Renewable Energy In Indonesia

<p style="text-align: justify;"><span data-preserver-spaces="true">The Jokowi's administration, through the Ministry of Energy and Mineral Resources (ESDM), has recently issued a Ministerial Decree No. 1415 K/20/MEM/2017 that officially approves the Business Plan of PT PLN (State Owned Electricity Corporation) on RUPTL for 2017-2026 or Electricity Power Supply Business Plan 2017-2026. This business plan provides PLN with clear directions and guidelines for developing the Indonesian power infrastructures and distribution systems.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">The new RUPTL sets the Indonesian economic growth assumption at 6.2% per year, with electricity demand projected to grow by an average of 8.3% annually from 2017-2026. During the period, the government's PLN and private investors are expected to build 77.8 GW of power generation, 67,000 kilometers of the transmission network, 464 kilometers of distribution networks, and 222,000 MVA of substation transformers across the Indonesian archipelago.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;" data-preserver-spaces="true">Investment in Renewable Energy</span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">Despite the domination of electricity production from coal, oil, and gas sources on the government's energy mix portfolio to reach the 35,000 MW programs, renewable energy has also received some serious attention from both the government and investors to promote and invest resources in this potential sector. For a quick note, the coal-fired power sector is still dominated by a state-owned corporations such as PT. Indonesia Power's Suralaya, a subsidiary of PT.PLN.&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">However, a recent growing interest to invest on a large scale from private coal mining operators such as Adaro Energy and Indo Tambangraya Megah, Tbk (Banpu Energy) has also been seen.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Renewable energy like geothermal, hydropower, solar power, biofuel, biomass, and wind power, by its strategic location, Indonesia can effectively attract foreign investors to invest their resources in the sector.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">In 2015, Indonesia, the largest Southeast Asian country, announced its ambitious medium-term target to increase its renewable energy share in total energy use to 23% by 2025.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Indonesia currently needs more clean energy supplies to satisfy its growing energy needs. The country highly depends on conventional fossil fuels for most of its energy supply:&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Oil (38.35%)</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Coal (22.21%)</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Gas (17.03%)</span></p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><span data-preserver-spaces="true">Renewable energy sources comprise less than 25% of Indonesia's energy supply, and less than 5% of traditional biomass used for cooking and heating in rural areas is excluded from the data source.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">The country's growing population and increased consumption of energy that has happened since the early 2000s, being supported by a growing economy, rising middle class, and upticks in urbanization as well as the government's commitment to boosting its total domestic supply of energy resources, offers promising investment potential to both foreign and local investors. Even the Government of Indonesia has planned to increase the use of renewable energy sources to make up 23 percent of all domestic energy needs by 2025.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">In addition, the country's electrification ratio (the percentage of households connected to the power grid) is approximately 82%, one of the lowest ratios in the Asia-Pacific region, meaning that millions of Indonesians do not have access to electricity.&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Energy use will rise in the coming years as the Indonesian government works to alleviate poverty and develop remote areas not connected to the national power grid systems and infrastructures throughout the archipelago.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">To boost specific investment in the renewable energy industry, the government has implemented various tax incentives to attract investors to invest in power projects, such as :</span></p><ul style="text-align: justify;"><li><span data-preserver-spaces="true">Tax deduction per year for six years</span></li><li>Import duty exemption for renewable energy-related equipment</li><li>Income tax reduction/exemption for 5-10 years from value-added tax</li><li>Accelerated depreciation of capital and fixed assets</li></ul><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;" data-preserver-spaces="true">Single-Window Approval System</span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">The single-window approval system (system satu pintu) is one of the numerous incentive programs launched by the Indonesian government to trigger more investment influx into its renewable energy sector for now and in the future. The planned incentives would play a critical role in Indonesia's efforts to boost its share of renewable energy&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">sources in the total energy mix to 19% by 2019 and to 25% by 2025, up from its current share of renewable energy sources of between only 5% and 6%.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;" data-preserver-spaces="true">National Energy Policy</span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">The National Energy Policy, as approved by DPR (the House of Representatives) in January 2014, foresees that renewable sources shall supply at least 23% of Indonesia's Energy needs in 2025 and 31% by 2050, up from around 6%. Renewable energy could bring off-grid power to the millions of Indonesians who currently have no access to electricity or rely heavily on expensive power supply from diesel generator sets.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;" data-preserver-spaces="true">Renewable Energy Sources</span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">Indonesia's renewable energy potential is particularly huge in geothermal, hydropower, solar, biofuels, biomass, and wind power. The sector is expected to be a lucrative business due to the already good support and programs from the government, such as deregulation, regulatory simplification, reduced license and permit administrative processing lead-time, stakeholder negotiation assistance, increasing demand for energy, increased electrification rate targets, and better Indonesian economy in the future. Thus major foreign investors, including long-time operators or new private equity firms, should consider investing in the sectors.