High cost of capital and limited project pipeline hinder clean energy investment in Southeast Asia

Investments into low-emissions power in Southeast Asia have steadily increased since 2021, and are expected to surpass USD 19 billion in 2025. However, this remains well below the potential implied by the region’s resource base and its announced climate and energy targets. Getting on track for these targets would mean increasing investments in low-emissions power by a factor of 5 in the next ten years, reaching USD 95 billion in 2035. Reducing the cost of capital and improving the flow of suitable projects are critical to unlocking this additional investment.

The cost of capital is the minimum required rate of return required to justify an investment, reflecting the actual and perceived risks faced by investors. The weighted average cost of capital (WACC) represents the weighted average of financing costs from both debt and equity.

The IEA’s latest update of the Cost of Capital Observatory expands coverage of countries in Southeast Asia. Survey responses covered Indonesia, Viet Nam, and for the first time, the Philippines, Thailand and Malaysia.

The median weighted average cost of capital (WACC, nominal, post-tax and in local currency) for solar PV in Indonesia, Viet Nam and the Philippines based on survey responses was 9.4%, 9.0% and 8.0% respectively in 2024, while a lower range was quoted for Thailand (6.0-8.0%) and Malaysia (6.0-7.0%). These are above the range of 5.0-6.5% seen in advanced economies.

In Indonesia, there is strong participation from international lenders in project finance with USD-denominated loans. Rising US treasury rates contributed to a rise in overall WACC, while there has not been a noticeable shift in equity IRR expectations. Several respondents commented that, due to limited volumes of utility-scale solar projects in the pipeline, there is strong competition among both commercial lenders and development finance institutions (DFIs) to participate in these deals.

In Viet Nam, lending costs fell following cuts in lending rates from the State Bank of Viet Nam (SBV) in 2024, and reductions by commercial banks under direction of the Prime Minister to lower rates to achieve the Government’s 8% growth target. Respondents also cite improved regulatory clarity following publication of the Revised Power Development Plan 8 released in April 2025, the new Direct Power Purchase Agreement (DPPA) scheme, a new tender scheme and a new round of solar price caps, with variation by location and incorporating storage systems.

Survey results show WACC for utility-scale solar for surveyed countries in Southeast Asia are comparable, or below that of other EMDEs surveyed. However, while investment volumes have grown in other markets such as India and Brazil – driven by large-scale and predictable solar auctions – a similar growth has not been observed in Southeast Asia.

In Indonesia, despite around 1,500 GW of solar potential, deployment of utility-scale solar was less than 1 GW  as of 2024. Survey respondents cite a limited pipeline of projects available for financing due to complex and slow-moving procurement processes, with low predictability of volumes. Permitting processes can also involve multiple bodies and levels of Government, adding to project timelines. Viet Nam saw rapid capacity deployments of solar between 2019-21, driven by attractive feed-in tariffs. Since then, transmission bottlenecks, curtailment, and lack of alternative pricing mechanisms following the removal of the feed-in tariff (FIT) regime led to a significant reduction in investments. Some participants noted concern arising from ongoing disputes related to the pricing of feed-in tariffs. The Philippines, despite seeing a small reduction in investment volumes between 2020-24 compared to 2015-19, recently launched an auction for over 10 GW of solar and onshore wind targeted for commercial operations from 2026-29 (GEA-4).

It is important to increase the pipeline of projects available for financing, in parallel with taking action to reduce the cost of capital. Areas to address include increasing predictability, transparency and standardisation of procurement processes, and increasing the ability of the system to integrate increasing shares of variable renewables.

For Indonesia, Viet Nam and the Philippines, the cost of capital for offshore wind and battery energy storage systems (BESS) is higher than for solar PV in 2024.

While BESS markets in Indonesia and Viet Nam are nascent, interest in the technology is growing. In 2025, Viet Nam increased its ambition in the Revised PDP8 to deploy 10-16.3 GW of BESS capacity by 2030, while Indonesia launched its first integrated solar plus BESS system in IKN Nusantara. Further regulatory development in both countries is required to facilitate the deployment of stand-alone BESS. The Philippines is at a more mature stage of market development, with deployment of stand-alone BESS driven by the procurement of ancillary services and participation in the reserve market launched in 2024.

Despite high resource potential along the coastlines of Southeast Asia, there is no installed offshore wind capacity in the region. Expected WACC for offshore wind in Southeast Asia is the highest of technologies surveyed, due to a lack of demonstration projects and regulatory frameworks, limited grid infrastructure serving coastal regions with high wind potential, and supply chain uncertainty. Despite global challenges, there have been some encouraging developments in the region. Notably, the Philippines launched an auction round for 3.3 GW of offshore wind for commercial operation from 2028-2030 (GEA-5), which has the potential to kickstart the sector in the country.

Survey respondents cite regulatory, political, transmission infrastructure and permitting risks as key factors contributing to elevated cost of capital for technologies surveyed.

Survey respondents noted the importance of clear and consistent regulatory and legal frameworks. The past two years have seen encouraging developments including the publication of power development plans in Indonesia (RUPTL 2025-34) and Viet Nam (Revised PDP8), revised solar tariff caps in Viet Nam and the launch of new renewable energy auction rounds in the Philippines.

In particular, the introduction of corporate PPAs, including the Direct Power Purchase Agreement (DPPA) in Viet Nam and Corporate Renewable Energy Supply Scheme (CRESS) in Malaysia, have the potential to reduce off-taker risk, offer long-term and predictable volumes, and improve investment attractiveness. This has in part been motivated by efforts to attract investment from international corporate consumers, including data centres, who wish to secure reliable, low-cost and clean power in line with corporate renewable energy and decarbonisation targets.

Survey respondents noted the importance of further strengthening the regulatory environment including building clarity on the financial and legal mechanisms for offshore wind and BESS and streamlining complex and time-consuming permitting processes.

Transmission infrastructure risks are key in Viet Nam and the Philippines, contributing to the risk that projects will see delays in connection to the grid, or lost revenue through curtailment.

In Viet Nam, transmission capacity is an issue particularly in the South-Central provinces where there is already a high concentration of solar and wind projects. Curtailment risk is often borne by the investor, with limited risk sharing with the state utility EVN. In the Philippines, the transmission system operator (NGCP) is planning for transmission system upgrades to accommodate increased renewable energy deployment in Competitive Renewable Energy Zones and areas of high offshore wind potential, and to transmit electricity from areas with high renewable potential to demand centres.

A scale-up in investment in the sector is required to facilitate integration of new generation sources and improve grid reliability. With prices and waiting times for grid components almost doubling since 2021 due to supply chain pressures, advance planning is required for timely deployment and upgrades to grid infrastructure.

To scale up investment, it is important for policymakers to act both to reduce the cost of capital and increase the pipeline of projects available for financing.

In Southeast Asia, key actions include 1) developing clear regulatory and financial frameworks for the deployment of clean energy technologies; 2) increasing the predictability, transparency and standardisation of procurement processes; 3) continued development and piloting of corporate PPA schemes; and 4) prioritising investment into transmission infrastructure to facilitate the integration of new generation assets into the grid.

The IEA recently established its Regional Cooperation Centre to deepen and expand its longstanding collaboration with countries in Southeast Asia and beyond. Among other topics, the IEA is committed to supporting the region on energy investment issues, including providing new analysis on financing approaches for grids and storage in the region, providing support to lower the cost of capital, and approaches for scaling up clean energy investments on a pathway to achieving a secure, affordable and sustainable energy future.