ASEAN is feeling the heat to transition

As a major engine of global economic growth, ASEAN has significant leverage and opportunities to drive the clean energy transition through regional collaboration and policy reforms. 

As rising demand from data centres and ambitious economic growth targets drive further industrial expansion, decarbonisation is more urgent than ever. ASEAN currently operates 1.5 GW of data centres, with more in the pipeline, indicating significant demand growth. 

Malaysia’s data centre market is expanding rapidly, forecasted to grow by 13.9% between 2024 and 2029. Indonesia is also emerging as a hotspot, especially with plans to relocate data centres from the costlier Singapore. Thailand is another potential market, with investments reaching up to $2.9 million USD.

This growing sector will not only require a large and stable electricity supply, but also challenge governments to align this demand with their clean energy agendas, creating an opportunity for the region to tap into its vast renewable energy resources.

ASEAN is set to be more interconnected in the coming decade

Interconnections in Southeast Asia

Despite being proposed nearly 30 years ago, interconnections in the ASEAN region remain limited. The first roadmap for the ASEAN Power Grid was set out in the ASEAN Plan of Action for Energy Cooperation (APAEC) 2004-2009, aiming to boost regional energy security through cross-border projects. A year later, the ASEAN Interconnection Master Plan Study (AIMS) assessed the technical and economic feasibility of these projects. 

Out of 18 key interconnection plans, eight interconnections have been completed, resulting in 7.7 GW of cross-border transmission capacity, which includes 4.7 GW of dedicated Independent Power Producer (IPP) generation exports (generation to grid), and 266 GWh of electricity traded as of July 2023.

Most of these interconnections are bilateral, with energy trade conducted through long term power purchase agreement. In bilateral power trading, Lao PDR has become the main exporter of hydropower in Southeast Asia. Lao PDR is increasing its electricity exports to neighbouring countries while promoting renewable energy development. Its main export markets include Thailand ($2.03 billion USD), Cambodia ($188 million USD), Vietnam ($134 million USD), Singapore ($24 million USD) and China ($3.69 million USD).

To date, only one multilateral power trading currently operates through the ASEAN power grid. The power interconnection between Lao PDR, Thailand, Malaysia and Singapore (LTMS– PIP/Lao PDR- Thailand – Malaysia – Singapore power integration project) marks a significant milestone in ASEAN’s regional energy cooperation and integration, with the potential to drive economic growth, enhance energy security and support sustainable development across the region. 

Future developments of both bilateral and multilateral power trading are expected to follow. The Brunei Darussalam, Indonesia, Malaysia and the Philippines Power Integration Project (BIMP-PIP) is the next agenda of the ASEAN Power Grid. Singapore’s 6 GW low-carbon electricity import target by 2035 lays the foundation for its ambition to become a renewable energy hub. Plans to import from Australia, Indonesia, Cambodia and Viet Nam demonstrate progress toward this goal.

Wind and solar exhibit good complementarity in ASEAN

The complementary nature of wind and solar power could be understood by examining capacity factors and weather data from 2019 to 2024 across several ASEAN countries, under the current grouping:

• Indonesia (Kalimantan Island) – Malaysia (Sabah and Sarawak) – Brunei Darussalam
• Viet Nam – Cambodia – Thailand – Indonesia
• Lao PDR – Thailand – Peninsular Malaysia – Singapore
• Peninsular Malaysia – Indonesia – Singapore
• Brunei Darussalam – Indonesia – Malaysia – the Philippines

The solar capacity factors in Peninsular Malaysia and Singapore, peaking at around 20% from January to April, align well with Indonesia’s wind capacity factor of up to 30% from May to October. This temporal complementarity can help balance supply and demand across the countries, highlighting the potential of interconnection projects.

Wind and solar power complement each other based on diurnal patterns (active patterns during the day). With solar power peaking during midday and tapering off as the sun sets, wind patterns can complement solar with wind speeds expected to be higher at night in some locations.

This indicates that cross-border interconnection and grid-flexibility improvement can boost solar and wind use, fostering mutually beneficial relationships among countries with market opportunities and varying renewables potential, especially in solar and wind. Countries equipped with the necessary technologies can build a robust renewable energy ecosystem.

