An energy policy for ASEAN? Lessons from the EU experience on energy integration, security, and decarbonization

Diaz-Rainey, Ivan; Tulloch, Daniel J.; Ahmed, Iftekhar; McCarten, Matthew; Taghizadeh-Hesary, Farhad Working Paper An energy policy for ASEAN? Lessons from the EU experience on energy integration, security, and decarbonization ADBI Working Paper Series, No. 1217 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Diaz-Rainey, Ivan; Tulloch, Daniel J.; Ahmed, Iftekhar; McCarten, Matthew; Taghizadeh-Hesary, Farhad (2021) : An energy policy for ASEAN? Lessons from the EU experience on energy integration, security, and decarbonization, ADBI Working Paper Series, No. 1217, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: https://hdl.handle.net/10419/238574 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series AN ENERGY POLICY FOR ASEAN? LESSONS FROM THE EU EXPERIENCE ON ENERGY INTEGRATION, SECURITY, AND DECARBONIZATION Ivan Diaz-Rainey, Daniel J. Tulloch, Iftekhar Ahmed, Matthew McCarten, and Farhad Taghizadeh-Hesary No. 1217 February 2021 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. Suggested citation: Diaz-Rainey, I., D. J. Tulloch, I. Ahmed, M. McCarten, and F. Taghizadeh-Hesary. 2021. An Energy Policy for ASEAN? Lessons from the EU Experience on Energy Integration, Security, and Decarbonization. ADBI Working Paper 1217. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/energy-policy-asean-lessons-eu-experienceenergy-integration-security-decarbonization Please contact the authors for information about this paper. Email: [email protected] Ivan DiazRainey is director of the Climate and Energy Finance Group (CEFGroup) and Department of Accountancy and Finance of the University of Otago in Dunedin, New Zealand. Daniel J. Tulloch and Iftekhar Ahmed are researchers at the CEFGroup and Department of Accountancy and Finance of the University of Otago. Matthew McCarten is Lead, Spatial Finance at the Sustainable Finance Programme of the University of Oxford in Oxford, United Kingdom. Farhad TaghizadehHesary is an associate professor of economics at Tokai University in Hiratsuka-shi, Kanagawa-ken, Japan. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. This paper has benefited from comments received during presentations to the Otago Energy Research Centre (OERC) Seminar Series (Dunedin 2019) and the ADBI conference on Economic Integration in Asia and Europe: Lessons and Recommended Policies (Tokyo 2019). We are particularly grateful for comments received from Peter J. Morgan, Venkatachalam Anbumozhi, and Xunpeng Shi. The usual disclaimer applies. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2021 Asian Development Bank Institute ADBI Working Paper 1217 I. Diaz-Rainey et al. Abstract The European Union (EU) has redefined the energy sphere in Europe over the last three decades. Transnational policies targeting liberalization and integration, energy efficiency, renewables, carbon pricing, and energy security have led to major steps forward in terms of a more secure, integrated, and environmentally friendly energy supply. This paper explores, through the lenses of a paradigm shift and transition pathways, how the Association of Southeast Asian Nations (ASEAN) grouping might advance its own energy trilemma through greater energy cooperation. We provide evidence that ASEAN has lagged behind in terms of energy transition, representing considerable risks in multiple forms ‒ most notably, political and physical climate risks from failing to meet the Paris Agreement targets and the risk of stranded assets if accelerated transition is achieved. However, accelerated transition could come in many forms. By drawing on the EU experience, we argue that an energy policy for ASEAN should explicitly pursue a dual transition pathway strategy to yield the best outcome in terms of the energy trilemma. First, an ‘ASEAN Supergrid’ supported by a single energy market and by common carbon pricing would ‘green’ urban and industrial demand. Second, ‘Distributed Smart Grids’ would help reap the social and economic benefits of providing electricity to the rural/remotely located population that have hitherto not had access to electricity. This is a dual transnational and local approach that contrasts with energy transition defined at national level. This interconnected approach should yield security, environmental, and economic dividends. Keywords: energy transition, EU, ASEAN, energy policy, carbon pricing, renewable energy, climate risk, smart grids JEL Classification: O44, O52, O53, Q40, Q54 ADBI Working Paper 1217 I. Diaz-Rainey et al. Contents 1. INTRODUCTION ............................................................................................................ 1 2. ENERGY TRANSITION PATHWAYS ........................................................................... 3 2.1 Paradigm Shift and Transition Pathways .......................................................... 