Analysis: China remains key to success of Southeast Asia’s energy transition

As a leading investor in the region’s energy sector, China can provide significant support for renewable energy projects
<p>A floating solar farm at the Sirindhorn dam in Ubon Ratchatani, Thailand (Image: Wang Teng / Alamy)</p>

A floating solar farm at the Sirindhorn dam in Ubon Ratchatani, Thailand (Image: Wang Teng / Alamy)

“Accelerating just and inclusive energy transition” was a key action given by leaders in their statement at the 43rd summit of the Association of Southeast Asian Nations (ASEAN) in September. It was adopted to put ASEAN at the heart of Asia’s economic growth.

The statement demonstrates member countries’ commitment to driving the low-carbon transition in pursuit of green development. Major energy-consuming countries in ASEAN, including Indonesia and Vietnam, have now made “carbon neutrality” pledges and significantly increased the share of renewables in their national power plans.

Effecting this transition is no simple matter, however. Large-scale deployment of renewables requires enormous investment. Yet in ASEAN, as in developing countries elsewhere, such projects face a range of problems. Private investors are less enthusiastic, and it is difficult to get projects off the ground.

Global energy-related investment is expected to reach US$2.8 trillion this year, according to the latest World Energy Investment report from the International Energy Agency (IEA). More than half of that total will be spent on deploying clean-energy technologies, including electric vehicles, renewable-energy plants and energy storage. Clean-energy investment, however, is concentrated within a select pool of countries and regions: China, the European Union, the United States and Japan. Over 90% of the increase in such investment since 2021 has taken place in advance economies and China.

Private investment is key

To meet the Paris Agreement temperature targets, the world needs to cut greenhouse gas emissions by nearly half by 2030. The power sector, as a major carbon emitter, is crucial to realising this goal. According to the IEA’s 2021 report, Net zero by 2050: a roadmap for the global energy sector, annual energy-related CO2 emissions must fall to 21.1 billion tonnes by 2030 – 38% less than in 2020. Of that reduction, 60% will come from the power sector. However, this sector’s transition appears to be straying from the IEA’s pathway. In 2022, CO2 emissions from it reached an all-time high of 14.6 billion tonnes, up 1.8% from 2021.

This means there is a need to boost investment in clean energy and, while ensuring stable and secure electricity supply, accelerate the replacement of traditional fossil energy. A report from BloombergNEF found that worldwide investments related to the energy transition hit a record $1.1 trillion in 2022. For the first time ever, this figure was on par with fossil-energy investments. Renewable energy experienced the largest annual increase. The report also noted, however, that transition-related investment must rise sharply to a $4.55 trillion annual average by 2030. If not, the world will not be on track for net-zero emissions by 2050, a crucial step for mitigating the worst impacts of climate change. 

It is particularly important to ramp up clean-energy investments in developing countries, ASEAN members included. In 2022, more than 80% of energy-transition-related investments were made in China, India, the US, large European economies, Japan and South Korea. But developing countries, with their rapid economic development and industrialisation, are expected to account for most of the growth in power provision during the coming decades.

If the ASEAN region’s power sector is to follow a path to the Paris Agreement’s 1.5C target, the International Renewable Energy Agency (IRENA) estimates that about $45.8 billion must be invested annually through to 2030. This will expand renewable-power generation capacity and develop relevant grid infrastructure to the necessary scale.

Aerial photo of a two people standing on top of a wind turbine in a wooded mountainous area
Sidrap wind farm in South Sulawesi, Indonesia (Image: UPC Sidrap Bayu Energi / Alamy)

Such figures far exceed the investment capacity of ASEAN’s public sector, which has historically been the region’s largest source of funding for power development. Between 2016 and 2020, public investment in ASEAN’s energy as a whole totalled about $20 billion – well below the amount needed to drive even one year of power-sector transition.

In addition, the pandemic has pushed up public debt in the region, because ASEAN countries have introduced policies to protect vulnerable groups and drive economic recovery. The average government debt-to-GDP ratio among ASEAN countries rose from 41% in 2016 to 57% in 2021. This is making it harder to expand fiscal allocations for clean-energy investment.

