A new report assesses the main market and regulatory barriers to the development of solar and wind power in four major Southeast Asian economies and proposes policy and regulatory refinements to accelerate their deployment.
Bangkok, 29 October 2024 – Last year, almost 200 governments at the United Nations Climate Conference COP28 pledged to triple the world’s installed renewable energy generation capacity by 2030. While global renewable capacity grows rapidly, wind and solar energy development in Southeast Asia lags behind this trend. In the lead-up to COP29, this new report emphasises the need for policy and regulatory reforms in the region’s main power systems to unlock renewable energy investment and accelerate the transition to clean energy.
The report outlines measures such as designing de-risking mechanisms for renewable investments, enhancing planning certainty through predictable renewables tenders, and revising power purchase agreements (PPAs) of newer fossil-fuelled power plants to incentivise flexibility. It stresses the need for system transformation strategies to phase out coal and phase down gas power in a just and equitable way. The report proposes reorganising fossil fuel fleets along three tracks to reach that goal—Retire, Reserve, Repurpose.
Focusing on Indonesia, Thailand, Viet Nam, and the Philippines, the report is published under the project “Clean, Affordable and Secure Energy for Southeast Asia” (CASE). The project supports the region’s power sector towards achieving the Paris Agreement goals.
“Refining power market designs – originally developed for fossil fuels – in Southeast Asian countries is key to accelerating wind and solar deployment in the region. More predictable and transparent tenders, advanced grid development plans, and increased system flexibility would help attract investments and facilitate renewables integration, thus paving the way to a resilient, low-carbon energy future,” said Dimitri Pescia, Director Power System Transformation, Agora Energiewende.
Revamping PPAs and refining market structures to attract renewable investments
The electricity sectors in Southeast Asia encompass a variety of market structures, from vertically integrated monopolies to restructured competitive markets, with single-buyer models being particularly prevalent. For instance, the Indonesian and Thai electricity markets operate under a single-buyer system, where large renewable energy projects are heavily dependent on government-led power procurement. Meanwhile, Viet Nam has an unbundled system under state ownership with emerging wholesale competition, and the Philippines operates a liberalised market with central dispatch.
The report recommends that, first, Southeast Asia needs to drastically scale up renewable energy investments to meet net-zero targets. An increase in tender volume is crucial, but these processes must also be transparent to attract a wider pool of investors. Introducing competitive pricing in tenders, as implemented in the Philippines, can help reduce costs for wind and solar projects.
Second, investment in renewable energy needs to be de-risked. Current power purchase agreements (PPAs) often place higher financial risks on renewable energy projects than on fossil fuel plants, discouraging investment in the sector. Renewable energy PPAs should be adjusted to provide long-term revenue certainty, reducing project risk and mobilising critical financing. A similar approach has underpinned Southeast Asia’s investment in coal and gas power assets over the past two decades.
Third, reforming fossil-fuel PPAs to enhance power system flexibility is crucial. Those PPAs should be revised to incentivise greater operational flexibility, moving away from a “baseload” paradigm to operational practices that values rewards and flexibility. This would ensure smoother integration of renewables while maintaining grid stability.
In countries without wholesale markets, like Indonesia and Thailand, renegotiating PPAs to reward flexibility services is key to achieving these goals. Meanwhile, in countries with wholesale energy markets, such as Viet Nam and the Philippines, this would involve exposing fossil fuel generators to short-term market pricing, encouraging them to reduce output when renewable energy is abundant and ramp up when necessary.
Phimsupha Kokchang, a co-author of the report and researcher at the Energy Research Institute, Chulalongkorn University said, “Thailand must move beyond the enhanced single-buyer model to fast-track renewables and meet its 51% target by 2037. To achieve this, Thailand should enhance its centralized procurement process and introduce a solar booster program with an annual installation target of 5 GW. These steps, supported by regulatory adjustments, are essential for creating a competitive, transparent market that ensures fairness and affordability for all.”
Finally, the report underlines the potential for fossil fuels to be phased out in a just and equitable way through a three-step approach—Retire, Reserve, Repurpose. This approach aims to mitigate oversupply in fossil power to scale renewables deployment, reduce the operational costs of the fossil fuel fleet, and ensure that remaining fossil fuel assets in operation accommodate the shift to renewables. Carbon pricing, introduced in Indonesia and considered in Viet Nam, helps inform such decisions while generating revenues that can be used to manage the transition. However, it requires a robust policy framework and an effective market design to ensure it achieves its objectives.
“Indonesia faces tremendous challenges in scaling up renewable energy rapidly and potentially high-cost energy transition due to the existing electricity market structure and a large share of a relatively young coal fleet. Reforming coal and gas subsidies to the utilities, strengthening the existing cap and trade for fossil fuel plants, and repurposing PLN’s coal fleet for flexibility purposes are the first steps leading toward broader and structural reform,” said Fabby Tumiwa from Institute for Essential Services Reform (IESR)].
Tripling renewable energy capacity by 2030, as outlined at COP28, is ambitious. However, with key reforms, Southeast Asia can achieve a smoother transition to an affordable, reliable, and climate-resilient energy system. Bold policy actions will enable the region to unlock its renewable potential and align with the global shift toward clean energy.
The report, ‘Electricity market design in Southeast Asia: Harnessing opportunities for renewable energy growth in Indonesia, Thailand, Viet Nam and the Philippines’, is the result of extensive research and discussion with experts across Southeast Asia. It is available for free download https://bit.ly/4dWYRlM.
Further information
The report will be presented at a webinar on Tuesday, 29 October 2024 at 15:30-17:00 ICT/BKK. You can register here.
Media Contact Information
Thitikorn Srichomphoo (GIZ Thailand)
thitikorn.srichomphoo@giz.de