3 3. EU ENERGY POLICY AND INTEGRATION ................................................................. 5 3.1 Liberalization Stream ......................................................................................... 6 4. ENERGY EFFICIENCY STREAM ................................................................................. 7 4.1 Renewable Energies Stream ............................................................................. 8 4.2 Security of Supply Stream ................................................................................. 9 5. ASEAN ENERGY TRANSITION .................................................................................. 10 5.1 ASEAN Energy Context and Cooperation ....................................................... 10 5.2 Renewables Diffusion and Policy .................................................................... 13 5.3 Integration and the Asian Super Grid .............................................................. 15 5.4 Carbon Pricing and Climate Risks to the Energy Sector ................................ 15 6. CONCLUSIONS: THE FUTURE OF ASEAN ENERGY COLLABORATION ............. 17 REFERENCES ........................................................................................................................ 19 APPENDIX 1: RENEWABLE ENERGY POLICIES IN ASEAN COUNTRIES ....................... 22 ADBI Working Paper 1217 I. Diaz-Rainey et al. 1 1. INTRODUCTION In this paper, we explore how the ASEAN grouping might advance its energy trilemma ‒ the need for secure, affordable, and green energy ‒ through greater energy cooperation and whether the EU’s efforts on energy integration may hold lessons for ASEAN. This is particularly important since ASEAN countries have been described as climate and energy policy laggards (Razzouk 2018). To see whether EU energy collaboration holds lessons for the ASEAN grouping it is important to understand the historical context of EU energy integration. With the birth of the European project attributed to the European Coal and Steel Community (1951), energy matters were at the heart of European economic integration at its inception (McGowan 1994). However, progress toward a European energy policy and a single European energy market has been slower than in other areas due to the determination of national governments and national interests to retain control over energy matters (Andersen 2000). Despite setbacks along the way, European efforts have persisted over time with the Energy Policy for Europe (EU Commission 2007) representing a watershed effort to increase European influence on energy matters. This policy set ambitious targets for energy efficiency, the adoption of renewables, and cutting greenhouse gas emissions, as well as continuing efforts to create integrated and liberalized European energy markets. Thus, the Energy Policy for Europe sought to integrate energy and environmental policy at the EU level, which had hitherto functioned largely separately. The birth of EU environmental policy was marked by the European Council’s 1972 declaration of the first Environment Action Programme (Gubb 2007). Subsequently, EU influence on environmental matters has grown as exemplified by the commitment to sustainable development in the Maastricht (1992) and Amsterdam (1997) Treaties and by the Lisbon Strategy (2000). Though there have been policy failures, such as the aborted proposals for an energy/CO2 tax in the early 1990s (Andersen 2000), there have been numerous accomplishments. Of these perhaps the most prominent were the leading role the EU played in global environmental negotiations, like Kyoto, and the establishment of the EU Emissions Trading Scheme. Just as significant have been a raft of low-profile decisions, directives, and resolutions on a host of environmental issues, ranging from water quality to setting standards for waste disposal, and from protecting wildlife and fauna to increasing the energy efficiency of appliances and buildings (see Section 3.2). The EU is now on its seventh Environmental Action Plan, which runs until 2020. Andersen (2000) reviews efforts at creating a European energy policy up to the turn of the century and identifies four distinct periods. The first covered the period 1946‒1957 when energy cooperation, in particular concerning coal, drove wider political cooperation. This was followed by a period (1957‒1972) when cheap imported oil replaced coal, resulting in energy policy becoming largely peripheral to the European project. The third period (1973‒1985), heralded by the oil shocks of 1973 and 1979, created renewed interest in European energy cooperation, which ultimately failed (Andersen 2000). Since 1985, the supranational influence of the EU in energy matters has steadily grown as the EU’s environmental and competition policies have become increasingly established and pervasive (Andersen 2000). As reviewed