Opportunities to prioritise and strengthen regulations to boost renewables in carbon financing

As some ASEAN countries establish domestic carbon markets, the idea of a regional carbon market is gaining traction. Such a market could accelerate decarbonisation in the power sector and beyond by mobilising finance from carbon-intensive sectors to renewable energy and advanced technologies like storage facilities.

Two types of carbon markets can be implemented regionally: voluntary and compliance markets. Compliance markets are regulated by law, mandating businesses to reduce emissions typically through carbon pricing instruments, such as carbon taxes and emissions cap-and-trade mechanism. In contrast, voluntary carbon markets rely on the willingness of businesses to reduce emissions through carbon offsets to meet climate pledges.

While voluntary carbon markets are emerging globally and in Southeast Asia, regulated carbon markets are still in development. Singapore is currently the only ASEAN country implementing a carbon tax mechanism. However, some ASEAN countries are taking steps toward regulated carbon markets, putting a price on greenhouse gas emissions. 

The rise of carbon markets and pricing mechanisms in ASEAN

Indonesia has introduced a carbon pricing mechanism following the 2021 presidential decree on the economic value of carbon. This led to the launch of an emission trading mechanism for the power sector, covering 99 grid-connected coal power plants, although captive coal plants are not yet included. The carbon tax mechanism, originally scheduled for 2022, has been postponed indefinitely, with no clear timeline for its official rollout.

Thailand is on its way to become the second country in ASEAN to introduce a carbon tax, targeting implementation next year. Announced in June, the tax will levy 200 baht ($5.60 USD) per tonne of carbon dioxide equivalent on oil products like diesel and gasoline.

Malaysia’s National Carbon Market Policy is underway and expected to be finalised by next year. The policy aims to support the mandatory and voluntary carbon market mechanisms and accommodate potential investments in carbon projects.

The Philippines is also eyeing carbon pricing instruments, conducting a study to explore suitable options.

Viet Nam, having earned $200 million USD per year from carbon credits, plans to enter a pilot phase of its emission trading system from 2025 to 2027, aiming for official operation by 2028. Recognising the large potential for carbon revenues, Lao PDR is also preparing a decree on carbon credits to centralise its carbon trading system. 

As the leading ASEAN country in the domestic carbon market, Singapore’s market size was valued at $14.5 million USD in 2023 and is expected to grow exponentially to around $55 million USD by 2030.

Additionally, the Article 6 mechanism under the Paris Agreement is gaining momentum in ASEAN, enabling country-to-country emissions trading to meet Nationally Determined Contributions (NDCs) and providing developing nations with additional financing through emission reduction sales.

Singapore is positioning itself as a regional carbon trading hub, actively sourcing Article 6 carbon credits to meet the growing domestic corporate demand for offsetting their carbon tax liabilities and achieving climate goals. To date, Singapore has signed agreements with Cambodia, Lao PDR, Viet Nam and the Philippines on Article 6 cooperation, along with broader climate change and sustainability cooperation with Indonesia.

The Article 6 cooperation between Thailand and Switzerland marks a global first, having completed the inaugural transfer of Internationally Transferable Mitigation Outcomes (ITMOs) earlier this year from an electric bus initiative toward fulfilling NDC commitments.

Another carbon finance initiative is the transition credit mechanism, which focuses on emissions reductions from early coal power plant decommissioning. Such a mechanism has been established through Singapore’s Transition Credits Coalition and the Coal to Clean Credit Initiative, which explore a pilot project in the Philippines.

Optimising carbon finance distribution with robust regulations

In the voluntary carbon market, some renewable energy plants in ASEAN are certified under prominent carbon credit standards, Verra and Gold Standard, resulting in more than 11 million tonnes of carbon dioxide equivalent (tCO2e) in registered annual emission reductions as of this report.

Our analysis shows ASEAN could achieve 41 million tCO2e in potential emission reductions from renewable energy generation in 2023, leaving 30 million tCO2e of emission reductions untapped for carbon revenues (see Methodology).

Stringent certification requirements for maintaining additionality, high certification costs—particularly for small-scale projects—and regulatory developments are likely contributing factors.

For example, Indonesia’s ongoing carbon policies have led to a halt in the international carbon certification, pending clarity since 2021. As a result, no new carbon projects have been registered or issued during this period.

