South-east Asia’s reality check: What’s hindering data centres’ green transition?

[SINGAPORE] Powered by large-scale data centres, South-east-Asia’s digital economy is expanding at breakneck speed – but the region’s clean energy transition is struggling to keep up.

From soaring green energy costs and policy uncertainty to ageing national power grids compounded by the absence of an interconnected Asean power network, the challenges facing a fully sustainable operation are mounting.

With clean power supply – and the infrastructure to deliver it – not moving at the same pace, the gap between the region’s energy ambitions and reality is getting wider.

Against this backdrop, the question is not whether the region can fuel its digital future, but how clean that future will be. 

Rising data centre energy demand

A Boston Consulting Group report projects South-east Asia’s data centre capacity to treble to between 5.2 gigawatts (GW) and 6.5 GW by 2030. Several reports indicate that Malaysia is set to overtake Singapore as the top growth market for data centre power demand in the region. 

But despite green ambitions, the region’s energy mix remains heavily reliant on fossil fuels. Malaysia, in particular, still sees about 70 per cent of its electricity from fossil fuels, notes Philippe Arsonneau, senior vice-president of the infrastructure segment at Schneider Electric. 

Meanwhile, Peninsular Malaysia’s data centre power demand will account for at least 8 per cent of its total capacity requirement by 2030, compared with less than 2 per cent today, notes Feng Xiaonan, principal research analyst of power and renewables at S&P Global Commodity Insights.

The 2035 growth projection is even more ambitious. Malaysia’s Deputy Prime Minister Fadillah Yusof has reportedly said that data centres will likely need 19.5 GW of power-generation capacity by that year, accounting for 52 per cent of Peninsular Malaysia’s electricity use.

The recently launched RM611 billion (S$186 billion) master plan by the Malaysian government also bets heavily on artificial intelligence, underscoring the rising data centre demand in the country.

“Powering this (data centre) growth sustainably remains a challenge,” adds Arsonneau.

Procurement costs

Bryan Tan, a partner at global law firm Reed Smith, notes that the Malaysian government has been pushing data centres to adopt renewables, partly to avoid straining domestic electricity resources. 

“The thought behind this is that (the high costs that go into running) data centres mean (the operators) can afford renewable sources,” he says.

But hurdles remain in the current landscape for procuring renewable energy – evident from a closer look at the enabling policy frameworks.

Malaysia’s Corporate Renewable Energy Supply Scheme (Cress), an initiative introduced in September 2024, allows corporations to purchase green electricity from renewable energy developers directly through the existing grid system, subject to system access charges (SAC).

But these charges are 80 per cent higher for intermittent renewable energy sources – such as solar and wind – with sufficient battery storage capacity, compared with the fees imposed on fossil fuel-powered sources. 

Moreover, SAC is fixed only for three years and subject to a 15 per cent cap on revisions, potentially leading to even higher prices. This makes Cress an unappealing option for data centre operators, who would rather pay the utilities directly even if it means taking on market risks, notes Faez Abdul Razak of Wong & Partners.

The law firm partner adds: “To date, there’s only been three public announcements about parties participating in this scheme. Although encouragingly, the offtakers for these three projects are all data centres, so the demand is definitely there.”

Nonetheless, Cress participation is unlikely to rise in the future, he says, because higher pricing risks remain with the SAC mechanism. Corporates are choosing to wait for policy updates instead. “So hopefully, the government can consider changing the mechanism, for example a revision every five years, or a much lower variation cap.”

Ultimately, the economics of renewable energy procurement need to make sense for data centres to opt for renewables. 

As Razak puts it: “One of the reasons Malaysia experienced this data centre development surge is that we have one of the lowest utility tariffs in the region… Any move by operators to embrace renewable energy sources would need to make sense from a cost perspective.”

Delayed renewables

The fact that acquiring green electricity is expensive is a structural problem.

Adrian Mucalov, partner and head of long life infrastructure at Actis, notes that the high SAC is due largely to Malaysia’s single-buyer electricity market structure and the way grid infrastructure costs are allocated.

To lower such fees and make renewable energy procurement more attractive for data centre operators, he points to increasing cross-border electricity trading and other initiatives such as the Corporate Green Power Programme (CGPP).

But CGPP also has glaring limitations.

While Cress supports direct power purchase agreements (PPA), CGPP allows corporate consumers to purchase solar energy from developers of solar projects – virtually. 

Under this framework, the parties agree on a fixed price, but contractual rights to the project’s renewable attributes commence only once the project is completed and operational.

The permitting and financing complexities involved end up delaying the solar projects, and ultimately CGPP itself, explains Feng of S&P.

“The data centre operators won’t be able to get the renewable energy certificates until the project is developed, and the solar project cannot be developed until financing is in place,” adds Razak.

Other than resulting in delays, CGPP is constrained by a cap on renewable capacity, unlike Cress. Razak highlights that CGPP’s 800 MW quota was already fully subscribed in 2023.

If all projects go as planned, solar capacity in Malaysia will almost treble to more than 9 GW by 2030, Feng says. Meanwhile, new data centre projects in the pipeline have secured a load of close to 6 GW. 

While the scale of solar capacity expansion seems to be in line with the scale of the data centre load, solar power’s intermittency makes its generation profiles unfit for data centres’ demand profiles – they require power that is stable 24/7.

This means that for data centre operators to be willing to swallow the pricier solar, the renewable energy needs to be paired with battery storage systems, which only add to the costs, notes Feng. 

Limited options

Even as governments push data centres to adopt renewables, the question remains whether countries such as Malaysia even have enough renewable energy sources, notes Tan of Reed Smith.

Feng highlights limited options for procuring such energy that can match data centres’ requirements. While expanding, they are not matching the growth rate of data centres, which are coming online within two years or less. 

