Southeast Asia Energy Outlook 2019

Any assessment of the outlook for global energy has to reckon with the growing weight of Southeast Asia. Home to nearly one-in-ten of the world’s population, the rapidly growing economies of the region are shaping many aspects of the global economic and energy outlook.

Southeast Asia is a very diverse and dynamic region, but one common element is that policy makers across different countries have been intensifying their efforts to ensure a secure, affordable and more sustainable pathway for the energy sector. This includes action to facilitate investment in fuel and power supply and infrastructure, while focusing also on efficiency. The potential benefits of a well-managed expansion of the region’s energy system, in terms of improved welfare and quality of life for its citizens, are huge.

There are encouraging indications in many areas, but also some warning signs. Rising fuel demand, especially for oil, has far outpaced production from within the region. Southeast Asia as a whole is now on the verge of becoming a net importer of fossil fuels for the first time.

At the same time, Southeast Asia is well on the way to achieving universal access to electricity by 2030. Millions of new consumers have gained access to electricity since 2000, yet some 45 million people in the region are still without it today and many more continue to rely on solid biomass as a cooking fuel.

Southeast Asia’s growth in electricity demand, at an average of 6% per year, has been among the fastest in the world, but a number of power systems in the region are facing significant financial strains.

Since 2000, overall energy demand has grown by more than 80% and the lion’s share of this growth has been met by a doubling in fossil fuel use. Oil is the largest element in the regional energy mix and coal – largely for power generation – has been the fastest growing. This has underpinned the region’s development and industrial growth, but has also made air pollution a major risk to public health and driven up energy-related carbon dioxide (CO₂) emissions.

Southeast Asia has considerable potential for renewable energy, but (excluding the traditional use of solid biomass) it currently meets only around 15% of the region’s energy demand. Hydropower output has quadrupled since 2000 and the modern use of bioenergy in heating and transport has also increased rapidly. Despite falling costs, the contribution of solar photovoltaics (PV) and wind remains small, though some markets are now putting in place frameworks to better support their deployment.

Southeast Asia’s electricity sector is in a very dynamic phase of development, both for supply and demand.

Relatively low generation costs and indigenous supply have traditionally given coal a prominent place in power sector planning. This is maintained in the Stated Policies Scenario – our measured assessment of planned additions means that the share of coal-fired generation in the region’s power mix remains broadly flat at near 40% over the next two decades, Natural gas-fired plants, based on domestic supply as well as imported liquefied natural gas are also set to maintain a strong foothold in Southeast Asia.

However, the declining costs of renewables and concerns over emissions and pollution are starting to alter the balance of future additions to the power mix. Recent revisions to policy planning documents have tended to boost the long-term share of renewables, typically at the expense of coal.

Moreover, a switch is visible in near-term project developments, with a significant slowdown in decisions to move ahead with new coal-fired capacity and a rise in additions of solar and wind. In the first half of 2019, approvals of new coal-fired capacity were exceeded by capacity additions of solar PV for the first time.

On the demand side, electricity consumption in Southeast Asia doubles to 2040; the annual growth rate of nearly 4% is twice as fast as the rest of the world. The share of electricity in final energy consumption is 18% today but this rises rapidly to 26% in 2040 and reaches the global average.

Space cooling is one of the fastest growing uses of electricity to 2040, propelled higher by rising incomes and high cooling needs. For the moment, less than 20% of households across the region have air conditioning: in Indonesia, the most populous ASEAN country, around 10% do. In our projections, appliance ownership and cooling demand skyrocket, not only raising overall electricity demand but accentuating strains on power systems as the share of cooling in peak power demand rises towards 30%.

There are real opportunities for efficiency policies to reduce some of these projected strains: our detailed market analysis shows that the average efficiency of air conditioning units sold today is well below the global average, even though much more efficient units, including those manufactured locally, are available at comparable cost. Enhanced efforts to improve building and equipment efficiency (as in the Sustainable Development Scenario) would be sufficient to reduce the growth in cooling demand in 2040 by around half (read more in The Future of Cooling in Southeast Asia).

Whichever pathway the region takes, meeting Southeast Asia’s energy needs and policy priorities will require higher levels of investment. The need to step up investment is particularly acute in the power sector. Today’s investment levels fall well short of the projected needs in the Stated Policies Scenario and are more than 50% lower than what would be required in the Sustainable Development Scenario.

Mobilising investment requires broad participation from the private sector, as well as the targeted use of public funds. Public sources have thus far played a very important role in financing thermal power plant projects and large-scale renewables (such as hydropower or geothermal) with sizeable upfront capital needs. By contrast, wind and solar PV projects have relied much more on private finance, spurred by specific policy incentives.

There is a critical need in Southeast Asia to attract additional private sources of capital. This would require governments to address the risks that affect the bankability of projects; we highlight four priority areas for action:

• enhancing the financial sustainability of utilities;
• improving procurement frameworks and contracting mechanisms, especially for renewables;
• creating a supportive financial system that brings in a range of financing sources
• promoting integrated approaches that take the demand-side into account.

The types of investment that go ahead will also depend on the extent of regional cooperation and integration, especially progress with the ASEAN Power Grid – an ambitious project to interconnect the power systems in the region and establish multilateral power trading.

Regional power system integration is vital to facilitate growth in renewable sources of generation, in particular from wind and solar PV. Integration allows access to a larger and more diverse pool of flexible resources on the supply side (from sources such as hydro or gas-fired power) as well as the demand side. Interconnecting with neighbouring grids also reduces the system variability of wind and solar output, which is smoother when individual plants are aggregated over larger geographic areas.

Our detailed case study shows that multilateral power trading and an expansion of cross-border transmission bring major cost savings in building and operating the region’s power systems. They also bring significant environmental gains when they accompany and enable an expansion of renewables-based power.