Against this backdrop, private investment is of critical importance for the success of ASEAN’s energy transition. By IEA estimates, more than 70% of ASEAN’s energy-transition investment over the next 10 years will come from private capital.

ASEAN renewable energy projects face many hurdles

The cost of generating power from wind and solar PV has fallen dramatically over the past few years, as the technology has advanced. In many countries and regions, it is now close to or lower than the cost of coal power.

ASEAN countries have abundant, diverse resources of renewable energy, with enormous development potential. This suggests the region should be hugely attractive to investors, but the reality is quite different. The public sector remains the mainstay of clean-energy investment in ASEAN, with only a low level of private investment.

For power projects, private investors base their decisions to a large degree on profitability, with cost being just one of the relevant factors. As the economics commentator Martin Wolf has written: “While it is possible to prevent businesses from doing profitable things, it is impossible to make them do things they consider insufficiently profitable, after adjusting for risk.”

ASEAN countries are densely populated, so land acquisition is a major headache for renewable-energy projects. Building wind and solar PV power plants requires a lot of land – up to ten times that needed for coal- or gas-fired plants, per unit of electricity, even when factoring in land for producing and transporting the fossil fuels. This, coupled with the high proportion of privately held land in ASEAN countries, means that land acquisition often entails complex negotiations. In addition, some plots belong to local institutions or government authorities, which need to be relocated before the land can be acquired.

A man crouches next to an electronics panel, surrounded by solar panels
A technician maintains solar panels atop the Istiqlal mosque, Jakarta, March 2023 (Image: Tatan Syuflana / Associated Press via Alamy)

Project approval is also a major issue. During the project preparation phase, investors often have to secure a series of administrative approvals including those for environmental considerations and grid connection. Approval typically involves separate regulatory bodies and fragmented systems that may have information and regulatory gaps. This can create uncertainty among investors.

Take offshore wind as an example. Long coastlines provide ASEAN countries such as Vietnam and the Philippines with huge potential. Vietnam’s recently adopted Eighth National Power Development Plan provides for dynamic development of offshore wind power, aiming for six gigawatts (GW) of installed capacity by 2030, from a standing start. Yet, as recently as 2022, the Global Wind Energy Council highlighted the need for “a clear and visible transitional support mechanism to support Vietnam’s initial offshore wind development”.

Another problem of new energy projects is power-grid capacities. In Vietnam, for example, total installed solar PV capacity hit 16.5 GW in 2020, almost 160 times higher than 2018. This rapid growth put the grid under massive strain, forcing the country’s largest power company to cut back on PV power generation. As ASEAN countries raise the share of renewables in their future power mixes, the bolstering of grid planning and construction will therefore be crucial in attracting renewable-energy investment.

Other problems facing ASEAN countries include delays in the development of the power market and a lack of high-quality power-purchase agreements. These problems are often compounded by macroeconomic factors such as restrictions on foreign direct investment, currency exchange rate risks, and lags in the development of local banking systems and capital markets. These cast a shadow over the profitability of renewable-energy projects and create an absence of attractive projects for investors.

Potential Chinese pathways for driving an energy transition in ASEAN

ASEAN is one of the main destinations for overseas power investments from China. According to Boston University’s Global Development Policy Center, between 2000 and 2022 Chinese companies invested in more than 1,400 overseas power-generating units. This represented a total installed capacity of more than 170 GW in the form of greenfield investments and equity acquisitions. Of those plants, 31% were in Southeast Asia.

Explore the data behind this chart

Chinese overseas investment in power generation projects, 2000 to 2022 (MW)

RegionCoalGasOilNuclearHydroNon-hydro renewablesTotalShare (%)
 Central Asia1,480808164002702,9742%
 East Asia3981,486375652,3241%
 Middle East1,3202,464511,1965,0313%
 South Asia13,8103,8836233,2953,6201,31426,54516%
 Southeast Asia28,5768,20462415,0828652,57231%

Source: Developed by the author based on China’s Global Power Database (Boston University Global Development Policy Center, 2022)

This table provides an overview of Chinese overseas investment in power generation projects since 2000, covering greenfield investments and mergers & acquisitions. It offers a more complete picture than other widely used databases, such as China’s Global Energy Finance, which only focuses on public financing for global energy projects provided by China’s policy banks – the China Development Bank and the Export-Import Bank of China.

