Within Asia, there are both economic and pragmatic reasons to accelerate the transition to clean energy, according to the April 2023 report “Energy Transition in ASEAN” by the EU-ASEAN Business Council. This is well illustrated by the Climate Economics Index, which Swiss Re Institute developed to measure how unmitigated climate change could impact 48 of the world’s economies (representing 90% of global GDP). The various modelled scenarios in this index suggest that, in the event of a severe increase in global temperatures of 3.2˚C by 2050, ASEAN countries would be the most vulnerable in Asia, with ASEAN markets as a whole losing about 37% of GDP by 2048.

We explore below some of the challenges which may impede the transition to clean energy, particularly in ASEAN countries, and provide some food for thought for parties as they seek to navigate this transition.

Key challenges

Existing priority for fossil fuels

According to the report “ASEAN Renewables Investment: Opportunities and Challenges” by the IEA and Imperial College London, renewable power development in ASEAN countries is lagging due primarily to inadequate policy and investment frameworks. Further, the impact of these inadequacies is exacerbated by regulatory barriers, incumbent interests in coal, concerns about energy security and inflexible commercial arrangements, which favour the continued prioritisation of fossil fuel generation.

For example, oil producing countries in ASEAN such as Malaysia, Brunei and Indonesia heavily subsidise fossil fuels for domestic consumption. According to the EU-ASEAN Business Council’s April 2023 report, these subsidies artificially increase the cost difference between renewable energy and fossil fuels and divert public funds away from renewable energy and low-carbon solutions projects.

In addition, given the significant investments made into commissioning existing fossil fuel plants, some of which only came online relatively recently, electricity companies are understandably reluctant to switch to cleaner energy before they see a return on their investment. Moreover, electricity companies may also be locked into fossil fuel-based energy sources through inflexible power purchase agreements which do not allow for early termination at will without incurring significant penalties.

Fluid and diverse regulatory frameworks

Countries within the ASEAN region have separate and diverse regulatory and legal energy frameworks. These frameworks are often fluid and at risk of change at short notice, particularly where the political landscape is volatile. The IEA/Imperial College report predicts that unless there is a dramatic shift in domestic policies, complemented by financial support from international investors, the rising electricity demand within the ASEAN region will be met mainly by fossil fuels.

High costs and lack of financing

Notwithstanding falling costs for renewable technologies globally, the cost of solar and wind projects remains elevated within the ASEAN region due to the lack of deployment scale and the under-development of supply chains.

Accordingly, in order to meet their stated targets, ASEAN countries require much higher levels of investment in the energy sector, reaching at least US$200 billion by 2030 according to the IEA and Imperial College London, of which over 75% is required to develop clean energy projects. These clean energy investments include the widespread rollout of renewables, improvements in energy efficiency, the electrification of end users and the deployment of low-emission fuels, including modern bioenergy, hydrogen-based fuels and carbon capture technology.

Reports, including one by DBS, suggest that governments in emerging Asia (particularly in developing ASEAN countries) cannot afford to fund the transition to renewable energy. These governments therefore need to attract private capital into the energy transition infrastructure to meet their sustainability goals.

Security of supply

A key concern with transitioning to clean energy is the need to ensure access to stable, reliable and accessible sources of energy. This concern is particularly acute in Asia, where many renewable energy generation projects are located in remote areas, subject to uneven availability of wind and solar resources and/or constrained by inadequate grid reliability.

What can you do?

Given the variety of players involved in or affected by the clean energy transition, we have grouped our thoughts on the relevant considerations loosely into three categories, namely from the perspectives of investors, energy producers and energy consumers/purchasers.

