Rapidly growing electricity demand alongside accelerating momentum behind renewables deployment will require major investment in grids across Southeast Asia. Electricity consumption in the Association of Southeast Asian Nations (ASEAN) region has increased ninefold since 1990 and is projected to continue to grow at annual rate of 3 to 4% through to 2040, considerably faster than the global average. ASEAN member states have committed to a massive expansion of new generation capacity to meet this demand. By 2040, total generation capacity is set to more than double with renewables accounting for 75% of new additions under today’s policy settings. This will require over USD 300 billion of investment in the expansion and modernisation of electricity grids from 2025 to 2040 – a 72% increase compared to investment from 2009 to 2024.

Interconnectors are set to be a critical component of this grid build-out. The ASEAN Power Grid (APG) has been a pillar of regional cooperation for decades and has emerged as a cornerstone of the ASEAN energy transition. IEA analysis shows that ASEAN countries are very diverse in terms of electricity demand profiles, power supply mixes, and renewable energy potential. By connecting diverse renewable resources and demand centres across the region, the APG can smooth out the variability of variable renewable energy generation and demand – allowing countries to export surplus energy during periods of excess and import when local resources are insufficient to meet demand.

A well-designed APG can unlock cost savings and promote longer-term energy security objectives. Leveraging geographic complementarity promotes cost-effective development and utilisation of the region’s resources. Previous analysis has found that higher levels of connectivity can significantly reduce operational costs, curtailment of variable renewable energy output and total generation capacity needs compared to a scenario of weak power system integration. Better utilisation of low-emissions generation can also prevent deepened dependencies on fossil fuel imports that are prone to supply shocks, as witnessed during the 2022-2023 global energy crisis which caused regional subsidies for fossil fuel consumption to soar. Optimising both variable renewable and flexible resources across countries requires a strong degree of trust, regulatory and technical co-ordination, robust business models, harmonised arrangements for cross-border trade, and substantial investment; but if achieved, it could benefit consumers through lower electricity costs and governments through enhanced energy security.

Since the first project connecting Lao PDR with Thailand broke ground in the 1970s, only around USD 2 billion has been invested in cross-border interconnectors. An interconnected power system does not yet exist – the reality today is a much more fragmented landscape, composed of multiple subsystems at various stages of development. For comparison, the region invested more into electricity transmission in 2024 alone (USD 3.6 billion) than on interconnectors for the past 50-plus years. Most of the investment in cross-border projects has been for the purpose of one-way power exports, not for the type of bi-directional, grid-to-grid projects envisaged by regional integration plans.

Consequently, financing models and commercial arrangements for cross-border interconnectors have been slow to evolve. While export-oriented interconnections in Lao PDR, typically linked to new hydropower projects, have successfully mobilised international and private investment through project finance structures, similar dynamism has not emerged elsewhere in the region, nor in general for grid-to-grid interconnectors which are the focal point of regional planning. Today, most interconnector projects are developed in the same manner as the 1970 and 1980s: as two separate projects meeting at the border, financed on the balance sheet of state-owned enterprises, and remunerated through bespoke, bilateral contracts.

Sustained high-level political backing is bearing fruit, with multiple key milestones achieved in recent years. Those include the Lao PDR–Thailand–Malaysia–Singapore Power Integration Project, now in Phase 2, which showcased the technical and commercial feasibility of multilateral cross-border electricity trade in ASEAN; Malaysia’s framework for the issuance of cross-border renewable energy certificates for power exchange with neighbouring Thailand and Singapore; the enhanced Memorandum of Understanding on the APG between ASEAN member states; the endorsement of a Submarine Power Cable Development Framework terms of reference to inform regional cooperation for the legal, regulatory, technical, commercial, and governance aspects of subsea interconnectors; and the launch of the APG Financing Initiative, which looks to mobilise capital and strengthen the role of multilateral development banks and other financiers in support of the APG. Taken together, these achievements demonstrate a meaningful commitment to deliver on regional power system integration.

The ASEAN Power Grid requires a substantial mobilisation of investment. Reflecting both the scale of the interconnector pipeline and a shift towards more capital-intensive transmission technologies, annual interconnector investment would need to surpass USD 1 billion before 2030 and average more than USD 2 billion per year thereafter. This is around 20-times higher than annual spending levels observed between 2019 and 2024 but only 8% of total projected grid investment to 2040.

The scale and complexity of interconnectors is set to increase. Many projects will span extreme distances and traverse challenging archipelagic geography to link the northern, southern and eastern subsystems of ASEAN. If built today, four interconnectors in the project pipeline would each exceed the length of the Viking Link between the United Kingdom and Denmark: currently the world’s longest operational subsea interconnector.

Mobilising financing from diverse sources will be key to meeting this step change. The scale of investment requires new financing models and sources of finance, especially in the context of already sizeable investment needs for domestic transmission and distribution. This is reflected in the APG Financing Initiative, which aims to mobilise de-risking capital, technical assistance, and other supportive instruments to create a pipeline of bankable projects and crowd in investment from public and private sources.

