8 September 2023
ASEAN energy demand is projected to increase up to three times of the 2020 level, with industry and transport as the two largest consuming sectors. To meet the future energy demand, the region needs to increase up to four times of the 2020 level to be at 2,647 Mtoe in 2050. Oil, natural gas, and coal are projected to supply 88% of the total primary energy supply (TPES) of ASEAN in 2050 (ACE, 2022). In line with the net-zero emission target of nine ASEAN member countries, the need for accelerating the deployment of RE technologies in the region is more urgent.
Energy sector accounted for 75% of total greenhouse gas emissions in 2019, with approximately 42% coming from electricity and heat production (ClimateWatch, 2022). Under the ASEAN’s Plan of Action for Energy Cooperation (APAEC) Phase 2, the region aims to achieve a 23% share of renewable energy (RE) in the Total Primary Energy Supply (TPES) and a 35% share of RE in the installed power capacity of the region by 2025. With stronger deployment of RE technologies, the region would be able to reduce up to 75% of total CO2 emissions in 2050 (IRENA, 2023). However, under the implementation of current national targets of AMS, the current progress shows a potential of 5.5% gap in achieving 35% of RE share target in 2025. One important way to close this gap is by mobilizing additional investment in clean energy projects. According to ACE (2022), an estimated USD 160 billion will be required by 2030. In the long run (2031-2050), an additional investment of USD 400 billion (2022 real terms) is required.
Securing additional investment for clean energy projects is undoubtedly a complex task and will never be straightforward. Moreover, the economic uncertainty caused by the COVID-19 pandemic further adds to the difficulty of attracting funding. However, achieving the necessary investment is not a herculean task. In this context, three important policy areas should be prioritized: improving regulatory framework, realigning public budgets and leveraging them, and utilizing blended finance.
Improving regulatory framework
The regulatory framework has been considered an important factor in mobilizing clean energy finance. Using Regulatory Indicators for Sustainable Energy (RISE) developed by the World Bank and ESMAP in 2022, AMS performance on their regulatory frameworks towards best practices shown continuously improvements from 13.6 in 2010 to 50.0 in 2021.
The rise in the average score of AMS in the RISE indicator can be attributed to the improvement of the institutional framework in some AMS. This improvement includes three key aspects: the legal framework, planning, and counterparty risk. Most AMS have achieved medium to high scores for these pillars, indicating that they have implemented relevant regulations for renewable energy investments.
However, there is ample improvement in the regulatory framework of AMS. Especially given the fact that there are considerable gaps among the AMS. In 2021, Vietnam achieved scores of around 84, which be likened to that of European nations such as the United Kingdom (92), Germany (92), and Belgium (84). Conversely, Lao PDR and Myanmar have the lowest scores in terms of regulatory framework for renewable energy, with only 32 and 24 points, respectively.
One area to improve is in terms of planning and execution of policies relating to clean energy investment, such as having a clear and credible schedule for a pipeline. Using the same data (RISE), it is found that almost none of AMS have schedules for future bids/auctions available for investors. This raises concern, given the importance of a clear auction schedule to allow project developers adequate time to prepare competitive offers. Additionally, a transparent auction schedule is crucial for the timely execution of the renewable energy (RE) plan. By providing project developers with a clear vision of future opportunities and ensuring certainty in the execution of competitive tenders, greater investment mobilization in RE can be achieved.
In addition, easing permit and license processes is of utmost importance. Prolonged processes introduce risks of project delays and escalate transactional costs, diminishing project appeal and deterring private investment. This requires political commitment because reforming these processes may encounter resistance from institutions hesitant to relinquish their authority.
Realigning public budgets and leveraging
While private sector involvement is crucial for achieving clean energy transition targets, the role of public finance is also equally important. Green public finance, if it is designed correctly, will not only signal commitment towards clean energy transition, but it can stimulate investment and de-risk renewable energy projects.
When it comes to mobilizing clean energy finance, the government should focus on two sides of fiscal policy. The first side is namely spending, where the objective is to create enabling conditions to attract private investment. In this case, feed-in tariffs (FiTs) and loans are found to be effective in attracting private investors (Azhgaliyeva et al, 2021).
The second side is the revenue side, where the fiscal policy should be directed to increase fiscal capacity while levelling the playing field for renewables. In this case, it is crucial for the AMS to gradually remove support for fossil fuels. On average, AMS spends an average of 4.4% of GDP on subsidies for petroleum and 2.2% on coal subsidies (ACE, 2023). Reallocating this budget will not only increase fiscal space but also create a level playing field between fossil fuels and renewables.
Utilizing blended finance
In this case, the utilization of blended finance becomes especially crucial for the development of projects in their earlier stages and for technologies that are unfamiliar or deemed risky. The earlier stage of project development is often overlooked, despite its significance. This is mainly due to the high costs and risks associated with upstream activities like pre-feasibility studies. In particular for new and unfamiliar technologies, financial institutions tend to demand a premium, making the services less affordable.
Blended finance offers the potential to not only reduce investment costs but also drive progress in the project pipeline by financing early-stage preparations. One viable approach to channel blended financing towards clean energy projects in ASEAN is by establishing an intermediary financial fund. This pooled financing mechanism offers advantages over direct market engagement, as it lowers transaction costs, especially for small- to medium-sized clean energy projects.
Mobilizing clean energy finance requires extra effort, but it is a mission that can be accomplished. To drive decarbonization pathways in ASEAN, implementing three key policies is crucial: improving the regulatory framework, realigning public budgets, and utilizing blended finance.
As a first step, it is important for AMS to enhance the regulatory framework involves developing and enforcing stringent environmental standards, promoting renewable energy adoption, and encouraging sustainable practices across industries. At the same time, realigning public budgets to allocate substantial resources towards green initiatives and climate action will be essential. Enhancing regulatory framework and realigning public budgets would be crucial for the first step as it sends a signal to other parties that the country is committed towards a clean energy transition. Finally, utilizing blended finance, which combines public and private sector funding, to further accelerate clean energy projects and sustainability initiatives. As the deadline for climate ‘points of no return’ is approaching, there has never been a more crucial time than now to take immediate action for energy transition in the region.