in Section 3 of this paper, these efforts can be placed into a hierarchy of energy sector restructuring streams as illustrated in Figure 1. ADBI Working Paper 1217 I. Diaz-Rainey et al. 2 Figure 1: Hierarchy of Sector Restructuring Streams Source: Author’s depiction. The liberalization objective or pillar contains one stream (Internal Energy Market); the decarbonization objective is comprised of two streams (Energy Efficiency and Renewable Energies); a miscellaneous objective contains the Security of Supply stream. As noted above, the Energy Policy for Europe attempted to integrate environmental and competition (liberalization and integration) pillars of energy and environmental policy. Further the policy sought to add an energy security pillar or objective by ‘promoting EU energy solidarity’ (EU Commission 2007). Though the EU has seen marked successes in the liberalization and environmental pillars of its energy policy, progress on energy security has been slower (see Section 4.1). Some might argue that a precondition to establishing a truly credible energy security policy is the creation of a broader foreign and security policy for the EU. If this is challenging for the EU then the challenge for ASEAN is even larger. The EU and ASEAN share a number of similarities yet they have important differences that strongly moderate the strength of integration and cooperation in any sphere, including energy policy. Both seek to integrate their economies, are involved in trade agreements, have regular political and economic dialogue, and seek to promote peace (Koh 2017). However, ASEAN is an inter-governmental organization while the EU is a supranational organization where large elements of sovereignty have been ‘pooled’ at the EU level. The EU has a parliament with the power to legislate and a powerful quasi-executive body in the form of the EU Commission and the Council of the EU. Crudely put, the EU can pass legislation that requires implementation of laws and regulation by member states in specific areas, which include energy and environmental policy, while ASEAN has no such powers. These differences provide an important context for any lessons that ASEAN may glean from the EU’s efforts to create an Energy Policy for Europe. The rest of this paper is structured as follows. Section 2 introduces energy transition and its many potential forms or pathways. Section 3 reviews EU-level efforts on integration, renewables, energy efficiency, and energy security. Section 4 explores the equivalent context in ASEAN. Section 5 concludes by comparing and contrasting the EU and ASEAN experiences and drawing relevant conclusions and policy recommendations. ADBI Working Paper 1217 I. Diaz-Rainey et al. 3 2. ENERGY TRANSITION PATHWAYS In response to growing concerns about climate change and the need to meet the social and economic needs of energy demand, new energy production and consumption paradigms have been advocated worldwide. Despite contrasting visions, techno-market approaches dominate (EU Commission 2011; US DOE 2009; Verbong and Geels 2010), where the interaction between markets and technological innovation, such as smart appliances, smart grids, and electric vehicles, is envisaged. This approach emphasizes price signals as being central to directing change within the energy system, not only in altering the energy mix and moving supply from fossil fuels toward renewable energy, but also in creating more demand-responsive consumers. There is a good deal of forward-looking work attempting to envisage the decarbonized energy system of the future as reflected with interest in ‘smart grids’ (e.g., Battaglini et al. 2009; EU Commission 2011; US DOE 2009). Smart grids can be understood as the marrying of ICT technologies and software (including artificial intelligence and blockchain) to the electricity grid in order to facilitate an electricity system that allows for demand-responsive consumers and effectively integrates renewable generation and new consumer technologies such as electric vehicles (see Section 2.1 for a fuller description of ‘smart grids’ and ‘smart energy systems’). As noted above, a central tenet behind most visions of the ‘smart grids’ of the future is the price signals that energy markets will deliver to facilitate effective and efficient resource allocation. Hence, smart consumers will charge their electric vehicles when prices are lowest and feed back to the grid when they are very high. This vision intertwines energy systems with electricity market liberalization and competition (see Section 3.1 for a related discussion in the European context). Thus, energy transition represents a technology-driven paradigm shift that involves doing things in ‘new ways’ facilitated by technology and markets. 2.1 Paradigm Shift and Transition Pathways Some of the key attributes of the ‘smart grids’ or ‘smart energy systems’ of the future include (see Lund et al. 2017; US DOE 2009; Valocchi, Juliano, and Schurr. 