Connecting Energy Transition in Southeast Asia: Derisking and Regional Cooperation

Faiz Philarette is a recent MPA graduate from Columbia University’s School of International and Public Affairs. He is concentrating in Economic and Political Development. Previously he had experience working as a consultant for Indonesia’s Ministry of National Development Planning focusing on urban infrastructure within the water and sanitation sectors.

Abstract: In 2021, Southeast Asia accounted for 1.74 billion metric tonnes of CO2 emissions, with the region’s most productive economies–Indonesia, the Philippines, and Vietnam– accounting for 90% of the emissions. To meet international climate goals, emerging economies in Southeast Asia face a dilemma in choosing between development and decarbonization, especially for less economically developed countries. A regional approach is vital in order to meet international climate goals of ASEAN. Energy cooperation in the region will play a crucial role in helping these countries achieve their climate targets, enhance economic integration, and promote regional stability in the area. This paper will explore the concept of “network based derisking” which aims to incorporate a regional approach into energy transition projects and to reduce the burden of nations to derisk individually.

The Landscape of Southeast Asia’s Carbon Emissions

In 2021, Southeast Asia accounted for 1.74 billion metric tonnes of CO2 emissions.[1] While the number is significantly less than the United States, which emitted 6.3 billion metric tonnes of CO2 in 2021,[2] it should be noted that the region’s most productive economies–Indonesia, the Philippines, and Vietnam– accounted for 90% of the emissions.[3] To meet international climate goals, emerging economies in Southeast Asia face a dilemma when choosing between development and decarbonization. While the Association of Southeast Asian Nations (ASEAN) could serve as an intermediary to assist its regions in achieving its climate goals as ASEAN countries set ambitious climate targets, achieving this without regional cooperation would be a herculean task. Energy cooperation in the region would play a crucial role in helping these countries achieve their climate targets, enhance economic integration, and promote regional stability.

The rapid economic and industrial growth poses a significant challenge in meeting the growing energy needs while pursuing sustainability goals. For instance, ASEAN's energy demand is expected to increase by more than 2.5-fold by 2050.[4]  Meanwhile, ASEAN’s energy-related CO2 emissions are projected to rise 71% compared to 2018 by 2040.[5] These significant growths will magnify the region's existing reliance on coal and other fossil fuels, undermining efforts to curb emissions. ASEAN has set ambitious renewable energy targets, aiming for a 23% share of the total primary energy supply and ­­­­­­­­­­­­a 35% share of installed power capacity by 2025.[6] However, progress has been mixed, with primary energy targets remaining a challenge. Five ASEAN countries have also announced net-zero emissions targets by 2050, but Cambodia and the Philippines still need to set net-zero targets.[7] Achieving these long-term goals will require concerted efforts, as well as significant investments in renewable energy, energy efficiency, and low-carbon technologies.

Multiple factors hinder the energy transition in ASEAN: the region's reliance on coal, the high cost of renewables, reluctance of the private sector to invest, and the difficulty in integrating with the global supply chain.[8] These challenges are compounded by the diverse economic and political landscapes across ASEAN member states, in addition to varying development levels and available resources. A successful energy transition in ASEAN could reduce climate change vulnerability and fossil fuel price volatility, while enhancing economic opportunities for clean energy developments. The region's abundant renewable energy resources, such as solar, wind, and geothermal, offer immense potential for sustainable energy generation and job creation.[9]Regional collaboration can facilitate resource sharing efficiency and renewable energy integration. This regional approach can also foster technology transfer, knowledge sharing, and the development of interconnected energy systems.

