Development Banks Can Catalyze the Clean Energy Transition, Starting in South and Southeast Asia

South and Southeast Asia are in many ways central to the global clean energy transition.

More than one in four people in the world live in this region, which stretches from Pakistan in the west to Vietnam in the east and the Philippines in the south. Its population and economies are on the rise, with energy demand growth among the fastest in the world. Because renewable energy is not scaling quickly enough to keep pace with population and economic growth, these countries are still adding new fossil fuel-based power.

As a result, the region is one of the world's largest carbon emitters and still climbing. And its people are feeling effects of a warming planet keenly, from suffocating heat in Pakistan and India to deadly floods in Bangladesh and Indonesia.

Shifting Asia's energy systems to clean, renewable power is critical to slowing the pace of warming and reining in these impacts, while also meeting the energy needs of its growing population. This will require massive resources: Some developing countries need a seven-fold increase in energy investment and finance to meet global clean energy goals by 2030. Based on current trends and projections, most of this finance will have to come from private sector investments, both domestic and international.

However, many countries in South and Southeast Asia lack the right ingredients to attract clean energy investment: a supportive and predictable policy environment, enabling financial systems, and modern grid infrastructure that can handle renewables. Overcoming these barriers will be key to unlocking more finance and catalyzing the region's clean energy transition. And multilateral development banks (MDBs) can help.

Overcoming Clean Energy Barriers with a Boost from MDBs

To attract the up-front investment needed to build a clean energy sector, countries need a national environment that can support and facilitate clean energy scale-up. Investors in South and Southeast Asia have been hindered by range of issues on this front, including unclear and inconsistent policies and regulations (such as for energy procurement); persistent fossil fuel subsidies; and insufficient or outdated transmission and grid infrastructure - all of which create real and perceived risks for foreign investors and raise the cost of capital. In addition, many South and Southeast Asian countries have a limited range of financial products available to scale clean energy finance. And coordination among local, national, regional and international stakeholders is lacking.

A small solar system in front of a store in downtown Phnom Penh, Cambodia. Renewables can help meet people's energy needs in countries like Cambodia, which face energy shortages and high electricity costs. Photo by fototrav/iStock

Countries may need help addressing these challenges - both financial and capacity-related - to transition to a low-carbon economy.

This is where multilateral development banks come in. MDBs are increasingly shifting their focus to not only support economic growth in developing countries, but also ensure that this growth is sustainable and low carbon. Because they operate at the nexus of public and private finance, MDBs can play a supporting role in overcoming investment hurdles and catalyzing private finance for clean energy. This can include financing projects directly, lowering risks for private investors, or helping governments build their capacity to develop policies and regulations to support the clean energy transition.

Three MDBs operate in South and Southeast Asia: the World Bank Group, the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB). By collaborating with local partners, each other and other international organizations, they can help speed the transition to renewable energy in this critical region and ensure all of its people have access to clean, reliable, affordable power.

1) Support Projects to Modernize Grids and Transmission Infrastructure

Despite a growing pipeline of clean energy projects dominated by wind and solar, many countries lack the grid and transmission infrastructure needed to transition to clean energy. Renewables require modernized battery storage, transmission, distribution and power management systems; without them, even a grid with ample renewable resources will have to turn to fossil fuels when sun and wind are scarce or when electricity needs are surging. A modern grid is also important for matching demand and supply - ensuring that generated electricity is available where and when it is most needed.

This is particularly true in South and Southeast Asia. In Thailand, for example, the government has enacted policies to increase renewable power generation. But their impact has been constrained by the country's limited transmission grid, which is unable to handle large-scale renewable deployment - especially to serve the region's large, growing cities. Fragmented island nations like the Philippines and Indonesia may also need distributed generation facilities, built in many locations, to reach remote communities.

Windmills and powerlines flank a road in Tamil Nadu, India. As countries scale up renewable energy sources like solar and wind, it's equally important that they modernize their grid infrastructure to deliver clean power to end users and help balance supply and demand. Photo by Kamionsky/iStock

Grid modernization projects face even higher barriers to private investment than many renewable installations. This is primarily because the public ownership of grid infrastructure (often through state-owned-enterprises) makes it better suited to public financing. In addition, the grid - which includes pylons, wires, transformers and more - is physically extensive. Upgrading it means dealing with landowners, permits, and a bevy of local authorities and their permitting departments. MDBs can help overcome these complexities and bring transmission projects to fruition.

