Grid reforms vital for boosting ASEAN's clean energy growth: Report

Asia risks missing out on billions of dollars of green investment because its underfunded power grids are failing to keep pace with surging energy demand, a report released in May warns.

The report by Bain & Company and Standard Chartered bank says the region is facing a crunch. Investors are lining up to invest in data centers, renewable energy, green industrial parks, and electric vehicle production and infrastructure. But most power grids in Southeast Asia have limited regional interconnections and are not adapting fast enough to meet the rapid electrification of economies.

Some investors are deterred by long grid connection times, lack of policy clarity, and rigid rules of bureaucratic state-run power companies in the region, home to nearly 700 million people and one of the world's fastest-growing energy markets.

The region's grids urgently need more investment and reforms to expand and modernize, says the report. Many are governed by a hodgepodge of inflexible rules limiting private operators and a lack of innovative power purchase agreements. Long grid connection times also frustrate investors, such as data center developers who cannot afford to wait several years.

The constraints are already affecting clean energy projects. For example, between 50 and 60 percent of renewable energy projects in Vietnam, Thailand and Indonesia have been canceled between 2021 and 2025 because of system constraints, including unclear power-purchase agreement structures, permission hurdles and grid connection rules, the authors note.

Grid investment has failed to keep pace with demand growth. Annual investment in power transmission and distribution fell 3 percent between 2015 and 2025 in Southeast Asia.

Southeast Asia should be spending $29 billion a year on grid infrastructure but is investing only $11 billion. This leaves an $18 billion annual investment gap, putting the region's growing green economy at risk.

The green economy is growing at 8 to 9 percent annually and is worth $290 billion. By 2030, it could reach $430 billion, the authors say. But there is a significant gap between investments announced and what is likely to be built.

"Of approximately $540 billion in green capital expenditure announced across Southeast Asia's power and EV value chains between now and 2030, only around $315 billion is on a credible path to deployment under current conditions.

"Capital is flowing where commercial demand, energy security and policy that delivers infrastructure come together, and stalling where any of the three is missing," said coauthor Dale Hardcastle, partner at Bain & Company, in a statement.

New electricity demand from data centers, rapid adoption of EVs, and green industrial clusters could be a major catalyst for the region's green transformation, the authors say. But this requires grid reforms and greater investment in renewable energy and battery storage.

Over the next three to four years, the region is projected to face more than 100 terawatt-hours of new energy demand from data centers, EVs and green industrial parks, representing more than $200 billion in committed investment, the authors say.

Infrastructure timeline

A key problem, however, lies in the infrastructure timelines. Data centers, EV infrastructure, and production and green industrial parks can all be built in one to three years. Yet, the grid required to serve them takes at least five years to build, creating a structural time-to-power gap.

The report referenced a Bain survey of regional data center operators and large global data center developers, which found that 90 percent cited grid connection delays as a top constraint, while 70 percent cited grid transmission capacity limits.

Solutions include the quick deployment of solar and battery storage to meet near-term power demand, fast-tracking grid interconnections for high loads for key investments, and enabling private participation in power transmission and distribution. In the longer term, solutions include establishing regional power markets and strengthening interconnections under the ASEAN Power Grid initiative.

But timing is critical because a delay could entrench additional fossil fuel-based power generation, the authors note.

"Each long-term contract for gas or thermal (coal) supply makes it harder for green power to replace these sources in the future, and many data center operators are accepting interim gas or thermal supply instead of waiting for clean power to catch up," they say.

That finding comes as Southeast Asia is facing rising energy costs because of its dependence on fossil fuels.

The supply shock caused by conflicts in the Middle East and Tehran's blockade of the Strait of Hormuz have further underscored the value of affordable renewable energy and limiting dependence on imported fuels, the burning of which is accelerating climate change.

The Straits Times, Singapore