2010; Verbong and Geels 2010): • Integration of renewables: In particular intermittent wind and solar photovoltaic (PV) generation, which has become cost-competitive relative to fossil fuels on a levelized cost of production (LCOE) basis. Indeed, in many countries that is now cheaper than fossil fuel generation (Merchant 2018). • Demand-side management and price-responsive consumers: Enabled by technological innovations such as smart appliances and smart meters, as well as the aforementioned ‘aggregators’ and their new services. • ‘Prosumers’: Consumers, being also producers, provide small-scale generating technologies such as photovoltaic generation and small-scale wind turbines. The ability to be a ‘prosumer’ is enabled by technologies such as bidirectional smart meters. ADBI Working Paper 1217 I. Diaz-Rainey et al. 4 • New energy market participants and services: An increased emphasis on energy services rather than energy consumption with new third-party market participants intermediating (often referred to as aggregators and/or energy services companies (ESCOs)) between the energy system/market and end users. • Integration of electric vehicles (EVs): Increasingly EVs are seen not just as a drain on the system but as an integrated component for balancing due to the possibility of using EV batteries as a form of energy storage that can feed back into the grid (US DOE 2009). This is known as Vehicle to Grid (V2G) and is possible since vehicles spend the vast proportion of their time idle (parked), so if they are idle and they are connected to the distribution network they can be used as batteries in the network to smooth out peaks and thus reduce costs. • Energy storage: Storage is again expected to be facilitated by technological innovation such as improved battery technologies. • Green hydrogen: Although many facets of the energy system are likely to be electrified (e.g., light vehicles fleet) there will remain a need for liquid fuels to deal with long-range transport, industrial processes, and winter heating needs. Green hydrogen is ideally placed to meet these needs in the energy sector and indeed some countries will seek to pursue the hydrogen economy more broadly (Lund et al. 2017; Clark II 2008). Most visions of the future share these attributes; however, there are contrasting configurations of the future end state of the energy system within the boundaries of these attributes (Battaglini et al. 2009; Foxon, Hammond, and Pearson 2010; Verbong and Geels 2010). Table 1: Alternative Visions for the Energy System in the Long Term Transition Pathway Description Network Change Dynamic TP1: Transformation or ‘Hybrid Smart Grids’ Centralized generation continues to dominate but is complemented by renewables and small-scale distributed generation. Network infrastructure remains principally defined at the national level. Use of fossil fuels continues but Carbon Capture and Storage ensures system is decarbonized. Medium Economic: the market as an organizing force TP2: Reconfiguration or ‘Super Smart Grid’ Supranational/regional energy policy (e.g., EU) results in the creation of a transnational super grid that geographically diversifies away the intermittency problem of renewables, thereby allowing for a fully renewable-based system. High Economic and political: the market and international collaboration as organizing forces TP3: Realignment or ‘Distributed Smart Grids’ This TP can be seen as the opposite response to TP2 to energy policy challenges. There is an increased emphasis on energy conservation and local small-scale renewables generation. The national network is replaced by ‘loosely coupled regional and local grids (micro grids)’ (Verbong and Geels 2010). High Localism: A decentralized and localized response to energy policy challenges Source: Adapted from Battaglini et al. (2009); Hojčková, Sandén, and Ahlborg (2018); Verbong and Geels (2010). ADBI Working Paper 1217 I. Diaz-Rainey et al. 11 • ASEAN Power Grid • Trans-ASEAN Gas Pipeline • Coal and Clean Coal Technology • Energy Efficiency and Conservation • Renewable Energy • Regional Energy Policy and Planning • Civilian Nuclear Energy APAEC strongly emphasizes ASEAN energy market integration and connectivity to accelerate the realization of the ASEAN Economic Community (Andrews-Speed 2016b). However, as intimated in the Introduction, these programs do not have the legal standing that equivalent EU directives and legislation have (see Sections 3.1 to 3.4). The ASEAN Power Grid (APG) aims to facilitate multilateral electricity trading, while the Trans-ASEAN Gas Pipeline (TAGP) aims to connect liquefied natural gas (LNG) regasification terminals. In addition, APAEC 2016‒2025 encourages clean coal technologies, promotes strategies for energy efficiency and renewable energy sources, and focuses on nuclear capacity building for future energy security. It also