This makes gas – a more accessible source – a near-term solution for data centres. 

In June, Megat Jalaluddin, the chief executive officer of Malaysia state utility Tenaga Nasional, reportedly said that he expects the country to add 6 to 8 GW of gas-fired power – or about 50 per cent more gas-fired power capacity – to meet data centres’ demand.

Thorbjorn Fors, group senior vice-president and managing director for the Asia-Pacific at Siemens Energy, also notes that data centre operators are relying primarily on gas for power stability. But the company has also seen rising demand for its gas turbines that can incorporate green fuels as well, such as hydrogen, ammonia and biofuels.

Nonetheless, fossil fuels have been powering the region’s industrialisation and are expected to stay longer as the key for its digital boom. 

Most data centres in South-east Asia, specifically Malaysia, Indonesia, Singapore and Vietnam, are still plugged into national grids that run mainly on fossil fuels, highlights Christina Ng, managing director and co-founder of Energy Shift Institute (ESI).

She adds that these include gas-based power grids that are neither clean nor green, just like coal.

As national grids were originally built around centralised fossil fuel power plants, incorporating decentralised renewables into them can be costly.

“This fundamental mismatch in grid architecture creates significant inefficiencies in renewable energy distribution,” Edwin Khew, chairman of the Sustainable Energy Association of Singapore (Seas), notes. 

This underscores the high procurement costs for renewables in Malaysia’s energy market, and is also a key hurdle to sustainable energy growth in other countries in the region, notes Kavita Gandhi, Seas’ executive director.

Kitty Bu, vice-president for South-east Asia at the Global Energy Alliance for People and Planet, agrees, adding: “Without storage or smart grid upgrades, solar and wind projects risk curtailment or may require costly integration measures.”

Therefore, the next phase of the region’s green transition is not just about building more renewable capacity, but integrating them “faster and smarter”, Schneider Electric’s Arsonneau says.

He adds that distribution technologies are important for data centres operating in the region, where infrastructure and clean energy access are still uneven.

Similarly, Vinit Chitkara, Asia-Pacific director of energy operations and clean tech at data centre operator Equinix, acknowledges that the biggest challenge lies in the distribution of clean and renewable energy. 

On top of that, “the renewable energy market in the region is tight, characterised by existing power infrastructure limitations, regulatory hurdles, and low project supply, which makes buying renewable energy for data centres challenging”, he says.

Lavan Thiru, executive director of Infrastructure Asia, points out that a connected regional grid would enable investors to expand market reach and pool risk across geographies, paving the way for large-scale integration of renewables.

Seas’ Khew and Gandhi concur, noting: “The full potential of the region’s renewable resources can only be realised through a robust, interconnected Asean power grid.”

However, the realisation of this visionary project seems far away, hobbled by a complex web of challenges, including policy disagreements and the sheer scale of the engineering challenges. 

Investors’ concerns

While South-east Asia’s growth story remains compelling, foreign investment continues to flow with a distinct undercurrent of caution.

This prudence is largely driven by persistent regulatory risks, which investors consistently highlight as a major challenge in supporting the region’s nascent green transition, notes Bu.

“Changes in auction rules, feed-in tariffs, or PPA terms create unpredictability. Many utilities are still structured around traditional fuel pricing, making it difficult for renewables to compete on fair terms. Additionally, land acquisition, grid access, and cross-border connectivity remain difficult to navigate,” she says.

Investors require transparent and long-term policies to mitigate risks and unlock capital at scale, says Thiru, adding that regulatory uncertainty continues to dampen investor confidence. 

Khew highlights inconsistent permitting processes and PPA structures across Asean. “Governments must work towards harmonised policies to accelerate project timelines and provide a more stable investment climate.”

Governments in the region need to act fast to create “appealing locations” for investors looking into energy and infrastructure projects, Actis’ Mucalov adds.

ESI’s Ng notes that despite strong government ambition to grow renewables in Malaysia, “the uncertainty of when tenders will be announced, whether the grid is ready to absorb new projects, and how long it will take to get necessary permits, are making investors think twice”.

While industry players advocate greater certainty from governments, blended finance offers a parallel pathway to accelerate risk mitigation as these regulatory frameworks evolve.

One of the ways blended finance can help is by using philanthropic capital to absorb early-stage risks of projects, notes Bu.

However, this approach remains underutilised in the region, says Thiru. “Of the US$231 billion mobilised globally through blended finance to date, less than one-third has gone to Asia.”

He adds that there is still a gap in early-stage development capital in the region, where local developers lack the initial capital for feasibility studies or environmental assessments. 

Moving forward

At their current capacity, renewable energy is not keeping pace with the rising demands of the digital economy in the region, leaving data centres little choice but to keep relying on traditional fuels, say industry players.

Chitkara of Equinix points out that “renewable sources alone won’t be enough to meet future needs”.

Siemens Energy’s Fors notes that, just like how liquified natural gas evolved to be a major power commodity, hydrogen and ammonia could also be key sources of energy in the future. “With the right support from governments, we believe they can support us to come to the tipping point where the markets (of green fuels) can take off by themselves.”

In addition to green fuels, nuclear energy is also on the table. 

Chitkara highlights that emerging technologies, including small modular reactors, fuel cells and heat reuse systems, are being actively explored. 

Meanwhile, regional capacity is expected to expand with additions from large-scale solar and wind projects, in tandem with the growth of battery storage systems, says Bu.

“As the region shifts from ambition to execution, the focus will be on scaling projects (more quickly), improving grid readiness, and creating an enabling policy environment that gives investors long-term certainty,” says Arsonneau. 

And as Ng puts it: “Data centre players can actively shape the region’s energy future by demanding large-scale, clean power. It’s now up to governments to unlock access to renewables at scale – and fast.”