&nbsp;</span></p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><strong><span data-preserver-spaces="true">Geothermal Power</span></strong></p><p style="text-align: justify;"><span data-preserver-spaces="true">Geothermal power is one of Indonesia's most exciting business opportunities in Indonesia, and unlike most other forms of electricity generation business, it is dominated by the IPP group (Independent Power Producers).&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">As a country with exceptional volcanic activity, Indonesia can become the home of around 40% of the planet's geothermal potential, with estimated resources and reserves totaling 28,000 megawatts (MW). Sumatra holds most of these resources and then followed by the Jawa region. Jokowi's administration planning is to boost a new installed capacity to at least 6.6 GW of geothermal power plants by 2026.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Geothermal energy is a sustainable energy created and stored on the earth. Located on the Pacific Ring of Fire and possessing 127 active volcanoes, Indonesia is a potential geothermal energy powerhouse.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">The government has tendered some new projects since 2014; however, explorations and infrastructure development must be expedited if the country wants to meet its 35,000 MW targets.&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">License and permit problems and stakeholders' opposition (local community, NGOs) are blamed for halting projects in some areas, particularly in Sumatera Islands.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">To turn its supportive commitment into action, the government has even helped mediate between the investors and the local stakeholders, especially the landlords, to resolve land compensation issues and between investors and local communities/NGOs who oppose the projects to arrive at a mutual understanding and support toward the projects.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Some geothermal projects have received opposition from local stakeholders due to the need for more effective communication from the companies to the stakeholders. To solve the issues, an effective stakeholder engagement and communication program designed in the framework of the grand CD and CSR programs should be prepared and implemented from the very first day of the project management process is kicked off.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Last year alone (2016), the government issued new regulations that allow full foreign ownership for geothermal power plants larger than 10 MW and 67% foreign ownership for smaller plants, and this is a very positive and encouraging policy for investors.</span></p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><strong><span data-preserver-spaces="true">Hydroelectric Power</span></strong></p><p style="text-align: justify;"><span data-preserver-spaces="true">Hydroelectric power holds the largest potential of all renewable energy sources in Indonesia, and it is also the most utilized alternative energy resource at approximately 4.4 GW installed capacity. However, most of these resources are located in areas like Maluku and Papua, with low demand for power and low electrification rates compared to Sumatera and Jawa regions, which always have a higher demand for energy and higher electrification rates.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Hydropower holds a potential greater than geothermal energy, about 75,000 MW. It is currently the most utilized renewable energy source, with a total installed capacity of around 6,000 MW.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Potential hydropower sites are scattered around the country; unfortunately, the most potential for large-scale projects exists in areas like Maluku and Papua instead of Jawa and Sumatera, whose energy needs are high and stepping up from year to year.</span></p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><strong>Challenges</strong></p><p style="text-align: justify;"><span data-preserver-spaces="true">Hydropower business investors also face numerous geographic challenges, as the sites for large-scale projects&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">are located in isolated and usually densely forested regions with little or no infrastructure at all. Small-scale hydropower projects are defined as being less than 10 MW; on the other hand, they are less bankable with very high technical difficulty and commercial risk.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">However, micro and mini-hydropower projects can still enjoy various support from the government and development agencies and, in some cases, from microfinance credit institutions/banks. Hydropower offers more business opportunities for suppliers and consultants working with local stakeholders.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Although hydropower project development in Indonesia is not easy, several companies have invested resources in this sector, such as the South Korean company Daelim, who partnered with Italian firm Astaldi Group and Indonesian Wika to construct the US$800 million Upper Cisokan plant, a 1,040 MW pumped storage project in Western Java.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;"><strong>Solar Energy (SE)</strong></span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">Solar energy is one of Indonesia's most neglected forms of renewable energy. Located on the equator, Indonesia has strong solar radiation sources, especially in the eastern and southern Indonesian regions, especially Kalimantan.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Solar power is well suited for electrifying rural regions across those regions. The challenge with off-grid rural SE projects is that they are unfeasible purely commercially, while appropriate government programs to subsidize the SE installations still do not suffice.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Despite the growing interest in grid-connected projects to sell SE electricity to PLN, the project still needs to be explored in Indonesia.&nbsp;</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">The government must encourage investors to invest resources in the sector through relevant government policies, regulations, and programs to make the industry attractive to investors. Some private equity firms have reportedly been interested in exploring new businesses in the solar energy sector.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;"><strong>Biofuels</strong></span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">Biofuels are gaining traction as Indonesia looks to reduce its oil imports and improve its ecological credentials from time to time now. Both ethanol and biodiesel can be produced in Indonesia as crude palm oil can provide an abundant feedstock despite being vulnerable to fluctuating global prices. Exports were forecast to rise by more than 20% or higher due to stronger demand from China, India, Australia, South Korea, and the US since last year.