Rising power demand in a fossil-fuelled region
Southeast Asia’s regional electricity consumption surged by 24% from 2021 to 2025, more than twice the global average. But while sustainable renewable sources are becoming more affordable, coal and gas met 70% to 80% of this new electricity demand, not wind or solar.
The fossil-fuelled status quo has deep roots in past policy choices. Seeking to power the region’s economic growth, Southeast Asian governments banked heavily on abundant domestic coal and imported gas, building large thermal plants under secure, long-term contracts. The result is that many markets in the region optimised around steady coal power: grids are engineered with limited storage and interconnectivity, while market structures are regulated around pricing systems that assume fixed-price, always-on supply.
How can this design be adapted to make room for investment in cleaner energy? This question is particularly relevant as accelerating electrification drives up demand peaks, while renewable generation creates more intermittent supply.
The legacy of PPA-based power markets
Decades of state-led development have left Southeast Asia with electricity markets dominated by long-term contracts and monopolies. In most countries, a vertically integrated national utility – often the ‘single buyer’ – controls the grid and electricity procurement, while private power producers participate via power purchase agreements (PPAs). This model was widely adopted in the 1990s and 2000s and achieved its primary goal of rapidly expanding generation capacity with the help of foreign investments.
Long-term PPAs have been vital to finance essential power plants, but often favour fossil-fuelled assets as a side-effect of terms designed to attract investors with guaranteed returns. This limits potential contributions from wind or solar projects, even if cheaper renewable energy is available.
Another regional hallmark with important implications for renewable power adoption is regulated electricity tariffs and government control over prices. Policymakers have historically kept electricity prices low and stable to spur industrial growth. Policies like subsidising fuel costs and minimising price fluctuations prioritise affordability and predictability, but also limit visibility into potential cost advantages from renewables.
Recent efforts enabling renewable investments
Southeast Asian countries have been taking important steps towards adopting more flexible power market structures, strengthening market signals, and allowing renewables to show their true value.
Structural reforms have typically begun with the unbundling of legacy utility functions: generation, system operator, single buyer, transmission, and customer services. Such unbundling can reduce conflicts of interest, improve transparency in contracting, and help build investor confidence in renewable energy projects, even within a single-buyer framework.
More recent reforms have tended to concentrate on improved contract design. Vietnam, for example, has taken steps from feed-in tariffs to competitive auctions and piloting direct power purchase agreements (DPPAs) that allow renewable producers to sell to corporate buyers. Malaysia, Vietnam, and Indonesia are going even further, introducing third-party grid access.
A measured path forward
Continuing this transformation of Southeast Asia’s electricity markets from PPA-driven to renewable-friendly will be a delicate, but essential, endeavour. Boston Consulting Group (BCG) has identified six strategic levers to support this transition.
Lever 1: Strengthening institutions and transparency with unbundling
In some markets, the same organisation still procures power, operates the grid, and owns the generation assets. Unbundling these roles, even within a single-buyer framework, helps reduce conflicts of interest. When the entity awarding PPAs or dispatching plants is structurally independent from those competing to supply power, procurement becomes more neutral and market access more predictable for renewable developers.
Lever 2: Gradual wholesale market introduction
Pilots and gradual additions of wholesale markets or day-ahead trading platforms can be introduced alongside existing contracts. This measured approach allows system operators to gain experience with cost-based dispatch and pricing following a ‘merit-based order’ of dispatch, without immediately subjecting consumers to volatility. Over time, the market can expand the scope of pilots, adding an intraday market for adjustments, and eventually allowing large consumers to buy directly from the pool.
Lever 3: Flexibility in contracts
Regulators can review and modify existing PPAs to increase flexibility. This might mean renegotiating minimum offtake clauses, or imposing terms that any new PPAs for thermal plants have a shorter duration or limited must-run obligations. Consider limiting new baseload-only PPAs and instead procuring new generation through auctions that reward reliability and low cost. This approach retains investment security but still exposes generators to short-term market signals.
Lever 4: Integrating grids and providing cross-national investment frameworks
A unified ASEAN Power Grid has been a long-discussed goal for the countries of the region. Under this vision, countries might import cheap hydropower from Laos or excess solar from Vietnam to offset shortages elsewhere. This regional approach reduces the cost of transition by smoothing out each country’s variability and creating a larger market to attract energy investors.
Lever 5: Protecting consumers and industry during the transition
A calibrated reform should maintain focus on affordability. Policymakers can design mechanisms to prevent price shocks and protect customers. One tool is a two-part tariff or retail level capacity-payment mechanism – charging a predictable fixed fee for capacity availability and a variable fee for energy that reflects market prices. Another possible tool is targeted subsidies or rebates.
Lever 6: Introducing carbon attributes
Introducing carbon attributes such as renewable energy certificates (RECs) can help Southeast Asian markets scale corporate demand for clean electricity and improve transparency in renewable procurement. Establishing standardised, government-endorsed carbon attribute systems would create valuable new revenue streams for renewable developers.
Energising market transition
Thermal power will remain part of Southeast Asia’s energy mix for a long time. The route forward is leveraging these plants to support renewable integration, redesigning their role to better fit this new paradigm (e.g., keeping some coal plants as reserve or peaking units rather than baseload). Enabling this approach will require new kinds of contracts and market products that value capacity and flexibility, not just energy. By embracing competitive market principles in a careful way, within existing single-buyer structures, Southeast Asian countries can attract the investment needed to power up renewables across the region.
