This is an extract from a recent report “Decarbonising Southeast Asia’s Hard-to-Abate and High-Emitting Sectors: Transition Finance, Technologies, and Policy Approaches” published by Economic Research Institute for ASEAN and East Asia (ERIA). This extract focuses on solar PV and grid integration.

Large-scale solar PV

The state of solar PV adoption: The solar energy potential in Southeast Asia far exceeds its current deployment. The region boasts an estimated 16 TW of solar energy potential, yet as of 2023, only about 26 GW have been installed. Between 2016 and 2020, Southeast Asia has attracted one of the lowest levels of investment in solar photovoltaic (PV) and wind power, second only to Sub-Saharan Africa. To meet net zero targets, it is estimated that annual renewable energy capacity additions must increase sevenfold for solar energy, from an average of 5 GW per year between 2018 and 2021 to about 36 GW annually from 2030 to 2050.

Financing challenges: Renewable energy investments in Southeast Asia face significant financing constraints due to limited capital availability for early-stage projects, contractual and policy uncertainties, and grid capacity issues. These challenges hinder the mobilisation of capital from commercial and financial providers. Currency and inflation risk further complicate the investment climate.

  • Indonesia: Policy-driven penalties or the ‘deliver or pay’ scheme, where the state electricity company (PLN) pays independent power producers (IPPs) based on their availability to delivery electricity rather than the actual offtake, imposes penalties on IPPs if they fail to meet agreed availability or capacity requirements, which adds financial risk to projects. The new ceiling tariff set by the government is considered too low, while the competitive bidding process, which rewards the lowest price, leads to unattractive tariffs, making it difficult to generate sufficient returns for investors. Electricity tariffs do not fully cover PLN’s operating costs, requiring reliance on state capital injections. PLN is also mandated to purchase renewable power at higher prices than coal while supporting coal through a 25% domestic market obligation. With a majority coal-based fleet, PLN faces limited fiscal space to pursue power sector reforms or scale up clean energy investments, discouraging both PLN and IPPs from investing in renewables in the absence of direct subsidies.
  • Viet Nam: The attractiveness of the renewable energy market is undermined by limited cash flow stability for developers, compounded by high curtailment risks. The shift from 20-year fixed feed-in tariffs to negotiation-based tariffs, which cannot exceed the ceiling announced by the government for the year, along with more variable calculation factors, makes the financial outlook less predictable. The national electricity company, Vietnam Electricity (EVN), has the authority to curtail assets and only pay for the energy received, creating a further challenge for developers seeking reliable revenue. Additionally, the weak grid capacity in the country increases the curtailment risk. Feed-in tariffs are denominated in the local currency, while financing often relies on the United States (US) dollar, exposing them to exchange rate risks that could undermine profitability.

Technical challenges: Across several countries in Southeast Asia, technical challenges significantly impact the successful integration of renewable energy into the grid. These challenges include slow transmission infrastructure development, which delays renewable energy projects, and grid capacity limitations that lead to curtailment, reducing project profitability. A common challenge across this region is the delay in transmission infrastructure development, which affects renewable energy integration. 

For instance, Viet Nam faces increasing curtailment issues, particularly in regions with high concentrations of solar and wind generation. This problem is more pronounced in the southern part of the country, where the density of solar farms is higher, leading to grid congestion

Policy challenges: Across several Southeast Asian markets, investors and developers face substantial policy-related barriers that hinder the development of renewable energy projects. These challenges include complex and time-consuming permitting and licensing processes, unclear policy vision and governance, and uncertainty surrounding the terms of power purchase agreements (PPAs). Additionally, project developers must contend with challenges such as limited suitable land for project development and inconsistent policies, which increase investment risks and slow the development of bankable projects.

  • Indonesia: Current policies on renewable energy development, such as complex procurement procedures and overly restrictive local content requirements, often diminish investment attractiveness and hinder the acceleration of renewable energy deployment. While the government has set renewable energy targets, a clear and credible policy direction is lacking. State-owned utility PLN also faces resource constraints in accelerating renewable energy deployment, such as the lack of capital, internal budget limitations, and insufficient experienced personnel to handle renewable energy projects.
  • Philippines: The country faces competition for limited suitable land for renewable energy projects as many potential sites are located near farmland or areas with established communities. In addition, land use conversion is a time-consuming process that involves multiple steps, such as barangay endorsements, public hearings, mayoral endorsements, and the issuance of development permits for civil works. The pre-feasibility study requirement adds significant delays (about 18 months), compounding issues with land consolidation involving local stakeholders.
  • Thailand: Renewable energy growth in Thailand is hindered by fluctuating government policies, including past bans on new renewables projects and recent suspensions

Recommendations for scaling adoption of solar PV

The key to scaling solar PV projects across Southeast Asian countries lies in leveraging well-structured policies, securing financing, enhancing grid infrastructure, and fostering local partnerships. As the region’s market conditions vary due to differences in energy policies, economic development, the regulatory framework, and technical readiness, strategies need to be tailored to each market to fully realise the region’s renewable energy potential.

