Southeast Asia can reach clean energy targets by investing in transmission

With almost 10% of the world’s population, the 10 member countries of the Association of Southeast Asian Nations (ASEAN) together make up the fourth-largest global economy. The region’s young and expanding population means electricity demand is expected to continue growing strongly in the coming decade.

In addition, the countries of Southeast Asia have committed themselves to meeting a target of 23% renewable energy (excluding traditional use of biomass) in total primary energy demand by 2025. This target, established in the ASEAN Plan of Action for Energy Co-operation, has been implemented in the national plans of ASEAN member states. This commitment brings with it a need for investment in renewable energy capacity and in electricity networks to facilitate the flexibility needed to integrate renewables.

Fostering flexibility also requires increased institutional development, such as continuing regional efforts to expand multilateral power trade.

Investment in the power sector in Southeast Asia needs to increase significantly, whichever way the sector develops. Under the IEA Stated Policies Scenario, cumulative investment between 2025 and 2030 needs to reach USD 350 billion; in the Sustainable Development Scenario they rise to USD 490 billion, according to the IEA World Energy Outlook 2020.

Both scenarios also require much higher levels of investment in electricity transmission networks not only to better integrate renewables but also to meet energy security, sustainability and access goals. 

So far, the majority of the investment in electricity networks in Southeast Asia has been financed by public funds. In most countries of the region, state-owned enterprises have a monopoly over the power transmission sector. The Philippines is the exception. A private consortium, the National Grid Corporation of the Philippines, has a concession to operate, maintain and expand the transmission sector from 2009 until 2034.

Investment in electricity networks need to be scaled up significantly, along with investment in renewable energy. However, the Covid-19 crisis has put pressure on already constrained state-owned enterprises. In addition, power sector investment needs are now under stronger competition from other sectors of the economy. Although we expect public financing will continue to be important for ASEAN member states, our analysis suggests that many models of private participation could bridge the financing gap. 

ASEAN countries have different market structures and regulations in their power sectors, so the approach to transmission investment may differ from country to country. The majority of countries have vertically integrated markets, while the Philippines and Singapore have restructured markets.

Under the Clean Energy Transitions in Emerging Economies Programme, and with the support of the European Union’s Horizon 2020 research and innovation programme, the IEA has an extensive work programme in Southeast Asia covering many aspects of the energy system. The IEA analysed business models for attracting private investment in transmission, and developed a framework to evaluate which models could be relevant for each ASEAN country, illustrated in the figure below. 

For further detail on the business models please refer to the full analysis : Attracting private investment to the electricity transmission sector in Southeast Asia.

The choice of business model for attracting private investment in transmission depends on whether the government wants to attract investment in part of the transmission system or transfer the whole system to the private sector. It also depends on regulatory capacity in the power sector, as some models require strong regulatory capacity to monitor implementation. National legal frameworks for allowing the private sector to own and operate the transmission system can also be a key deciding factor. Some ASEAN countries do not allow the private sector to own transmission. 

Cross-border power transmission could also increase flexibility of power systems but provides an extra dimension of complexity since there is no common ASEAN framework to facilitate it. The ASEAN community is increasingly focusing on establishing regional institutions and frameworks that enable cross-border power trade. When a transparent regional market is established, attracting private investment in the power sector will be more likely since investors can calculate the business case based on a more predictable set of cross-border arrangements. In regions where cross-border trading is limited and terms are decided on a case by case basis, the private sector can require a larger risk premium to invest in cross-border transmission lines due to uncertainty. Currently the ASEAN Power Grid, which aims to connect ASEAN countries to share resources and increase the region’s prosperity, has been developed to some extent. In the future private investment could also be relevant for the ASEAN Power Grid, allows cross-border transmission to be utilised with new frameworks and institutions. 

Among the several models analysed, policy makers could consider the Build, Own, Operate, Transfer (BOOT) model because it presents many advantages and has been successfully applied in other regions. The model has attracted investments in transmission in Australia, India, South America, the United Kingdom and the United States.

Under the BOOT model, a private company finances and builds transmission lines, operates them for 20-25 years and then transfers them to the government. The private company typically receives a tariff and thus does not take a price risk on the investment, an arrangement similar to the widely applied independent power producer model in generation. A main advantage of this model is that it allows countries to pilot the model by tendering short sections of transmission, and then evaluating how well the pilot has worked before expanding it.

When governments apply the BOOT model, accompanying regulations should create a transparent tendering environment to facilitate multiple bidders. They should also ensure transparent and fair operation of the transmission lines in accordance with the national rules that apply for the rest of the transmission system. Since the model can be piloted, the risks are lower and regulation can evolve as governments gain experience with tendering out transmission.

Governments that consider implementing the BOOT model to attract private finance must first ensure that the regulatory framework allows for private ownership of the transmission system. They must also develop good implementing regulation that sets out clear requirements for tendering, land access and tariff setting to ensure the success of the model. 

The BOOT model, while successful in some situations, is only one of a set of options outlined in the IEA’s analysis; other models may be appropriate in other circumstances. The IEA is committed to continue working with willing partners to identify the best fit with both domestic and regional priorities in mind.

The options outlined in the IEA analysis are all possible ways of bridging the transmission investment gap in Southeast Asia. Reducing this gap is crucial for ASEAN countries to successfully and securely integrate higher shares of renewable energy. These models, which present options for scaling up investment in transmission, provide a tool that ASEAN countries can use to achieve their renewable energy targets and thus make secure and affordable clean energy transitions.

Viet Nam was chair of ASEAN in 2020. The IEA, as a strategic partner of ASEAN, is committed to support the chair with its priorities. Given the investment gap highlighted in the analysis, Viet Nam asked the IEA to analyse innovative business models for privately financed transmission. Through ongoing engagement with officials from the Ministry of Industry and Trade of Viet Nam, the IEA developed and delivered comprehensive analysis ahead of the ASEAN Ministers on Energy Meeting hosted virtually Viet Nam from 17 November to 20 November 2020. Ministers attending the meeting noted the IEA analysis on private investment in transmission.

In addition to work at the ASEAN level, the IEA has a work programme with Indonesia on power system enhancement. This will include an evaluation of the applicability of the models for attracting private investment for transmission in Indonesia, based on a request from the Ministry of Energy and Mineral Resources, to help make Indonesia’s power system cleaner and more efficient.