innovative funding strategies need to be optimised to address project-specific obstacles and risks.

The development of clean energy is becoming essential for countries to meet their zero-emission goals. However, to realise the clean energy targets, substantial financial investments are required. This is due to the fact that most renewable and green power plants have high initial setup and operational costs and a lengthy installation phase, which are considered to be among the most crucial aspects of clean energy development. Also, due to their substantial reliance on fossil fuels for economic and industrial development, the Association of Southeast Asian Nations (ASEAN) faces tremendous challenges regarding the future energy landscape and how the energy transition will be impacted. Whereby in 2020, the share of renewable in its total primary energy supply was only 14.2%. Given the high share of fossil fuels in ASEAN’s current energy mix (oil, coal, and natural gas comprise almost 80%), the clean use of fossil fuels through the deployment of clean technologies is indispensable for decarbonising ASEAN’s emissions.

The future energy landscape of ASEAN will depend on today’s actions, policies, financial mechanisms, and investments that can change the fossil fuel-based energy system towards a cleaner energy system. The ASEAN has set the aspirational target to achieve 23% of its primary energy from renewable sources by 2025. However, any decisions and targets made regarding the energy policy measures to be implemented during the energy transition must take into account the possibility of higher energy costs, affordability issues, and energy security risks, as targeted investments in energy security remain critical throughout energy transitions. To put ASEAN nations on the road to achieving net-zero emissions, an unprecedented rise in renewable energy spending and investment is necessary.

In order to ensure the transition to a cleaner energy system, financial mechanisms,  local and foreign direct investment, will eventually become the primary drivers behind the expansion of renewable energy in the ASEAN countries. Local and foreign direct investment in renewable energy also has large multiplier impacts in other sectors, such as supply chain value creation, green job growth, CO2 emissions reduction, air pollution reduction, and improved energy security and sustainability.

Generally, all ASEAN economies have established renewable energy targets and policy on governance, which covers three important elements for encouraging green investmentv. These are reforming energy governance, legislating renewable energy, and general investor conditions. In terms of international regulatory support and assistance, the majority of ASEAN member states have adopted progressive renewable energy legislation and regulations. These regulatory measures are often advised and drafted with the aid of international organisations and funders. The Asian Development Bank and the World Bank, for instance, have assisted ASEAN nations in adopting renewable energy, although private foreign investors have not yet made substantial investments in solar and wind. The ASEAN region will need to invest USD 27 billion in renewable energy each year to meet ASEAN’s aim of 23% renewables in primary energy supply by 2025. From 2016 through 2021, the ASEAN nations did not draw more than USD 8 billion a year. Hence, ASEAN nations require more supportive policies.

On the other hand, investors regularly place a greater emphasis on whether institutions can successfully and consistently comply with the law than on the legislation itself. However, poorly administered legislation could make it difficult to attract investors, even at low prices. The Energy Market Authority study urged ASEAN investment policies to prioritise the viability of projects, which includes creditworthiness, payment risk mitigation, utility transparency, and monitoring. The finding of the market study also demonstrates that bank capability has improved more than other dimensions and that ASEAN is becoming more price competitive.

Uncertainty regarding the commitment and long-term reform orientation of the region’s governments discourages investment. By 2022, however, the majority of ASEAN nations would have adopted renewable energy regulations based on international best practices. International organisations provide extensive details on renewable energy legislation in each country. By increasing the proportion of clean energy produced relative to the total amount of energy produced and taking into account the factors involved in producing clean energy, ASEAN countries will be able to meet the minimum level of their net zero-emission goal. However, lack of financial support, poor governance, legislative and institutions are among the obstacles and crucial factors that can impede the development of renewable energy investment projects on a large scale in the ASEAN region. This is due to the reason that the majority sources and technologies

Precisely, the transition of energy creates significant new economic and business opportunities, particularly through the development of new jobs associated with clean energy investment and activities. More job opportunities are created by investing in more efficient appliances, electric and fuel cell vehicles, building retrofits, and energy-efficient building construction. Governments must guarantee that the transition to clean energy is people-centred and inclusive in order to assist communities in navigating new possibilities and the future closure of emission-intensive resources. To address transitional issues, emphasis must be placed on transparent public debate, the development of programs to enhance skills in all aspects of clean energy transitions, the introduction of more green financing mechanisms and incentives, and the promotion of the establishment of new employment opportunities in more sustainable economic activities. The ASEAN countries must attract much higher levels of energy sector investment in order to accelerate their clean energy transition, meet the rising demand for energy services, and achieve their net zero-emission goal.

The primary goal of the energy transition is to reduce pollution by shifting to clean energy, which is critical for energy security, sustainability, and long-term development. On the other hand, the dependency on energy imports makes shifting to clean energy economically insecure. Thus, there is a need to increase the potential of renewable and clean energy production in every country. However, to fund the accelerated transition to renewable energy, huge new investments and the mobilisation of private capital are required.

