Overcoming fossil lock-in is pivotal for Asia to buffer against energy shocks

Navigating energy uncertainties amid oil and LNG halt in Asia

Structural redesign of the energy system is gaining urgency to shield Asian countries against recurring oil and gas trade turmoil. Steering countries off the fossil path and back towards clean energy will ensure countries mitigate potential risks, maintain energy security and remain on track for decarbonisation.

The longer that Liquified Natural Gas (LNG) and oil supplies from the Middle East are disrupted, the greater the implications for energy security. A prolonged period of conflict could reshape price dynamics and risk geopolitical fragmentation across Asia, fueled by intensified competition in the spot market. A spike in energy prices will weigh on Asian currencies, weaken output and investment and raise the inflation rate. As a result, countries may need contingency plans to prevent an economic slowdown.

Time to rethink Asia’s energy security

For decades, Asian economies have relied on stable global oil and gas markets to support rapid industrial growth. But the conditions that sustained this model are changing, exposing vulnerabilities in the region’s energy systems.

1.1 Fossil fuels underpin Asia’s economic growth — and its energy vulnerability

Asian countries have long depended on the stability of the global oil and gas market as a cornerstone of their economies. Countries in the region are experiencing some of the world’s fastest economic growth rates, with developing economies averaging 5.4%. Supporting this figure is a substantial dependence on oil and gas of key sectors of the economy, including agriculture, transportation, electricity and industry.

The closure of the Strait of Hormuz and a halt in Qatari LNG production expose the vulnerability of countries’ energy systems and economies. Around 84% of crude oil and 83% of liquefied natural gas that passed through the Strait of Hormuz went to Asia in 2024. Singapore and Thailand, the two Southeast Asian countries that are most reliant on imported gas, sourced the largest share of LNG from Qatar last year, at 42% and 27% shares respectively of total imports. In East Asia, Japan imports over 90% of its crude oil from the Middle East, while South Korea sources around 70% of its crude from there, most of which passes through the Strait of Hormuz. China received over 40% of its crude oil from the Middle East in 2025, and has been stockpiling oil reserves since.

A prolonged energy supply disruption from the Middle East would affect Asia disproportionately. It would intensify competition for alternative sources and push prices higher globally. While the impacts will apply to the rest of Asia, the vulnerability will be pronounced in economies that have less diversified energy sources. Importing countries with a larger share of gas in electricity generation will need to rethink their energy security. Countries that found themselves unable to compete in a supply crunch would likely end up revisiting their LNG facilities expansion plan.

On the economic front, a surge in the prices of US-dollar-denominated fossil fuels will weigh on Asian currencies, given that most are net importers. Furthermore, energy shocks might lead to a rise in domestic interest rates, as well as a decrease in industrial output and spending power.

1.2 Energy shocks have a lasting economic effect in Asia

The implications of the current energy shock could potentially affect Asia over the longer term rather than immediately. Rising energy prices in the spot market will spur intense competition among buyers to secure supplies. This will induce volatility in the energy markets, affecting developing Asia the most.

Globally, there have been several periods of volatility in oil and gas prices. Recent episodes took place during the global financial crisis of 2008, the COVID-19 pandemic of 2020, and the Russia-Ukraine conflict in 2022. These events prompted inflation in several Asian countries, most notably in Singapore and Thailand. Both countries recorded a surge in inflation in 2023, reaching 8.5% and 6.1%, respectively.

In Thailand, the conflict between Russia and Ukraine led to tighter supply of energy and high domestic prices of fuel and electricity. In 2022, gas prices averaged more than US$50/MMBtu and reached US$100/MMBtu at their peak, spiked as much as tenfold compared with pre-conflict gas prices which ranged between US$10–15/MMBtu. The Thai Baht also depreciated. The depreciation, coupled with high prices of energy, led to costlier goods and services.

Singapore, which is highly reliant on imported goods and services, is sensitive to changes in energy prices. In the aftermath of the pandemic, the tighter energy supply and rising global food and energy commodity prices, compounded by the Russia–Ukraine war, intensified inflationary pressures and contributed to cost-push inflation.

Since then, economies have stabilised, and inflation tends to significantly decelerate as oil prices fall. Countries such as Thailand extensively hand out economic stimulus packages to shield their export-driven economies from rising global pressures.

