Published daily by the Lowy Institute

Indonesia lags on renewable energy, and pays the price

Global companies are looking for clean energy, but Indonesia is failing to keep up with neighbours in the region.

Workers installing high voltage lines for a 35,000 MW electricity project in Jakarta, December 2019 (Aditya Irawan/NurPhoto via Getty Images)
Workers installing high voltage lines for a 35,000 MW electricity project in Jakarta, December 2019 (Aditya Irawan/NurPhoto via Getty Images)

Indonesian President Joko “Jokowi” Widodo’s vision to make the country a destination for foreign company investments neglects the growing demand for clean energy.

RE100, a group of global companies committed to using 100% renewable energy, reached an annual total electricity consumption in 2018 almost equal to Indonesia’s total yearly consumption. The group includes big companies, some of which are present in Indonesia, such as Nike and Coca-Cola. One report has stated that their clean energy goal could drive an investment opportunity of US$94 billion.

Global companies are increasingly going greener, and their demand for clean energy is rising. Bloomberg New Energy Finance found the amount of clean energy purchased by the industrial and commercial sectors in 2018 doubled the previous year’s figure, from 6.1GW in 2017 to 13.4GW in 2018.

Indonesia is trailing because it is lacking a clean energy landscape and unable to provide options for sourcing clean energy.

While global companies’ large energy consumption and investment provide opportunities for host countries to catalyse renewable energy investment and to create employment, Indonesia is trailing because it is lacking a clean energy landscape and unable to provide options for sourcing clean energy.

Southeast Asia is an emerging market, and many companies have eyed Southeast Asia as an alternative destination to diversify their businesses in the wake of the China-US trade war.

Indonesia is ranked 73 globally in the World Bank’s Ease of Doing Business (EODB) ranking, outpaced by Malaysia (12), Thailand (21) and Vietnam (70). The World Bank sees high contract enforcement costs and rigid employment regulation as hindering Indonesia’s EODB. Furthermore, according to OECD Data, Indonesia is more restrictive to foreign direct investment compared to those three neighbours.

Indonesia’s vast renewable energy potential could provide an alternative to lure foreign investments, especially for companies pledging to use clean energy.

But the problem is Indonesia is struggling to create a cleaner energy landscape for its economy.

Indonesia’s renewable energy capacity of 9 GW is only a third of Vietnam’s. Moreover, while renewable energy capacity grew by more than 50% from 2014 to 2019 in Vietnam and Thailand, Indonesia’s figure only increased by 17% during the same period.

Indonesia’s low renewable power plant capacity, as a result of many issues in policy, financing and coal dependency, is a troublesome constraint for companies to source clean energy supply. Indonesia is not in a good position to reach its ambitious renewable target of 23% in 2025’s electricity mix, considering the current figure of only 13.6%.

Those facts expose Indonesia’s weak position in optimising its renewable resource as a tool to attract foreign company investment.

With less renewable energy capacity, Indonesia has limited options to serve clean energy to commercial and industrial consumers. From the International Renewable Energy Agency report, Thailand outpaced Indonesia and other Southeast Asian countries in providing options for companies to purchase renewable energy power.

Geothermal gas pipeline, Dieng, Indonesia, July 2015 (Geo Rising/Flickr)

For example, Thailand allows companies to directly purchase electricity from renewable independent power producers in a long-term contract via a direct power purchase agreement (DPPA) scheme, instead of buying from state utility companies. In addition, Thailand provides a renewable energy offering, a scheme to purchase renewable energy with a premium tariff.

Vietnam also introduced a pilot DPPA scheme in 2017 and planned to release the regulation this year. Moreover, in 2019, Malaysia released a green rider tariff to allow customers to customise and pay according to their energy mix.

Indonesia’s energy policy has yet to include DPPA and renewable energy offering schemes.

Moreover, Thailand, Vietnam and Malaysia also offer an Energy Attribute Certificate (EAC), an option which Indonesia just released in the last month, to certify the customer’s source of energy, whether fossil or renewable.

Indonesia has nonetheless made some progress in giving a new clean energy option for companies. Indonesia’s state-owned electric company and sole buyer of electricity, PT PLN, just released its renewable energy certificate (REC) in November 2020. The move is intended to bring options for companies to source clean energy. This option adds existing incentives for renewable energy technology, such as duty exemption, tax allowance and tax holiday.

Indonesia should consider two actions to atttract more foreign company investment.

First, Indonesia urgently needs a more attractive renewable energy price to boost the country’s renewable energy capacity. The current pricing scheme is seen as the source of the lack of renewable energy investment in Indonesia. Government should accelerate the issuance of a promised new presidential regulation drafted to solve this issue. Moreover, a stronger legal foundation for renewable energy business requires the enactment of the long-awaited renewable energy law.

Second, Indonesia should take fast action to provide more options and start by reviving the discussion of power wheeling, a scheme to rent utility transmission networks for transferring energy, allowing companies to access off-site renewable energy.

The scheme is most appropriate for Indonesia’s regulated electricity system, with PT PLN as the sole transmission network owner. The power wheeling regulation already exists in Indonesia, but what is needed now is to speed up the discussion about missing details and fee structures.

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