The Asian Development Bank, for example, has designed projects to improve transmission infrastructure while also expanding electricity access locally. ADB provided loans to Nepal's government to upgrade transmission and distribution infrastructure and power management systems in the Kathmandu Valley. These upgrades have increased access to renewable power and helped Nepal move away from expensive and polluting diesel generators to meet peoples' daily electricity needs.

In addition to grid improvement loans, MDBs can provide training in power management and modeling tools to enable utilities to better anticipate supply and demand. They can support the modernization of countries' power markets and associated regulations. And they can provide expertise and legal resources to help strengthen power purchase agreements (PPAs) to lock in demand and provide more flexible power systems.

2) Reduce Investment Risks to Attract More Private Finance

For developing countries, attracting private finance for clean energy is especially difficult because investments are seen as riskier. In markets where utilities struggle financially, investors face "off-taker credit risk," or the risk of not being paid for power output. Supply chain risks can cause delays in obtaining equipment. Investors are also wary of losing money due to unexpected fluctuations in local currencies. Where bankers and investors are unfamiliar with newer business models associated with clean energy projects, these risks may be perceived as larger than they really are.

These real and perceived risks constrain clean energy finance by raising the cost of capital. Interest rates for borrowing money in developing countries can be 3 times higher, on average, than the rates in developed countries, thereby making it harder for renewables projects to be economical.

To help attract private capital to traditionally "risky" countries, MDBs have proven effective at de-risking investments through a variety of strategies. This can include providing grants or low-interest loans as well as blended finance support (which combines public with private finance), such as concessional debt capital, insurance and partial risk guarantees. By lowering risks, MDBs can help attract investment from private investors, commercial banks and national development banks.

In Bangladesh, the World Bank and Global Environment Facility have joined other development finance institutions in funding the country's Infrastructure Development Company Limited (IDCOL), a non-bank financial institution established by the government in 1997. Leveraging more than $400 million in financing provided by the World Bank for its Solar Home Systems program, IDCOL has been able to provide local partner organizations, such as Grameen Shakti, with more than $500 million in credit and almost $100 million in grants. These local partners then offer microfinance loans and direct subsidies to homeowners who install solar power. Between 2003 and 2020, the program helped provide electricity services to 20 million people, increasing the percentage of Bangladesh's population with access to energy from 27% to 97%.

Expanding access to this type of support will require ramping up MDBs' coordination at the country level with both local development and commercial banks. Efforts among MDBs to standardize risk underwriting and concessional credit lines for borrowers would help scale up this support and facilitate more lending by local banks.

Rooftop solar panels in Dhaka, Bangladesh. Financial support from the World Bank and other development banks has helped supply clean electricity to more than 20 million people in the country. Photo by NurPhoto SRL/Alamy Stock Photo

3) Work with Governments to Enable Country-level Energy Transitions

As in most regions, some countries in South and Southeast Asia lack policies that can support the clean energy transition by giving markets clear signals about the future of renewables.

Persistent fossil fuel subsidies create strong disincentives in many countries for energy users to switch to renewables; this is the case with Bangladesh's subsidies for kerosene. Some countries offer no tax rebates for renewable energy projects. And firms avoid investing in clean energy in countries where energy planning, permitting and procurement policies are onerous or unclear. Cambodia, for example, has no standardized procedures for securing approval for new renewables projects from the relevant energy authority. The resulting lack of coordination among government ministries can lead to delays and increase project development costs.

Governments, local banks and other stakeholders in the region may also lack internal capacity and resources to create strong policy and regulatory systems that support renewables. Thailand, for example, has no auction frameworks specifically for renewable energy projects. MDBs can help address these issues by working directly with governments and local financial institutions in the design and financing of countries' energy strategies and development "platforms."