The Transition Strategy of Derisking

The concept of derisking in development is introduced by Ursula Von Der Leyen, who highlights the need to derisk rather than decouple in response to the trade war with China.[10] This approach led to a reshoring movement by the United States and European Union countries in an attempt to increase economic security in the region. Within the context of energy transition, however, derisking assumes a distinct meaning of its own. The United Nations Development Programme (UNDP) notes public derisking in low-carbon energy development as a strategy to improve the investor risks in current developing countries, which have an effect on financial investments and demand for renewable energy.[11] Furthermore, the UNDP categorizes public derisking measures into two types: policy derisking instruments and financial derisking instruments. Policy derisking instruments are defined as measures that remove underlying barriers which are the root causes of risks. These instruments encompass support for renewable energy policy design, institutional capacity building, and grid connection. Meanwhile, financial derisking instruments focus on transferring risks from investors to public entities such as development banks. These instruments include loan guarantees and political risk insurance.[12]

The burden of the energy transition cannot rest on public actors alone; they require support from the private sector as well. Yet, foreign investors are reluctant to invest in the emerging market due to the many risks it entails. This is where financial derisking instruments become crucial. The state would be able to absorb some of these risks through guarantees on liabilities incurred by foreign investors or lenders, or through implementing policies such as subsidies.[13] For instance, the US Inflation Reduction Act (IRA) utilizes tax credits and subsidies,[14] which follows a derisking framework. Such approaches may direct investments to renewable energy projects aimed at decarbonization, but a paradox remains for emerging markets. Do states possess enough capacity to absorb the private capital risks to attract green investment? How extensive must derisking be for private actors to fill the green financing gap?

The financial capacity of emerging markets to derisk renewable energy projects, particularly in Southeast Asian countries, is concerning. According to an Indonesian climate change adaptation report, approximately 266 trillion IDR (17 billion USD) is needed yearly to finance climate mitigation. From that number, only 80.3 trillion IDR (5 billion USD) is covered by the state budget, which leaves 12 billion remaining.[15] The amount of regulation adjustment and “carrot” approach taken by the government presents an extensive undertaking, even if it were the largest economy in the region. For example, Lao People's Democratic Republic (Lao PDR), needs 4.8 billion USD to reduce greenhouse gas emissions by 60 percent in 2030.[16] In comparison, Lao PDR’s GDP was 15.47 billion USD in 2022.[17] Such large financing gaps demonstrate how decarbonization targets could fail in these countries. If derisking processes are not accompanied by other acceleration measures, the country would not be able to address the competing priorities between development and decarbonization.[18]

McKinsey, in their regional energy transition report, presented a typology of countries based on their opportunities and priorities for energy transitions.[19] These typologies cover three aspects of energy transition opportunities and priorities–short-term fossil fuel reliance, natural energy resource endowment, and financial resources.[20] Under this typology, most Southeast Asian countries fall into a “developing and at-risk” classification, due to their low natural resource potential, disposable financial resources, and higher short-term fossil fuel reliance. The report also notes that the transition for countries in this classification would likely require foreign support.[21] Most Southeast Asian countries have lower medium grade sovereign credit ratings.[22]A lower credit ratings would mean that most Southeast Asian countries would fall under a low general investment environment.[23] Under this classification, energy transitions would need both policy and financial derisking instruments; should it fall in the low baseline energy generation category, it would need direct financial incentives.[24]

Cooperation, Coordination, and Network-Based Derisking

The limited capacity of the state establishes a ceiling for domestic derisking policies. While no certain alternatives exist, a case from Morocco offers a compelling example of how a clear and disciplined domestic initiative, supported by certain degrees of cooperation, could drive efficient renewable energy transitions. According to Carafa et al., at the center of energy transitions within the Middle East and North Africa (MENA) region, Morocco has been developing derisking policies as a national and regional-level strategy since 2009.[25] Morocco’s Mediterranean Solar Plan, which has drawn cooperation among MENA countries, aims to develop an additional 20 Gigawatts (GW) of renewable energy capacity in the region by 2020, in addition to electricity transmission capacity and cross-border connectivity deemed necessary.[26] This initiative spans several aspects of policy derisking, including policy and technical support, feasibility studies, training and qualifications, and best practices in grid management. While the MENA study reports that regional cooperation, known as “network-based derisking,” has had minimal impact on green transitions,[27] the development of grid management capacities and domestic transformation have been shown to produce more impact.  

