Southeast Asia is one of the fastest growing energy markets in the world. The region represents nearly 9 per cent of the global population and over 6 per cent of the global GDP, and its energy demand is projected to grow (~4 per cent annually) faster than the global average up to 2050. Several structural factors are pushing electricity demand upward, including expansion of manufacturing and export industries, transport electrification, growth of data centres and digital infrastructure, and expanding middle-class consumption.
A recent International Energy Agency (IEA) report, “Financing the ASEAN Power Grid”, examines how Southeast Asia can mobilise capital on a large scale. The report focuses specifically on financing models, investment barriers and institutional arrangements required to develop cross-border infrastructure.
ASEAN Power Grid and the scale of investment
The key elements of the ASEAN Power Grid [APG] Vision 2045 include cross-border high-voltage transmission lines, subsea interconnections between island systems, regional electricity trading frameworks, and harmonised grid codes and operational standards.
AIMS III estimates that $764 billion will be needed for transmission expansion and new generation to support high levels of renewable energy. Developing the APG transmission network alone is expected to require at least $100 billion by 2045, according to the Asian Development Bank (ADB). As per an IEA analysis across three modelled cost scenarios, the total interconnection investment needed to realise the APG’s ambitions is estimated at $27 billion between 2025 and 2040, in the base case. This translates to an average annual spending of around $1.9 billion – roughly 20 times higher than the annual spending levels observed in 2019-24. Annual investment will need to surpass $1 billion before 2030 and reach an average of more than $2 billion per year during the 2031-40 period.
The three scenarios modelled are as follows:
Cost reduction case – all projects are achieved on time with minimal challenges, keeping overall costs low. The cost of subsea cables and converters increases in the short term but declines in the 2030s as supply chains improve
Base case – All projects are achieved on time with capital expenditures matching expectations based on historical project costs. The cost of subsea cables and converters increases steadily over time due to sustained demand
Cost overrun case – Various challenges lead to longer construction times and higher capital expenditures. Sustained supply chain constraints drive long-term price inflation for cables and converters.
Financing challenges
Structural and macrofinancial barriers include the fiscal constraints of many ASEAN state-owned enterprises (SOE), which already carry heavy investment burdens for domestic transmission and distribution. Most ASEAN regulatory frameworks restrict the majority ownership of transmission assets by private or foreign entities on national security grounds, limiting the pool of potential investors. Currency mismatches – in which projects earn revenues in local currencies, but debt is often denominated in USD – create foreign exchange exposure that deters long-term commercial lenders. Country credit ratings and shallow domestic capital markets in some ASEAN economies mean that commercial debt is expensive and short-tenored, typically 7-10 years – far shorter than the 20-30-year horizons interconnectors require.
Commercial arrangement challenges stem from a lack of standardised, transparent trading frameworks. Power trade in ASEAN relies on bilateral power purchase agreements negotiated on a case-by-case basis, with limited standardisation and no regional market mechanism. Diverse market structures and tariff regimes across ASEAN countries – ranging from liberalised markets with cost-reflective tariffs in Singapore and the Philippines to vertically integrated markets with bundled tariffs in Indonesia and Cambodia – create asymmetries that complicate cost and benefit allocation. Wheeling charges for transit through third-party grids, such as those used in the Laos-Thailand-Malaysia-Singapore Power Integration Project, lack a harmonised methodology, raising the risk of “tariff pancaking” that discourages the very trade that integration seeks to promote.
Project-level bankability challenges arise because revenue streams for interconnectors are unpredictable, especially for grid-to-grid projects where volumes depend on decisions made by utilities controlling electricity despatch. Without availability-based payments that compensate investors regardless of how much electricity flows through the line, interconnectors face acute utilisation risk. The report’s financial modelling shows that at 20 per cent utilisation with no availability payments, comparable to current usage of the Malaysia-Singapore link, will lower equity internal rates of return (IRRs) by 12 percentage points relative to a purely availability-based revenue model.
Key priorities for scaling investment
Making the APG a reality will require co-ordinated action to overcome the challenges, make interconnector projects bankable and catalyse the financing needed to build them. The IEA report’s recommendations are categorised into the following seven themes.
Embed cross-border projects in national planning – Interconnectors should be integrated into national power development plans, not treated as politically aspirational add-ons. Governments must proactively assess and articulate the economic and social benefits of interconnectors – in terms of cost savings, energy security, job creation and emissions reductions – to build the business case and attract financing.
Establish transparent and harmonised commercial arrangements – Revenue frameworks should be guided by regulation, not bespoke contracts. A harmonised regional methodology for transmission charges and wheeling costs – as demonstrated by the West African Power Pool and Central American Electrical Interconnection System (SIEPAC) – would reduce transaction costs, strengthen investor confidence and improve asset utilisation. Remuneration should capture multiple services provided by the interconnection infrastructure – electricity transmission as the main service provided, as well as the secondary services delivered in terms of grid stability, flexibility, emissions reductions and savings from deferred investment into other solutions for flexibility. Availability-based payments should be adopted as a standard feature. Governments can also blend availability-based payments with utilisation-based charges.
Deploy alternative financing models to attract new sources of capital – Governments should move beyond the split-project SOE model. Joint bilateral SPVs with shared ownership, independent transmission project (ITP) models with third-party developers and shared ownership structures for projects with regional benefits should all be explored and, where needed, enabled through targeted regulatory reform. ITP models can enable SOEs to raise non-recourse project finance and minority equity from international investors through SPVs, potentially reducing SOE financing requirements across the APG project pipeline.
Mitigate investment risks to lower financing costs and enhance bankability – Key risks should be identified early through engagement with technical, insurance and advisory experts and addressed in project design, technology selection and contractual structuring. Risks must be allocated to the parties best able to manage them, while residual risks, such as political or market uncertainties, can be mitigated through guarantees, insurance and credit enhancement tools provided by multilateral and private institutions.
Leverage international public finance strategically – Multilateral development banks, development finance institutions (DFIs) and export credit agencies help mitigate risks – political, currency and credit risks – especially in markets with weaker fundamentals, while also offering local currency financing and credit enhancements.
Establish capital recycling mechanisms through structured exit pathways – Sustaining ASEAN’s interconnector pipeline requires recycling early-stage capital, as investors are often unable to exit operational projects, creating an equity valley of death that limits funding for new developments. Addressing this involves pre-structuring clear exit pathways, such as refinancing windows, minority stake sales to institutional investors and integration into regional investment platforms, so capital can be redeployed efficiently.
In sum
ASEAN has achieved significant political momentum around energy connectivity, but translating ambition into implementation requires addressing gaps in policy, institutional capacity and financing structures rather than economics, as modelling shows interconnectors can deliver competitive, bankable returns. Critical enablers include tariff certainty, availability-based payments, harmonised commercial frameworks, access to affordable long-tenor debt and credible investor exit pathways. Achieving the investment challenge will demand sustained, coordinated action by governments, regulators, utilities, DFIs and the private sector. Finally, the APG’s success will hinge not only on infrastructure investment but also on financial innovation, institutional coordination and regional cooperation, enabling Southeast Asia to build one of the world’s largest integrated electricity systems and support both economic growth and the long-term energy transition.