In recent years, the global and regional landscape for energy financing has changed with the emergence of new sources of financing, such as climate finance and carbon markets, as well as new instruments, such as green bonds and risk mitigation strategies. Energy entrepreneurs, project developers, investors, and financing institutions can benefit from these innovations. However, investment in clean energy, such as solar, wind, bio-energy, hydropower, and geothermal, as well as energy efficiency initiatives, necessitates a thorough understanding of the risks, uncertainties, and challenges associated with financing on both the supply and demand sides. These initiatives differ significantly from conventional energy initiatives.

Risks and challenges may vary not only by project type, but also by country. The optimal combination of financing tools, risk mitigation strategies, funding sources, and business models must be selected for the effective financing of each clean energy project. Therefore, innovative funding strategies need to be optimised to address project-specific obstacles and risks.

The development of clean energy is becoming essential for countries to meet their zero-emission goals. However, to realise the clean energy targets, substantial financial investments are required. This is due to the fact that most renewable and green power plants have high initial setup and operational costs and a lengthy installation phase, which are considered to be among the most crucial aspects of clean energy development. Also, due to their substantial reliance on fossil fuels for economic and industrial development, the Association of Southeast Asian Nations (ASEAN) faces tremendous challenges regarding the future energy landscape and how the energy transition will be impacted. Whereby in 2020, the share of renewable in its total primary energy supply was only 14.2%. Given the high share of fossil fuels in ASEAN’s current energy mix (oil, coal, and natural gas comprise almost 80%), the clean use of fossil fuels through the deployment of clean technologies is indispensable for decarbonising ASEAN’s emissions.

The future energy landscape of ASEAN will depend on today’s actions, policies, financial mechanisms, and investments that can change the fossil fuel-based energy system towards a cleaner energy system. The ASEAN has set the aspirational target to achieve 23% of its primary energy from renewable sources by 2025. However, any decisions and targets made regarding the energy policy measures to be implemented during the energy transition must take into account the possibility of higher energy costs, affordability issues, and energy security risks, as targeted investments in energy security remain critical throughout energy transitions. To put ASEAN nations on the road to achieving net-zero emissions, an unprecedented rise in renewable energy spending and investment is necessary.

In order to ensure the transition to a cleaner energy system, financial mechanisms,  local and foreign direct investment, will eventually become the primary drivers behind the expansion of renewable energy in the ASEAN countries. Local and foreign direct investment in renewable energy also has large multiplier impacts in other sectors, such as supply chain value creation, green job growth, CO2 emissions reduction, air pollution reduction, and improved energy security and sustainability.

Generally, all ASEAN economies have established renewable energy targets and policy on governance, which covers three important elements for encouraging green investmentv. These are reforming energy governance, legislating renewable energy, and general investor conditions. In terms of international regulatory support and assistance, the majority of ASEAN member states have adopted progressive renewable energy legislation and regulations. These regulatory measures are often advised and drafted with the aid of international organisations and funders. The Asian Development Bank and the World Bank, for instance, have assisted ASEAN nations in adopting renewable energy, although private foreign investors have not yet made substantial investments in solar and wind. The ASEAN region will need to invest USD 27 billion in renewable energy each year to meet ASEAN’s aim of 23% renewables in primary energy supply by 2025. From 2016 through 2021, the ASEAN nations did not draw more than USD 8 billion a year. Hence, ASEAN nations require more supportive policies.

On the other hand, investors regularly place a greater emphasis on whether institutions can successfully and consistently comply with the law than on the legislation itself. However, poorly administered legislation could make it difficult to attract investors, even at low prices. The Energy Market Authority study urged ASEAN investment policies to prioritise the viability of projects, which includes creditworthiness, payment risk mitigation, utility transparency, and monitoring. The finding of the market study also demonstrates that bank capability has improved more than other dimensions and that ASEAN is becoming more price competitive.

Uncertainty regarding the commitment and long-term reform orientation of the region’s governments discourages investment. By 2022, however, the majority of ASEAN nations would have adopted renewable energy regulations based on international best practices. International organisations provide extensive details on renewable energy legislation in each country. By increasing the proportion of clean energy produced relative to the total amount of energy produced and taking into account the factors involved in producing clean energy, ASEAN countries will be able to meet the minimum level of their net zero-emission goal. However, lack of financial support, poor governance, legislative and institutions are among the obstacles and crucial factors that can impede the development of renewable energy investment projects on a large scale in the ASEAN region. This is due to the reason that the majority sources and technologies

Precisely, the transition of energy creates significant new economic and business opportunities, particularly through the development of new jobs associated with clean energy investment and activities. More job opportunities are created by investing in more efficient appliances, electric and fuel cell vehicles, building retrofits, and energy-efficient building construction. Governments must guarantee that the transition to clean energy is people-centred and inclusive in order to assist communities in navigating new possibilities and the future closure of emission-intensive resources. To address transitional issues, emphasis must be placed on transparent public debate, the development of programs to enhance skills in all aspects of clean energy transitions, the introduction of more green financing mechanisms and incentives, and the promotion of the establishment of new employment opportunities in more sustainable economic activities. The ASEAN countries must attract much higher levels of energy sector investment in order to accelerate their clean energy transition, meet the rising demand for energy services, and achieve their net zero-emission goal.