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Indonesia is widely known as a hotbed for various energy resources but the country still relies heavily on fossil fuels such as crude oil and coal for its major energy supplies to date. Given the depletion of reserves and the technology and cost required to conduct exploration and exploitation, not to mention the impact on the environment, shifting toward renewable energy is becoming more urgent and inevitable. The change is required in order to create a more sustainable energy supply that would help reduce government’s dependency on the aforementioned fossil fuels. Oil imports are one of major contributing factors to the country’s current account deficit. The current energy consumption derives predominantly from coal-based plants and coal constituted for almost 60 percent of Indonesia’s energy mix in 2018 and will remain so for at least the next 5 years, considering new plants under construction and/or announced recently.

It is predicted that carbon dioxide (hereinafter shall be referred to as “CO₂“) emissions created by burning coal, oil and natural gas will continue to rise even further, in line with the rapid energy demand until 2024. As per 2018, electricity sector is reported to utilize the most fossil fuels in which the highest percentage of energy mix derived from coal. The magnitude of CO₂ emission has increased by 5.2 percent from 543 million ton in 2018 and the Indonesian government has committed, environmental wise, to reduce emissions by 29 percent in 2030 over business as usual levels and as much as 41 percent with international support. The commitment for well-managed emission, which was made during Paris Climate Agreement in 2015, is also accompanied by the government’s targeted plan to improve its national energy mix derived from renewable, from 8.6 percent at the end of 2018 to 23 percent by 2025. These priorities are paths to establish efficient energy management and ensure clean energy or minimal negative impact on environment and more importantly, create more employment.

Implementation of Government Policies

As evident in the emission reduction strategies in several countries including Indonesia, as well as research findings, power plant and transportation are two key sectors in the effort to promote a low-carbon development. The government has so far implemented several initiatives, by considering potential impact and dynamics of energy system, to reach the objectives of creating green and more cost-efficient renewable energy for the long run.

The clean energy programs include implementation of regulation of Ministry of Energy and Mineral Resources no.12 of Year 2015 regarding third amendment of Ministry of Energy and Mineral Resources regulation no. 31 of Year 2008 regarding Supply, Utilization, and Trading of biofuel as alternative fuels (hereinafter shall be referred to as “Permen ESDM 12/2015”). Since January 2016, the government has started the mandatory blending of 20 percent of biodiesel with 80 percent of diesel-based fuel called B20 in several industry sectors including transportations, which will be upgraded to B30 starting 2020. Other biofuels blending regulation also include pure plant oil and bioethanol such as blending bioethanol with gasoline-based fuels up to certain percentages as well as promoting biohydrocarbon as alternative to gasoline-based fuels. In conjunction with the utilization of biofuels, the government’s continuous encouragement for the society to use electric vehicles is indicated by Presidential Regulation no. 55 of Year 2019 regarding Acceleration Program for Battery Electric Vehicles (hereinafter shall be referred to as “Perpres 55/2019”). A major part of the electric vehicles development will focus on batteries that constitute for 60 percent of electric vehicle components. The utilization of Indonesia’s abundance of minerals such as copper and tin are encouraged for the production of electric vehicle components, especially nickel, due to readiness of technology. The government prepares several incentives such as electric vehicle purchase subsidy and free parking fees, as well as targets establishment of 1,000 electric vehicle-charging stations by 2025 and more than 10,000 in 2050 in order to create an eco-friendly environment.

Meanwhile, the government’s effort to accelerate the development of renewable energy focuses on enticing more investments in the sector by determining the economical pricing strategies and streamlining permit and/or licenses. The agenda indicated by a Presidential Regulation that will be effective in early 2020 as well as House of Representatives initiated-draft law on renewable energy that started in October 2019. Pricing is currently one of major problems for investors in renewable sector due to its relatively higher price and operational costs compared to conventional energies such as oil and coal. The economical price of renewable energy still compared unfairly to fossil fuel-based like coal, a regular recipient of subsidy incentive. Non-inclusion of environmental impact factor on fossil fuel-fired plants in the production cost analysis also plays a role as to why renewable energy-fired plants, for instance geothermal or solar still considered more expensive than coal-fired plants. The current practice adopts unfixed tariff system that created potential business uncertainty in which businesses must negotiate the tariff with state-owned electricity firm, PT. Perusahaan Listrik Negara or PLN. Another factor includes restriction of electricity rates derived from renewable sources, where electricity rates are currently set at maximum 85 percent of the local electricity supply costs (hereinafter shall be referred to as “Biaya Pokok Penyediaan / BPP”).

In addition, other deregulation reforms aimed at certain type of renewable sources that require substantial spaces as well as lack of energy infrastructures in some areas. Land availability is a major impediment in specific power plants including hydropower and geothermal, and obtaining licenses such as Leasehold of forest area license (hereinafter shall be referred to as “IPPKH”) is crucial to expedite the development of these specific types of renewable energy. In this case, if all documents are fulfilled, it requires shorter period to obtain this particular license (only 11 days to be exact) which can be used for many purposes such as electricity, roads, dams, and so forth. Lastly, the importance of large capital cannot be eliminated due to currently small number of renewable energy installations and plants (unlike fossil fuels) and considering the majority of technologies in the sector are still imported.

Investments in Renewable Sector

According to the Minister of Energy and Mineral Resources in November 2019, the utilization of renewable energy in the country currently constitutes around 32 gigawatt or equivalent to 8 percent, out of total potential that reached more or less 400 gigawatt. The government’s strategic plan is to increase the proportion of renewable energy in regions with no current electricity connection in its effort to achieve 100 percent electrification ratio by 2020 compared to 98.9 percent as per August 2019. The rapid progress is visible on the establishment of renewable energy-fired power plants with intermittent nature since 2018. Hydroelectric, geothermal, biomass and recently wind-generated power are the leading types of power plants. According to the Coordinating Minister for Maritime and Investment Affairs, Indonesia has the potential to develop 33,000 megawatts of hydropower and 29,000 megawatts of geothermal energy at costs as low as 2-4 cents per kilowatt. However, due to its intermittent nature, limited ability of the networks and registered electricity customers in potential regions can have expensive consequences to both developers and PLN. In order to attract more investments in these inner-outer as well as disadvantaged regions, new industrial estates will be created following the establishment of renewable energy-powered plants to maximize the usage of electricity.

In summary, transition period is required during the process of sector development for a stable electricity system, since a 100 percent electricity system is theoretically not possible and closure of fossil fuel-based power plants altogether will have negative impact both economically and financially. The government needs to accelerate the resolution of major concerns for investors in the sector, pricing in particular, and possibly granting price subsidy to the electricity generated by the sector instead of regular recipients such as those of fossil fuel-based. Incentives for investments in renewable energy such as tax expenditure will potentially improve the investment climate in the long run, considering industrialization that is likely to occur with gradual shift to electric vehicles, which possibly require renewable-energy generated powers.