Southeast Asia (SEA) is entering a decisive phase in its economic and energy development. Rapid industrialisation, urbanisation, rising incomes and the expansion of manufacturing and services are driving strong growth in energy demand, while the region’s increasing integration into global supply chains is creating new requirements for reliable and affordable power. At the same time, recent geopolitical disruptions have exposed the vulnerabilities of an energy system that remains heavily dependent on imported fossil fuels. Against this backdrop, the Southeast Asia Energy Outlook 2026 by the International Energy Agency (IEA) highlights a fundamental challenge. The region must expand its energy system at scale while simultaneously making it more secure and diversified, and also reducing the sector’s carbon emissions.
The stakes are significant. SEA accounts for about 9 per cent of the global population and 4 per cent of global GDP, yet it is expected to contribute nearly 20 per cent of the increase in global energy demand through 2035 under today’s policy settings. By 2050, regional energy demand is projected to exceed three times Japan’s current level. The trajectory, therefore, will have implications well beyond the region, particularly for global energy markets, manufacturing supply chains, critical minerals and clean technology deployment.
Economic expansion is reshaping the energy landscape
The region’s energy outlook is closely linked to its economic transformation. SEA has recorded average annual GDP growth of nearly 4 per cent over the past decade, with Vietnam and Cambodia among the fastest growing economies. Services already account for more than half of regional GDP and their share is expected to approach 60 per cent by 2050. Manufacturing and energy-intensive industries are also
expanding rapidly, reinforcing the demand for electricity, fuels and supporting infrastructure. The IEA projects that SEA’s economy could more than double by 2050, growing at an average annual rate of 3.5 per cent compared to the global growth rate of 2.6 per cent.
Urbanisation will be another major driver. Just over half of the region’s population currently lives in urban areas; this is expected to rise to around two-thirds by 2050. Almost all population growth during this period is expected to be concentrated in cities. This will translate into higher demand for buildings, transport, cooling, digital infrastructure and urban services, making energy infrastructure increasingly central to the region’s competitiveness and quality of life.
The energy system is already responding to these structural shifts. Total energy use has risen by around 40 per cent since 2015, with fossil fuels accounting for most of the increase. Coal has been the fastest growing major fuel, with demand increasing by around 8 per cent annually and its share of the energy mix rising from 20 per cent in 2015 to around 30 per cent today. Renewables have also expanded rapidly, particularly solar photovoltaic and wind, although from a considerably smaller base.
Electricity moves to the centre of growth
One of the most significant findings of the Outlook is the increasing electrification of SEA’s economy. Electricity demand has grown by around 6 per cent annually since 2015, compared to 4 per cent growth in overall energy demand. Electricity now accounts for almost one-quarter of final energy consumption and this share is expected to rise steadily across all scenarios.
Over the next decade alone, additional electricity demand is expected to be equivalent to Japan’s entire current electricity generation. Buildings, industry and new digital infrastructure will be major contributors. Cooling is particularly important, with the stock of residential air conditioners projected to triple by 2035. Data centres are also emerging as a significant new source of electricity demand in countries such as Singapore, Malaysia and Indonesia.
This creates a clear infrastructure imperative. Growth in generation capacity will not be sufficient on its own. Transmission and distribution networks will need to expand substantially, while storage, demand response and other flexibility mechanisms will become increasingly important as variable renewable energy gains a larger share of the system.
The IEA estimates that transmission and distribution networks will need to more than double in length by 2050. Investment in grids and storage would need to rise from around $13 billion currently to approximately $50 billion by 2050 under announced pledges. This includes around $27 billion by 2040 for planned cross-border interconnections under the ASEAN Power Grid (APG).
The implication is that SEA’s energy transition is increasingly becoming an infrastructure transition. Grid modernisation, interconnection, storage and digitalisation will determine how effectively new generation can be integrated and how reliably electricity can be supplied to rapidly expanding industrial and urban centres.
Fossil fuels remain embedded in the transition
Despite the acceleration of clean energy, the Outlook does not envisage a rapid displacement of fossil fuels under current policies. Coal remains the largest single source of electricity generation, while natural gas continues to play an important role in power generation and system balancing.
Coal-fired generation doubled between 2015 and 2024, growing at more than 8 per cent annually. Under the IEA’s Stated Policies Scenario (STEPS), coal generation growth slows considerably and plateaus after 2035. However, under the current policies scenario (CPS), coal-fired generation continues to increase towards 2050. Natural gas generation is also expected to grow, with output projected to rise more than one-and-a-half times – to around 600 TWh by 2035.
This reflects a central tension in SEA’s energy strategy. Coal and gas remain attractive for meeting rapidly growing electricity demand and providing system reliability, particularly where renewable deployment is constrained by grid limitations. Yet continued dependence on these fuels increases exposure to fuel price volatility, import dependence and emissions.
