ASEAN; a region in transition1 January 2016
Almost 50 years after the foundation of the Association of Southeast Asian Nations (ASEAN) in August 1967 the ASEAN Economic Community (AEC) commenced on 31 December. The AEC goals are broadly similar to the EU, namely a single market, a highly competitive economic region, a region of fair economic development and a region fully integrated with the global economy. If the economic growth and development of the region’s weak socio-economic framework are to be achieved then the explicit development of a single energy market would surely be on the list of single market objectives. But it is not.
The ASEAN region is energy rich, from the significant gas resources in Malaysia, Indonesia and Myanmar, the world's largest thermal coal export market in Indonesia, and an abundance of renewable energy potential encompassing biofuels, geothermal and solar. Yet the region also suffers from dislocations between energy resource areas and key demand centres, and has poor transportation and transmission infrastructure both within and between the 10 ASEAN members.
It is this poor infrastructure that has undermined economic development and bequeathed a weak socio-economic framework. With the obvious exception of Singapore the wealth in ASEAN countries is mainly centred in the main urban areas, and the poverty in the underdeveloped rural areas. This has encouraged economic migration to urban areas that places strains on the already weak infrastructure, forcing governments to prioritise more investment in urban infrastructure at the expense of rural areas, which further increases rural poverty and encourages more urban migration. And so the cycle continues.
If the ASEAN market is to develop as envisioned more progress is required on integrating the members energy markets. The communiqué of the 2003 ASEAN Ministers on Energy Meeting in Langkawi called for "intensified co-operation in the development and exploitation of the energy resource potentials in the ASEAN region, as well as attracting more private sector participation and investment". Two key visions were agreed at this meeting, a Trans-ASEAN Gas Pipeline (TGAP) and the ASEAN Power Grid Project. Both projects are essential to move the ASEAN region to a more energy secure future, yet progress on both has been slow.
Interconnectivity and power trading beyond neighbouring borders will be major contributors towards energy security, but while ASEAN energy ministers recognise the need to improve connectivity there has been palpably little progress. A decade on from the 2003 vision, energy ministers are still assessing the technical viabilities of using existing infrastructure, exchanging information on generation resources and identifying the raft of legal and regulatory issues involved in developing an ASEAN power grid.
Progress on the TGAP has been more purposeful but most of the pipeline development has been on domestic, not regional, infrastructure. Indeed development of gas supply security will more likely be achieved through increasing the region's LNG regasification capacity.
In this respect the Singapore Exchange plan to develop LNG futures will potentially provide the region with increased forward LNG price transparency and the ability to remove price volatility through hedging, which in turn will reduce commercial risks associated with gas.
Adding a potential layer of complication to TGAP and power grid visions is the acceptance that the region needs to work towards developing a greener economy, particularly following the climate pact agreed at the Paris COP21 meeting in December. But developing a green ASEAN economy is arguably more challenging than the development of interconnected gas and power infrastructure.
... displacing cheap coal with more expensive gas, even in a low oil-price scenario, is not economically viable ...
The ASEAN region is broadly a coal-centric generation market, and displacing cheap coal with more expensive gas, even in a low oil-price scenario, is not economically viable. With the topic of carbon taxes not a consideration among ministers, and unlikely to be in the medium-term as economic growth remains a priority over sustainability, it is difficult to see the economics of coal-gas displacement becoming viable in the medium-term.
Myanmar, which is rich in gas reserves, exports most of its gas production to China and Thailand, and the required investment in new generation capacity will be in coal. The government plans to increase coal capacity from just 120 MW in 2014 to 9 GW by 2020, while gas-fired capacity is planned to reach just 1.6 GW by 2020 compared with 837 MW in 2014.
Other countries in the region are also heavily investing in coal-fired capacity as opposed to gas. Vietnam has 16 GW under construction and another 39 GW planned, Indonesia has commissioned 7.3 GW of new capacity, the Philippines 2.6 GW and Cambodia 650 MW.
Consequently the route to a greener ASEAN economy will be achieved through investment in renewable capacity and energy efficiency. And this would be assisted by the removal of fossil fuel subsidies and the provision of electricity tariffs that account for the cost of production and supply. But subsidies are a contentious issue for the region's populist governments, with public protests often leading to subsidy revisions being deferred although both Malaysia and Indonesia reduced subsidies in 2015.
As the ASEAN region embarks on a new period of economic co-operation and development it needs to adopt more dynamism in its energy visions. Economic and energy market development are intrinsically linked, particularly for a region where economic growth is being driven more by manufacturing than services. Understanding the opportunities presented by a more interconnected energy region are welcomed, but now there has to be an acceleration towards realising the benefits of increased connectivity.
The start of the AEC was originally planned for 2020, and bringing forward the state date to 2015 shows the urgency attached to the region's economic development. Yet there has not been reciprocal urgency with respect to the energy sector, with both the gas and power interconnection projects still scheduled for 2020 with slow progress raising the risk of delays to both deadlines.
The ASEAN region has significant economic and energy potential, but there needs to be greater synergy if both are to be realised.
*Jeremy Wilcox is managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm. Tel: +66 2 653 1263, Mobile: +66 8609 93375
(Originally published in MPS January 2016)