Power to the people

Asean states must invest in their energy infrastructure if they are to ensure strong economic growth

Christian Vits
January 14, 2014
Power to the people

Asean states must invest in their energy infrastructure if they are to ensure strong economic growth

By Christian Vits

From the ground up: Geothermal and coal are part of the energy mix powering the Indonesian economy. Reuters
From the ground up: Geothermal, along with coal, is part of the energy mix powering the Indonesian economy. Reuters

Southeast Asia’s hunger for energy is insatiable. Since 1990, the region’s energy demand has expanded two-and-a-half times, according to a joint study by the International Energy Agency (IEA) and the Organisation for Economic Cooperation and Development (OECD).
“Considerable further growth in demand can be expected, especially considering that per-capita use of its 600 million inhabitants is still very low, at just half of the global average,” the organisations wrote in the recently published Southeast Asia Energy Outlook. More than 130 million people – or more than 20% of the region’s population – lack access to electricity, leaving much scope for additional future demand.
Energy demand in Asean’s ten member states is projected to jump by more than 80% in the period to 2035 – a rise equivalent to current demand in Japan. “Southeast Asia is, along with China and India, shifting the centre of gravity of the global energy system to Asia,” IEA executive director Maria van der Hoeven said at the launch of the report.
Demand for coal will triple by 2035, accounting for almost 30% of global growth, after having grown at double-digit rates each year since 1990. It is also predicted that, by 2035, appetite for oil will grow by more than 50% while natural gas demand will surge by 80%. At the same time, the share of overall renewables in Asean’s energy mix will decrease over the same timespan as the rising use of modern techniques such as hydro, geothermal and wind power is offset by reduced use of traditional biomass for cooking.
The consequences of this run deep: Dependency on oil imports will double and amount to 75% of total demand, inflating Southeast Asia’s oil bill,
particularly in Thailand and Indonesia. This development also translates into a higher vulnerability to disruptions and supply shocks in the region. In 2035, Asean will be the world’s fourth-largest oil importer after China, India and the European Union, according to IEA calculations.
At the same time, revenues from natural gas and coal exports are expected to shrink as production will be increasingly redirected to satisfy domestic needs. “The rising share of coal in power generation underscores the urgent need to deploy more efficient coal-fired power plants,” van der Hoeven noted.
Against this background, the region will have to invest huge amounts on modernising and expanding energy grids, transport networks and production facilities to meet rising demand and increase energy efficiency. Distribution within Asean countries is still one of the big challenges, according to Elspeth Thomson, senior fellow and head of the Energy and Environment Division at the National University of Singapore. “The necessary infrastructure is often simply not there, such as pipelines, roads capable of taking heavy trucks, railroads and so forth,” she said.
The IEA estimates the investment needed for energy-supply infrastructure to amount to $1.7 trillion in the period to 2035. Historically, Asean infrastructure investment accounts for an average of 3% of gross domestic product, lower than the global average of 3.6%. In Indonesia, an increase in infrastructure investment equivalent to 1% of GDP would create 700,000 jobs, the McKinsey Global Institute, a think tank of the management-consulting firm, calculated.
“Sustained infrastructure investments over multiple years can have a multiplicative impact on GDP potential, which tends to be disproportionately higher in developing economies,” the Kuala Lumpur-based CIMB Asean Research Institute wrote in a study published in last month. “However, making uninformed or no investment can be extremely costly from a socio-economic perspective.”
Still, whether the region will be able to attract the capital needed to sufficiently expand energy infrastructure remains unclear. Constraints on public-sector budgets limit the leeway for additional spending, while private investors shy away from the high costs and risks associated with infrastructure projects.
“Some of the [Asean] economies are growing very rapidly and therefore may have the ability” to shoulder the investments, Thomson said. “Others are growing, but at a slower rate, and there are so many other pressing needs that the governments must address such as healthcare and education,” she added.
To overcome budget constraints some governments aim to get private investors on board with so-called public-private partnerships (PPP). “However, many governments are often poorly prepared to tap into private financing due to unclear allocation of risk and returns between the public and the private sector. [They also] often lack the legal, regulatory and institutional frameworks that are a critical pre-requisite for successful PPP’s,” according to the CIMB research institute.
The implementation of such projects is challenging, not least because of their huge scale. The Philippines is a case in point: The country prepared over 16 PPP projects worth more than $4 billion, but only successfully bid out two of them.
At the same time, the integration of energy grids could save money by taking advantage of the cheapest resources across Asean countries and sharing reserve margins. Thirteen new interconnections are planned over the next decade, with Laos and Myanmar being net exporters of energy, especially hydropower. The heads of Asean power utilities and authorities estimate that planned interconnection projects will save member countries $788m per year, according to the IEA.
“Countries cannot meet these huge power requirements all on their own,” said Seethapathy Chander, senior advisor on infrastructure and public-private partnerships at the Asian Development Bank in Manila. “The region must accelerate cross-border interconnection of electricity and gas grids to improve efficiencies, cut costs and take advantage of surplus energy.”
A further concern is that certain subsidies in many Asean countries lower the price paid by energy consumers to below international market levels or below the full cost of supply. The IEA estimates that fossil-fuel subsidies amounted to $51 billion in 2012, with those to oil and electricity having the biggest share.
Intended to help the poor and broaden the share of people with access to energy such as electricity, experts argue that the negative repercussions are huge. “Pricing must reflect real costs,” Thomson said. “Energy investments cannot function in a situation where there are energy subsidies.”
Government grants are seriously distorting energy markets as they encourage wasteful energy use, deter investments in clean and efficient infrastructure and burden the budgets. In Indonesia, petrol and electricity subsidies swallow up about 20% of the government budget. As a result, countries have begun to phase out such practices (see table).
Big choices need to be made in the coming years but, for the moment, it would seem that Southeast Asia has a long way to go to satiate its increasing appetite for energy.
Also view:
“Uncharted waters” – Four Asean nations are negotiating hard to form a giant free trade zone in the Asia-Pacific region. Those choosing not to join in may regret their decision
“Claws and fire” – India is working hard to maintain strong economic ties to Vietnam
“East by southeast” – What do the conflicting forces of slower Chinese growth and a more competitive Japan mean for the economies of Southeast Asia?

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