Asean energy transition faces financing challenges

  • Market: Coal, Emissions
  • 27/10/23

Southeast Asian countries need much more funding to meet their energy transition goals, and blended financing is key, speakers at the Singapore International Energy Week conference said.

But the region faces significant challenges in achieving the right mix of public and private financing.

Financing for decarbonisation projects in southeast Asia takes three forms, said senior research fellow at the Energy Studies Institute of the National University of Singapore, Kim Jeong Won. The first is bilateral or multilateral official development assistance (ODA), or international public climate finance. The second is domestic public or private climate finance, which entails government expenditure and financial products such as green bonds and loans. The third is private investment consisting of foreign direct investment or domestic investment.

Asean has received $2.24bn worth of ODA between 2012-21 for renewable energy generation projects, said Kim. Indonesia and Vietnam received the bulk of these investments, with shares of 44pc and 34pc respectively. Green bonds and loans for Asean members totalled $12.8bn in 2022, with cumulative amounts between 2016 and 2022 reaching $50.6bn. Almost 80pc of these funds have gone into green building and energy.

According to renewable energy agency Irena's calculations, global investments in energy technologies reached $1.3 trillion in 2022, but additional investments of $4.4 trillion/yr are required to further develop renewable energy technologies to meet Paris climate agreement targets, and in southeast Asia, this amounts to $6 trillion by 2050, director of external relations at the Energy Market Authority of Singapore, Jonathan Goh said.

Developing economies in southeast Asia hence require substantial amounts of private investment to reach their energy transition goals. Blended financing could allow for this if ODA, government funding and private sector financing is structured in a way that supports private sector investment in the renewables sector, said Jennifer Tay, Asia-Pacific infrastructure leader at PwC Singapore.

Private capital still elusive

But receiving private investment is currently challenging, as many energy transition projects on the table still have not crossed the threshold for bankability, which means that private capital cannot come in, said managing director of the Monetary Authority of Singapore, Ravi Menon.

Many coal-fired power plants in Europe are ageing, making them easier to phase out. In comparison, in Asean, "we have a very young fleet of coal-fired power plants, and whereas a lot of private capital [has gone into] renewable energy… almost no capital, except for the Energy Transition Mechanism by the ADB, is going to the coal phase-out," Tay said, reiterating that for developing countries, energy security will take priority, and the most economically viable and affordable option will be chosen to drive economic growth.

Blended finance is hence essential "because it encapsulates the way public-private partnerships can work," said Menon. ODA is important in areas that are not receiving private sector funding, so that "the project gets off the ground before private sector money wants to come in," according to Tay. ODA also helps to de-risk projects as "you need a layer of concessionary capital to reduce the overall cost of capital, so that private capital can come in," Menon said.

But ODA money in the renewable energy generation sector in Asean will likely not increase, said Kim, as these funds are not intended only for this region. Multilateral ODAs will likely prioritise less developed countries outside of Asean, she added.

This was echoed by senior energy specialist at the Asian Development Bank (ADB), Architrandi Priambodo, who said that while the ADB provides financing for developing member countries, "what we see in Asean, because many of the countries have already reached [upper or middle level] income, for us as a multilateral development bank, it's more difficult to [provide] concessional financing for those types of countries".

But support can be provided in other ways, said Priambodo, using the example of the ADB's Energy Transition Mechanism, where public and private investments from governments, multilateral banks, philanthropies and long-term investors can help to retire coal power assets on an earlier schedule than if they were to remain with current owners. Power purchase agreements for coal-fired power still have a few years left on them before they expire, "so if there is no incentive to restructure these PPAs, the coal-fired power plants will continue to operate", Priambodo said.

Critical to financial firms' ability to support the transition away from coal and other fossil fuels are clearer government-set sectoral pathways, said Menon, providing Malaysia's energy transition roadmap as an example. Pathways set out by the IEA, for example, are also important "because financial institutions need to refer to them and determine whether [they are] on a pathway that is consistent with net zero, otherwise there is reputational risk and there's project risk". In the managed phase-out of coal, for instance, "you need clarity about [whether] when the coal plant is retired early, no new coal plants will be built," he added.


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