Southeast Asia at the crossroads

Summary

Southeast Asia’s energy transition is at a crossroads. Policymakers are hedging bets rather than making bold commitments and the tension between tactical, stopgap measures and strategic, long-term investments will define 2025. Stay ahead of the curve with our breakdown of trends to watch this year.

The region’s lock-in problem — resulting from existing power purchase agreements, plans for future grid flexibility needs, and market development — continues. Electricity tariff structures, rather than generation costs, will be central to ensuring affordability while enabling the energy transition.

Politics and geopolitics shape energy policy as much as market forces. Ministerial restructurings, evolving LNG supply chains, and increasing competition between China, Japan, and the US for influence in the region will all impact investment and regulatory decisions in the year ahead.

Data transparency and market design remains critical and continue to hinder market development. TransitionZero’s ongoing work aims to bridge some of these gaps, but greater collaboration is needed.

Energy in Southeast Asia: the big picture

The forces shaping Southeast Asia’s energy markets are shifting. It’s no longer about sweeping policy commitments — though they still get headlines. Now, governments are making hard decisions as energy security, affordability and access to finance take centre stage.

Are these choices aligning with long-term energy transition goals, or are they a reactive pivot driven by shifting geopolitics and short-term pressures? The reality is more complex.

Across the region, policymakers are balancing immediate electricity affordability and economic growth concerns with future sustainability by hedging bets rather than making bold commitments amidst growing geostrategic uncertainty. We’re seeing this reflected in drafts of Power Development Plans, where the future technology options have become more diverse — featuring some solar, some batteries, some gas, some grid expansion. This is most apparent in the (re)consideration of nuclear power in future energy mixes in countries like Singapore, Malaysia, Vietnam, and the Philippines. There’s a little of everything, but not too much of anything.

This trend may be frustrating to observe, especially as Nationally Determined Contributions (NDCs) are due for an update in ambition this year. The grid infrastructure, electricity market structure, and finance gaps that have become apparent in the last two years have led to a restructuring of energy planning and development for most Southeast Asian countries. Domestically, there is pressure to get it right.

At the heart of this is a fundamental challenge: how to design resilient, affordable power systems while navigating uncertainty. This is where energy system modelling is essential. Market-level analysis helps policymakers and investors test assumptions, and stress-test pathways to understand trade-offs related to capacity expansion and dispatch. With so much at stake, decisions can’t be based on black-box assumptions, over-optimistic scenarios, or outdated data (this is where TransitionZero comes in — read our secret master plan!).

This tension between tactical, stopgap measures and strategic, long-term investments will define 2025. Here is how we are thinking about the energy transition in the region in 2025.

The focus is on 2030 and 2035, not 2050

The transition is about what happens in the next five to ten years, because that’s what determines project pipelines, financing flows, and infrastructure choices.

Most policy roadmaps assume smooth, linear progress toward net-zero, but the reality is far messier. Bottlenecks in permitting, financing, or grid readiness are already forcing hard trade-offs. When assumptions are wrong, they don’t just delay progress; they lock in bad choices that are costly to reverse.

Government planning documents like PDP8 in Vietnam or the RUPTL in Indonesia often get misinterpreted as fixed outcomes, but they don’t always reflect how markets and systems will actually develop and operate, especially as some of them plan for very high, unlikely degrees of capacity expansion and demand growth.

This is why actions and targets eyeing 2030 and 2035 matter. These aren’t abstract waypoints on a decarbonisation pathway; they are real deadlines on the path to 2050 that will determine whether the transition actually happens, and on what terms. For instance, the policies and regulations for the gas industry in the Philippines and Vietnam are currently in development. Whether sufficient guardrails will be implemented to prevent upstream and downstream infrastructure overbuild, while ensuring gas remains a transition fuel, and how consumers will be protected from the volatility of the global gas market, should become clearer this year.

Electricity tariffs, not just costs, will shape the future

We can’t talk about affordability without talking about electricity tariffs: who pays, how much, and whether the system — from operations to retail pricing — can sustain the transition. The cost of decarbonisation technologies like solar, batteries and wind have fallen rapidly which has aided in their deployment around the world. But in Southeast Asia, the cost of generation and grid technologies is one thing; the structure of electricity tariffs is another.

Most energy system models prioritise the most affordable technologies to build and dispatch (least-cost optimization approach). This assumes that as technology costs decline and economies of scale improve, a virtuous cycle will take hold, driving more renewables that further reduce costs and prices. This logic underpins most global energy transition scenarios, where falling costs for solar, wind, and storage lead to rapid market expansion.

But few markets in Southeast Asia function purely under an energy-only market (which compensates for power produced) or capacity markets (which compensates for readiness); instead, they operate under cost-plus or pass-through pricing mechanisms for conventional generation. This means that fossil fuel plants, particularly coal and gas, have guaranteed cost recovery, shielding them from price competition with renewables. As a result, the expected market-driven expansion of low-cost renewables does not materialize as quickly as models suggest.

