Bilateral agreements key to mitigating risks of Asean Power Grid projects: OCBC

[SINGAPORE] To overcome significant political and regulatory risks hindering the Asean Power Grid (APG), governments within the regional bloc should first ink overarching bilateral agreements governing cross-border electricity trade, said OCBC group chief sustainability officer Mike Ng.

“Many of the individual regulatory issues... are ultimately symptoms of the absence of a sufficiently durable cross-border legal framework,” he said in an exclusive interview with The Business Times.

He was speaking about a new report examining the commercial and legal conditions required to finance projects that export low-carbon electricity to Singapore.

Besides regulatory uncertainties, the report, which was released on Wednesday (Sep 16) by the Singapore Sustainable Finance Association (SSFA), also looked at various ownership structures and revenue models that could have an impact on the bankability of such projects.

Led by OCBC, with management consultancy Baringa and law firm Hogan Lovells Cadwalader Lee & Lee as knowledge partners, the report focused on two import-export corridors: between Singapore and Indonesia, as well as between Singapore and the Malaysian state of Sarawak.

These two corridors were selected because of the export regions’ proximity to Singapore, their availability of renewable energy and demonstrated willingness to collaborate.

Thus far, Singapore’s Energy Market Authority has awarded conditional approvals or licences to import 3.4 gigawatts (GW) of low-carbon electricity from seven projects from Indonesia, as well as a 1 GW project from Sarawak.

The success of APG is particularly crucial for Singapore, as the city-state – which lacks alternative renewable energy resources – aims to import 6 GW of low-carbon electricity from its neighbours by 2035 under a broader nationwide plan to achieve net-zero carbon emissions by 2050.

However, progress on building regionwide connectivity has been slow, even though discussions on APG have been ongoing for more than two decades.

While Asean governments have set a goal of linking all 11 member states’ power systems for energy trade by 2045, the ambitious project continues to face significant bottlenecks. These include a large financing gap, a fragmented regulatory framework and a tendency to prioritise domestic over regional interconnections.

Regulatory risks

Almost half the report was dedicated to several regulatory risks and how the current regulatory environment disproportionately places such risks on the project developers and the financial institutions funding the projects.

Some of these uncertainties include:

• The lack of an enforceable electricity-trade agreement between governments;
• How renewable energy certificates could be transferred and recognised across borders;
• Requirements that parts of the renewable energy supply chain have to be located in the export markets;
• The prioritisation of domestic energy needs;
• The duration of export licences, such as Indonesia’s five-year limit;
• The construction and maintenance of subsea cables that cross third-party countries, such as the Singapore-Sarawak corridor.

While all of these are important issues that need to be resolved, Ng believes that a binding bilateral agreement between governments can establish reciprocal regulatory commitments that could help address the long list of issues.

Improving bankability on cross-border projects is not about eliminating risks. What is needed is for the risks to be allocated properly to the party best placed to manage them, with that party responsible for providing compensation should the risks materialise.

“The key is not so much to make the projects less complex. The key is to disambiguate the risks... If the risk allocation is wrong, it could make the cost of financing higher, or the deal could become unbankable,” said Ng.

“For banks, we are generally quite good at assessing and mitigating certain risks like construction risks, operating risks, technology risks, offtake risks. But when it comes to political and regulatory risks, that’s a different animal altogether, because they are ultimately outside the control of the private sector.

“When we are doing a deal today, the banks are not only underwriting today’s government; they are potentially underwriting four to five governments over the 20 to 25-year tenor of the loan,” he added.

Commercial models

The report also examined measures to mitigate the risk of power generation facilities and transmission cables becoming stranded assets if integration is not properly managed.

It looked at three main types of ownership structures:

• A single company that owns both generation and transmission assets during construction and operation;
• A single company that owns both generation and transmission assets during the construction phase, with ownership separated when the project becomes operational;
• Having separate owners for these assets throughout the life cycle of the project.

Ng noted that there is no single model that is better than the others, and that OCBC has been involved in deals structured in all three ways.

Ultimately, it is about taking a more integrated approach with these two types of assets through greater coordination with the different ownership structures, said Kavitha Menon, director of SSFA.

The report also noted that there may be a pricing gap between current retail or wholesale electricity prices and imported low-carbon electricity. This is because developers would have to recover a much broader cost stack that covers generation, storage, transmission, financing and backup systems.

This may affect corporate buyers in Singapore in signing long-term power purchase agreements with the developers, which may in turn affect their financing.

“The implication is that matching demand-side price expectations with supply-side costs will require a blend of revenue models,” the report stated.

Bilateral-first perspective

The report prioritises establishing bilateral interconnections first, stating that multiple bilateral projects would create the foundation for future multilateral expansion.

Besides Malaysia and Indonesia, EMA also awarded conditional approval for low-carbon electricity import projects with developers in Cambodia, Vietnam and Australia.

Ng said what is needed for APG to become a reality is to prioritise some bilateral corridors and establish a clear bankability road map.

Once the first bilateral project comes to a financial close and becomes operational, the next one “would not be starting from zero”.

“There will be much less friction, and the perceived risk will be lower. And as we repeat this process, project by project, corridor by corridor, I personally believe that the APG will just emerge organically,” said Ng.

“It is why we don’t see a bilateral-first approach as a compromise to the multilateral vision of the APG. In fact, we see it as the pathway to that vision,” he added.

While Asean already has a multilateral cross-border project transferring green electricity from Laos to Singapore through Thailand and Malaysia, the project has faced several hurdles. Previous reports have alleged that the deal has been held up since 2024 by disagreements between the countries over how the electricity should be transmitted.

However, the deal has been renewed since January 2026, after Malaysia’s state-run utility signed a two-year agreement to continue transmitting low-carbon electricity from Laos to Singapore.

Menon noted that the regulatory and legal conditions of such cross-border projects have to be tailored to those specific jurisdictions.

“You need... for every corridor at least one transaction to get your toes dipped in the water and understand what it takes to get to bankability. So, what is applicable in Vietnam or Cambodia may not be lessons that are directly transferable for a Singapore-Indonesia conversation,” she said.

While APG has been stuck in limbo for decades, its value proposition beyond Singapore rose amid the recent Iran war, as Asean governments recognised the need for more stable and diversified sources of energy after soaring prices for imported Middle Eastern fuel exposed their vulnerability to external supply shocks.

“For each of these countries, getting that domestic energy mix and the diversification becomes an important angle. So really thinking hard about the competitive advantage at an Asean level, who is best placed to produce energy at what cost, and having a unified regional coalition coming together and driving that is even more critical today than one year ago,” said Menon.

Ng said APG should not be viewed as a “zero-sum game”, where each Asean member state is focused on what they are getting out of it.

“These projects can create value for many parties – the exporting country, the importing country, and the wider region through new sources of income, energy security, decarbonisation, investments ... But not every benefit can be quantified, not every benefit can be allocated to a country,” he said.

“We need to think about how you can make the pie bigger, and the pie can be bigger because everybody is going to be benefiting from it.”