The next phase of South-east Asia’s energy transition: Fixing the grid

[KUALA LUMPUR] South-east Asia’s green energy push is entering a harder phase, as Middle East tensions and surging power demand amid a data centre boom, shift the real transition battleground from generation to the grid.

For years, the region’s transition story centred on building more solar farms, wind projects and hydro capacity. The bigger challenge lies in modernising ageing power systems, strengthening cross-border electricity links and ensuring that clean energy can be delivered reliably to where demand is growing fastest.

Malaysia’s Deputy Prime Minister Fadillah Yusof said that Asean member states have agreed to accelerate the implementation of the Asean Power Grid (APG) and broader regional energy connectivity initiatives to strengthen energy security cooperation.

Speaking at a recent event, Fadillah, who is also minister of energy transition and water transformation, noted that the agreement was reached during the latest Asean Ministers on Energy Meeting, which included discussions on the Trans-Asean Gas Pipeline and the sharing of available energy resources among member states.

He expects further progress by the next Asean Leaders’ Meeting in November, noting that stronger regional grid integration could enhance energy security, improve system resilience and unlock new opportunities for cross-border electricity trade.

The urgency has sharpened since the war in Iran revived concerns over fossil-fuel supply and price volatility – and is mounting. South-east Asia is home to nearly 700 million people and is one of the world’s fastest-growing energy markets. The International Energy Agency projects that the region’s energy demand will rise by more than 60 per cent by 2040 if current trends continue.

Meanwhile, surging demand from artificial intelligence, data centres, electric vehicles and green industrial parks is placing unprecedented strain on power systems.

As a result, policymakers are increasingly viewing grid infrastructure and regional energy connectivity as strategic priorities rather than technical afterthoughts.

Connecting a fragmented region

After decades of talks, the APG is gaining momentum as countries balance surging electricity demand with ambitious decarbonisation targets.

One project already in operation is the Laos-Thailand-Malaysia-Singapore (LTMS) Power Integration Project, which allows renewable electricity generated in Laos to be transmitted across multiple countries through existing interconnectors.

In an interview with Bernama TV, Tenaga Nasional Bhd (TNB) senior chief strategy, regulatory and sustainability officer Muhamad Nazri Pazil described the LTMS project as a milestone that demonstrates the viability of regional electricity trading while enhancing energy security.

Several other projects are under study, including the Vietnam-Malaysia-Singapore interconnection, the Sarawak-Peninsular Malaysia-Singapore link, and enhanced transmission links between Malaysia, Thailand and Singapore.

“These projects allow countries rich in renewable resources – such as Laos with hydropower and Vietnam with wind energy – to export electricity to neighbouring markets such as Malaysia and Singapore,” he added.

Market observers said that regional electricity trading could help countries better manage supply and demand as renewable energy penetration rises. However, a fully integrated regional grid remains some distance away.

A report by BMI in March noted that governance around the APG is gradually strengthening, including efforts to develop a regional framework for subsea interconnector infrastructure and harmonise regulatory, commercial and technical standards across member states.

Yet cross-border electricity trade ultimately depends on political alignment, regulatory certainty and long-term infrastructure investment – factors that remain uneven across the region.

Renewables expose grid weaknesses

As the energy transition evolves, the primary hurdle is no longer building renewables, but integrating intermittent solar and wind into electricity networks originally designed for centralised fossil-fuel plants.

In Malaysia, solar power now accounts for the bulk of new renewable capacity additions in Peninsular Malaysia, with about 5.1 gigawatts already installed.

At the same time, the country is exploring emerging technologies including hydrogen, battery storage and carbon capture.

Floating solar projects in Penang are being developed to support renewable energy production, while Sarawak is positioning itself as a hydrogen hub through collaborations with Japan and South Korea.

Speaking to the public during a discussion session at the Economic Forum in February, Muhamad Nazri explained that the challenge is to ensure that variable generation, particularly solar, can be integrated into a grid that was traditionally designed for centralised, synchronous power generation.

To support renewable energy integration and rising demand from the digital economy, TNB has committed RM43 billion (S$13.8 billion) under the Incentive-Based Regulation framework to modernise and strengthen the national grid.

The investment is expected to support growing demand from industrial users and data centre clusters emerging in key growth corridors.

Muhamad Nazri said that the upgrades would enable the grid to support Malaysia’s renewable energy targets of 40 per cent by 2035 and 70 per cent by 2050.

Financing the shift

If building renewable generation is challenging, expanding grid infrastructure is even harder.

BMI estimates that South-east Asia needs at least US$100 billion in transmission investment by 2045 to realise the APG – yet current funding commitments fall dangerously short.

Cross-border infrastructure projects, particularly high-voltage subsea cables, are expensive and involve complex ownership structures, tariff arrangements and regulatory approvals spanning multiple jurisdictions, said BMI in a report.

Patrick Lee, chief executive officer for Singapore, Asean and South Asia at Standard Chartered (StanChart), said that Asean’s green economy could be worth US$430 billion by 2030, but the region is struggling to absorb funding.

Around 35 per cent of announced green capital expenditure remains unrealised, a gap that is wider than in many other regions globally.

In a separate interview with The Business Times, Kim-See Lim, chief investment officer at the Asian Infrastructure Investment Bank (AIIB) for public sector clients in South Asia (except Afghanistan and Pakistan), South-east Asia, the Pacific Islands and Sub-Saharan Africa, said policy clarity is crucial for attracting investment into energy transition projects.

AIIB has partnered with local financial institutions to support sustainable investments, including energy transition projects, green transport and digital infrastructure.

However, Lim noted that technologies such as hydrogen, carbon capture, battery storage and grid digitalisation remain in relatively early stages of deployment.

“This is where multilateral development banks can play a catalytic role. Our objective is not to crowd out private capital, but to create markets,” she added.

According to her, AIIB offers flexible financing tenors: 15 to 20 years aligned with power purchase agreements for established independent power producers of solar, and longer, blended structures – potentially including first-loss positions – for emerging technologies.

The AI effect

The pressure to upgrade grids is becoming more urgent as electricity demand accelerates.

Data centres, EV infrastructure and green industrial parks are projected to generate more than 100 terawatt-hours of additional electricity demand across the region by 2030.

Malaysia is already seeing signs of that shift. According to RHB Research analyst Max Koh, TNB’s electricity unit sales in the first quarter rose 7 per cent year on year, driven by a combination of prolonged heatwaves and growing electricity demand from AI-related data centres.

While traditional manufacturing demand remains relatively subdued, the rise of AI workloads and data centre investments is creating a new source of structural electricity demand, said Koh.

In a recent report published by Bain & Co and StanChart, Lee said this presents both a challenge and an opportunity.

On the one hand, surging electricity consumption risks overwhelming infrastructure, undermining competitiveness and slowing decarbonisation efforts. On the other, it could provide the long-term demand certainty needed to support renewable energy projects and attract investment into grid infrastructure.

“Realising that promise hinges on the development of a robust power grid,” he said.

The challenge is particularly acute in Singapore and Johor, which account for more than 70 per cent of Asean’s data centre demand.

“This concentration of demand is placing significant strain on transmission networks that were not designed for such rapid, localised growth,” explained Lee.

He sees investment in the APG as a vital lever to unlock regional potential, connecting member states via cross-border interconnections and linking renewable supply to demand centres.

Lee added: “The prize is an additional US$70 billion in clean energy and grid-related capital unlocked by 2030, materially expanding the South-east Asian green economy.”