offers an avenue for collaboration between ASEAN’s dialogue partners (DPs), international organizations (IOs), businesses, and academics in an effort to share their expertise. The APG has been a flagship initiative of APAEC 1999‒2004 under the ASEAN VISION 2020 since 1997, aiming for an integrated regional power grid. However, due to regulatory, policy, and fiscal barriers, progress towards establishing integrated energy market has lagged behind expectations (Andrews-Speed 2016b). In September 2014, ministers from the Lao People’s Democratic Republic (Lao PDR), Thailand, Malaysia, and Singapore agreed to initiate a pilot project to evaluate the likelihood of cross-border power trading. Andrews-Speed (2016b) notes that no initiative has been undertaken so far under this proposed pilot and blames the lack of liberalization of the ASEAN power sector for hindering the integration process. According to the ASEAN Energy Cooperation Report 2017 (ACE 2017b), as of 2016 eight APG projects have been completed out of a planned 16 projects with a capacity of about 1,723 MW, thereby bringing the total capacity of the APG to 5,212 MW. Another ambitious project that ASEAN has sought to promote is called the Trans-ASEAN Gas Pipeline (TAGP), which is an integrated natural gas pipeline network connecting regional gas reserves in the Gulf of Thailand, Myanmar, and Indonesia to the rest of the region (Sovacool 2009). The project aims to increase energy security and promote cooperation and dialogue among the regional counterparts. ACE (2017b) highlights that, so far, 3,673 kilometers of pipelines linking six countries and six liquefied natural gas (LNG) regasification terminals, with a total capacity of 22.5 million tons per annum (MTPA), have been built. However, these are the result of a bilateral approach as opposed to a more integrated and planned approach. As noted earlier, the ASEAN region has been growing rapidly, meaning that meeting associated growth in power demand, particularly uninterrupted electricity demand, is a considerable challenge for ASEAN governments (Rakhmah and Li 2016; Shi 2016). The population, urbanization, and industrialization have kept energy demand high. To meet this demand, electricity installed capacity increased by an average of nearly 8% per year between 2005 and 2015. ACE (2015) estimates that energy demand is projected to rise by an average of 4.7% per year between 2013 and 2035. ADBI Working Paper 1217 I. Diaz-Rainey et al. 12 Given this expected increase in energy demand, cooperation among ASEAN countries is important if this extra demand and existing demand are to be ‘greened’ via renewables – as noted in Section 2.1, a ‘Super Smart Grid’ in line with TP2 makes the integration of renewables much easier. This approach would thus support the growing power demand and limit greenhouse gas emissions. However, the current power supply path in the ASEAN region is not sustainable due to clusters of energy poverty (lack of access to electricity or clean cooking facilities) and a rising power demand met largely via fossil fuels (IRENA 2018; Shi 2016). Shi (2016) describes the ASEAN energy mix as brown and expects that CO2 emissions will double in coming decades under current trajectories. Further, although there are a rising number of interconnectors in the region, ASEAN energy market integration has been slower than planned and restricted to bilateral relations (see Andrews-Speed 2016a and Section 4.3 below). The total primary energy supply (TPES) in the region is dominated by fossil fuels (Figure 2). In 2017, oil had the largest share of TPES with more than 35% for the ASEAN region, while gas and coal contributed approximately 20% each. Biofuels hold the highest share in renewable sources at 18.40%, followed by geothermal and hydro at 4.58% and 2.16%, respectively. Other renewable (solar, wind, etc.) sources were underutilized as they amounted to less than a 1% share. Figure 2: ASEAN Primary Energy Supply Structure by Fuel (2017) (%) Source: Compiled from IEA 2019 World Energy Statistics and Balances. Indonesia, Malaysia, Thailand, and Viet Nam have the highest energy needs in the region (Figure 3). However, all four countries depend heavily on either oil, gas, or coal. On the other hand, a few countries, such as Cambodia and Myanmar, rely more on renewable sources (Figure 4), particularly on biofuels and waste. Malaysia and Viet Nam are leading the way in terms of hydro projects, and Indonesia has the largest geothermal sector, followed by the Philippines, in ASEAN. Energy trading has been growing in the region due to the rise of the People’s Republic of China (PRC) and India (Wu 2016). According to ACE (2017a), the key energy commodities for export are coal and gas. Malaysia and Viet Nam are the main exporters of gas, Indonesia exports considerable amounts of coal, and the Lao PDR is a hydropower exporter in the region, whereas Thailand and the