Let’s Work Together


An investor’s outlook on solar energy in emerging Asia

Published on May 21, 2024


In Southeast Asia’s energy sector, fossil fuels continue to dominate, comprising around 83% of the region’s energy mix and largely overshadowing the 14.2% contribution from renewables. Among these, solar energy remains notably underutilized. While Vietnam has made significant strides, achieving an impressive 20.5% share of its power from solar, Indonesia still lags substantially, with less than 1%.

Roughly 40% of Indonesia’s off-grid areas are scattered across islands beyond Java. It is unlikely that the national grid will reach most of these places soon. This complicates infrastructure development but also encapsulates a broader challenge facing the region: harnessing its abundant renewable resources effectively.

For those less familiar with energy terminology, a one-gigawatt power plant produces enough energy to power approximately 750,000 homes. There are 1,000 gigawatts in a terawatt, and our global civilization currently runs on around 17.7 terawatts of power from all energy sources—oil, coal, natural gas, and alternatives such as solar, wind, hydropower, and others.

Southeast Asia-based climate investor Helen Wong is Managing Partner at AC Ventures. She recently joined an episode of Indonesia Digital Deconstructed to discuss the outlook on solar energy in Indonesia. As Southeast Asia’s most populous country, it accounts for 40% of the region’s power consumption.

Early retirement of coal

The regional prospects for solar energy are compelling. Southeast Asia has a technical potential of 17 terawatts—more than 20 times the capacity needed to meet the net-zero emissions target of 2050—yet current renewable energy capacity stands at a mere 99 gigawatts.

Against this backdrop, opportunities are afoot and investors are already hedging their bets today in the region’s renewable energy space.

The Just Energy Transition Partnership (JETP) for Indonesia was launched in November 2022 at the G20 Leaders’ Summit in Bali. It is an agreement to mobilize an initial US$20 billion in public and private financing to decarbonize the nation’s energy sector. The country resolved to accelerate renewables domestically, with a recently revised target of achieving 19%-21% renewable energy by 2030.

A big part of the plan involves the early retirement of Indonesia’s coal plants, which currently account for a staggering 60% of the local energy mix. To bridge the inevitable production gap, an aggressive ramp-up in renewable energy investments is required, targeting an annual generation of 36 gigawatts from solar photovoltaics alone, a sevenfold increase from the investments recorded between 2018 and 2021.

Helen explained, “The urgency to do something about climate change is clear, especially in Southeast Asia. Looking at Indonesia, specifically, part of the problem is that there has historically been an overinvestment in coal which has resulted in a surplus of cheap electricity. In this sense, the JETP discussion should be viewed as encouraging for global climate investors.”

She added, “That said, the regulatory framework in Indonesia still has to contend with a lot of subsidies still going to fossil fuels, particularly coal, which at the moment makes it quite difficult for solar to compete. PLN, which manages the grid, is the only off-taker for solar energy, and currently, they are not too keen to actually purchase more solar energy.”

Starting with commercial and industrial

Optimistic about the outlook of solar energy in Indonesia over the next decade, Helen shared that ACV most often comes across new ventures that fall into a few distinct categories.

She explained, “We most often see three types of solar projects: utility-scale, which requires large capex, and has fluctuated according to the tenders from PLN; the commercial and industrial subsector, where companies can build or lease on-site renewable power plants for self-consumption; and residential, which currently is a bit harder to scale.”

Helen added that the most promising subsector in Indonesia’s solar energy market right now is the commercial and industrial space. “Xurya, our portfolio company, is the largest player in Indonesia’s commercial and industrial market today, supplying clean power to multinationals. They currently have a capacity of about 200 megawatts.”

When asked how investment firms evaluate the opportunity of solar energy projects in emerging markets like Indonesia, Helen replied, “In Southeast Asia, solar energy is still at a very early stage. The key is in originating the right projects and ensuring that financing costs allow for a good internal rate of return. We look at the internal rate of return of a solar project and the overall payback period. Regarding subsidies, while nice to have, they can lead to market volatility and solar prices have come down so much that they are close to parity with fossil fuels.”

Backing the winners in solar

Helen pointed to the use of solar yield optimization tech like trackers and software that assesses the suitability of rooftops for solar installations, underscoring these as enhancements rather than fundamental solutions. She also mentioned the use of IoT in auditing renewable energy projects, which is becoming increasingly vital as green financing grows, supporting the need for detailed auditing to facilitate loan approvals and attract necessary debt financing alongside equity in the investment landscape.

“Financing is quite critical as the initial costs for solar projects are substantial. As investors, we need to understand how long the company can manage the payback of their initial investment and how they handle their cash flows,” she explained.

“Once these projects scale and mature, they can look to securitize the assets. Fortunately, we see considerable support from development finance institutions. We are optimistic about the potential for more blended financing solutions, possibly with guarantees of first loss from entities like the World Bank, which would significantly bolster the industry.”

On the topic of what needs to happen for broad solar implementation to accelerate in Indonesia, she brought up the nation’s power grid. Increased grid connection between the nation’s main islands is likely to be achieved by 2028 at the earliest.

“More than US$300 billion is needed not just in distribution but also in transmission for renewable energy,” said Helen. “The grid needs to be upgraded to be able to handle more intermittent sources of energy like solar. In the context of venture investing, we at ACV are keen to back the winners in this space and help with the imminent energy transition in Southeast Asia at large.”

Want to join a podcast episode? Please fill out our guest booking form.

EN | 中文