Now, economic growth momentum is facing yet another challenge. Economic activity will likely be weighed down by energy supply constraints, in turn resulting in declining industrial production. Complicating matters further, fossil reliance will continue to play a major role in the region’s energy policy. For example, gas generation is projected to reach almost 200 GW under ASEAN’s energy transition scenario by 2030, double the current 106 GW. The cost of generating electricity from gas at current Japan Korea Marker (JKM) LNG price levels of US$49/MWh amounts to approximately US$71 billion. Based on future price projections, this cost could rise to as much as US$109 billion. By comparison, generating the same amount of electricity with solar—despite requiring larger capacity—would cost roughly half as much, at around US$42 billion.

1.3 Japan: Oil price volatility to impact consumer prices

Japan is one of the world’s biggest oil importing countries, ranking in the top five consumers. Crude oil imports from Qatar fell by about 51% year-on-year, from 470,080 kilolitres in January 2025 to 230,228 kilolitres in January 2026 This is influenced by a number of factors, including falling domestic demand for transportation fuel and the shift towards low-carbon fuels.

However, disruption in the supply from Qatar will likely have a domino effect. The surge in crude oil prices up to US$100/barrel raised concerns about potential shortages due to longer disruption to Middle East energy supplies. By comparison, the oil import price rose to above US$116/barrel in July 2022, at the height of the Russia/Ukraine disruption.

The Bank of Japan is currently assessing the direction of monetary policy as it plans to raise interest rates later this year contingent upon yen depreciation or rising consumer prices. Increasing crude oil prices will directly impact the price of gasoline. For example, if crude oil prices rise to US$110/barrel with no exchange rate fluctuations, prices are expected to climb 30% to around US$1.24/litre.

1.4 Singapore: Electricity price exposure

In 2024, gas accounted for 95% of electricity generation in Singapore. Gas is, supplied from Indonesia and Malaysia via pipelines, along with LNG from global markets.

LNG prices, benchmarked against the Platts Japan–Korea Marker (JKM), rose by 68% to US$25/MMBtu for April delivery, posing potential risks to countries reliant on LNG for power generation.

Ember’s analyses show that gas-fired electricity generation costs could rise to around US$260.8/MWh, based on the prevailing JKM price and other cost components. This is more than double the average Uniform Singapore Energy Price (USEP) price in the last week of February, around US$105/MWh. USEP is the price benchmark for the Singapore Wholesale Electricity Market. In comparison, in 2025, the USEP had largely settled in the range of US$78-150/MWh.

Further, a gas price rise to US$100/MMBtu could spike the cost of gas-fired electricity generation to US$770/MWh. This is a plausible scenario, as seen in August 2022 when gas prices peaked at over US$100/MMBtu.

Based on the analysis, the fuel cost will continue to constitute the largest component of the regulated electricity tariff (about 80%). The rise is due to changes in the cost of fuel or imported gas.

The government has set a temporary price cap that acts as a “circuit breaker,” activated only during periods of high and sustained fluctuations, to stabilise prices and protect consumers from price volatility. In 2021, the cost of 1 MWh jumped to more than US$2000/MWh at peak, close to the maximum cap.

To mitigate the impact, the country has set a Temporary Price Cap (TPC). The TPC helps curb price volatility for a certain period of time and go above the threshold. Singaporean households that are purchasing electricity through a fixed-price retail contract or regulated tariff may be cushioned from immediate price volatility.

Singapore is also ramping up its solar energy use to 3 GW by 2030, increasing clean electricity imports and supporting deployment of the ASEAN power grid. The strategy could also create development spillovers for neighbouring countries.

Pragmatic balance to strike security, sustainability and affordability

Boosting investment in regional renewable energy sources and strengthening supply chains in clean technologies can keep crises at bay.

2.1 A short-term pivot to coal is high-cost, high-risk

Indonesia, the largest coal producer in the region, plans to revise the coal production quota for 2026, amid the Gulf situation. Coal prices surged by as much as 9.3% to US$134/tonne in early March 2026. The country had previously reduced the national coal production target to around 600 million tonnes this year, down 190 million tonnes from last year’s realised output. Most of the production was directed to export markets, totalling around 514 million tonnes, or 65.1% of total output.