Philippines import energy commodities, particularly oil and gas. ADBI Working Paper 1217 I. Diaz-Rainey et al. 13 Figure 3: ASEAN Primary Energy Supply Structure by Country (2017) Source: Compiled from IEA 2019 World Energy Statistics and Balances. Figure 4: ASEAN Primary Energy Supply Structure by Sources (2017) Source: Compiled from IEA 2019 World Energy Statistics and Balances. Although ASEAN depends heavily on fossil fuels for energy production (Tongsopit et al. 2016), the region has abundant renewable resources, which could be harnessed to contribute to regional energy security (Huang et al. 2019). In 2015, the region announced an intention to increase renewable energy to account for at least 23 percent of the energy mix by 2025 (ACE 2017b). In line with our earlier augment in favor of a TP2-type architecture (see above and Section 2.1), Huang, Kittner, and Kammen (2019) and IRENA (2018, 156) note that the region can transition toward a low-carbon future cost-effectively by integrating renewable energy sources on an interconnected grid. 5.2 Renewables Diffusion and Policy Wind and solar are the two key competitive ‘new’ renewables whose LCOE has dropped substantially around the world to make them increasingly competitive relative to coal and gas generation – indeed, in many parts of the world they are now cheaper than fossil fuel generation (see Section 2.1). As such, regions and countries experiencing rapid diffusion of these technologies will be making good progress in energy transition. Figure 5 and Figure 6, respectively, show the diffusion of wind and solar PV. From the figures it is ADBI Working Paper 1217 I. Diaz-Rainey et al. 14 evident that the material level of diffusion started to come about in a limited number of countries from 2010 onward. Yet these are still extremely low levels of market penetration. For instance, from Figure 5 it is clear the Philippines (along with Thailand) is one of the leaders in wind energy in ASEAN with about 1,000 GWh, which represents about 1.2% of generation in 2016. To put this number into context, the UK generated around 12% and Denmark around 40% of its electricity from wind energy in 2016. A green finance gap may be contributing to this low level of diffusion (Sachs et al. 2019). This low level of diffusion is not surprising given the low level of policy support (see Appendix 1). Appendix 1 shows that policies that are regarded as ‘key’ or substantial by the International Renewable Energy Agency (IRENA) did not start to appear in the region until 2011 and policies were nationally defined. This contrasts with the EU experience, which has seen a raft of policies at EU level since 2001 and a whole host of national policies well before then. Indeed, the focus of many EU renewable directives was to ensure a level playing field across Europe in terms of national policies (see Section 3.3). Figure 5: Wind Energy Diffusion in ASEAN Countries (GWh) Source: Compiled from IEA 2019 World Energy Statistics and Balances. Figure 6: Solar PV Diffusion in ASEAN Countries (GWh) PV = photovoltaic. Source: Compiled from IEA 2019 World Energy Statistics and BalancesNote: Excludes countries that had less than 50 GWh in 2017. ADBI Working Paper 1217 I. Diaz-Rainey et al. 15 5.3 Integration and the Asian Super Grid A major element of energy transition in theory and practice is market coupling across borders (integration), since it permits higher penetration of renewables due to portfolio and geographical diversification (see TP2 in Table 1 in Section 2 and Section 3.4) but also leads to competition that drives cost-efficiency and innovation (Section 3.1). Figure 7 provides a proxy of ASEAN countries’ electricity integration with neighboring countries (includes all interconnectors to ASEAN and non-ASEAN neighbors). The solid line aggregates for the ASEAN countries’ import and export (GWh). This is akin to the volume of electricity traded across borders. The dashed line divides this aggregate ASEAN total gross production (GWh), giving us a ratio of total import and export to total gross production. It is clear from the chart that in absolute and relative terms, ASEAN electricity systems are becoming more integrated, yet by 2017 import and export represented less than 2 percent of the total electricity consumption. Figure 7: ASEAN Electricity Integration Source: Compiled from IEA 2019 World Energy Statistics and BalancesNote: Left axis GWh, right axis (import+export)/total GWh aggregated for ASEAN. This increased integration may be attributed, at least in part, to ASEAN policy efforts in the guise of ASEAN Power Grid (APG) interconnections. Halawa et al. (2018, 12) note that heads of ASEAN power utilities/authorities have adopted a gradual and incremental strategy driven initially by bilateral agreements, but they believe this will evolve to a subregional and then to a regional basis. Efforts or proposals for integration, however, go beyond the ASEAN realm and cover Asia as a whole as articulated by the vision for an Asian Super Grid (that would interlink ASIA with HVDC links) and a potential Australian–Asian Power Grid that would bring Australian renewable power to Asia (via HDC links). 