This is an opportunity for MDBs to expand their impact by leveraging their experience, expertise and convening power. Examples include:

• Sharing climate and development analyses among funders. For example, the World Bank's Country Climate and Development Reports (CCDR) analyze what actions are needed at the national level to meet both climate and sustainable development goals. These could be used across banks to ensure that all funders involved have access to the same information.
• Blending financial capabilities to finance large portfolios of projects and accelerate the energy transition across the region. MDBs that have the ability to design policy-based lending, which provides finance in exchange for policy action, could explore ways to provide the full suite of their capabilities, including reforming energy markets and innovative financing. This could benefit country-led clean energy initiatives and provide a stable and supportive policy backdrop for sustained financing of this sector.
• Building capacity among local institutions. MDBs can also share expertise with national development banks, working with local banks' workforces to source and finance clean energy project pipelines. And they can support governments in creating financial mechanisms to help scale up investments. Since 2018, for example, the World Bank has been collaborating with PT-SMI - a special vehicle under Indonesia's Ministry of Finance - to build their technical capacity to issue "green bonds" in Indonesia.

4) Improve International Coordination to Bolster Clean Energy Investment

Even with assistance at the project and country level, scaling up clean energy financing throughout South and Southeast Asia will require a more coordinated effort by governments, MDBs and other institutions to address barriers that affect the entire region.

Consider green bonds, for example, which are a type of bond that can be used by governments or the private sector to raise funds for climate and other environmentally friendly action. A survey of investors and underwriters carried out by ADB in 2022 showed broad agreement across the region that providing credit enhancement for the underwriting of green bonds, such as risk insurance, could lower the price of borrowing and thus support investments in clean energy. However, it also identified a range of shared barriers among countries interested in using this financial tool. These include uncertainties around the level of government support for clean energy and different definitions of what would qualify for green bonds. Concerted effort among regional development banks to coordinate green bond definitions (as seen in the EU) could spur an increase in this type of finance.

Other ways MDBs can facilitate international collaboration on clean energy deployment include:

• International and regional MDBs can collaborate more systematically to address regional transmission challenges. In 2024, the World Bank and African Development Bank announced a partnership to help 300 million people in Africa gain access to electricity through distributed renewable energy systems or grid-connected electricity. By focusing the different partners' energies on both addressing transmission challenges and mobilizing private capital at scale, MDBs could potentially replicate such an initiative in South and Southeast Asia. ADB's 2017 Cambodia Solar Power Project could also be a source of inspiration for the success of such partnerships with a private mobilization aspect.
• MDBs can work with national development banks in the region to aggregate projects and facilitate private investment. One challenge for projects in low-income countries is that small-sized clean energy producers often don't have access to finance; this is partly because financiers are not willing to pay the high transaction costs associated with taking up multiple smaller deals. One solution is to pool similar types of projects across countries or even regions and aggregate them to enable cross-learning and increase ticket sizes for private investors. National development banks may be better placed to handle these types of aggregated projects in specific areas. Engagement between multilateral and national development banks could also open opportunities to develop project pipelines for larger projects, share risk across clean energy portfolios, and share institutional knowledge and capacity.
• MDBs can work with other global entities to scale up facilities to mitigate currency risk, one of the common barriers to investment in the region. The latest evaluation of the Multilateral Investment Guarantee Agency showed that the deployment of guarantees hinges upon currency depreciations and cost overruns, as well as construction delays. To address this, MDBs can work with local banks or existing platforms to provide mechanisms to hedge currency risk or find scalable solutions for lending in local currency.

Turning the Tide on Fossil Fuels

Shifting from fossil fuels to clean, renewable energy is the most urgent priority to curb climate change and sustainably meet Asia's growing energy needs. It's also one of the most difficult. A successful and equitable transition will require collaboration at every level; from national and local governments to utilities, private companies, the financial sector and international institutions. While national governments must take the lead, development banks and others can and should serve as partners.

As multilateral development banks continue to incorporate climate considerations into their operations, supporting the energy transition in South and Southeast Asia offers an opportunity to make a significant impact. By drawing on their financial firepower, convening ability, experience with private financiers and policy acumen, MDBs can help turn the tide on fossil fuels and help some of the world's most dynamic countries meet their growing energy needs more sustainably.