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span class="inline inline-left">The development of renewable energy sources such as solar, micro-hydropower and palm oil-based biogas, notably in rural areas, could virtually stop next year after the Budgetary Committee of the House of Representatives simply turned down the government proposal for a Rp 1.3 trillion (US$100.1 million) subsidy for the development of renewables.

Many may immediately blame the rejection of the subsidy proposal on the state budget austerity approach. But deliberations at the House on the 2017 draft budget showed that the lawmakers simply misunderstood the concept of the subsidy for the development of renewables. They argued that since the proposed subsidy spending would go to companies and not directly to consumers, the proposed subsidy for renewables does not comply with the 2007 Energy Law.

The misunderstanding should also be blamed partly on officials of the Finance Ministry who seemed unable to enlighten the politicians on the need for fiscal incentives to entice private-sector investors in harnessing renewables. Officials used the terminology of subsidy to describe the fiscal incentives, which are vital for producers of electricity and biofuel derived from renewable energy sources.

But the lack of comprehension was also caused by the way renewables are communicated to the public. The marketing of renewables is often made primarily within the environmental perception and perspective prevailing in the developed world of the US and Europe, which focuses on mitigating climate change.

In emerging economies such as Indonesia, the imperative development of renewables should be promoted more from their economic benefits. This concept is more palatable to politicians and the people, rather than the warning on carbon emissions.

With an abundance of almost every renewable energy source — including 40 percent of the world’s geothermal reserves — Indonesia can be a global clean energy leader. The government itself has set an ambitious target of raising renewables’ share of the national energy target to 23 percent by 2030, from about 6 percent at present. Around 94 percent of the primary energy supply now is derived from fossil fuels (oil, gas and coal).

But these targets need to be converted into real projects and stable private sector investments. And pioneers in the development of renewables initially need fiscal incentives, which actually boil down to subsidies, to offset the high up-front capital costs until the minimum level of economies of scale is achieved.

Tariff structures and regulatory guidance for clean energy must also be improved. This would entail preferential tariffs for geothermal, micro-hydropower, solar energy and waste-to-energy such as palm oil mill biogas, wind and solar PV rooftop cells power. Regulatory frameworks should be stable and sensitive to market and private sector needs.

Take, for example, the development of micro hydropower stations with capacities of up to 10 MW. A series of successfully commissioned pilot projects in eastern regions such as Sulawesi, East and West Nusa Tenggara and Papua have provided much-needed project development experiences and capacity. These models have attracted the interest of private investors (independent power producers or IPP) as these provinces have resources for run-of-river hydropower plants. But the small-scale hydro power stations initially need fiscal incentives through higher feed-in tariffs of state-owned electricity firm PLN.

Even more important, the development of micro-hydropower plants is also environmentally friendly because the electricity makes people in rural areas, who are mostly not yet connected to the national grid, much more aware of the vital role of forests. This awareness makes them strong protectors of forests in their surrounding areas.
 Likewise, solar power has big potential. Most of Indonesia lies close to the Equator with maximum sun intensity year-round. Average daily insolation is said to range from 4.5 to 5.1 kWh/m2, indicating good solar potential, especially suitable for remote islands and communities with limited or no grid connections.

The country’s current installed solar capacity is low (30 MW) relative to its potential. Solar energy development in Indonesia is appropriate for mini-grids for lighting and thermal purposes, in isolated grids, solar home systems in very remote, off-grid areas of rural Indonesia, or solar rooftops in urban areas.

The pricing regime for solar photovoltaic (PV) power should provide fiscal incentives to attract IPP investment to make solar home systems a viable option for off-grid electrification in rural Indonesia. But it is not possible within the current institutional framework to provide the secure, long-term operational subsidies needed to ensure supply affordability. Even the US government gives tax credits of up to 30 percent for installing rooftop solar panels. Another subsidy is available to households that are able to sell surplus electricity to the energy company at favorable prices. Similar tariff mechanisms or guidance on fiscal incentives are also needed for wind power.

Another renewable, biogas from palm oil mill effluent (POME), which is still mostly burned to create carbon emissions, can be harnessed to generate power. As palm oil mills are located near plantations, biogas from POME is available in major plantations in Sumatra and Kalimantan and can become most efficient resources of power through small-scale decentralized power stations.

Several pilot projects built by plantations companies show that 10,000 to 15,000 hectares of oil palm estates can produce biogas to generate one MW for 1,000 households. The potential is quite huge as Indonesia is the world’s largest palm oil producer with a total area of 10 million ha. But plantation companies need fiscal incentives to invest in the biogas power station.

The Finance Ministry therefore should seek alternative fiscal incentives and other concessional and innovative financing to promote renewable energy use and electrification projects for the poor people in remote areas.