Southeast Asia’s (SEA) energy demand has grown by over 80 per cent since 2000. The region is growing at an annual average rate of 6 per cent, which is one of the fastest in the world. However, the region relies heavily on fossil fuels to meet its energy demand despite considerable potential for renewables. Renewables led by hydropower currently meet only 15 per cent of SEA’s energy demand. However, the declining cost of renewables and issues posed by emissions are making SEA countries focus on cleaner sources for meeting energy demand.

The International Energy Agency (IEA) makes some interesting observations on the future of energy in SEA in a recently released report “Southeast Asia Energy Outlook 2019”. The IEA has projected various energy parameters for the SEA region under two scenarios – the stated policies scenario and the sustainable development scenario. The former outlines a pathway for the region that reflects current policy frameworks and the latter considers accelerated transition to clean energy in the region. While the stated policies scenario describes “where the region is heading”, the sustainable development scenario shows “where it would need to go” to meet internationally agreed goals. To reduce the gap between the outcomes of these scenarios, strong policy actions will be required by SEA nations.

The projections under the two scenarios are based on the following assumptions – the growth rate of gross domestic product (GDP) between 2019 and 2040 at 4.4 per cent per year, an increase in the region’s population from 650 million in 2018 to almost 770 million in 2040, and an increase in the share of the population living in urban areas from just under half today to more than 60 per cent in 2040. Southeast Asia Infrastructure presents an overview of the key projections and findings of the report…

Stated policies scenario

In the stated policies scenario, SEA’s energy demand is projected to increase 1.6 times to 1,110 million tonnes of oil equivalent (mtoe) by 2040. The energy demand is likely to be met mostly by fossil fuels with coal, oil and gas accounting for about 80 per cent of the total demand. While the deployment of renewables is expected to increase in absolute terms, its share in primary energy demand is likely to remain flat at around 15 per cent between 2018 and 2025.

The final energy consumption in the region is expected to increase by over 50 per cent from about 430 mtoe in 2018 to 680 mtoe by 2040. All end-use sectors – industry, transport and buildings – are likely see a notable increase in energy consumption with industry accounting for the maximum consumption of 280 mtoe, followed by transport (200 mtoe) and buildings (190 mtoe). Electricity and natural gas would serve most of the projected demand in the industrial segment. In the buildings segment, electricity will be a key source to meet demand while oil will continue to be a dominant energy source for the transport segment (although the role of biofuels may increase, led by blending standards in Indonesia and Thailand).

SEA’s electricity demand is projected to double to 2,000 TWh between 2018 and 2040 at an annual growth rate of about 4 per cent, which is twice the growth rate in the rest of the world. The share of electricity in final energy consumption will also increase from 18 per cent at present to 26 per cent by 2040, in line with the global average. The highest electricity consumption (of 1,200 TWh) is likely to come from the buildings segment led mainly by residential users. This is followed by the industrial segment, which will account for 780 TWh of electricity demand by 2040, while the rest will be accounted for by the transport segment. Notably, given the current policy framework, electric mobility uptake is likely to be limited in the region.

Regarding the power generation mix, coal is likely to retain a major share of 40 per cent in SEA’s installed generation capacity base by 2040. Based on coal-based projects under construction and planning, a net capacity addition of 90 GW is expected by 2040, taking the installed coal-based capacity base to 165 GW. Ultra-supercritical and supercritical technologies will be deployed in most of the upcoming capacity. Natural gas will be the next widely used fuel for electricity generation after coal. Together, the two fossil fuels are likely to account for about 70 per cent of power generation capacity in SEA by 2040, marginally lower than its share in 2018.

Renewables-based capacity addition in the region is likely to exceed 180 GW to reach 250 GW by 2040. Solar photovoltaic (PV) and hydropower capacity will account for the maximum capacity during this period. Overall, the share of renewables-based generation in the power mix will increase from 24 per cent to 30 per cent by 2040. Lao PDR, Cambodia, Indonesia, Malaysia, Myanmar, the Philippines and Thailand are expected to see large-scale hydropower deployment spurred by domestic demand and cross-border trading opportunities. Solar PV, geothermal, wind and bioenergy are likely to be driven by incentive schemes in Malaysia, the Philippines and Thailand.

