Despite abundant natural resources and an encouraging regulatory framework, large-scale renewable energy deployment in Southeast Asia has been limited, largely due to the continuing high cost relative to fossil-fuel sources and high initial capital costs. Although there are still challenges, recent market and policy shifts, particularly in Thailand and Malaysia, are expected to drive significant investment in the solar industry.  

Driven by economic growth and strong manufacturing sectors, energy demand in Southeast Asia continues to rise; the ADB estimates that electricity demand in the region will increase by 5% a year till 2030. These economies are generally dependent on oil and gas with high import dependency and most governments have policies in place to encourage alternative energy sources.

There is high solar potential in the region; expected electricity generation is about 1.4 MU/MW in Thailand and 1.25 MU/MW in Malaysia. As technology costs fall globally, solar technology will be an increasingly attractive option; KPMG has estimated that solar costs will fall by 5-7% p.a. for the next decade, given increasing economies of scale and improved efficiencies in product technology. At the same time, the price of electricity from conventional sources will rise, particularly as many Southeast Asian countries have a high volume of gas-fired power plants. Although development costs in Southeast Asia are typically high (up to USD 2.5 M/MW), project developers can realize high returns through preferential tariffs and the absence of fuel costs and related volatility. Further, the ability to access project debt at low rates (5-6%) in these countries also improves equity returns for investors.  However, despite the low cost of debt, conversations with lenders in Malaysia and Thailand indicate a lack of familiarity with solar PV technology and the associated risks. Here, a lender’s engineer can play a valuable role in helping banks get comfortable with the project.

The Thai government has set a goal to increase alternative energy usage by up to 20.4% by 2022. The primary mechanism for renewable energy developers in Thailand is structured in the form of an “adder” or a surcharge to the electricity purchase price of renewable energy sources. Adders are provided under two programs, for Small Power Producers (SPP) and Very Small Power Producers (VSPP). These allow private developers to build, own, and operate power projects (<10 MW under VSSP and 10-90 MW under SSP) and enter into power purchase agreements (PPAs) with EGAT, the government utility. Solar projects are eligible for an adder subsidy of B8 (USD 0.25) per kilowatt-hour (kWh) for 10 years from the start of operations. As the base electricity tariff remains low, a feed-in-tariff mechanism with longer tenors would provide greater comfort and could encourage foreign investors.

Malaysia has set a target for 850 MW of solar PV capacity by 2030. The Malaysian government has an attractive policy providing for long-term feed-in-tariffs (FiT), starting from RM0.85 (USD 0.27)/kWh for solar projects for 16-21 years; under special conditions, very small projects could earn up to RM1.75 (USD 0.5 /kWh. However, investment has been slow to pick up and remained stagnant from 2007-2009. Some of the challenges include low annual capacity quotas that place a cap on project development Foreign ownership is also limited to 49% in order to qualify for feed-in tariffs and other incentives, discouraging foreign investment. Project development till recently has mainly been for smaller rooftop kW systems and there is a growing need for foreign expertise to help the local system integrators to install MW scale plants.

Despite the high costs of solar project development relative to other technologies, well-structured projects can generate attractive and stable returns given the preferential tariffs and the availability of low debt.  Partnering with the right technology partners and advisors is critical; by developing projects with strong techno-commercial fundamentals and appropriate for the local market, investors can meet their return expectations and project developers can access more capital. By harnessing the considerable natural potential in Southeast Asia, solar capacity additions can be a stable source of energy, meeting policy goals and encouraging low-carbon investment.