Southeast Asia’s Renewable Energy Puzzle

Southeast Asian economies are growing fast, and investment in energy infrastructure to fuel that growth is racing to keep up. In 2018, the Philippines, Thailand, Vietnam, Malaysia, and Indonesia had a combined GDP of $2.5 trillion and generated 939,803 GWh of electricity. The Asian Development Bank estimates that from 2016 to 2030, the region will soak up $14.7 trillion of investment in energy infrastructure, leaving little doubt that much more generating capacity is going to be built in the coming years.

The question is what kind of capacity will it be?

Investors, developers, utilities, and governments are laying the groundwork now for energy systems that will last for decades, and the choices they make will determine whether these fast-growing economies get locked into high-carbon footprints, or whether they can finesse the transition to more sustainable models of energy governance. Those looking for a magic bullet that can affect this transition, such as a tax on carbon, are likely to be disappointed. Southeast Asia is a large and diverse region, and one-size-fits-all approaches will have limited traction.

More important is understanding how the state exerts control over domestic fossil fuel resources and the rents derived from them. As long as states in Southeast Asia can control their own energy destinies, market-based solutions like taxes or subsidies designed to nudge them toward renewables will be weak motivation. Many countries have spent decades building large and powerful economic sectors around the exploration, extraction, consumption, and exportation of fossil fuels, and that cannot be hand-waved away. Decoding these motivations is key to figuring out what path a country is likely to follow, where market-based solutions might have some cachet, and where trickier and more painful political choices and trade-offs may be required.

Thailand and Vietnam have been leading the pack in Southeast Asia when it comes to renewables, gradually liberalizing energy markets and seeking to give private capital a bigger role in the industry. These changes did not occur in a vacuum, however. In Thailand, the political class and other interest groups started getting serious about reforms around the time the domestic fossil fuel supply began to dry up. Thailand’s domestic production of natural gas, its largest fossil fuel resource, peaked in 2014 and after that the onboarding of renewables like solar increased at a much quicker pace.

In other words, when the ability of the state to determine its own energy destiny through the control and extraction of fossil fuels began diminishing, that’s when Thailand pivoted in earnest toward renewables. For a country like Thailand, which has structured its economy around exports and current account surpluses, being a net energy importer poses a major threat to its development model. This has provided considerable motivation to boost the role of renewables in its energy mix.

By contrast, Indonesia still has sizable fossil fuel reserves, which feed domestic markets, drive exports, provide revenue for the government, and support a deeply embedded network of powerful interests. Indonesian officials are less motivated to alter the status quo, and this has to be acknowledged and accounted for in any discussion of a clean energy transition. In fact, if we look at it purely in terms of rational, utility-maximizing self-interest it makes perfect economic sense for Indonesia to keep building coal power plants because it can guarantee a cheap supply of domestic coal for many years to come, even if global market prices start to rise. How to change that calculus is one of the biggest puzzles when it comes to clean energy transitions in the region.

Thailand: The Early Convert

The structure of electricity markets in Thailand is heavily intertwined with the apparatus of the state, from procurement to generation to transmission to distribution. The Electricity Generating Authority of Thailand (EGAT) controls the national grid, and also owns and operates about 35 percent of total generating capacity. Fifty-two percent comes from private power plants, and 13 percent is imported (this is electricity that is generated in overseas power plants and transmitted to Thailand, which is different from importing the raw fuel that powers domestic plants). Distribution is handled by two state-owned entities, one for Bangkok and one for the rest of the country.

The grid relies heavily on natural gas, which accounted for 59 percent of supply in 2020, followed by coal at 18 percent and renewables at 7 percent. PTT, an oil and gas giant 51 percent owned by the Ministry of Finance, controls the national gas pipelines through which many of these power plants are fueled, and also procures and refines much of Thailand’s natural gas and oil. According to their 2020 Annual Report, PTT contributed $2 billion to state coffers in the form of taxes and dividends.

While efforts have been made to liberalize the gas and electricity sector, the overall structure, especially on the production side, is not one that lends itself to market solutions. The state exercises considerable influence over the industry through its ownership of power plants, the grid, and PTT, and this structure is firmly rooted in its desire to control the country’s fossil fuel resources, in particular natural gas.

A new and decentralized energy source, like rooftop solar, could potentially erode that control and the revenues that come with it. Displacing natural gas and oil with wind and biomass gasification will cut into the billions of dollars in profit being generated by Thailand’s PTT, much of which is paid to the state. Something like carbon pricing may not be sufficiently powerful on its own to break the state’s hammerlock on the industry and the rents and incentive structure that prop the whole thing up.

And yet, the uptake of renewables in Thailand has been pretty fast, going from almost zero to 7 percent of the energy mix in just a few years. This has been accomplished through investment incentives and policy tools like feed-in-tariffs, but the real driving force is that the politico-business class has supported it. Why would they do that? Because Thailand’s natural gas reserves are being depleted. Every year PTT has to procure more gas through imports. This increasingly puts them at the mercy of global energy markets, where prices are determined by external forces over which they have no control. This is the real reason why Thailand has gotten serious about making the switch to renewable energy. They don’t have much of a choice.

