Accelerating investments in renewables in Indonesia

Overview

This report discusses the risks constraining renewable energy (RE) investments in Indonesia. Part of a series, which assesses barriers to the flow of capital into RE markets in emerging economies, it focuses on solar and wind energy, which are the major drivers of global RE investments. It follows an issue brief, which found five types of investment risks prevalent in emerging economies: demand, transmission and evacuation, macro, off taker (purchaser of RE), and political.

This report also provides a snapshot of the political economy of renewables in Indonesia, incorporating national priorities pertaining to electricity planning and implementation; the country’s RE potential and pace of capacity addition; and a description of the key stakeholders in the RE ecosystem. It provides recommendations to leverage RE investments in Indonesia, which could be considered by policymakers while planning interventions.

Key Highlights

• Indonesia is expected to become the world’s fourth-largest economy by 2050. The rate of electrification stands at 98.3 per cent and it aims to achieve 100 per cent by 2020.
• The country has considerable reserves of thermal coal and is the world’s largest exporter of the commodity. Coal miners have to sell 25 per cent of total production in the domestic market.
• Indonesia has relied on coal-fired generation which is supplemented by gas, hydro- and geothermal-based generation, for its electricity needs. It has supported its coal fired generation through caps on coal prices.
• Indonesia’s solar and wind generation potential (208GW and 61 GW, respectively) adds up to around four-and-a-half times the current installed power capacity of 62.9 GW.
• The country’s grid-interactive solar installed capacity stands at around 24 MW. This is complemented by 100 MW of off-grid decentralised solar systems. The installed capacity for wind energy stands at around 150 MW.

Challenges which restrict RE investment in Indonesia

• Uncertainty over solar and wind project pipeline: Lack of certainty of demand for RE projects is a deterrent for long-term investment planning, and disincentivises RE investments in Indonesia.
• Regulatory provisions that impact the viability and bankability of projects: Interplay between a number of regulatory provisions governing solar and wind generation, including the tariff regime and local content regulations, adversely impact the viability and bankability of projects.
• Transmission infrastructure-related constraints: The characteristics of Indonesia’s grid infrastructure and considerations governing the dispatch of RE generation negatively impact the scale of intermittent RE generation that may be integrated into the grid.
• Land acquisition risks: Land acquisition risks impacted the pace of deployment of RE projects in Indonesia. Delays in obtaining clearances from the Ministry of Environment and Forests have added to the risk.
• Challenges in obtaining domestic debt financing: Lack of a pipeline of bankable projects is a roadblock for the flow of debt financing from local financial institutions.

Key Recommendations

• Review existing regulatory structures and enforce the state of power firm’s (Perusahaan Listrik Negara-PLN) compliance with performance standards. Restructure PLN’s business segments to address conflict of interests.
• Create certainty of demand for RE by introducing greater predictability in the power procurement process, and renewable portfolio standards.
• Facilitate RE grid integration using flexible sources of generation such as gas, hydro, and geothermal. Strengthen existing transmission infrastructure and set up solar/wind parks, which provide land and evacuation infrastructure to developers for a fee.
• Review existing capacity-planning methodologies and assumptions since capacity addition planning takes its cues from national-level energy planning.
• Review domestic content regulation since modules produced by the domestic PV manufacturing industry currently do not meet the stipulated local content requirements (60 per cent).
• Create an ‘open category’ of projects as the high pricing of locally produced modules (compared to imports) raises capital costs for developers and makes it challenging to meet existing tariff caps.
• Adopt new business models to adapt to ongoing technological shifts.
• Adopt catalytic financing to facilitate the flow of RE investments at scale.