3 ways South-East Asia can fund its clean energy ambitions

ASEAN countries such as Vietnam, Thailand, Malaysia, Indonesia and Singapore have all committed to either net-zero emissions or carbon neutrality by 2050. Governments have simultaneously increased the role of renewable power in national energy development plans. In recent years, however, the region’s high economic and demographic growth, coupled with rapid urbanization and industrialization have led to a continuing rise in its energy demand – mostly met, currently, by fossil fuels.

Meeting this increasing energy demand securely and affordably, while remaining aligned with sustainable targets calls for a rapid scale-up of investment in clean energy in the region. The acceleration of renewables, in combination with energy efficiency and electrification measures, are especially critical if South-East Asia is to address its increasing import bill for oil and gas, which otherwise could reach over 5% of GDP by 2030.

According to recent estimates, $180 billion of annual investment is required in South-East Asia by 2030 to maintain a trajectory compatible with the region’s climate goals. A number in stark contrast with the $30 billion that flowed into clean energy between 2016 and 2020.

How to address this clean energy investment gap then? A new report from Imperial College’s Centre for Climate Finance & Investment and the International Energy Agency (IEA) calls, among other things, for greater transparency around the financial performance of renewables projects, stronger regulatory frameworks, and risk management tools to boost clean energy investment in the ASEAN region.

Here are three solutions that, through public-private collaboration, could support the advent of the much-needed finance for South-East Asia’s clean energy transition:

A lack of data related to clean energy in South-East Asia presents a barrier for global investors to invest in ASEAN renewables. We need greater transparency around the cost of capital in emerging markets in general and the ASEAN region in particular.

The Cost of Capital Observatory, launched by the International Energy Agency in partnership with the World Economic Forum, Imperial College London and ETH Zürich, aims to address this need. By providing reliable data and improving transparency around clean energy investment in emerging economies, the Observatory will help address data obstacles experienced by investors.

In South-East Asia, renewable investments face financing constraints and bankability issues, which are barriers to mobilizing capital from commercial and financial providers. By providing catalytic capital from public sources to increase private sector investments, blended finance transactions can play a significant role for the region. In particular, the increased provision of blended finance from DFIs could ensure that projects meet high climate and compliance standards and provide leverage in setting up viable contractual and financing frameworks for renewable energy projects.

The World Bank has been working with governments in the ASEAN region to develop carbon pricing mechanisms that could help put renewable energy on a level playing field with other fossil fuel-based generation technologies. Initiatives such as the Climate Action Data Trust illustrate the type of solutions that can provide technical assistance in building a regional voluntary carbon market.

In many instances, private investors face elevated credit and currency risks in South-East Asia. It is challenging to protect investors from foreign currency fluctuations, especially over the long tenures typically required for clean energy infrastructure projects.

A proposal to address this risk was made by the Center on Global Energy Policy of Columbia University, the World Economic Forum and the World Bank Climate Change Group’s Invest4Climate programme. A clean energy Exchange Rate Coverage Facility (ERCF) would increase clean energy finance in emerging economies by protecting foreign currency lenders and domestic sponsors against the depreciation of local currency payments by leveraging credits generated by clean energy projects, blended finance mechanisms and private international capital.

The good news is: ASEAN countries do present a significant opportunity for investors willing to contribute to sustainable economic growth. There is no doubt that the rapidly growing demand for clean energy, the gradual improvements in policies and increasingly favourable economics will attract private investors’ interest, and the kind of private capital needed to achieve the region’s ambitions. However, barriers to foreign investment must be addressed. All pillars and sectors must come together to scale clean energy in South-East Asia.