Writer: Sharla Sabaruddin | Editor: Caroline Crowley
As Southeast Asia’s energy demand continues to soar, the clean energy transition is becoming increasingly necessary for the region’s growing population. With energy consumption projected to rise by 60% by 2040, renewable sources offer a sustainable, long-term alternative to a grid currently contributing to one of the biggest fossil fuel markets in the world. Continued dependence on emission-heavy fuels will worsen the effects a warming world has on the area. But more than just supplying carbon-neutral power in a time where mitigating climate change impacts is so critical, expanding Southeast Asia’s renewable energy sector will promote energy independence and present significant opportunities for economic growth.
Growing Pains: The Energy Dilemma
However, balancing economic growth targets while meeting the energy needs of growing populations continues to be a daunting task for these countries, as financing and infrastructure gaps present barriers to meaningful growth. Outdated grids typically make it difficult to add renewable energy projects without causing strain, hindering opportunities for large-scale renewable energy projects, and discouraging private investment in the sector. Upgrading transmission lines and distribution systems is a crucial first step in ensuring renewable energy can be transported efficiently across large distances without contributing to grid congestion.
Achieving the right balance between economic growth and energy efficiency is also a topic of contention in many Southeast Asian nations undergoing a new round of elections. As candidates vie for public support, energy policy can become a pivotal issue, splitting voters on the challenge of finding a middle ground that satisfies both economic and environmental goals.
Banking on Development: A Multilateral Affair
This is where multilateral development banks (MDBs) come in, typically backed by multiple countries whose role consists of pooling resources to fund large-scale projects that individual nations or private investors may not be able to finance alone. MDBs, such as the World Bank, Asian Development Bank, and Asian Infrastructure Investment Bank, play a pivotal role in supporting renewable energy projects. These entities provide the funding needed for developing countries to build sustainable infrastructure, modern energy grids, and an economic environment able to support growing populations and increased energy demand.
MDBs achieve this through concessional loans, credit guarantees, and other financial tools. Concessional loans are offered with low to no interest rates, allowing countries and companies to borrow money for renewable energy projects at little expense. Credit guarantees encourage private investment by having MDBs cover a portion of any losses incurred from a failed project, reducing the overall risks for private investors and stimulating investment in the energy sector.
Aside from financial assistance, MDBs also provide policy guidance for facilitating long-term sustainable energy projects. Developing nations, including Thailand, Indonesia, and the Philippines in Southeast Asia, face inconsistent regulations and bureaucratic delays that continue to hinder developmental opportunities. MDBs tackle this issue by reforming market dynamics previously ruled by heavily subsidized fossil fuels, at the same time streamlining bureaucratic processes through arrangements like power purchase agreements, or PPAs. Doing so helps clean tech firms avoid limitations stemming from complex regulatory frameworks that draw out approval processes for new projects. This is especially true in the context of strict government control over publicly-owned grid infrastructure.
Here, multilateral development banks can facilitate collaboration between private and public entities, often in the form of stronger power purchase agreements. These arrangements provide clear, long-term contracts between power producers (often private companies) and purchasers (typically government entities or public utilities). This implies that private investors are assured of a guaranteed buyer for the electricity generated from the project, making the investment all the more attractive. Having clear guidelines included in the agreement also ensures financial security for all parties involved, locking in prices and terms over extended periods. This ensures stable revenue streams that can justify the – often quite large – initial capital investments needed for infrastructure improvements. Not only does this process provide a better view of projected long-term financial performance, but it also alleviates concerns over market volatility and pricing fluctuations by securing the provisions included in the PPA. Overall, this creates predictable environments for long-term investments through a blend of public and private financial support.
Taking the example of Bangladesh, the World Bank and Global Environment Facility have joined forces with multiple other development finance institutions in funding the country’s non-bank financial institution known as Infrastructure Development Company Limited (IDCOL). Through this public-private partnership program, 4.2 million solar home systems have been installed in rural households as well as on remote shoals and islands, providing electricity to 12 percent of the population that previously relied on kerosene lamps for lighting. Resulting in increased energy access in Bangladesh with an estimated growth of 27% to 97% between 2003 and 2020, benefitting over 20 million people. This demonstrates the potential of strategic coordination between multilateral development banks and local development and commercial banks in expanding access to renewable energy financing.