  Need for accelerated energy transition

In the stated policies scenario, a large part of fossil fuel demand (mainly oil and gas) is likely to be met by imports, leading to an increase in the fossil fuel trade deficit from $57 billion in 2018 to $300 billion in 2040. In terms of countries, import dependency would increase in Thailand, Indonesia and Malaysia. Further, carbon dioxide emissions are likely to increase by two-thirds over the period from around 1.4 gigatonnes (Gt) in 2018 to almost 2.4 Gt in 2040. Sulphur dioxide (SO2) and nitrogen oxide (NOX) emissions are also projected to increase by 40 per cent over the period, driven by coal-based and transport sectors respectively.

Clearly, SEA is expected to fare badly in achieving goals like improving environmental sustainability and reducing climate change risk under the stated policies scenario. Therefore, there is a need for policymakers to push for low-carbon pathways to meet energy demand as highlighted under the IEA’s sustainable development scenario. This requires greater emphasis on renewables for power generation, greater energy efficiency in industries, phasing out of fossil fuel subsidies, retirement of old and inefficient coal-based power plants, deployment of carbon capture, utilisation and storage (CCUS) technology, and expansion of regional power trade for optimal utilisation of energy resources.

In the sustainable development scenario, SEA’s total primary energy demand increases slightly over the current level owing to an increase in energy efficiency and a reduction in energy intensity across segments. There is likely to be an annual average decline of 4.3 per cent in the demand for coal between 2018 and 2040, bringing it to 50 mtoe in 2040. This is mainly because of the diminished use of coal in electricity generation where the share of coal is expected to decline to 4 per cent from 40 per cent. The demand for natural gas is likely to increase by about 50 per cent over the same period.

In power generation, the share of renewables in the power mix is projected to increase from 24 per cent in 2018 to 70 per cent in 2040. Solar PV, hydropower and wind would be required to add over 450 GW of capacity during the period. This is possible with the right policy and regulatory framework that not only attracts investment in renewables but also promotes greater flexibility in the power system.

The way forward

The SEA region can reap enormous benefits with an accelerated transition to clean energy as highlighted in the sustainable development scenario. In this scenario, carbon dioxide emissions are likely to be around 1 Gt in 2040, almost 30 per cent below the 2018 level. In addition, SO2, NOx and PM2.5 are also expected to decline sharply. Further, energy efficiency and electrification are expected to help reduce oil demand by almost 30 per cent, reducing dependence on imports and generating annual savings worth nearly $200 billion by 2040 compared to the stated policies scenario.

The IEA notes that the demand for space cooling is expected to increase in SEA with rising incomes and urbanisation as well as rising temperatures and humidity. Therefore, there is a need for governments to impose minimum energy performance standards (MEPS) on air conditioners as well as take measures to increase the performance of new and existing building envelopes, prioritise passive or hybrid strategies and raise awareness on reducing energy consumption.

Further, the creation of an ASEAN Power Grid (APG) to facilitate regional power trading can play a crucial role in improving energy security, expanding electricity access, integrating renewables, and improving the economics of power system development. So far, eight of the 10 ASEAN member states have transmission interconnections but trade arrangements are mainly limited to unidirectional or bi-directional power trade through long-term PPAs. However, power trade deals are gathering pace in the region.

A key issue highlighted by the IEA is the declining energy sector investment in SEA. Investment in the energy sector declined to $65 billion in 2018 from a peak of about $80 billion 2012. The region’s investment is low on per capita and GDP bases relative to other regions. This decline can be partly attributed to low oil prices in recent years. Regional energy spending is concentrated on the power sector, which accounts for nearly half of the total investment in energy. The investment in fossil fuel-fired plants accounts for the largest share of investment although investment in renewables has picked up in recent years.

Under both the stated policies scenario and the sustainable development scenario, the investment requirements in the SEA energy sector are immense. Under the stated policies scenario, cumulative investment needs over 2019-40 total over $2.5 trillion; in the sustainable development scenario, they rise to nearly $3.2 trillion. In order to meet investment needs, it will be necessary for stakeholders to mobilise investment from various sources – private players, government, multilateral financial institutions and local banks.

Further, the financial sustainability of utilities needs to be ensured so that they can invest in capacity augmentation. There is a need to fix cost-reflective electricity tariffs and reduce transmission and distribution (T&D) losses. The average T&D losses in SEA stand at over 10 per cent and there is significant scope to reduce them to a level of 6-7 per cent as in the case of the US and China. T&D losses also vary widely within the region – losses are around 20 per cent in Cambodia and Myanmar, while in Singapore, T&D losses are nearly 2 per cent.

Hence, a range of policy actions and reforms in the power sector will be required to accelerate SEA’s energy transition to a greener future.