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;"><strong>Biomass</strong></span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">Biomass is another untapped area of Indonesia's renewable energy portfolio with the potential to generate 49,500 MW of power. The State-owned plantation corporations PTPNs have only recently ventured into this area in partnership with other international organizations, e.g., NEDO of Japan has undertaken projects with PTPN III for biomass production from CPO waste and PTPN X for bioethanol production using liquid waste from sugar cane processing. Rice husk, coconut husk, and not to mention empty fruit bunches (EFB) from CPO production offer intriguing opportunities for the renewable energy business in Indonesia.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">State, as well as privately owned large-scale plantation corporations that have entered into downstream processing or are planning to do so are a good starting point for companies offering suitable technology in the field of biomass power generation. Recent step-ups in electricity tariffs for businesses and frequent electricity outages are leading agribusiness firms to search for sustainable and self-reliant energy solutions that effectively utilize bio-based waste.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Agricultural cooperatives for crops such as tea and cocoa as they move up the value chain also offer the business potential that sufficient expertise can be provided in supporting supply chain operations for centralizing waste material collection across various small subsidiaries.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;"><strong>Wind Power</strong></span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">Finally, another renewable energy source is wind power, which is relatively low at less than 1,000 MW due to low wind velocity; however, this resource has also recently attracted the attention of foreign investors to invest resources in the sector in Indonesia.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">The wind energy systems are installed in typically remote areas or islands as part of R &amp; D projects.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Several northern and southern parts of Java Islands, the eastern part of Madura island, southern and northern Sulawesi island, and east Lombok island have installed wind turbine systems to generate electricity.</span></p><p style="text-align: justify;"><span data-preserver-spaces="true">Today, the largest wind power generation facility, 735KW, is installed at Nusa Penida in Bali Island, followed by another 540kW at Sangihe in North Sulawesi and Selayar South Sulawesi.</span></p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;" data-preserver-spaces="true">Waste Based Energy</span></h2><p style="text-align: justify;"><span data-preserver-spaces="true">Waste-based energy seems to be a totally brand new potential worth exploring by investors as Indonesia's major cities, such as Jakarta and Surabaya, to mention a few, have an abundance of raw materials (waste/thrash) to realize the project by using advanced technologies and machinery in the waste-to-energy power generating process. The one project that may be the first project will be a JV company formed by Fortum Group of Finland and Jakpro (Jakarta Propertindo) of Jakarta, Indonesia, which jointly has selected Sunter areas for its first power plant site before expanding across the province in years to come and maybe other provinces across the archipelago. Jakarta alone produces about 7,000+ tons of waste/thrash daily, of which 2000 tons would be expected to supply waste/trash to the waste-based energy power plant in North Jakarta, Indonesia.</span></p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/herpiani-ng-639b6791/">Dr. Herpiani Ng</a>&nbsp;</em></span></p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p><h3 style="text-align: justify;"><span style="font-size: 18pt;">Frequently Asked Questions Answered by Dr. Herpiani Ng</span></h3><h3 style="text-align: justify;">&nbsp;</h3><h2 style="text-align: justify;"><span style="font-size: 12pt;">1. What is the role of private investors in developing renewable energy infrastructure in Indonesia? </span></h2><p>The pivotal role of private investors is chiefly to provide project financing and project management to ensure the emerging yet highly potential source of the renewable energy industry grows profitably and slowly. However, it steadily helps transition the country from its reliance on traditional fossil energy sources to renewable and more environmentally friendly energy sources.</p><p>&nbsp;</p><h2><span style="font-size: 12pt;">2. How could increased investment in renewable energy affect Indonesia's economy and environment? </span></h2><p>The foreseeable impacts of the increased investment are:</p><ul><li>It contributes to the country's net zero emission goal by 2060</li><li>Minimizes ecosystem and habitat destruction</li><li>Economically benefits the investors in particular and the business stakeholders in general</li></ul><p>&nbsp;</p><h2><span style="font-size: 12pt;">3. What are the future prospects for renewable energy in Indonesia, and how will they shape the country's energy landscape and economic growth in the coming years?</span></h2><p>The Indonesian government has set targets for renewable energy to represent at least 23% of its energy mix by 2025 and at least 31% by 2025. The country has to work harder to achieve the targets as the current energy mix from renewable sources represents less than 15% of the energy mix from renewable sources.</p><p>The renewable business in Indonesia definitely has a promising future as the archipelago country has a bountiful amount of renewable energy potential, especially the 108 GW solar energy sources. The Indonesian electricity consumption was 1.172 kwh/capita in 2022 and is expected to grow anywhere between 5% and 7% in 2023, hence being a good business for investors to explore and focus long-term growth on.</p><p>&nbsp;</p><h2><span style="font-size: 12pt;">4. What are Indonesia's main challenges facing renewable energy development, including regulatory and economic barriers? </span></h2><p>The challenges include:</p><ul><li>The country's heavy reliance on fossil energy sources such as coal and natural gas as main sources of energy</li><li>Resisting rivalry from the existing fossil energy producers</li><li>Changing central government policies and regulations</li><li>Higher cost of production</li><li>Project financing and land acquisition issues</li></ul><p>These are to mention a few.</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p>
KR Expert - Dr. Herpiani Ng

Core Services

Human insights are irreplaceable in business decision making. Businesses rely on Knowledge Ridge to access valuable insights from custom-vetted experts across diverse specialties and industries globally.

Get Expert Insights Today