Indonesia: The Reluctant Adopter

Other countries do have a choice, however (assuming they are willing to put their economic self-interest above the environmental well-being of the entire planet, which may be the case). Indonesia’s electricity sector follows the same model as Thailand, with state-owned utility PLN maintaining a complete monopoly on the transmission and distribution of power. In 2020, PLN owned and operated 70 percent of Indonesia’s installed capacity, making it by far the largest player in the electricity generation market. Meanwhile, state-owned Pertamina plays a commanding role in the country’s oil and gas sector and regularly pays hundreds of millions of dollars to the state in dividends.

The key difference is that Indonesia still has large fossil fuel resources at its disposal. Oil and gas reserves have been declining, but domestic production is still substantial. The door is even more wide open on coal, with Indonesia producing 563.7 million tons in 2020, 72 percent of which was exported and the rest used for domestic consumption, mostly in power plants. The Ministry of Energy estimates Indonesia’s verified coal reserves at 25.8 billion tons, so if they continue mining 500 million tons a year, existing reserves won’t be exhausted for another half century.

Unsurprisingly, Indonesia’s uptake of renewable energy has been very slow. Of the 274,851 GWh of electricity generated in 2020, 87 percent came from coal, oil, or gas-fired power plants, 12.7 percent from hydropower and geothermal, and a mere 0.3 percent from renewables like solar, wind, and biomass gasification. This is despite many years of legislative and policy efforts designed to increase the share of renewables. In the end, these efforts, even if well-designed and intentioned, will struggle to overcome the fundamental logic of Indonesia’s political economy and its reliance on coal.

Understanding this logic is important. Because the government has access to large coal reserves, it can control domestic prices in a way that Thailand once could with natural gas but no longer can. If the price of coal sold on global markets jumps above $200/ton (as it did starting in late September) Indonesia can insulate itself from these swings by forcing local coal companies to supply domestic power plants at a much lower price, say $70/ton.

This prevents higher global coal prices from being passed onto consumers and keeps the retail price of electricity low, something that is of great political value to Indonesian leaders. They control the supply, so they can control the price, and that is not something they will want to give up easily. Any credible plan for jump-starting renewable energy in a country like Indonesia must grapple with these political and economic realities.

What Comes Next?

The good news is that not all of these decisions can be taken unilaterally by Indonesia, or other countries rich in fossil fuels. Recent pledges by countries like China, Japan, and South Korea to end financing for coal power will be huge – if they are followed through. Indonesia might prefer coal for the reasons discussed above, but power plants can cost billions of dollars. If international lenders aren’t stepping up to bankroll them, it would have a seismic effect on the political economic calculus that makes fossil fuels attractive for a country like Indonesia in the first place. If international lenders switch in earnest to financing large-scale renewable energy development, while turning off the tap on coal financing, this would be a gamechanger. At the moment, however, these are just pledges. We’ll have to wait and see if it’s backed up with substantive action.

In the meantime, states in Southeast Asia are already trying to shift the structure of their energy sectors toward more sustainable configurations. The key question is how to reshuffle incentives so that large energy companies that have built their power bases and supply chains around fossil fuels can benefit from the introduction of renewable energies that threaten the existing modes of production and rent-seeking.

In Thailand, the depletion of natural gas reserves has forced Bangkok’s hand, but PTT is trying to get out ahead of these developments by positioning itself as a leading investor in the country’s nascent electric vehicle manufacturing sector. Indonesia is doing something similar, with Pertamina and PLN taking equity stakes in the newly formed Indonesia Battery Corporation, a state-owned company that’s also hoping to jumpstart the country’s battery and electric vehicle ambitions.

By involving themselves in battery and electric vehicle production, these companies are looking for an off-ramp from fossil fuels. It gives them an incentive to support the development of renewable energy and electric vehicles, because if these ventures are successful, they will share in that success. Similarly, PLN in Indonesia will need to get more directly involved in developing (and thus profiting from) renewable energy projects if solar and wind are to be added to the mix at scale.

As things stand now, renewable energy developed by private companies merely chips away at PLN’s 70 percent share of the market, and so its role in a clean energy transition ought to be reimagined as more than just that of an off-taker. Otherwise, what is the incentive for it to support plans which will erode its own market power and reduce its influence?

Trying to put a price on carbon that is so high it will tax big energy companies out of existence is not, alone, a solution, especially in emerging markets where they have been key agents of economic development and represent huge chunks of GDP. There has to be an alternative vision on offer, one that engages with the complex political economic challenges involved and can compensate for the losses incurred when fossil fuels are phased out. If we ignore that side of the equation, and put our hopes in the impersonal and elegant power of the market to solve what are fundamentally political problems, then the fossil fuel incumbents that can stay in power will stay in power for as long as they can. And in Indonesia, that could be 50 years or more.