• Design well-structured auctions: Implement auctions with guaranteed offtake to enhance investment security and create market confidence. 

• Streamline land acquisition: Simplify permitting and land acquisition processes, with government support for securing land and conducting feasibility studies, to ensure a robust project pipeline. 

• Leverage local expertise: Establish local teams and partnerships to improve foreign developers’ ability to navigate market-specific challenges, such as land acquisition, permitting, and grid access, leading to more efficient and streamlined project development. 

• Engage in regulatory management: Participate in policy discussions, public consultations, and regulatory forums to help shape policies that support renewable energy development and foster a more favourable investment environment.

• Speed up permitting for transmission projects: Expedite transmission permits and regulatory approvals to ensure timely integration of renewable energy projects.

• Expand offtaker base: Enable direct PPAs between renewable energy developers and commercial and industrial consumers to reduce reliance on state utilities, which often face financial and grid capacity constraints. 

• Pursue bold, large-scale developments: Support and incentivise large-scale projects that can attract significant capital, foster regional collaboration, and unlock new opportunities for the renewable energy sector. 

• Support distributed solutions: Complement utility-scale projects with distributed renewable energy options such as solar-powered mini-grids, especially for remote or island communities.

• Target transmission buildout: Focus on expanding and modernising transmission infrastructure to handle increasing variable renewable energy (VRE) generation.

• Expand financing mechanisms: Introduce blended finance to reduce currency risks with local currency loans and make solar projects more attractive in less developed markets by sharing risks and increasing investor confidence through development bank involvement.

• Narrow price gap between fossil fuels and solar PV: Implement an appropriate carbon pricing scheme, especially in countries with high fossil fuel dependency, to increase the cost of emitting carbon dioxide (CO2) from fossil-based power generation, making solar a more cost-competitive alternative energy source, which enhances its attractiveness to investors. 

• Innovate financing and commercial structures: Provide tailored financing options and commercial structures to suit various clients, from large corporations to industrial players. 

• Diversify investment portfolios: Spread investments across different countries in the region to reduce risk exposure and enhance financial resilience, enabling sustained investor and developer presence to scale the deployment pipeline. 

• Develop risk mitigation strategies: Build risk mitigation capabilities to address potential challenges, such as political instability, and explore innovative approaches to managing project risks.

Grid connectivity and infrastructure 

The state of grid connectivity in ASEAN: The ASEAN Power Grid (APG), a key programme of the ASEAN Plan of Action for Energy Cooperation (APAEC) since 1999, aims to integrate the region’s power systems through cross-border interconnections, grid code harmonisation, and the establishment of regional institutions. It is expected to progress in three stages: (i) bilateral trade, (ii) subregional trade, and (iii) an integrated regional system. The APG is divided into three geographic areas: the North System (Cambodia, the Lao People’s Democratic Republic (Lao PDR), Myanmar, Thailand, and Viet Nam); the South System (Indonesia, Malaysia, and Singapore); and the East System (Brunei Darussalam, Indonesia, Malaysia, and the Philippines). According to the ASEAN Interconnection Masterplan Study (AIMS) III, 18 priority interconnection projects have been identified, aiming to increase the existing transmission capacity of 7.7 GW to 17.6 GW by 2040.

Financing challenges: An estimated US$16 billion of capital investment is needed for the 18 cross-border grid interconnection projects. Securing financing for these projects can be complex, especially for less developed ASEAN Member States (AMS). Challenges include political uncertainties and perceived risks, which deter potential investors due to increased risk perception and financing costs. In most AMS, transmission infrastructure is primarily financed through the balance sheets of state-owned enterprises (SOEs), meaning financing capacity depends on the overall financial health of these entities rather than project-specific fundamentals. This structure also limits opportunities for private sector participation and project-based financing models. Additionally, there is limited investment from private sector players and financial institutions, both domestically and internationally, in the development of APG projects. 

Cambodia: Moody’s Investors Service revised Cambodia’s sovereign credit outlook from ‘stable’ to ‘negative’, while affirming its long-term issuer rating at B2 in April 2025. The revision reflects Cambodia’s high dependence on trade relations with the US and the downturn in its real estate and construction sectors. This could pose a potential barrier to attracting private capital for the grid interconnection projects.

