Spotlight Activity: Indonesia Is Lacking The Investment Needed To Harness Its Renewable Energy Potential
Indonesia’s current energy mix is 55% coal, 26% gas, 12% renewable, and 7% oil. Indonesia plans to increase renewable energy to 23% by 2025. By 2050, Indonesia aims to raise renewables to 31%. Indonesia plans to gradually phase out coal and gas by an undetermined date.
While only 3.5% of the overall energy mix comes from geothermal, geothermal is the most heavily invested renewable with 80% of overall renewable energy investment. Indonesia has 28 GW of potential geothermal. With the Pacific Ring of Fire running underneath the country, Indonesia is an extremely volcanically active region of the world that has an estimated 40% of global geothermal reserves. Despite dominating the domestic renewable energy investment, geothermal is underutilized; only 1.9 GW were used in 2018. However, this still puts Indonesia in second place in the world for geothermal installed production (the United States is first at 3.6 GW). It is projected to surpass the United States by 2023. In 2024, Indonesia plans to install 4 GW of geothermal capacity, providing 5% of national energy needs. These increases are small compared to the potential geothermal reserves.
Indonesia could do more to increase geothermal energy production, such as increasing subsidies for independent power producers (IPPs) who are slow to invest in geothermal due to high upfront costs. Indonesia recently issued law no. 21 of 2014 on Geothermal which allows geothermal development in conservation forests. The law ended the categorization of geothermal as mining. Investors are wary to commit to geothermal while One Map is still underway; until land control is resolved, investing in geothermal in areas with contested claims is perceived as risky. The state electricity company (PLN, Perushaan Listrik Negara) uses a feed-in-tariff scheme to purchase geothermal projects. Investors shy away from renewable sources due to uncertainty in PLN pricing. PLN will purchase power from IPPs by setting tariffs. These tariffs are based upon benchmarking against the Electricity Basic Cost (Biaya Pokok Penyediaan Pembangkitan, BPP). This basic electricity cost does not include cost of power transmission. If local BPP is higher than the national BPP, the tariff is set at 85% of local cost. Varying local conditions therefore make predicting the value of produced power difficult for investors. Further, the BPP (basic electricity cost) does not vary depending on source.
There is an estimated 75 GW of technically potential hydropower in Indonesia, concentrated in Sumatra, Java, and Sulawesi. The economically viable total GW is likely quite lower than 75 GW. Of the 56 GW expected increase in total energy use by 2030, PLN aims to install 8.3 GW of hydropower. PLN appears to be making progress in hydropower. In July of this year, PLN announced the largest hydropower plant in North Kalimantan with 1.35 GW of capacity.
Status: Standing Still
PLN has gone forward with numerous renewable energy projects, however investment is slow. In 2018, only $1.6 billion went to renewable energy projects. This investment level is 10% to 15% of what is needed to achieve the 23% 2025 target. The IESR (Institute for Essential Services Reform) estimates that Indonesia will need $8 to $12 billion in renewable investment a year to reach this target. MEMR – the Ministry of Mining and Energy Resources – must improve energy policy, particularly for investors, to achieve this 2025 target. Some ministries are doing good work, such as the Ministry of Finance which recently created a Government Drilling Program to reduce upfront costs for geothermal exploration. Until recently, IPPs had to shoulder the exploration costs of proving their geothermal source before PLN agreed to sign with an IPP. IPPs had to pay between $20 and $50 million to prove a reserve before they could even sign with PLN. Some sites might fail to prove potential. This program reduces that risk. MEMR should implement similar programs to facilitate renewable investment.
Encourage MEMR to facilitate renewable investment and set more ambitious renewable energy targets, particularly in geothermal.
Indonesia plans to expand 35 GW in coal to achieve its energy needs in the next 10 years. This is out of line with preventing a greater than 1.5 degrees Celsius temperature increase. MEMR, along with PLN, should push for renewables to make up a larger percentage of Indonesia’s future energy mix. This can be achieved with policy changes. Indonesia should subsidize geothermal plant construction, which is up to twice as expensive as coal plant construction. MEMR should push the government to reduce fossil fuel subsidies that make renewable energy sources less attractive to investors and decrease renewable tariffs and feed-in fees. Indonesia should reduce the risk of investing in renewables which increase the interest on bank loans for renewable projects. If PLN and IPPs more evenly share the risk of renewable projects, land use disputes are resolved, and upfront construction costs are reduced, renewables will be more attractive and lucrative. To reduce risk to investors, MEMR and PLN must clarify costs of electricity purchases, particularly in the maximum 85% ceiling for BPPs. MEMR should also decrease regulatory uncertainty. PLN could increase the length of time IPPs own and operate facilities under the build, own, operate and transfer (BOOT) schemes to encourage renewable investment.
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MEMR (EDSM, Energi Dan Sumber Daya Mineral)
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