The region’s oil dependence is particularly significant. Around 60 per cent of crude oil imports came from the Middle East before the recent crisis, while around 45 per cent of refined oil products were ultimately linked to Middle Eastern crude. The IEA estimates that the region’s fossil fuel import bill could increase from more than $80 billion in 2024 to around $245 billion by 2035 under current trajectories. Meeting announced climate and energy pledges could reduce the 2035 fossil fuel import bill to roughly half that level.
Energy security, therefore, is becoming a powerful driver of the transition alongside climate policy. Diversification into renewables, electrification and domestic energy resources can reduce exposure to external shocks while also supporting longer-term decarbonisation.
Renewables gain momentum, but grids will determine the pace
Renewable energy deployment is accelerating across the region. Solar PV and wind have been expanding particularly rapidly, while hydropower, geothermal and modern bioenergy remain important components of the existing renewable base.
In 2025, nearly 19 GW of renewable energy capacity was awarded through auctions, indicating a growing shift towards competitive procurement mechanisms. Under the STEPS, solar PV generation rises from 44 TWh in 2024 to almost 200 TWh in 2035 and more than 540 TWh by 2050. Wind generation increases from just 18 TWh in 2024 to around 175 TWh in 2035 and more than 520 TWh by 2050. Together, solar and wind could account for around 30 per cent of regional generation by 2050 under this scenario.
Hydropower will remain strategically important. It already accounts for a particularly high share of electricity generation in countries such as Lao PDR, where it supports both domestic power supply and electricity exports. Geothermal resources, concentrated primarily in Indonesia and the Philippines, also provide an important source of firm low-emission generation.
However, the expansion of variable renewables will increasingly test the region’s power systems. Investment in storage, flexible generation, demand response and interconnections will be essential to balance supply and demand. The challenge, therefore, is shifting from simply adding renewable capacity to developing an integrated electricity system capable of absorbing that capacity efficiently.
APG emerges as a strategic infrastructure opportunity
Regional electricity interconnection could become one of SEA’s most important energy infrastructure developments. The APG is intended to strengthen regional energy security by allowing countries to share generation resources and balance variations in demand and supply.
The IEA estimates that around $27 billion of investment could be required by 2040 to realise planned cross-border interconnections. However, existing commercial arrangements are largely based on bilateral contracts, with differences in transmission charges, allocation of costs and risks, and the distribution of benefits. This can make projects complex and limit their scalability.
A more integrated framework could improve project bankability and attract a broader pool of investors. Standardised approaches to transmission charges, predictable revenue mechanisms and stronger regulatory co-ordination would help move the APG from individual bilateral projects towards a genuinely integrated regional power market.
The IEA sees full integration by 2045 as achievable, but this will require coordinated action by governments, regulators, utilities, financial institutions and private investors. The opportunity extends beyond energy security: regional interconnection can also support greater renewable energy penetration by enabling countries with different resource endowments and demand profiles to share electricity.
Industry and clean technology manufacturing create a second growth engine
SEA’s energy transition is closely connected to its emergence as a global manufacturing and clean technology hub. Energy-intensive industries are expanding rapidly, with aluminium, iron and steel production expected to increase by around 70 per cent by 2035. Chemicals and cement production are also projected to grow strongly. Around 15 per cent of globally announced new steel capacity is currently located in the region.
This industrial expansion creates both an energy challenge and an investment opportunity. Manufacturing growth will require large volumes of reliable electricity, but the competitiveness of new industrial facilities will increasingly depend on the availability of affordable low-carbon power.
The region is also becoming strategically important for electric vehicles (EVs) and batteries. Battery manufacturing capacity is projected to more than triple by 2030, while EV production capacity could increase more than tenfold. Indonesia’s nickel resources give it a particularly important position in battery supply chains, while Malaysia, Myanmar, the Philippines and other countries have significant mineral resources and processing capabilities.
However, the transition also creates new supply chain dependencies. Indonesia’s nickel processing sector, for example, remains exposed to imported sulphur used in high-pressure acid leaching. Around 75 per cent of Indonesia’s sulphur supply is sourced from the Middle East, demonstrating that clean technology supply chains can themselves remain vulnerable to geopolitical disruptions.
The strategic priority, therefore, will be to build resilient regional supply chains rather than simply increase production. This will require investment in processing, logistics, electricity infrastructure and responsible resource development.
Transport electrification gathering pace
Transport is another area where structural change is becoming visible. Oil has supplied around 75 per cent of transport energy demand growth since 2015, but electrification is beginning to change the trajectory.
