Six Southeast Asian countries – Vietnam, the Philippines, Thailand, Singapore, Malaysia and Indonesia – added around 24GW of renewable capacity in the five years to 2020 but they are now on the cusp of a much bigger second wave of growth. We forecast their capacity will almost double by 2025.
The ASEAN region, the Association of South-East Asian Nations, enjoys an abundance of renewable resources, especially solar and wind.
The transition to renewable energy has been led by Vietnam, which offered attractive feed-in tariffs and other policies that attracted investment. It will continue to drive capacity additions, but the next wave should be more broad-based across the region.
Regulation is key to incentivising investment in renewables. Governments need to create an investor-friendly environment by setting clear rules and regulations.
The success in the first wave of growth in Thailand, the Philippines and Vietnam was driven by favourable government policies from those governments and all ASEAN countries are now updating their regulatory regimes to support renewable investments. Vietnam ranks top, closely followed by the Philippines and Thailand, but Indonesia lags.
Construction and use of renewables are now being prioritised over fossil fuels and, after a slow start over two decades, the ASEAN Power Grid is gaining traction and could aid power exports to countries like Laos or Singapore. Demand for power will also be driven by widespread use of electric vehicles, data centres and 5G phones.
Sharply lower equipment costs have driven down renewable budgets. Wind-turbine prices have fallen 41 per cent over the past decade with solar-module prices down 89 per cent thanks to technology advances, energy efficiencies, economies of scale, and supply-chain integration. Turbine prices could drop a further 18 per cent by 2025 with solar modules down another 27 per cent.
Technology will continue to reduce renewable costs. Higher towers and longer turbines are cutting wind costs while the next generation of solar cells could help raise conversion efficiency of solar from today’s 22 per cent to 25 per cent or more. Digitalisation will lower operating costs, reducing downtime for wind farms while robots clean solar panels. Meanwhile, green financing can cut borrowing costs.
Vietnam has the lowest cost solar and wind power, but coal and gas power are still generally cheaper. However, by 2025, renewable energy there – and in Thailand, the Philippines and Malaysia should be the cheapest source of power.
We think ASEAN’S solar power costs could fall from today’s USD56-USD130/MWh range to USD47-USD110/MWh by 2025 with wind falling from USD65-USD115/MWh to USD53-USD102/MWh. Costs are lowest in Vietnam but highest in Singapore, whose solar projects are on rooftops or floating.
Investment returns have normalised to low- to mid- double-digits from the days when wind and solar projects could earn over 20 per cent, mainly because of growing competition and the end of favourable tariffs and subsidies.
However, other Asia-Pacific emerging markets are rivals for investment. India’s current renewables capacity is under 100GW but it has a target of 175GW by next year and 450GW by 2030 and its clarity of regulation is giving confidence to investors.
First published 19 April 2021.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Rahul Bhatia, CFA, Daniel Yang.
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