Additionality concept ensures an intervention from carbon finance has a substantial effect when compared to the baseline. Stringent requirements currently limit renewables’ access to carbon finance, making new grid-connected renewable plants no longer eligible for carbon credit application unless the technology penetration rate is less than 5% of the total grid installed capacity in the national grid, among other conditions.

Carbon credit

Carbon credit is a tradable certificate representing the reduction of one tonne of carbon dioxide equivalent (tCO2e). Depending on the design of the carbon markets, carbon credits can be used as emission offsets to avoid carbon taxes in regulated markets or to help entities meet their climate goals in voluntary markets.

The untapped potential of emission reductions through renewable energy offers ASEAN a valuable opportunity to establish a regional carbon market with a semi-compliance, or a compliance system. These potential emission reductions can serve as emission trading supply, enabling more renewable energy facilities with high additionality to generate additional revenue alongside electricity sales.

High additionality could mean the implementation of such technologies in the host country is uncommon and may likely not be feasible without carbon finance. In carbon markets, renewable energy is typically viewed as economically viable even without carbon finance. However, economically challenging technologies in the renewable sector, such as storage facilities and offshore wind, can benefit from this mechanism.

Depending on the design of the regional carbon market, compliance markets can go hand-in-hand with carbon offsets. However, additionality assessments for offset credits will need to be remodelled and strengthened to ensure the integrity of the carbon market and that offsetting does not distract from the growth of the renewable sector.

For ASEAN to establish a regional carbon market, regulatory implementation can enable market growth at scale and facilitate a faster shift to a lower-carbon power sector. By pricing carbon emissions, generated revenue can be effectively channelled into climate mitigation and adaptation projects, including renewable energy, surpassing the impact of voluntary markets. 

Well-designed carbon pricing mechanisms, with a strong and appropriate price signal—particularly in the power sector—are essential for ensuring liquidity and accountability, and improving energy affordability.

The success of a carbon market hinges on a robust monitoring, reporting and verification (MRV) system. Ensuring data transparency and accuracy, as well as standardised approach across the region, is vital for the effective MRV operations, which uphold the credibility and reliability of the carbon market. Moreover, stringent criteria for renewable energy projects remain necessary to ensure the delivery of high-quality emission offsets in the compliance markets.

Some requisites are essential to initiate and ensure a robust regional carbon market in ASEAN. A unified emission reduction target can serve as the basis for creating a framework that equitably distributes emission reduction responsibilities among ASEAN countries. Once a regional target is established, emission allowances can be capped at the national level, allowing each country to maintain autonomy over its climate objectives while ensuring a coordinated approach to climate mitigation that aligns with regional goals.

Just transition to secure social acceptance

The concept of a just transition has gained traction in regional energy discourse in recent years and remains a focal point in 2024, particularly with the launch of the just and inclusive energy transition report by the ASEAN Centre for Energy. During the 2023 ASEAN Ministers of Energy Meeting Plus Three, leaders emphasised the importance of a just and inclusive energy transition to achieve carbon emissions reduction in the energy sector while ensuring energy security.

Just Energy Transition Partnerships (JETP), initiated at COP 26, aims to fund energy transitions and have included Indonesia and Viet Nam among Southeast Asian participants. The JETP structure is designed for Global North countries to support the Global South by mainstreaming more equitable, inclusive and democratic approaches to clean energy deployment and transitioning from fossil fuels. This includes enhancing nationally determined contributions and setting more ambitious national energy plans while also improving gender equality and empowerment, protecting biodiversity, diversifying local economies and providing social protection for affected communities.  

While a regionally recognised transition framework has yet to be introduced, some ASEAN countries, like Indonesia, have begun incorporating just transition concepts into their long-term and medium-term development plans. Integrating these concepts into project planning and proposals can increase investor confidence in financing energy projects in ASEAN. Most importantly, a just transition can help secure social acceptance from communities, policymakers and wider market actors, fostering a positive perception of renewables that may encourage further adoption. 

Besides JETP, other regions have established mechanisms to support just transitions. The European Union has a Just Transition Mechanism that allocates €55 billion to mitigate the socio-economic impacts of the transition. In South Africa, the Just Energy Transition Funding Platform serves as a matchmaking tool between funders and project implementers. If similar mechanisms were available in ASEAN, a faster integration of renewable energy into the energy system could be expected.