EV sales more than doubled in 2025 to around 500,000 units, representing almost 20 per cent of vehicle sales. Vietnam recorded particularly rapid growth, with electric car sales more than doubling to nearly 180,000 units. Electric two- and three-wheelers, which are central to mobility across SEA, offer an even larger opportunity: their share of sales is projected to approach 60 per cent by 2035 under current policy settings.
Nevertheless, the transition will be gradual. Oil demand in transport is still expected to rise by around 20 per cent through 2035. Biofuels will continue to play a role, already meeting around 10 per cent of road transport fuel demand and potentially reaching 15 per cent by 2050.
The region’s transport transition, therefore, will involve a combination of electrification, biofuels and low-emission fuels rather than a single technology pathway. Singapore, as the world’s largest bunkering hub, is also positioned to support the development of alternative maritime fuels such as ammonia and methanol.
Financing remains the critical enabler
Investment has emerged as one of the strongest themes in the Outlook. SEA’s total energy investment exceeded $100 billion in 2025, representing a 30 per cent increase from 2024. Clean energy investment has increased by around 60 per cent since 2015. Yet the region accounts for only around 3 per cent of global energy investment despite representing 9 per cent of the world’s population and a significant share of future energy demand growth.
Investment is projected to rise by around 35 per cent over the next decade under current policies and nearly double if announced pledges are implemented. However, the cost of capital remains a major constraint. In several SEA markets, the cost of capital can be around twice that in advanced economies and China, weakening the financial attractiveness of capital-intensive renewable energy, grid and efficiency projects.
The financing structure is also evolving. State-owned enterprises accounted for around 52 per cent of energy investment in 2025, while commercial institutions provided nearly two-thirds of financing. Private investment is becoming particularly important in renewable power: private corporations account for more than 80 per cent of solar PV and wind investment, supported by competitive auctions in markets such as the Philippines and Vietnam.
Development finance institutions currently account for only around 1 per cent of total financing, but their role can be disproportionately important. Guarantees, concessional finance, first-loss protection and other risk-mitigation instruments can reduce project risks and help mobilise larger volumes of private capital.
Energy efficiency and inclusion remain essential
The scale of future demand means that SEA cannot rely solely on new energy supply. Energy efficiency will be an increasingly important component of infrastructure planning.
Under stronger policy settings, energy intensity improves substantially, while electrification rises from around 23 per cent of final consumption today to 27 per cent by 2035 and 33 per cent by 2050. Improved efficiency and electrification together can reduce energy demand growth by more than 15 per cent by 2035.
Cooling is a particularly important opportunity. Rising incomes and increasingly frequent heatwaves are driving rapid growth in air-conditioner ownership. Energy-efficient buildings, appliances and cooling technologies, therefore, can help manage peak electricity demand while reducing household energy costs.
Energy access also remains an important consideration. Electricity access has improved from 86 per cent in 2015 to around 97 per cent today. However, clean cooking access remains less widespread, with around 120 million people still lacking access to clean cooking solutions. Ensuring that the energy transition remains affordable and inclusive will be critical, particularly for lower-income households.
From energy transition to long-term resilience
The IEA’s Outlook presents SEA’s energy future as a balance between growth, security and sustainability. Under current policy settings, the region remains on a trajectory of rising fossil fuel demand and emissions. Under stronger policy action, however, clean energy can meet most incremental energy demand growth, while fossil fuel demand peaks before 2035.
The difference between these trajectories is substantial. Under the announced pledges scenario, renewables and other low-emissions sources could provide around half of the electricity generation by 2035 and around 90 per cent by 2050. Regional energy-related CO2 emissions could remain close to current levels through 2035 before falling to around 1,000 million tonnes by 2050, compared with continued growth under less ambitious scenarios.
For SEA, therefore, the energy transition is not simply a decarbonisation exercise. It is increasingly an economic and infrastructure strategy. Expanding grids, regional interconnections, storage, renewable generation, efficient buildings, EV infrastructure and clean industrial capacity can simultaneously strengthen energy security, support manufacturing and reduce exposure to international fuel price shocks.
Consequently, the region’s next phase of growth will depend on how effectively investment is directed towards these enabling systems. The immediate priority is not only to build more generation capacity, but to create a more flexible, interconnected and resilient energy architecture. This will require stronger regional cooperation, improved market frameworks, lower financing costs and closer alignment between energy, industrial and infrastructure policies.
SEA has the opportunity to turn its rising energy requirements into a new growth engine. Its expanding manufacturing base, urban centres, critical mineral resources and rapidly growing electricity demand provide a strong foundation for investment. The challenge is to ensure that this expansion is supported by infrastructure that is secure, affordable and increasingly low-carbon. As the IEA Outlook makes clear, the decisions taken over the next decade will shape not only the region’s energy system, but also its long-term competitiveness and position in the global economy.
Extracts from the IEA’s Southeast Asia Energy Outlook 2026.
