ASEAN electricity market sparks interest in Thailand

Author: EIC | Economic Intelligence Center
Published in Bangkok Post/Asia In Depth: Asia Focus section, 7 December 2015

Growth-hungry Thai corporates have been searching Southeast Asia for opportunities, and the power generation business has become a favored target. In most of ASEAN, this important sector is less developed than in Thailand. The region’s expanding populations and speedy economic growth are driving demand for more power output. And the industry’s stable revenue streams are a perennial attraction for investors. Even companies with limited previous experience in this sector are trying to enter. But success will depend on choosing the right market, matched to the right power feedstock, whether fossil fuel or renewable.

Power markets in CLMV and Indonesia have the highest potential for expansion, but each market has somewhat different demand factors. Cambodia and Myanmar, for example, have very high GDP growth rates of 7%-8%. Their power sectors are underdeveloped, and so they have set ambitious targets for electrification, i.e., bringing power to locations and customers now off the grid. Indonesia’s power sector is relatively well developed, but demand is driven by the large size and growth of its population, requiring lots of additional supply. Vietnam’s need for power is driven by expansion of industry. Laos is developing its power industry in order to export electricity to neighboring countries. Whatever the specific factors in each of these markets, the mentioned countries’ average electricity demand is expected to grow by 10% per year from now through 2020. This high rate of growth and softer demand in the Thai power market has persuaded some Thai investors to move beyond their home market, initially targeting nearby countries like Laos and Myanmar. But other markets are also promising, especially Indonesia.

Indonesia’s power market is the largest in the region, yet it has plenty of room to grow. Some 40 million Indonesians still lack access to electricity. The nation’s abundant natural resources allow investors to choose from different types of power plant investment, whether conventional or renewable. The country’s National Mid-Term Development Plan for years 2015 to 2019 aims to increase power plant capacity by 35 GW, or by an amount that is close to Thailand’s existing capacity. Much of the new development will be in Java-Bali and Sumatra, the most populous islands.

Indonesia is inviting participation by private investors, to help reduce the state’s financial burden. The nation’s power market is highly regulated and is controlled mainly by PT Perusahaan Listrik Negara (PLN), a state-owned enterprise that has an 85% market share. PLN operates throughout the value chain, from generation to distribution. But under the country’s target to increase the capacity by 35 GW, a large portion (approximately 80%) of new power plant projects will be allotted to the private sector, a regime that is similar across many countries in ASEAN. Indonesia’s program calls for investment in projects that use feedstocks other than oil, to reduce generation costs. Indonesia may also allow the private sector to invest in the transmission business.

As for feedstock trends throughout ASEAN, coal will become king, while renewables will grow rapidly. The region as a whole now relies mostly on natural gas for power generation, because Thailand and Malaysia, the region’s second and third largest electricity markets, have large domestic supplies of gas. Yet gas supplies in many countries, especially Thailand, are dwindling, causing markets to shift toward other feedstock. The fuels likely to be favored in the future are coal and renewables.

Vietnam and Indonesia are among the countries pushing hardest to develop power generation from coal. Coal’s advantage is low cost, stability of electricity generation, and an economically feasible supply of cheap resources that will last for more than 100 years.

Renewable energy is garnering stronger support in ASEAN as it allows rural population to gain quick access to electricity. In addition, renewables help reduce emissions and imports of fossil fuels. But most renewable generation methods remain more costly than conventional fuel. For this reason, renewable power plant projects typically need support from government programs such as feed-in tariffs.

One interesting renewable fuel is geothermal electricity, which is derived from underground heat. This source is limited in Thailand, but the Philippines and Indonesia are currently the world’s 2^nd and 3^rd largest geothermal producers, outranked by only the United States. Little of the region’s geothermal resources have yet been captured. Indonesia has one of the world’s highest potentials to develop geothermal power. These power plants can produce electricity 24 hours a day, 7 days a week. And geothermal electricity generation is comparatively cheap, since no feedstock is needed. In Indonesia, this electricity is among the cheapest. But establishing this type of power plant requires high capital investment in the beginning, especially during the exploration and drilling stages, when most of the risks occur. Nonetheless, risk can be mitigated by careful site selection.

Each country differs in terms of power market structure, regulations and risk-return profile. Investing as a foreign company can be riskier than as a local operator, and investors require a good understanding of market dynamics. The right market entry strategies will also be critical in managing risks associated with overseas investment. Lastly, finding local partners who can offer valuable market knowledge and access can facilitate project development.