Energizing Diplomacy
However, it is important to recognize the potential challenges of MDB involvement, specifically in reference to geopolitical tensions. Energy initiatives led by powerful states like China can be perceived as tools for leverage over other nations. While China’s investments in renewable energy throughout Southeast Asia have provided essential infrastructure and funding sources, this strategy also enables China to exert significant influence over foreign energy policies and economic frameworks. This can lead to tensions between recipient countries and their investors.
The geopolitical landscape becomes increasingly complex when comparing MDB funding with bilateral initiatives from nations like the United States. While MDBs often promote inclusive approaches, bilateral initiatives may prioritize the strategic interest of the donor country, leading to competing energy agendas. Like China’s involvement in Southeast Asia, the United States can generate its own influence through developmental aid or direct investments. However, this often comes with specific conditions reflecting American foreign policy goals, rather than the immediate needs of recipient nations.
As countries navigate competing interests, weighing the benefits of MDB-supported projects against the potential of dependency on powerful states is imperative. The main focus for developing these energy initiatives is reducing dependency on foreign resources like oil, promoting energy security, and ensuring economic stability.
Balancing Growth and Green
Weighing the benefits of MDB-supported projects isn’t just an external issue, given that stakeholders within recipient nations often face competing priorities. This is evident, especially during presidential elections in Southeast Asian countries, where candidates may champion different visions. On one side, the tried-and-true method of powering economic expansion through a robust fossil fuel market. And, new to the table, demonstrating environmental commitment through investments in renewable energy initiatives. This divergence in priorities leads to a split electorate, as environmental activism is increasingly becoming a significant influence on voter behavior especially among younger demographics.
As one of the largest carbon emitters of fossil fuels in the world, this issue showed prevalence during Indonesia’s presidential election in 2019. Leading up to the elections, tackling the severe air pollution crisis became a significant issue, particularly in urban areas like Jakarta, with over 57% of Jakarta’s population directly suffering from respiratory problems linked to poor air quality.
The incumbent president, Joko Widodo (Jokowi), advocated for continued investment in coal and infrastructure projects to stimulate economic growth, aiming for a mix of renewable energy sources while maintaining continued reliance on coal. In promising to simultaneously push developments of renewables like palm oil, biodiesel, and geothermal energy he argued that this balance is necessary for job creation and economic progress. In contrast, his opponent Prabowo Subianto had energy proposals that leaned more toward traditional energy sources such as bioethanol and coal in centering his proposed policies on ensuring national energy security and lowering fuel prices and electricity tariffs as a way to boost consumer spending power and enhance the economy.
At the end of the race, Joko Widodo (Jokowi) won reelection, securing a second term and beating out his opponent Prabowo Subianto. Despite the environmental criticism regarding his coal policies he placed greater emphasis on renewable energy development, despite his continued support for coal-based energy. This election highlighted the tension between prioritizing economic development and addressing environmental concerns. This exemplifies the challenges Southeast Asian nations face as they navigate competing priorities of economic growth and environmental responsibility.
Watt’s next?
Ultimately, the interplay between MBD initiatives and the geopolitical maneuvering of powerful states highlights the importance of strategic partnership and a cohesive approach to energy development that prioritizes sustainability, economic growth, and international collaboration. As the potential for renewable energy transition continues to grow, especially in Southeast Asia, it is imperative for countries to leverage international financing and energy expertise to create resilient energy systems that fulfill both growth targets and sustainable development goals. Fostering cooperative relationships transcending geopolitical boundaries helps mitigate the risk of dependency on any single power while still addressing pressing energy needs. This multifaceted approach is needed in order to harness a region’s full energy potential, all the while remaining vigilant to the geopolitical tides that could sway energy initiatives in unpredictable directions.
Featured image by Harisankar on Unsplash