5.4 Carbon Pricing and Climate Risks to the Energy Sector It is perhaps not surprising from the preceding discussion, especially Sections 4.1 and 4.2, that ASEAN energy-related CO2 emissions continue to rise dramatically. This rise is depicted in Figure 8. Table 2 shows the absence of carbon pricing in the region, which undoubtedly will have contributed to this situation – there was no price on carbon until 2019 when Singapore implemented a weak carbon tax of $4/tCO2e. Contrast that with ADBI Working Paper 1217 I. Diaz-Rainey et al. 16 European carbon prices of 27 euro ($30.7) in June 2019, which, in turn, could be far from the social cost of carbon. Figure 8: ASEAN Metric Tons of CO2 Emissions from Fuel Combustion Source: Compiled from IEA 2019 World Energy Statistics and Balances. The above suggests that most ASEAN countries, if not all, are unlikely to meet their Paris Agreement targets. This poses a real political risk for ASEAN economies as they trade with nations that are taking much more proactive steps to mitigate emissions. Further, Asia is highly vulnerable to the physical risk of climate change and it is one of the regions contributing most to emission increases (Prakash 2018). This situation must change. Should ASEAN economies turn to accelerated transition to meet the Paris goal of staying below 1.5 °C warming, ASEAN energy systems and companies would find that the majority of their generating fleet would become stranded (Table 2). Table 2: Carbon Pricing and Climate Risk in the ASEAN Energy Sector Carbon Pricing Generating Units and Climate Risk Current Planned Total Units Incompatible with 1.5 °C Budget Brunei Darussalam no 55 7 62 88.7% (55) Cambodia no 155 13 168 94.6% (159) Indonesia no 2,478 287 2,765 89.0% (2,460) Lao PDR no 61 3 64 98.4% (63) Malaysia no 803 54 857 88.8% (761) Myanmar no 100 34 134 65.7% (88) Philippines no 1,303 195 1,498 83.3% (1,248) Singapore yes 149 5 154 81.2% (125) Thailand considering 541 130 671 52.8% (354) Viet Nam considering 198 116 314 86.9% (273) Compiled from World Bank (2019); Caldecott McCarten, and Triantafyllidis (2018). ADBI Working Paper 1217 I. Diaz-Rainey et al. 17 6. CONCLUSIONS: THE FUTURE OF ASEAN ENERGY COLLABORATION The EU and ASEAN share a number of similarities yet they have important differences that strongly moderate the strength of integration and cooperation in any sphere, including energy policy. ASEAN is an intergovernmental organization while the EU is a supranational organization with a parliament and with the power to legislate, and powerful quasi-executives bodies in the form of the EU Commission and the Council of the EU. This power to legislate has led to EU directives and policies on integration, renewables, and energy efficiency that have set the EU on the path to decarbonization and have created a level playing field for EU nation states to cooperate and companies to compete. The EU experience in trying to create a single European energy market (outlined in Section 3.1) holds some valuable lessons for ASEAN. The process is challenging and slow but can benefit from supranational legal authority and perseverance (in the EU, it took three legislative packages over several decades to make meaningful progress in liberalization and integration). Also, to ensure a level playing field, the sectors need to be restructured, and ideally independent supranational regulatory agencies need to be created. Sections 3.2 and 3.3 highlight that carbon pricing may not be enough, suggesting that a mix of instruments best achieves the complex needs of energy policy (Diaz-Rainey 2009). Regulation and directives on energy efficiency and renewable energy are the unsung heroes of energy transition in Europe; their impact is evident by how they affected incumbents’ stock market returns (see Tulloch, Diaz-Rainey, and Premachandra 2017). Regulation on energy efficiency has led to falls in demand, while regulation on renewables has ensured that renewables have grid access (and priority) to ensure that their environmental benefits are reaped. Section 3.4 highlights that the EU has implemented reactive energy security measures. These reactive measures are important but a far cry from a common EU foreign policy that could target energy security risks proactively (see the related discussion in the Introduction). Sections 4.2 and 4.4 show that ASEAN is a climate and renewable energy laggard. While the EU has had carbon pricing since 2005 in the form of the EU ETS and EU-wide renewables targets since 2001 (see Section 3.3), ASEAN courtiers do not have a coordinated approach to carbon pricing and did not have any carbon pricing until 2019 when Singapore