By Ambiyah Abdullah and Aisyah Fitri Azalia

ASEAN’s energy and finance landscape

ASEAN accounted for approximately 7.3 per cent of global GDP and 11 per cent of global energy demand in 2024, and is projected to account for more than 35 per cent of global energy demand by 2035, assuming the current growth rate continues.

Moreover, the region’s GDP is projected to grow around 5 per cent in 2026, which will affect energy demand in the region.

According to the 8th ASEAN Energy Outlook, energy demand in the region is projected to grow almost three times the 2022 level by 2050, with a fossil fuel-dominated energy supply under the baseline condition.

Aligned with the region’s commitment to carbon neutrality, the region aims to accelerate the deployment of renewable energy (RE) and emerging technologies, while also enhancing power grid interconnection.

Under the APAEC 2016-2025 Phase II the APAEC 2021-2025, the region aims to achieve approximately 23 per cent of the RE share in total primary energy sources by 2025 and is projected to reach around 50 per cent by 2050. This marks a substantial increase from the 2022 level, which was around 22 per cent.

For energy transition efforts, the region needs around US$200 billion. However, the current ASEAN expenditure for clean energy investment accounts for only 2 per cent of the global level.

The international investment energy across the region is estimated at approximately US$43 billion in 2022, while domestic investment is significantly lower.

ASEAN is estimated to have a total financial gap in RE investment of around US$96 billion by 2030.

The financial gap arises due to several challenges in the region, including limited access to capital markets, currency fluctuations, investment risks, and the inherent risks associated with clean energy investments.

This multifaceted challenge reduces private investor confidence to invest in the energy sector in ASEAN.

The investment decision made by the private sector is influenced heavily by the cost of capital, which comprises a risk-free rate and compensation for risk.

The compensation of risk is primarily influenced by actual and perceived uncertainties surrounding a project's cash flow.

Reducing these perceived risks is crucial to attracting greater investment from the private sector. Among the risks perceived by the private sector, technology and financial risks significantly impact the high upfront costs of energy transition projects in ASEAN.

When the high upfront costs associated with renewable and emerging technologies are combined with other risks, the required risk premium becomes substantial, driving up the cost of capital and ultimately discouraging investment from the private sector.

Existing blended finance schemes

To de-risk private investors in the energy transition, the government's role is crucial in minimising the risks perceived by private investors.

Among others, blended finance is a commonly used instrument that combines public and private investors for energy transition projects.

Through blended finance, the involvement of the public sector will reduce the cost of capital by providing concessional finance and guarantees, making it more attractive to the private sector.

The most used structuring approach of blended finance is concessional capital. This approach blends concessional finance with commercial debt or equity. Concessional finance offers more favourable terms, typically in the form of lower interest rates, more extended repayment periods, grace periods, or partial guarantees.

The other structuring approach of blended finance is guarantee/risk insurance, where public investors provide credit enhancement through guarantees or insurance on terms below market rates.

Lastly, blended finance may come in the form of a technical assistance fund scheme, where grants are offered to support activities either before or after investments are made.

Despite the advantages of blended finance as a capital mobilisation cycle, the choice of instruments and concessions needs to be assessed and tailored to a specific local context and the risk mitigation of energy projects.

Moreover, the use of blended finance in clean energy projects must also incorporate both financial and development additionality aspects.

Leveraging blended finance for energy transition in ASEAN

Energy transition projects in ASEAN vary according to the targeted risks to be mitigated and the stages of the energy projects and technologies, which significantly affect the choice of blended finance instruments.

For example, when the energy project is in its early stages, aiming to explore more bankable projects in the market, a grant-blended finance instrument is more suitable for application, as it provides technical assistance to energy business owners in preparing for market entry.

However, when an energy project enters the second stage (build stage), the application of equity, capital grants, and first-loss blended finance instruments is more suitable, as it guarantees the bank in the event of project failure.

A concessional blended finance instrument, which is currently the most common blended finance instrument, is ideal for application when an energy transition project is at a more mature stage in the market, as it can help mitigate broader associated risks.

Similarly, the choice of blended finance instruments also needs to consider the business scheme proposed or applied in the energy transition project.

Debt, outcome funding, equity, and concessional blended finance instruments are applicable when the project has a financially sustainable business scheme.

Moreover, not all blended finance instruments are suitable for mitigating all risks associated with energy transition projects. A guarantee can reduce the risks of technical, credit, and financial.

In comparison, an insurance blended finance instrument can cover political risk in addition to the risks covered under the guarantee.

Thus, to leverage blended finance for the energy transition in ASEAN, a robust assessment of the risks and stages of energy transition and technologies needs to be conducted and discussed with prospective private investors at the beginning stage of project finance design.

Tracking the progress and steps of finance is also crucial to ensure the applicability of specific blended finance instruments. It will also facilitate the combination of blended finance instruments to be applied.

Lastly, enhancing capacity building for financial institutions on energy transition finance and ensuring the macroeconomic stability, including currency exchange rate, is crucial for the long-term energy transition efforts in ASEAN.

-- BERNAMA

Ambiyah Abdullah is a Senior Researcher in the Energy Modelling and Policy Planning (MPP) Department at the ASEAN Centre for Energy (ACE). Aisyah Fitri Azalia is a Research Assistant in the Energy Modelling and Policy Planning (MPP) Department at the ASEAN Centre for Energy (ACE).