Since last year, the Indonesian government has mandated the use of a coal reference price, enabling the country to determine prices of coal sold to the global market. This will give greater autonomy to Indonesia for negotiating upcoming export contracts, insulating buyers from volatile global prices and international market mechanisms.

In 2024, China, Japan, South Korea, Malaysia, the Philippines and Thailand were the major export destinations for Indonesian coal, collectively accounting for 60% of the coal export market share.

As a temporary measure to manage the electricity crisis, Thailand’s government has ordered coal-fired power plants to operate at full capacity, risking higher carbon emissions. In 2024, coal power plants in Thailand operated at 62% capacity factors, compared with 66% in the years between 2020-2023. As a fallback option, coal will be costly, both economically and environmentally. An illustrative analysis shows that increasing the coal capacity factor in Thailand to 70% will be equal to an additional generation cost of US$263 million, using an estimation of US$60/MWh. This also risks increasing annual emissions to around 3.2 million tonnes CO2, about 5% targeted emissions by 2037, under the draft power development plan. In comparison, solar generation will cost about 35% less.

Arguably, increasing the capacity utilisation of coal power plants or adding new power plants is unsustainable. For instance, maximising coal plants capacity would raise coal use. If all those power plants in Thailand run at a load factor of 70% throughout 2026, that would result in an additional 4 TWh of hard coal power generation. This equates to an approximate increased coal requirement of 1.5 million tonnes. Additionally, developing new coal power plants could take up to seven years.

Also, coal cannot replace gas or oil in other key economic sectors such as transportation or industry, unless these sectors are electrified, risking new coal power stations assets becoming stranded. The average levelised cost for coal is around US$60-85/MWh, above the costs of onshore wind, solar and solar+storage at US$40/MWh, US$39/MWh, and US$57/MWh respectively – making coal considerably higher risk and cost compared with renewables.

2.2 Energy volatility risk exposure is higher in developing and emerging Asian economies

Asia must balance between energy security, affordability and sustainability. The recent oil and gas volatility illustrates the dilemma. The energy price swing driven by geopolitics in 2022 prompted economies to implement emergency fiscal measures, such as subsidies to cushion short-term price shocks. However, countries with limited space to expand fiscal policies might find it difficult to close the gap in electricity and energy access.

For example, Indonesia’s State Budget for 2026 determined the oil price to be US$70/barrel. A surge in oil prices to above US$150/barrel could effectively double the current oil spending, intensifying pressure on governments to expand energy subsidies and, in turn, widening fiscal deficits.

Currently, several ASEAN countries are bracing for the impact of oil and gas shortages via short-term measures. Thailand has announced a price cap on diesel for 15 days. The Philippines has implemented work from home measures to cut the use of transportation.

To achieve longer-term resilience, governments need greater policy options that enable quicker renewable deployment, scaling electrification, to bolster energy security and shield consumers from rising costs.

2.3 Prolonged crisis amplifies the case for diversifying away from fossils

Currently, the LNG sector in ASEAN is developing, with several planned capacity expansions. Countries would benefit from rethinking planned LNG expansions, to avoid being locked into import dependence. Should the volatile situation worsen further, impeding vital production and export infrastructure, ASEAN countries – particularly those who rely on the Middle East gas route – will have to weather a set of challenges to keep electricity running as they transform their power systems.

The current situation could be interpreted as a wake-up call for Southeast Asian countries to reshape their energy landscape by increasing the share of clean technologies, reducing fossil fuel imports, stepping up energy efficiency, expanding storage and grid infrastructure, accelerating electrification and integrating renewables at scale by investing in supply chains to reduce power system costs and strengthen domestic energy security.

Securing long-term energy sources from homegrown renewables should take into consideration battery and grid development.

2.4 Leveraging grid and renewables investment to boost resilience

The price differential in oil and gas markets can create arbitrage opportunities for the West. Competition for LNG and oil in the spot market can intensify during supply shocks, often favouring wealthier economies with greater purchasing power, redirecting cargoes towards higher-priced markets. Long-term energy contracts’ renewal prices might also be affected. This dynamic risks amplifying socioeconomic pressures, widening income disparities not only between countries but also within them as higher energy costs filter through to households and industries. Emerging economies may face greater vulnerability as they compete for limited supplies at elevated prices.