Despite limited success in Morocco, the value of multilateralism in the energy transition sector should not be overlooked. In fact, regional coordination is more important as ever. Research has shown that international treaties alone are inadequate instruments for environmental cooperation, due to a lack of enforcement mechanisms and other limitations.[28] Barrett also notes that countries are finding it harder to cooperate but rather finding it easier to coordinate.[29] The regional perspective offers a more manageable playing field for coordination as there are fewer stakeholders in a regional agreement compared to a global treaty. A sectoral approach, which manages policies among different sectors, is an important alternative global treaty with a general goal. This approach is argued to be the catalyst to drive deep decarbonization, facilitating a cost-effective transition to renewable energy.[30] ASEAN, as a region, has an opportunity to leverage both coordination and sectoral aspects for its energy transition. Its member states already uphold the framework within the ASEAN Plan Action for Energy Cooperation (APAEC), which encompasses large-scale projects in the ASEAN region.[31] ASEAN Power Grid (APG) is a proposal for cross-country power interconnection designed for the purpose of meeting rising electricity demand and improving access to energy services in the region.[32] Interconnection across borders plays a vital role in the transition to clean energy and decarbonization. By linking power systems to a larger regional scale, interconnection facilitates incorporates substantial amounts of low-carbon energy generation. This regional integration not only improves overall supply security but also brings economic advantages to the area by efficiently distributing inexpensive renewable resources among different regions. However, the APG has not progressed much due to limited commitments from member states in grid development.[33] The APG is projected to reduce the total installed solar generating capacity required by up to 600 GW (20%) by 2050 Instead of relying on domestic energy transitions by member countries.[34] The APG also reduces ASEAN energy transition footprints by 13% by reducing solar capacity, which connects these regions.[35]

The dynamics of each country's regulations might hinder the development of APG, which requires regulation harmonization and multilateral power trading market frameworks.[36] Regulation harmonization could encompass policies regarding the technicalities, such as transmission planning and system operation standards. The harmonization process could become a network-based derisking approach, as it requires multilateral cooperation and coordination. Not only would this change the domestic energy market regulations of the member states, but it will also require a secured and diversified supply chain of technology components in the region. In order to build a supply chain in the region, local manufacturing capabilities must be increased for essential renewable technology components such as solar panels, wind turbines, and hydrogen storage. The interconnectedness and geographical proximity of the regions would lower the cost of energy supplies compared to regions that rely on imports of energy infrastructure components.

Network-based derisking framework could also denote an increased energy reliance on other countries in the region, meaning a country would compromise its vulnerability from other countries to receive power supplies. While this could be seen as a risk for the country, this could also mean a political derisking for the whole region, since augmented interconnectedness with other countries reduces potential conflicts. Thaler and Hofmann also posit that in a cross-border electricity system, states cannot simultaneously achieve energy security, sustainability, and sovereignty, otherwise known as “energy trinity.” [37] In a world that is making progress and aims for energy transitions, compromising energy sovereignty is the most likely choice, especially for a region with no major political disagreements. This move is also in line with the ASEAN goals of maintaining peace and security in Southeast Asia,[38] which turns energy transition processes into an opportunity to increase connectivity. The APG and “Network-Based Derisking” would then be a multilayered derisking process, which both stabilizes the geopolitical outlook of the region and harmonizes the energy market and domestic regulations. The cooperation and coordination for the energy transition in the ASEAN would then be the optimal choice going forward, compared to financing and derisking energy transitions individually.

 Conclusion

Energy transition in Southeast Asia is a challenging process much like any other emerging markets, where a country would have large financing gaps to fund its transition. One thing that differs in Southeast Asia is the existing multilateral cooperation within the ASEAN region. Moreover, ASEAN has already planned to build a cross-border energy transmission system, which would help accelerate the energy transition for all its member states. Derisking from a multilateral perspective, carries many benefits such as lower risks and costs of developing renewable energy technology, and should be implemented by Southeast Asian countries as a main strategy for energy transitions. Although compromising energy sovereignty poses risks in any country, the logical choice would be to build a cross-border energy system, and place a higher value on energy security and sustainability, as it is impossible to address the “energy trinity,” namely energy security, sustainability, and sovereignty altogether simultaneously.

