IEA Chief Economist Fatih Birol on the rise of Southeast Asia’s least-cost option for electricity.
30 April 2014
In the past, when people thought of Asia in the context of the global energy landscape, they thought of China. Nowadays, they think of China and India. But Southeast Asia is rapidly becoming a third major player in the picture. Energy demand of the ten countries that make up the Association of Southeast Asian Nations (ASEAN) has risen two-and-a-half times since 1990 and is now around three-quarters of the level of India. Economic and demographic trends suggest that considerable growth is still to come, especially given that the per-capita energy use of the region’s 600 million inhabitants is low, at just half of the global average.
And so my team and I prepared Southeast Asia Energy Outlook, a special report in the World Energy Outlook (WEO) series. Our analysis found that Southeast Asia’s energy demand is set to increase by more than 80% by 2035, a rise equivalent to the current demand of Japan. This supports a near tripling in size of the region’s economy and a population that expands by almost one-quarter.
The rise of Southeast Asia’s least-cost option for electricity
The power sector is fundamental to that outlook, and within it, coal is increasingly the fuel of choice over natural gas. Coal remains relatively abundant and affordable, while additional gas will have to be sourced from imports at prices currently around four times higher than in the United States. This creates a strong incentive for the region’s larger gas producers, namely Indonesia and Malaysia, to export new supplies rather than use them domestically. For those countries that must import gas, the choice is often even more clear-cut, as the cost of generating power from coal is now around half that of gas. This counters the shift from coal in other parts of the world: some three-quarters of the thermal power generation capacity under construction in ASEAN countries is coal-fired.
Policy action could eventually swing the economics of power generation in favour of less carbon-intensive options. But, more immediately, priority needs to be placed on improving the efficiency of new coal plants from very low levels of current ones. In addition to improved air quality and reduced greenhouse-gas emissions, fuel use could also be cut significantly – for example, if the region’s coal-fired power plants were as efficient as those in Japan today, their fuel use would be one-fifth lower.
This preference for the least-cost option to meet rising power needs is put into context when you consider the serious challenges that Southeast Asia – a region that includes some countries still in the early stages of economic development – faces in ensuring that energy remains affordable. Its oil imports are on track to increase from 1.9 million barrels per day (mb/d) today to just over 5 mb/d in 2035, making the region the fourth-largest net importer in the world, behind only China, India and the European Union. This proves very costly: by 2035 spending on oil imports triples to almost 4% of gross domestic product. Meanwhile, net gas exports, which are an important source of revenue, shrink by about three-quarters.
Growing regional energy demand illustrates a global challenge
Given the anticipated scale of Southeast Asia’s energy demand growth, developing policies to attract investment will be vital for enhancing energy security, affordability and sustainability. Some USD 1.7 trillion of investment is required in the region in energy infrastructure through 2035.
Mobilising this will not be easy unless existing barriers are addressed, including subsidised energy prices, underdeveloped energy transport networks and the lack of greater stability and consistency in the application of energy-related policies.
Our report was warmly welcomed when Executive Director Maria van der Hoeven delivered it to the Seventh East Asia Summit Energy Ministers Meeting last year in Bali, Indonesia. Delegates called for the IEA to build on the report’s momentum through follow-up work.
As I consulted with experts from around the region to prepare the report, it became increasingly and abundantly clear to me that IEA and ASEAN member countries have become natural allies. We both need to build secure and sustainable energy supplies and markets as platforms for promoting economic development. These are global challenges to be tackled on a global basis.
This column by IEA Chief Economist Fatih Birol appears in the new issue of IEA Energy: The Journal of the International Energy Agency. The IEA produces IEA Energy, but analysis and views contained in the journal are those of individual IEA analysts and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation. Click here to read the new and earlier issues of IEA Energy, and click here to send a request a free subscription.
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