As a leading investor in ASEAN’s energy sector, China can provide significant support for the region by promoting private-capital investment in renewable-energy projects. Chinese Premier Li Qiang made it clear at the 18th East Asia Summit in September that he wants to deepen cooperation with ASEAN countries: collaborating on energy, climate change and electric vehicles will realise shared growth.

Specifically, China may consider the following three approaches:

First, through policy dialogue and capacity-building programmes, China could offer targeted policy support to ASEAN for building renewable-energy-based power systems. This would include renewable-energy planning and grid connection, the design of market mechanisms, and the formulation of relevant laws and regulations. As wind and solar energy develops in ASEAN countries, the mismatch with traditional power systems built on large-scale hydro and thermal power will become increasingly marked. Resolving this is key to integrating renewable energy into the power system and reducing uncertainty about project profits.

Second, China could deepen cooperation with multilateral financial institutions, funding renewable energy projects in ASEAN through the “blended finance” model of public–private partnerships. As defined by the OECD, blended finance uses development finance to mobilise additional capital (commercial capital, for example) to aid sustainability in developing countries. Blended financing can better leverage large-scale capital from ASEAN and international markets in support of renewable-energy projects contracted to Chinese firms, using development financing to cover the necessary pre-development preparations and reduce the project risks faced by private investors.

Multilateral financial institutions such as the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB) already implement blended financing for ASEAN renewable-energy projects. Such institutions have accrued expertise in the areas of finance structure, risk allocation, contract management and dispute resolution. In strengthening collaboration with multilateral financial institutions, the learning curve for those Chinese enterprises and investors participating in overseas renewable-energy projects is accelerated. Successfully landing such projects can boost investment and create jobs, generating favourable conditions for government departments in ASEAN to promote relevant reforms in the power market. This shapes a better investment environment for renewable-energy projects, creating a virtuous cycle.

A typical example of blended financing is the Hoa Hoi solar plant, built by China Energy Engineering Corporation (CEEC) in Phú Yên province, central Vietnam. With an installed peak capacity of 256 megawatts, it is the third-largest solar PV power plant in Vietnam. Its financing model involves the ADB and an international syndicate, including Chinese commercial banks, with CEEC contracted for engineering design and construction.

Thirdly, financial institutions in China and ASEAN could strengthen cooperation and innovate financial products that are more attractive to Chinese institutional investors. This would tighten the bond between Chinese capital and ASEAN renewable-energy opportunities. In 2019, it was estimated that Chinese institutional investors, such as insurance companies and sovereign wealth and pension funds, were managing assets worth around $16 trillion in total – significant potential support for developing renewables in ASEAN.

Building long-term prosperity in Asia

The ASEAN region’s energy transition presents win-win opportunities for China to cooperate with Europe and the US on the development of third-party markets. At this year’s AGM of the China Council for International Cooperation on Environment and Development, China’s special envoy for climate change, Xie Zhenhua, said: “China wishes to work with the United States, the European Union and the world’s developing countries, through dialogue and exchanges, to advance multilateral progress on global climate change and drive the achievement of a green, low-carbon transition.”

Europe and the US have an abundance of experience in market development, capacity building and project financing. This, combined with China’s considerable strengths in green-industry chains and manufacturing, can provide support for ASEAN in the field of renewable-energy investment, in turn driving industrial upgrades, job creation and economic development.

Such positive results would give ASEAN policymakers the confidence to set more ambitious energy-transition targets. While demonstrating China’s “soft power”, it would also help its relevant enterprises to expand their overseas markets, drive the integration of regional industry chains, and bring long-term prosperity and stability to Asian countries – all while advancing the construction of a more sustainable economic-development model.