Lao PDR: The Lao PDR holds a Caa3 credit rating from Moody’s (as of 2024, reflecting high external debt, limited foreign reserves, and currency depreciation, which necessitate significant multilateral and bilateral support to mitigate risks and attract private financing for projects.

Thailand: The Electricity Generating Authority of Thailand (EGAT), which operates Thailand’s power transmission sector exclusively, accumulated substantial debt by the end of fiscal year 2022 due to the soaring cost of liquefied natural gas (LNG) used for power generation. This accumulation of debt could, in the long term, undermine its creditworthiness and hinder investments in expanding the transmission network leading to the APG project.

Viet Nam: Viet Nam’s state-owned power corporation EVN, which exclusively operates the country’s transmission network, recorded significant losses in 2022 and 2023. These losses were caused by rising fuel costs and fluctuations in exchange rates, which led to increased power generation expenses. This financial challenge may hinder the ability to secure funding for the grid interconnection projects.

Technical challenges: Developing an integrated, multilateral power grid system that involves not only neighbouring regions or countries but also those separated by water bodies presents a myriad of technical challenges, fall under ‘immature VRE integration’ and ‘limited technology advancement’. Developing an integrated, multilateral power grid system in Southeast Asia faces significant technical challenges, including grid code disparities, outdated infrastructure, and a lack of specialised knowledge for complex subsea cabling. Additionally, competition for high-voltage direct current (HVDC) cables from Europe and North America could delay APG projects. These issues highlight the need for coordinated efforts and investments to overcome technical barriers and integrate renewable energy into the grid.

Lao PDR: The Lao PDR’s grid code focuses on basic operational parameters and is primarily managed internally by Électricité du Laos (EDL), whereas detailed grid codes are approved and updated by regulatory bodies in other countries like Singapore and Thailand. 

Philippines: The Philippines’ system operates at 60 hertz, while other AMS use 50 hertz. This necessitates frequency conversion infrastructure for future interconnections. 

Thailand: Thailand had to rehabilitate its aging transmission line to address lagging issues and ensure reliable power transfer for the Lao PDR– Thailand–Malaysia–Singapore Power Integration Project (LTMS-PIP)

Policy challenges: Stakeholders also face policy-related barriers to timely APG development. The primary challenges fall under ‘limited regional collaboration and interoperability’ and ‘limited enabling policies.’ Differing energy priorities, the absence of a regional regulatory agency, and varying political will hinder cross-border energy trade. Additionally, regulatory and economic difficulties from different pricing mechanisms and the lack of a standardised wheeling charge complicate efforts. These challenges highlight the need for coordinated policies and regional collaboration.

Recommendations for accelerating APG interconnection projects

• Involve financial and commercial players: Involve multilateral and national development banks, as well as international financial institutions, early in the process to enhance the viability and bankability of APG interconnection projects, since transmission projects in Southeast Asia are primarily financed through SOE balance sheets. 

• Regulatory harmonisation: Establish an institution that drives a regional regulatory framework covering elements like market rules and operational standards to enable efficient grid development and seamless energy trading amongst AMS. 

• Grid code harmonisation: Consult national grid committees to define regional power trade requirements and update grid codes as more variable renewables are integrated to ensure the stability and reliability of cross-border grid systems.

• Secure HVDC cable supply: Pre-negotiate long-term procurement agreements with HVDC cable manufacturers to ensure production slots and explore joint procurement initiatives amongst AMS for better pricing and faster delivery.

• Project of Common Interest designation: Classify APG interconnection projects as Projects of Common Interest to signal stability, demonstrate long-term commitment, and reinforce regional priority, which will boost investor confidence and attract private sector funding. 

• Phased implementation: Start with smaller or less complicated interconnection projects in neighbouring countries to build trust and expertise. 

• Standardised wheeling charge methodology: Develop a common wheeling charge methodology based on four internationally recognised principles: promoting efficiency, recovering costs, ensuring transparency, and fairness and predictability. 

• Data-sharing platform: Establish a standardised and reliable platform for real-time exchange of operational data across AMS to support regional power transactions and ensure coordination during system constraints. 

• Strengthen regional logistics and installation capabilities: Invest in cable-laying equipment and workforce to reduce reliance on foreign contractors amid limited global availability. 

• Uniform mechanisms for settlement, payment, and dispute resolution: Establish common rules and systems for pricing, payments, and conflict resolution to ensure fair transactions, reduce financial risks, and prevent power trade disruptions.

Access the report here