A key challenge for the bankability of cross-border projects is lack of standardised and transparent commercial power trading agreements. A reliance on bespoke bilateral agreements means the region lacks the basis for harmonised trading arrangements, thereby limiting transparency and scalability. Heterogeneity among countries in terms of market structures, third-party access, methodologies for determining transmissions tariffs and wheeling charges, and other incentives or penalties make it challenging to ensure a fair allocation of costs and benefits while also delivering a sufficiently high and predictable return for investors.

Historical financing models are not suitable for complex subsea projects. These projects can cost several billion dollars, and are complicated by asymmetric financing capabilities between utilities, subsea cables which pass through the territorial waters of multiple nations, heightened geopolitical and sovereign risks, and regional benefits beyond the countries directly involved. Siloed approaches to financing, concentrated on the balance sheets of state-owned enterprises, are unlikely to support all projects of this type.

These challenges are compounded by a backdrop of acute supply chain issues which are more likely to affect subsea projects. Prices for transformers and cables have nearly doubled since 2018, while manufacturers and cable-laying vessels are operating at or near full capacity. These market conditions increase risks of project delays and higher costs.

There are ways to realise and finance the ambitions of the APG, but this will require mobilising capital beyond state utility balance sheets. Decades of strong economic growth, ample foreign direct investment, and a relatively stable macro-financial environment create the ideal conditions for long-term investment to occur in the region. Institutional investors are increasingly interested in ASEAN's energy transition, and interconnector projects can attract this capital through clear revenue frameworks, affordable long-tenor debt and structured exit pathways.

Interconnector projects can be commercially viable under supportive regulatory and financing models, while retaining strong sovereign oversight and control. Financial modelling identifies tariff certainty and debt pricing as key drivers of returns. Implementing availability-based payments can significantly enhance project bankability and support long-tenor financing. The strategic focus must be on optimising these financial conditions while preserving a strong degree of state oversight and control. Viability can be further enhanced through blended finance structures and capital recycling mechanisms including regional investment platforms that free public capital for the next project.

Strong institutional leadership is essential to kick-start project development. Governments should proactively assess economic and social benefits, incorporate regional interconnector development as part of national power sector and investment planning, and provide leadership throughout early stages of project preparation and permitting. Above all, sustained political support is needed across all countries involved in each project.

Establish transparent, harmonised and predictable commercial arrangements for power trading. These should be guided by regulation, not bespoke contracts. Establishing a regional approach to transmission charges for cross-border trading as seen in the West African Power Pool, potentially including some degree of cross-border regulatory governance and oversight bodies, can create better visibility for investors and reduce transaction costs. Availability payments have been can also help increase the predictability of returns for investors and have proven successful in other countries like Brazil.

Apply alternative financing models, including shared ownership structures and independent transmission project models. Cross-border financing and shared ownership structures have been used in numerous European interconnector projects including the NeuConnect (United Kingdom-Germany), Viking Link (Denmark-United Kingdom) and NordBalt (Sweden-Lithuania), among others. This model can improve end-to-end project management and enable sharing of costs and benefits for capital-intensive, long-distance subsea projects. Independent transmission project models can reduce state-owned enterprise financing requirements and attract private sector capital at scale. For example, Brazil’s public auctions for independent transmission projects has attracted participation from over 200 different companies and led to significant discounts from the regulator’s initial payment offerings. Regional funding mechanisms like the Connecting Europe Facility for Energy can also be explored for projects that bring regional benefits beyond the countries hosting the asset.

Tackle key investment risks to reduce the cost of capital and improve bankability. Robust risk management is essential. Risks should be allocated to the party best placed to manage them: in particular, governments can play an important role in addressing regulatory, permitting and access risks. Singapore Energy Interconnectors – a government appointed private entity which helps to derisk, develop and crowd-in investment for cross-border interconnector projects – is an example of government-led intervention to promote bankability. Credit enhancement instruments such as guarantees can further mitigate political and off-taker risks, while insurance is critical for costly subsea projects. Where needed, public and concessional financing can be used to bridge bankability gaps.

Strategically deploy catalytic international public finance to bridge financing gaps and crowd in private capital. Multilateral development banks and development financial institutions can provide project preparation support and co-financing to increase project bankability alongside sovereign and other commercial investors. Existing examples from ASEAN include the APG Financing Initiative or the ASEAN Catalytic Green Finance Facility. Successful demonstration projects can establish more bankable structures and catalyse increased private capital participation, complementing ongoing public finance support in the region.

Enable capital recycling through structured exit pathways, allowing early stage investors to redeploy capital into new projects. This can be achieved by embedding refinancing provisions in concession agreements, allowing minority stake sales to institutional investors, and creating regional platforms to consolidate operational assets into secondary markets. Transparent regulatory frameworks for approvals, asset valuations and tax treatment can also play an enabling role.

Strengthen supply chain co-ordination and development. Forward planning, early engagement with equipment manufacturers, and co-ordinated procurement across the region can secure production volumes, manage rising costs and construction risk. For instance, long-term framework agreements have allowed Sweden and the United Kingdom to lock-in orders for large power transformers, shunt reactors, and HVDC cables and converter systems for planned and anticipated projects while providing clear visibility for suppliers. Investing in regional manufacturing and workforce development is an opportunity to capture local and regional benefits from the APG.