The Iran conflict is prompting a historic shift in Asean’s energy strategy

SINCE the outbreak of the Iran conflict in February, much attention has focused on the Middle East and, specifically, its energy infrastructure. 

Yet it is Asia – especially Asean – which is experiencing most of the economic repercussions of the crisis.

It is prompting the largest global rethink of energy investment strategy since the energy shocks of the 1970s, as countries in the region try to minimise their exposure to geopolitical vulnerability.

Asia has been at the centre of this sea change because the region, along with the Middle East, had – prior to the war – been the destination for roughly 80 to 90 per cent of energy exports from the Gulf. 

The numbers are stark, and underline the extent to which the conflict’s legacy can intensify a trend towards investment in domestic energy.

Of course, even before the conflict broke out, there had been discussions on how the countries most dependent on imported energy, particularly in Asia, were accelerating the diversification of energy sources to increase security. 

However, it is the landmark World Energy Investment 2026 report, released by the International Energy Agency on May 28, which provides the most conclusive and comprehensive evidence so far of how rapidly these developments are progressing.

Heightened investment in energy security

In the wake of the Iran conflict, total global energy investment is projected to rise to around US$3.4 trillion in 2026, a 5 per cent increase from the year earlier.

Around US$2.2 trillion of that is expected to flow into electricity grids, battery storage, low-emission fuels, renewables, nuclear energy, electrification and energy efficiency.

Crucially, Asean’s electricity demand is growing around 1.5 times faster than the global average. This highlights the need for the region to build new generation capacity, expand and strengthen grids, and increase energy storage capabilities.

To that end, Asean is forecast to spend around US$57 billion on renewables, grids and end-use sectors in 2026 – a record high.

While coal and natural gas remain key sources of power generation for the region, investment in renewables is expected to reach US$22 billion in 2026, more than 2.5 times the level of investment in fossil fuel-based generation.

The renewables landscape is being driven by hydropower, solar energy, and wind and geothermal technologies.

Additionally, an investment of US$15 billion in power grids is estimated to be completed in 2026, driven by cross-border electricity trade through the Asean Power Grid.

Funding in end-use sectors is forecast to increase by about 15 per cent in 2026, with momentum from growing electric vehicles purchases and increasing demand for cooling.

Reflection of regional concerns

This dramatic outlook for Asean is a microcosm of a wider, fast-changing Asia energy sector. For instance, expenditure in China – the world’s largest energy investor – is forecast to reach around US$945 billion in 2026, a 5 per cent increase annually.

The Iran crisis coincided with the start of China’s 15th Five-Year Plan, which runs from 2026 to 2030. This new plan is highly supportive of clean energy, with financing driven by green loans and bond issuance directing capital towards low-carbon infrastructure such as wind projects.

The country is also boosting investment in advanced nuclear and hydrogen energies. This underlines a major commitment to not only energy security, but also future competitiveness, which is at the heart of Beijing’s plan.

Likewise, India’s energy story is one of long-term transformation. Indian investment in power generation has grown massively during Prime Minister Narendra Modi’s time in office since 2014, and is projected to reach around a record US$170 billion in 2026.

Over the past half-decade, energy expenditure has grown by some 70 per cent as New Delhi navigates rising electricity demand, decarbonisation targets, industrial growth and, most recently, intensified energy security concerns prompted by the Iran crisis. 

For instance, in the last five years alone, solar investment has surged 25 per cent annually to reach US$20 billion, while investment in oil refining has grown 23 per cent on a yearly basis. This positions India for an increase of around 15 per cent in refining capacity by 2030.

Admittedly, coal remains key to India’s energy ecosystem, especially in mining. However, for every dollar invested in fossil fuel-based generation, India invests about three in renewables and nuclear power.

In Japan and South Korea, meanwhile, total combined energy investment is projected to reach around US$122 billion, with an emphasis on energy security and transition-related investment – a response shaped by the Iran crisis. 

Both countries are highly dependent on imported fuels, while rising electricity demand is increasing pressure on power systems. Investment in renewables, hence, is set to expand significantly.

For Japan, that means restarting nuclear reactors. This is a significant change in policy that will test public opinion in the country roughly 15 years after the Fukushima crisis in 2011.

A key driver of the shift is Prime Minister Sanae Takaichi, who is a proponent of nuclear energy. For Japan’s leader, it will be a key discussion point with French President Emmanuel Macron at the Group of Seven Summit, to be held from Jun 15 to 17 in France – which is a global leader in nuclear energy.

Taken together, the Iran conflict is catalysing a historic shift in Asia as the region seeks to achieve security, trust and diversity in energy projects and partners.

The writer is an associate at LSE Ideas at the London School of Economics