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 ENDNOTES

[1]. “ASEAN: CO2 Emissions by Country 1960-2021,” Statista, February 6, 2024, https://www.statista.com/statistics/1288198/asean-co2-emissions-by-country/.

[2]. “U.S. Emissions,” Center for Climate and Energy Solutions, April 3, 2024, https://www.c2es.org/content/u-s-emissions/#:~:text=U.S.%20Greenhouse%20Gas%20Emissions%20by%20Gas%20and%20Sector%2C%202021&text=In%202021%2C%20the%20United%20States,other%20greenhouse%20gases%20(3%25).

[3]. Adrianus Amheka et al., “Towards a Low Carbon ASEAN: An Environmentally Extended MRIO Optimization Model,” Carbon Balance and Management 17, no. 1 (September 7, 2022), https://doi.org/10.1186/s13021-022-00213-x.

[4]. “Renewable Energy Outlook for ASEAN: Towards a Regional Energy Transition (2nd Edition),” IRENA, September 1, 2022, https://www.irena.org/publications/2022/Sep/Renewable-Energy-Outlook-for-ASEAN-2nd-edition.

[5]. Kamia Handayani et al., “Moving beyond the Ndcs: ASEAN Pathways to a Net-Zero Emissions Power Sector in 2050,” Applied Energy 311 (April 2022): 118580, https://doi.org/10.1016/j.apenergy.2022.118580.

[6]. “ASEAN Plan of Action For Energy Cooperation (APAEC) 2016 - 2025,” ASEAN Centre for Energy (AEC), accessed April 23, 2024, https://asean.org/wp-content/uploads/2023/04/ASEAN-Plan-of-Action-for-Energy-Cooperation-APAEC-2016-2025-Phase-II-2021-2025.pdf.

[7]. Rika Safrina, “COP26: ASEAN’s Commitment in the Energy Sector,” The ASEAN Post, November 20, 2021, https://theaseanpost.com/article/cop26-aseans-commitment-energy-sector.

[8]. Danielle Fallin, Karen Lee, and Gregory B. Poling, “Clean Energy and Decarbonization in Southeast Asia: Overview, Obstacles, and Opportunities,” CSIS, accessed April 23, 2024, https://www.csis.org/analysis/clean-energy-and-decarbonization-southeast-asia-overview-obstacles-and-opportunities.

[9]. “The 6th ASEAN Energy Outlook 2017-2040,” ASEAN Centre for Energy (AEC), accessed April 23, 2024, https://asean.org/wp-content/uploads/2023/04/6th-asean-energy-outlook-2017-2040.pdf.

[10]. “Speech by President von Der Leyen on EU-China Relations to the Mercator Institute for China Studies and the European Policy Centre,” European Commission, accessed April 15, 2024, https://ec.europa.eu/commission/presscorner/detail/en/speech_23_2063.

[11]. Olivier Waissbein et al., “Derisking Renewable Energy Investment Framework,” United Nations Development Programme, accessed April 15, 2024, https://www.undp.org/energy/our-flagship-initiatives/derisking-renewable-energy-investment-framework.

[12]. Ibid.

[13]. James Guild, “The De-Risking State in Southeast Asia,” – The Diplomat, October 31, 2023, https://thediplomat.com/2023/10/the-de-risking-state-in-southeast-asia/.

[14]. Ahmed Mehdi and Tom Moerenhout, “The IRA and the US Battery Supply Chain: One Year On,” Center on Global Energy Policy at Columbia University SIPA | CGEP, October 30, 2023, https://www.energypolicy.columbia.edu/publications/the-ira-and-the-us-battery-supply-chain-one-year-on/.