implemented a low-carbon tax ($4/tCO2e) (see Table 2). However, Section 4.2 shows that the process of integration has advanced in ASEAN with a steady increase in the import and export of electricity in absolute and relative terms (see Figure 7); however, this is the result of bilateral relations (see Andrews-Speed 2016a), rather than that of an overarching ASEAN framework. Further, Section 4.4 highlights that ASEAN faces serious climate risks ‒ most notably, political and physical climate risks from failing to meet the Paris Agreement and the risk of stranded assets if accelerated transition is achieved. Informed by the EU experience, we argue the Energy Policy for ASEAN should explicitly pursue a dual transition pathway strategy to yield the best outcome in terms of the energy trilemma, that is, TP2 and TP3 as outlined in Section 2.1 and Table 1. First, TP1, as an ‘ASEAN Super Grid’ supported by a single energy market, would ‘green’ urban and industrial demand. Second, TP3’s ‘Distributed Smart Grids’ would help reap the social and economic benefits of providing electricity to the rural/remotely located populations that have hitherto not had access to electricity. This is a dual transnational and local approach that contrasts with energy transition defined at national level ADBI Working Paper 1217 I. Diaz-Rainey et al. 18 (i.e., TP1). This interconnected approach should yield security and peace dividends. As noted in the Introduction, the EU project was born out of energy cooperation and indeed the need to interconnect Europe so that conflict would not once more blight the continent. For all the contemporary criticism of the EU, it is beyond question that it has delivered peace and prosperity in the region. Energy integration has played a big part in this, with concomitant social, economic, and environmental benefits. Thus, the articulation of an Energy Policy for ASEAN that envisions a dual TP1 and TP3 strategy is critical from a social, environmental, and economic perspective. Unlike in Europe, such a statement of intent in ASEAN would not have the supranational top-down legal architecture that the EU has in implementation – so the question remains, how could delivery of such a vision be ensured in an ASEAN context dominated by bilateral relations? The answer lies in multiple sources of internal and external pressures galvanizing around the vision. Pressure will come from the Paris Agreement ‒ other parties (countries) to the agreement and multination organizations will apply pressure to ASEAN countries to ratchet up their implementation plans and ambitions with respect to renewables and decarbonization. A cogent example of this is the UN Secretary General’s recent call for Asia to overcome its ‘coal addiction’ (BBC 2019). Pressure will also come from ASEAN citizens as they start to feel the impacts of climate change – as noted in the Introduction, Asia is one of the most vulnerable regions in the world to the physical risks of climate change. Another source of important pressure will be investors and multinational banks as they seek to ‘green’ their investment and lending activities. For instance, by 2019, investors managing approximately $90 trillion worth of assets in the world had become signatories to the UN Principles for Responsible Investment (UNPRI), meaning that they will increasingly take into consideration climate change and the environment in investment decision-making. This applies as much to buying government bonds as it does to buying shares. ASEAN governments or energy utilities that are seen as not serious about energy transition will find raising capital increasingly difficult or expensive. Further, banks and investors are keen to invest in energy decarbonization via financing mechanisms such as syndicated loans and green bonds. But banks and bond investors will have a strong preference for liberalized electricity markets given the concerns about property rights and political risk in state-dominated electricity systems. Thus, electricity market liberalization is important to unlock investment in energy transition and will provide the price signals to drive integration (see Section 4.1 and Andrews-Speed, 2016b). Following on from the above, the biggest driver of change will be market forces. Europe needed strong policies to drive integration and renewables because, when it started, energy transition-related technologies were not cost-competitive, so strong policies were needed then. This is no longer the case as renewables and related storage and grid technologies (e.g., HVDC interconnectors) have become cheaper. Renewables have reached, or are close to reaching, grid parity even in Asia and the Pacific (IRENA 2018). Economics and market forces will mean that households, companies, investors, and cities will help drive energy transition forward and apply pressure to national governments. 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