Investors

• Due diligence on counterparties. At the risk of stating the obvious, it is important to conduct a thorough due diligence on any counterparties or joint venture partners. Ensure that you liaise with individuals who are authorised to represent the specific company which you are contracting with. Even if you are liaising with an established group of companies, you should get comfortable with the asset position of the specific counterparty or partner to avoid potential issues with piercing the corporate veil when seeking to enforce a court judgment or arbitral award against the counterparty or partner in the future.
• Due diligence on jurisdiction. When deciding whether to invest in a jurisdiction, ensure that you are familiar with the relevant regulatory and financing framework as well as any schemes incentivising clean energy. It is worth also checking what, if any, rights you may have as a foreign investor, whether under local laws or investment treaties. Have one eye on the political landscape as a change in government may trigger policy changes with a knock-on effect on the pace of transition to clean energy.
• Steer clear of bribes or facilitation payments. Bribes and facilitation payments fall foul of anti-bribery obligations and can result in liability not just for the company but also the individuals involved. Contracts have also been voided and therefore found to be unenforceable due to underlying bribery.
• Contractual allocation of risks. Given the uncertainties, particularly with regard to the development and use of new technology, careful attention must be given to the contractual clauses which allocate risk as between the parties. For example, must you increase your investment if the implementation costs exceed forecasted amounts? If so, is there a limit to your potential exposure? Do you have an exit option if there is a change in government policy or revocation of incentives? Must you continue to fund the project if a policy change or the price volatility of raw materials means that the project is no longer commercially viable
• Dispute resolution clause. Dispute resolution clauses are often agreed at the eleventh hour of negotiations. If you plan to invest millions (or billions) of dollars in a project, you should ensure that there is a contractual mechanism which facilitates the resolution of any dispute in a timely and cost-efficient manner. Any ambiguity in this clause risks satellite litigation, which will create delay and incur unnecessary costs. It may also be worth specifying that any disputes are to be determined by a judge or arbitral tribunal with the relevant expertise, in a neutral forum.
• Local contractual formalities. Check that you have complied with all contractual formalities required by the country into which you are investing as some countries have esoteric requirements. For example, contracts must be stamped before they can be admitted as evidence before the Indian courts, regardless of the governing law. Similarly, contracts are generally only enforceable in Indonesia if they are in Bahasa Indonesia or at least bilingual. Failure to comply will, at best, result in delay but could mean that the entire contract is unenforceable in that country.

Energy producers

• Government policies and regulation. Governments in countries such as Vietnam have sought to boost the production of clean energy through incentives including generous feed-in tariffs and tax benefits. Take advantage of such incentives promptly as they may be discontinued once there is sufficient uptake. Be mindful also that a change in the political environment could swiftly alter the regulatory framework.
• Retiring fossil fuel infrastructure. There will likely be a complex web of contracts to unwind when decommissioning existing fossil fuel infrastructure. Carefully consider each contract to ensure that you comply with the required procedure when terminating. Failure to do so could result in messy and prolonged disputes. It is also worth considering whether any of the existing infrastructure can be repurposed for use with clean energy.
• Embracing new technologies. The production of cleaner energy often involves adopting new technology at varying stages of development. Be mindful that developers of such new technology may not be as experienced in the energy sector and may have a shorter-term outlook.
• Commissioning new infrastructure. The construction of new energy infrastructure may be delayed by supply chain and design issues, leading to delay in bringing the infrastructure online and/or operating at the capacity required. For larger scale new energy projects, consider appointing a standing or ad hoc dispute board to ensure that most if not all disputes which arise can be resolved speedily, whether through adjudication or mediation.
• Contractual risk allocation. Given the numerous players involved in commissioning a new project, it is important to ensure that the web of contracts clearly and properly allocates risks between the various players. Be particularly careful to ensure that limitation and exclusion clauses in the various contracts do not leave you bearing unexpected risks. Questions to consider include the following: Who bears the risk of nascent but expensive technology being superseded before the project comes online? Is the project still viable if existing tax incentives are withdrawn? How does the contractual web adapt to a change in the regulatory framework during the life of a project? Where parties seek to limit or exclude their liability, ensure that the scope of such limitation or exclusion is clear.
• Insurance. Ensure that there is adequate insurance cover for the project, particularly the risks which fall on you. Some insurance will be similar to that for fossil fuel projects, for example, construction insurance against delays and non-completion. Some may be unique to renewables projects, such as climate risk insurance against risks related to weather and natural catastrophe events.

Energy consumers/purchasers

• ESG. Regulators and stock exchanges are increasingly focused on ESG disclosures. Within the ASEAN region, stock exchanges in Indonesia, Malaysia, Singapore, Thailand and Vietnam require listed companies to publish sustainability reports. If your ESG policies require the increased use of green or clean energy, you can leverage this to lobby electricity companies.
• Existing supply contracts. If you are currently locked into a fossil fuel-based electricity source, carefully review the termination provisions in the existing contracts to ensure you comply with the agreed termination procedure. Some contracts permit termination without cause after a minimum period, provided timely notice is given.
• Energy security. As a commercial consumer, security of energy supply is naturally critical to ensure continuity of business. When reviewing new power purchase agreements, ensure that there are measures to ensure continuity of supply, particularly where the clean energy source is weather dependent as power generation may otherwise be susceptible to changes to the climate and environment. 

1. Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. 

In-depth 2024-036