[15]. Directorate of Climate Change, Ministry of Environment and Forestry, Republic of Indonesia. “Indonesia’s Adaptation Communication.” United Nations Framework Convention on Climate Change. Accessed April 21, 2024. https://unfccc.int/sites/default/files/ACR/2022-11/221119%20Indonesia%20Adaptation%20Communication.pdf.

[16]. “IFC and Bank of the Lao PDR Strengthen Partnership to Boost Green Finance, Achieve Climate Goals,” International Finance Cooperation, accessed April 16, 2024, https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=27924.

[17]. “GDP (Current US$) - Lao PDR,” World Bank Open Data, accessed April 22, 2024, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=LA.

[18]. Danielle Fallin, Karen Lee, and Gregory B. Poling, “Clean Energy and Decarbonization in Southeast Asia: Overview, Obstacles, and Opportunities,” CSIS, accessed April 23, 2024, https://www.csis.org/analysis/clean-energy-and-decarbonization-southeast-asia-overview-obstacles-and-opportunities.

[19]. Daniel Pacthod et al., “The Energy Transition: A Region-by-Region Agenda for near-Term Action,” McKinsey & Company, December 15, 2022, https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/the-energy-transition-a-region-by-region-agenda-for-near-term-action.

[20]. Ibid.

[21]. Ibid.

[22]. “Credit Rating: Asia,” Credit Rating - Countries - List | Asia, accessed April 23, 2024, https://tradingeconomics.com/country-list/rating?continent=asia.

[23]. Olivier Waissbein et al., “Derisking Renewable Energy Investment Framework,” United Nations Development Programme, accessed April 15, 2024, https://www.undp.org/energy/our-flagship-initiatives/derisking-renewable-energy-investment-framework.

[24]. Ibid.

[25]. Luigi Carafa, Gianleo Frisari, and Georgeta Vidican, “Electricity Transition in the Middle East and North Africa: A de-Risking Governance Approach,” Journal of Cleaner Production 128 (August 2016): 34–47, https://doi.org/10.1016/j.jclepro.2015.07.012.

[26]. Ibid.

[27]. Ibid.

[28]. Steven Hoffman et al., “International Treaties Have Mostly Failed to Produce Their Intended Effects,” PNAS, August 1, 2022, https://www.pnas.org/doi/full/10.1073/pnas.2122854119.

[29]. Scott Barrett, “Coordination vs. Voluntarism and Enforcement in Sustaining International Environmental Cooperation,” Proceedings of the National Academy of Sciences 113, no. 51 (November 7, 2016): 14515–22, https://doi.org/10.1073/pnas.1604989113.

[30]. James Stock, “Driving Deep Carbonization,” International Monetary Fund, February 11, 2022, https://www.imf.org/en/Publications/fandd/issues/2021/09/how-to-drive-deep-decarbonization-stock.

[30]. ​​“Memorandum of Understanding on the ASEAN Power Grid,” ASEAN, accessed April 23, 2024, https://agreement.asean.org/media/download/20140119102307.pdf.

[31]. “ASEAN Power Grid, Enhancing Electricity Interconnectedness,” ASEAN, accessed January 22, 2024, https://asean.org/wp-content/uploads/images/2015/October/outreach-document/Edited%20APG-3.pdf.

[32]. “ASEAN Interconnector Study: Taking a Regional Approach to Decarbonisation,” DNV, April 16, 2024, https://www.eco-business.com/research/asean-interconnector-study-taking-a-regional-approach-to-decarbonisation/.

[33]. Ibid.

[34]. Ibid.

[35]. Ibid.

[36]. Ibid.

[37]. Philipp Thaler and Benjamin Hofmann, “The Impossible Energy Trinity: Energy Security, Sustainability, and Sovereignty in Cross-Border Electricity Systems,” Political Geography 94 (April 2022): 102579, https://doi.org/10.1016/j.polgeo.2021.102579.

[38]. “ASEAN Political Security Community - Overview,” ASEAN, accessed April 16, 2024, https://asean.org/our-communities/asean-political-security-community/.