Indonesia prepares “grand” renewables strategy; doubts remain over policy design, execution

Indonesia, which is aiming for net-zero emissions and a fully-decarbonized power sector by 2060, could soon have a bespoke legal framework to promote investments in renewable generation and low-carbon energy sources.

Late last month, the Indonesian parliament resumed discussions over the New and Renewable Energy Bill in the hope of passing it into law before the G20 summit in November, which will be held on the Indonesian island of Bali.

The draft legislation, which had been stalled for years, aims to define how the Indonesia government can incentivize renewable and low-carbon energy deployment to reduce emissions.

While detailed rules are yet to be ironed out, early reports suggest that lawmakers are proposing subsidies for and export taxes on renewable projects, a renewable energy fund, carbon trading fees for research, among other fiscal incentives and support measures.

Indonesia, the world's 8th largest GHG emitter, has a lackluster record of bolstering renewable investments, but some analysts suggest the country might be able to play catch-up.

"Investors need policies that create clear, long-term investment signals—to date, regulatory uncertainty has been a main barrier to renewables development in Indonesia," said Jamie Wong, a policy analyst at thinktank NewClimate Institute.

"The forthcoming bill on renewables and supporting regulations provide a crucial opportunity to address these issues," Wong told Net-Zero Business Daily by S&P Global Commodity Insights.

Grand vision

Having revealed its ambition to reach net-zero by 2060 last year, Indonesia plans to present a National Grand Energy Strategy with detailed, long-term energy transition proposals at the G20 summit, the first to be held in the country.

In February, the Ministry of Energy and Mineral Resources unveiled several headline renewable targets in an attempt to kickstart the transformation of Indonesia's power sector, where half of the installed capacity is based on coal.

The goal is to build a fully decarbonized power sector with an installed capacity of 587 GW by 2060, including 361 GW of solar facilities, 83 GW of hydropower, 39 GW of wind farms, 37 GW of bioenergy plants, 35 GW of nuclear capacity, 18 GW of geothermal facilities, and 13.4 GW of ocean currents power generation systems.

Based on the ministry's blueprint, all power plants built in Indonesia after 2030 will be renewables-based. Starting from 2035, the country's renewables capacity additions will be dominated by solar plants, then by wind farms and ocean currents power generation systems. Nuclear power will enter the grid around 2049 to maintain system reliability.

Separately, the ministry said pumped storage capacity will enter service in 2025 with a target of 4.2 GW in 2060. Battery storage will be deployed at scale from 2031, with a goal of 140 GW in 2060. The country plans to start producing green hydrogen in 2031, with a target for electrolyzer capacity of 52 GW in 2060.

Those goals are widely seen as a tall order for Indonesia. S&P Global figures show the country's installed renewable generation capacity reached 8.5 GW as of March, or 11% of the overall stack. Hydropower and geothermal plants accounted for nearly 95% of that renewable capacity, while solar and wind power together amounted to a touch under 260 MW.

For the interim period, the government said in October 2021 it plans to add 21 GW of renewables between 2021 and 2030, including 14 GW of hydropower and geothermal plants, 4.7 GW of solar power, and 597 MW of wind. Of that interim capacity, the government wants 11 GW to come online by 2025.

In 2020, Indonesia relied on coal and natural gas for over 80% of its power generation, while renewables made up 15-16%. The government is aiming for a renewables share of 23% in 2025 and 31% in 2030.

In a note published in April, S&P Global's ENR analysts said the government had yet to present solutions for some "fundamental issues" related to Indonesia's renewables deployment, such as grid reliability and stability, pricing mechanisms, among others.

Achmed Shahram Edianto, an electricity analyst at thinktank Ember, said the government should ensure that the grid infrastructure can accommodate the penetration of various renewable sources.

"Reconfiguring the electricity system to address this issue is important for investors. In addition, clear technology-specific deployment targets, supported by dedicated policies and tailored to the market segments are also essential to boost investor confidence," Edianto told Net-Zero Business Daily.

Other observers suggested Indonesian lawmakers should seek to revise the electricity pricing mechanism to make renewable power more attractive in the draft bill.

Currently, the feed-in tariff (FIT) for large-scale renewable projects is linked to the average price of energy generation in each region. As miners are required to sell coal at a low price domestically, renewable developers have struggled to compete with coal-fired power generators in regions where coal has a high share in the electricity mix.

"In this policy environment, the main opportunity for renewables is in the displacement of expensive diesel-fired power in remote areas," Bob Herrera-Lim, managing director at consultancy Teneo, said in a blog post earlier this month.

Vivi Fitriyanti and Massita Ayu Cindy, researchers at nonprofit Purnomo Yusgiantoro Center, told Net-Zero Business Daily in an email that a better FIT system would take into consideration renewable projects' technologies, locations, and scales.

A disappointing track record

Even if Indonesia can establish a sound legal framework for renewables and low-carbon investments, there remain worries over the government's policy execution.

Critics say the country is prone to policy changes and delays, often with little or late notice, and tends to cater to the coal industry's interests. Indonesia is one of the world's largest coal producers and consumers.

In a recent example, Indonesia was scheduled to impose a carbon tax of Rp 30,000 ($2.02) per kg of CO2-equivalent on coal plants from April. But the Ministry of Finance announced in late March that the implementation would be delayed until July, citing inflation worries.

"Implementation challenges are relatively common in the electricity transition process. A thorough plan is needed to ensure these challenges are addressed properly," Edianto said.

In its 2060 blueprint, the energy ministry said no more coal plants will be built, aside from those with firm financing and under construction.

State-owned utility Perusahaan Listrik Negara will retire its coal plants with accelerated amortization schedules, while those owned by independent power producers will be closed once their power purchase agreements expire, the ministry said.

But coal-bed methane, liquefied coal, and gasified coal are categorized as "new energy" alongside hydrogen and nuclear power in the draft bill, and could enjoy the same financial incentives and state support as renewables.

Fabby Tumiwa, executive director of thinktank Institute for Essential Services Reform, told an industry forum last month that the bill's ambiguity will increase the potential for stranded assets and will not significantly reduce emissions.

"This bill is heavily influenced by the interests of the status quo," Tumiwa said.

In its current form, the bill allows fossil fuels and "other harmful energy" to be associated with renewable energy, nonprofit Bersihkan Indonesia Coordinator Ahmad Ashov Birry said.

"This can be an unclear signal for the international community that wants to support Indonesia in solidarity with its transition. There is still an opportunity for change, and the government must take bold steps to change it," Birry said.

Posted 17 June 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.