Deploying investment into regional connected grids can leverage growth opportunities and shared infrastructure on the clean technologies receiving side. The region is rich in hydropower, geothermal, solar and wind that could be further explored to maintain energy stability. For example, South Korean President Lee Jae Myung called for accelerated deployment of clean energy as a medium term measure on the premise of a prolonged Middle East situation.

Although China does not explicitly frame its clean energy transition as a response to volatility in global oil and gas markets, recent policy developments indicate a shift in focus from simply expanding clean megawatts to building a clean mega-system—a “new-type power system” (新型电力系统) capable of accommodating much higher shares of renewable energy while maintaining supply reliability and energy security.

Recommendations underpinning the forthcoming 15th Five-Year Plan call for “accelerating the development of a new energy system, continuously increasing the share of new energy supply, advancing the safe and orderly substitution of fossil fuels, and building a new-type power system in support of becoming a strong energy nation.”

Supporting this shift will require substantial infrastructure investment. The State Grid Corporation of China has announced plans to invest around RMB 4 trillion (approximately US$550 billion) between 2026 and 2030, roughly 40% higher than investment during the previous five-year period, to strengthen transmission networks, expand inter-regional grid connections, and scale up energy storage deployment. This means China may reduce its reliance on fossil fuel use and imports.

From the ASEAN region, the ASEAN Economic Ministers have released a joint statement, underscoring the importance of strengthening regional energy security and resilience and accelerating the renewable energy transition, as well as continuing cooperation in the ASEAN Power Grid.

Returning to the energy crisis issue, countries with better grid infrastructure and renewables in the mix are structurally better positioned to absorb the shocks. As past crises have taught us, fossil fuel import dependence is putting energy security at risk. Now, Asian countries stand at a crossroads: they can transition toward electrostates that reduce emissions and meet climate goals, or remain petrostates that risk creating greater energy liabilities.

Supporting information

Methodology

ASEAN price analysis compares the cost of electricity generation from gas and solar by converting installed capacity into annual generation using assumed capacity factors, and then applying levelised cost of electricity (LCOE) estimates.

Gas-fired generation is calculated using a capacity factor of 60%, while solar generation assumes a capacity factor of 20%. Cost estimates are then calculated by applying LCOE assumptions of US$75/MWh for gas and US$40/MWh for solar to the equivalent level of electricity generation.

To assess sensitivity to fuel price volatility, gas generation costs are also benchmarked against the Japan Korea Marker (JKM) LNG price at US$49/MWh.

Singapore

The cost for electricity generated by gas is calculated based on the capital cost component assumption of CCGT plants, variable non fuel costs, carbon price and fuel cost from the strike price for gas of around $25.40 per million British thermal units, and US$100/MMBtu under the most extreme price hike. Carbon price is calculated based on the average carbon tax rates introduced by the National Environmental Agency Singapore, at $50 SGD per tonne, between 2024 and 2030. The cost is denominated in US dollar.

Thailand

Coal emission factor is calculated using emission factors at 726.19 g-CO2/kWh. Levelised cost of electricity for coal and solar is assumed to be US$60/MWh and US$39/MWh, respectively, under normal contracting condition.

Levelised cost of electricity for 2026 under coal price of $134/tonne and gas price of $85/MWh is calculated using NREL’s Annual Technology Baseline (ATB) 2023 Methodology. Some financial cases were taken from the ATB, and some were obtained from World Development Indicators, Climate Policy Initiatives (2023) for the cost of capital. Capacity factors for various energy technologies were adjusted using yearly historical data to better account for system degradation over its lifetime. Results show levelised cost for coal to be $75/MWh and $104/MWh for coal and gas, respectively.

Acknowledgements

Richard Black, Aditya Lolla, Tito Das, Shiyao Zhang, Nicolas Fulghum, Libby Copsey, Dody Setiawan, Chelsea Bruce-Lockhart, Jivan Zhen Thiru, Alnie Demoral, Lam Pham, Ardhi Arsala Rahmani, Eli Terry.