Addressing tariff design, subsidies, and the long-term ability to pay are front and centre in government agendas. Vietnam retail tariffs hiked aggressively, increasing by 13% since 2023 and the state utility Electricity of Vietnam (EVN) is planning to pilot a two-part tariff structure (capacity charge and energy charge) on selected consumers from this year in a bid to address both immediate and longer-term financial pressures for the utility. Malaysia’s Tenaga Nasional Berhad (TNB) is also proposing a 14% increase in base tariff effective from mid-2025 to fund grid improvements and capacity supporting higher solar penetration, a proposal which received backlash from consumers.

Without deeper reforms in tariff design, grid investments, and market structures, the transition to lower-cost clean energy will remain constrained. Any shift to market-based pricing, decisions on subsidies, and looming questions of how to finance grid upgrades all point to one uncomfortable reality: energy transitions don’t just require technology shifts — they require social and political consensus on affordability. And that’s a much harder conversation.

The lock-in problem: PPAs, markets, and where flexibility fits

PPAs remain the dominant way to finance new capacity, but they also lock in long-term structures and technologies that may not align with future grid flexibility needs and market development.

Batteries are a prime example. They are often treated as a secondary add-on when they should be shaping market design alongside grid development because they are able to balance load and complement the variability of RE technologies.

On existing assets, many big questions are still up in the air:

• Are grid, generators, and power systems ready for flexible renewable and fossil fuel operations that need to run differently in the future?
• Have we fully accounted for the additional costs that come with alternative strategies for delaying retirements, including coal flexibility or fuel conversion?
• What does this mean for existing PPAs and assets, particularly if they are operating as baseload?
• Are today’s PPAs reinforcing the very inflexibilities that markets are trying to solve?

The answers matter. Market liberalisation efforts, tariff reforms, and battery integration need to be understood together, not in isolation. In 2025, we will need to watch whether markets and PPAs develop in sync, rather than in parallel.

Admittedly, this will be difficult as real PPA data is difficult to capture. Much modelling is not driven by real data, but on more simplistic assumptions about how markets should evolve. TransitionZero’s Coal Asset Transition (TZ-CAT) tool, a PPA-level dataset for Indonesia and the Philippines will be updated in 2025. CAT Malaysia will also be released in Q1 2025.

Data transparency matters for market development

Interest in decarbonisation strategies like clean firm PPAs and the APG is growing. For example, we are currently modelling 24/7 CFE across five Asian countries to explore how clean energy supply can better align with demand in close-to-real time by 2030. Meanwhile, last year’s release of our ASEAN Power Grid Model, TZ-APG v1 provided insights into the potential impact of regional grid interconnection projects. Both models identify key variables that will help determine how these strategies can be implemented.

Without credible, validated data, it’s hard to move beyond speculation. This is not just limited to a lack of data. In some cases, it’s too much bad data and not enough useful disclosure. For example, hourly demand generation and other operational parameters at a power plant level are incredibly hard to come by. Technical parameters like technology costs at a country level, which are essential, can be time-consuming to collect, leaving modellers and developers to use regional or global averages. Therefore, investors and policymakers are often making decisions with incomplete, inconsistent, or outdated information. Overall, grid congestion data, market pricing structures, and operational constraints remain frustratingly opaque in many ASEAN markets.

For the region to develop clean energy markets, we don’t just need better forecasting tools. We need real-world data that reflects actual system dynamics for more stakeholders. Without that, we risk making decisions based on assumptions that don’t hold up.

Policy is important, but politics are hard

And then there’s the elephant in the room: politics. Following transitions of power in 2024, countries like Indonesia and Vietnam are restructuring their ministerial bodies and agencies, merging or reshaping responsibilities in ways that will impact energy governance. These institutional changes, alongside new leadership, signal a potential shift in energy policy direction or, at the very least, delays in policy implementation.

The geopolitical undercurrents are also stronger than ever. China, Japan, and the US aren’t just financing projects, they’re shaping the strategic direction of Southeast Asia’s energy systems. LNG supply chains remain fragile, with Vietnam and the Philippines still figuring out how to secure long-term supply, and build out a pipeline of LNG projects. Meanwhile, efforts to diversify solar panel and battery supply chains away from China are gaining traction, but how far can they realistically go?

Energy transition investments aren’t just about cost and efficiency. They’re about alliances, dependencies, and security, and the politics of energy investment will only get more complex.

Watch this space

So many inflection points and decisions are coming in 2025, and there will inevitably be a lot of noise. To get the latest analysis, insights, and tools mentioned above, sign up for our newsletter.