Both South and Southeast Asia offer significant opportunities for global climate action, with many governments setting ambitious net-zero targets. Solar, wind and hydro development potential abounds.
To achieve these targets, renewable energy deployment, especially solar and wind power, must increase five-fold by 2030. Asian investment in renewable energy has grown exponentially since 2004, with an average annual growth rate of 23 per cent, reaching US$345 billion in 2022, largely driven by China, which accounts for 80 per cent.
Despite the region’s diversity in infrastructure, industrial development and financial resources, there are lessons to be learned from successful public and private fundraising efforts both domestically and internationally.
Domestic funding
Infrastructure investments in South and Southeast Asian economies have traditionally relied on domestic public funding. However, the region’s bank-dominated financial systems have shown little appetite to fund renewable energy projects, often considered too risky to invest in. Moreover, the short-term nature of banking finance renders it unsuitable for long-term energy projects.
South and Southeast Asian economies also struggle with limited fiscal space, with high levels of debt relative to tax revenue. For example, Bangladesh had a tax-to-GDP ratio of only 8.5 per cent in the 2021–22 fiscal year, falling short of the World Bank’s recommended ratio of over 15 per cent for sustained growth. In comparison, the average ratio for the Organisation for Economic Co-operation and Development (OECD), which represents 38 of the biggest economies, was 34 per cent in 2022.
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To make a bigger impact, governments can leverage public finances to encourage private capital investment, which typically yields higher returns than simply using public funds to build infrastructure.
If domestic public banks see renewable projects as high risk, so too do private investors, so renewable projects seek the support of actors that can ameliorate the risk, quite often the government.
But in Myanmar, renewable energy developers face hurdles in obtaining government support, such as sovereign guarantees or risk-sharing agreements, essential for securing their investments. Furthermore, underdeveloped domestic capital markets limit opportunities for local businesses to raise funds through bonds. Across Asean countries, government bonds exceed corporate bonds in scale, exacerbating funding challenges.
International financing challenges in Asia’s least developed economies
Multilateral and bilateral funding are important foreign capital sources for infrastructure financing in Asia’s least developed economies. For instance, the Asian Development Bank (ADB) financed Cambodia’s first solar plant, while major projects in Laos, including the region’s largest wind power plant, also received assistance from the ADB, as well as the World Bank.
Similarly, Nepal has made strides in renewable energy with projects also supported by the World Bank and ADB-backed projects. However, heavy reliance on multilateral support has led to high external debt and underdeveloped domestic financial markets.
International private finance also plays a significant role, particularly in Laos, where the majority of infrastructure projects are undertaken by international entities. Nevertheless, private overseas investment remains cautious of investing in emerging Asian markets due to potential policy shifts and unreliable regulatory frameworks.
Lengthy approval processes, opaque procedures and delays, such as those experienced in Laos and Bangladesh, deter investment. Likewise, the delayed implementation of feed-in tariffs in Vietnam has stalled renewable energy projects. Challenges also persist in ensuring that renewable energy plants are capable of delivering power.
In Myanmar, an outdated and limited electricity grid, reliant on smaller 230 kilovolt (kV) lines, leads to significant losses over long distances. Plans for a 500 kV line connecting Yangon and Mandalay have seen limited progress since 2021. In Nepal, meanwhile, electrifying rural and remote areas remains challenging due to rugged terrain and inadequate grid infrastructure.
Enhancing renewable energy markets in South and Southeast Asia
Two countries, India and Malaysia, stand out for instituting standardised and transparent renewable energy auctions. These initiatives have bolstered investor confidence through increased transparency and policy consistency, attracting capital.
Contrast this to Indonesia’s announcement of a tariff scheme based on competitive auctions, which has faced hurdles due to regulatory complexities and frequent legal changes, particularly in solar photovoltaic energy generation. And in Myanmar and Bangladesh, the lack of competitive processes or standardised power purchase agreements (PPAs) for renewable energy, discourages foreign investments, which favour transparency and predictability.
A well-designed procurement process can mitigate risks for investors interested in renewable energy infrastructure. For example, India successfully attracted foreign investors to its solar sector by leveraging the Solar Energy Corporation of India (SECI), as an intermediary with a higher credit rating than state-level electricity boards.
SECI’s presence as guarantor boosted investor confidence in repayment capacity, thereby lowering investment risk. This centralised procurement model depends on an entity’s robust credit rating, an obstacle faced by state-owned distribution companies like Perusahaan Listrik Negara in Indonesia and Bangladesh Power Development Board. Financially strained, they are unable to fulfil the intermediary role that SECI did in India.
Another way to expand the market for renewables is to allow large commercial and industrial customers to buy directly from the power plants, bypassing state intermediaries. The Philippines and Malaysia have adopted this approach, incentivising the development of renewable plants for private industry. However, Vietnam currently lacks such incentives.
Much still to do, but achievement is within reach
The dominance of the banking sector in South and Southeast Asia highlights the importance of addressing banking architecture to finance renewable energy projects effectively.
One approach is to establish dedicated lenders, like Non-Bank Finance Companies (NBFCs), specialising in key areas. In India, NBFCs focussed on the power sector play a significant role, with six major NBFCs extending INR 1,500 billion (US$18 billion) in financing to the renewable sector in 2023.
Most importantly, these dedicated lenders can offer longer term loans than banks, addressing a key requirement for the infrastructure sector. Bangladesh also has the Infrastructure Development Company (IDCOL), a state-owned non-banking financial institution that funds renewable energy projects.
Nepal’s NMB Bank has gone a step further by establishing a separate Renewable Energy Department to focus exclusively on green projects and has secured a US$25 million green loan from the International Finance Corporation (IFC).
To make a bigger impact, governments can leverage public finances to encourage private capital investment, which typically yields higher returns than simply using public funds to build infrastructure.
The success of Malaysia’s Green Technology Financing Schemes (GTFS) – which provided loan subsidies for renewable projects – is instructive. Between 2010 to 2017, 28 financial institutions supported 319 schemes through GTFS, totalling $1.6 billion, resulting in finished projects generating 532.9 megawatt-hours (MWh) of electricity annually.
In March 2019, the Ministry of Finance approved an upgraded scheme, GTFS 2.0, offering a 2 per cent annual interest subsidy for the first seven years for project developers, with the government providing a 60 per cent guarantee on project financing.
As demand for renewable energy continues to drive innovation in the region, such examples will become more common. However, enough success stories already exist for countries to learn from and act to fund their renewable futures without delay.
This story was published with permission from The Third Pole.
