By Suchitra Sriram, Associate Director, Energy & Environment, Asia Pacific, Frost & Sullivan
According to the Electricity Market Report from the International Energy Agency (IEA), power demand in the Southeast Asia (SEA) region has been increasing, on average, by more than 6 per cent year-on-year over the past two decades. However, due to the recurring wave of COVID-19 infections and subsequent curtailing of economic activities, the region’s electricity demand weakened by one per cent during 2020. Amid high chances of fresh outbreaks and the re-emergence of cases, major investments in the energy sector have been muted in Q1 and are likely to remain so in Q2 2021. Post-pandemic recovery in the energy sector will be largely driven by increased R&D investment in the hydrogen economy, smart solutions for the offshore sector, transmission and distribution infrastructure expansion, and investments in building renewable energy capacity. The reprioritisation of business strategies is inevitable for energy industry participants, and it will focus on internal process improvements or advancements with digitisation and other immediate quick-wins.
Disruption in traditional business models
A decade ago, oil and gas (O&G) companies and power utility companies sold road fuel and electricity, respectively. However, with significant advancements in technologies and a call to mitigate carbon emissions, these energy industry stakeholders have been forced to diversify into new business areas, including entering each other’s territories to maximise revenue streams. Major acquisitions are expected from the O&G companies to enter the power industry value chain over the next five years. For instance, Malaysian national oil company (NOC) Petronas acquired Singapore-based solar power company Amplus Energy to foray into the renewable energy (RE) market. In some cases, O&G companies are either developing their own RE projects or playing in the market as venture capitalists.
Digital solutions set to accelerate across the energy industry value chain
The pandemic has critically increased the need to harness industrial revolution (IR) 4.0 technologies such as big data and artificial intelligence (AI), drones, digital twins and predictive analytics in business operations across industries. The energy industry is part of this trend. Digital technologies can be leveraged in the energy industry to build an infrastructure that is more flexible, intelligent, connected and responsive. As greenfield investments become fluid, the focus will be on improving and strengthening the existing energy infrastructure. For instance, NOCs in the SEA region such as Petronas, Pertamina and PTT Exploration and Production Public Company Limited (PTTEP) have embarked on digital transformation journeys to improve operational performance and safety and ensure asset optimisation and integrity. Power utilities in the region are prioritising new investments in digital and smart solutions that can facilitate seamless remote operation and visibility of their systems or assets on the supply side without needing manual intervention. This has become highly critical due to restrictions in labour movement and the shortage of skilled local staff for such niche services.
Coal power losing its sway in Southeast Asia
Funding coal-fired power projects is becoming increasingly difficult in the region as banks and financial institutions are transitioning to funding renewable energy projects and encouraging sustainability efforts. In 2019, Japan’s Sumitomo Mitsui Banking, Mizuho Bank and Japan Bank for International Co-operation (JBIC) withdrew from financing domestic and overseas coal-fired power projects that were being planned in the SEA region, especially in Indonesia and Vietnam. In 2020, Malaysia’s CIMB became the first Southeast Asian bank to commit to a coal exit strategy by 2040; Singapore-based DBS Bank also announced plans to phase out its coal industry financing completely by 2039. Recently, the Asian Development Bank (ADB), one of the largest financiers for projects in the emerging economies in Asia, announced that it would cease financing new coal-fired power plants, oil and natural gas field exploration, and drilling or extraction activities.
Investments in renewable energy projects remain resilient
Although supply chain disruptions in the SEA region temporarily deferred construction of RE projects in 2020, the overall investor appetite in this market, especially for wind and solar power, remains resilient. This has been possible due to the falling cost of RE power and technology advancements (such as energy storage) in the market to address the intermittency challenge of RE. For instance:
- The Malaysian government revised its renewable energy to an installed capacity mix of 31 per cent by 2025 from the previous target of 20.0 per cent.
- In the Philippines, applications for more than 13 GW of solar projects were received as of September 2020.
- Vietnam cancelled many of its planned large coal-fired projects and is replacing them with renewable energy
In addition, the demand for renewable energy procurement amongst corporates through power purchase agreements (PPAs) will increase exponentially in the region, driven by a commitment to reduce carbon emissions.
The next decade for the energy industry will be centred on value creation. Due to the expected growth in customer touchpoints, industry participants will effectively leverage those touchpoints to widen their market penetration and generate new value propositions. Energy market incumbents and investors will look far beyond their conventional assets to newer technologies such as renewable energy, energy storage, micro grids, hydrogen, etc., to expand their revenue streams and incorporate sustainability goals. Digitisation, a cultural change initiative for energy industry stakeholders, will gather momentum to drive efficiency and address aging workforce challenges.