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Could Indonesia make progress in its energy transition in 2025?

Indonesia's energy transition faces many challenges but has great potential.

Fabby Tumiwa (The Jakarta Post)
Jakarta
Thu, January 2, 2025

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Could Indonesia make progress in its energy transition in 2025? The floating panels of a solar power plant at Cirata Dam in Purwakarta regency, West Java, are seen from above on Sept. 26, 2023. Jointly built by state electricity company PT PLN and United Arab Emirates’ Masdar, the power plant generates 192 megawatts peak (MWp). (Antara/Raisan Al Farisi)

D

uring his first overseas visit last November, President Prabowo Subianto made two important statements highlighting Indonesia's ambitions for an energy transition.

In the Asia Pacific Economic Cooperation (APEC) summit, he mentioned that Indonesia will achieve 100 percent renewable energy ten years from now. This was followed by a statement that Indonesia will phase out fossil fuel plants in fifty years or by 2040 during the Group of 20 (G20) Summit.  

Many experts are skeptical given Indonesia's track record in delivering its target and developing necessary policy and regulatory support, saying that past performance does not support this ambition. However, past performance was under different leadership, and the country now faces different challenges.

Prabowo laid out his vision and intended to make decarbonization of the energy system a national mission in 15 years. Under his leadership, relevant ministries must make plans and strategies for accomplishing this in the next five years, starting this year.

Indonesia’s renewable energy journey has been fraught with slow progress. In 2014, renewable energy contributed to 7 percent of total energy supply. A decade later, it only reached 14 percent, far from meeting the 23 percent target stipulated in the 2014 National Energy Policy (KEN). Moreover, the initial goal of achieving a 23 percent share by 2025 has been downgraded to 17-19 percent.

Meanwhile, the country remains heavily dependent on fossil fuels, with coal dominating the electricity sector and contributing 67 percent of consumption. This reliance on coal isn't just an environmental issue, it’s an economic and political one. For decades, coal has been intertwined with the country’s political elite and economic strategies, creating a “lock-in” effect that makes divestment difficult to materialize.

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The challenge is exacerbated by stagnant investments in renewables. Only US$1.5 billion was allocated in 2023 and $1.23 billion in 2024 for renewable energy development, far below the government’s target and that of regional peers. Weak policies, unattractive tariffs, fossil fuel subsidies and regulatory uncertainties deter renewable energy investors.

Despite these challenges, Indonesia holds immense promise. The country has abundant solar, wind, biomass, geothermal and hydropower resources with a total capacity of 3,700 gigawatts (GW). Technological advancements and falling costs of solar, wind energy and batteries make these options increasingly viable.

The government has initiated several policies to catalyze investment, including Presidential Regulation No.112/2022, which mandates coal phase-out by 2050, the Energy Transition Mechanism (ETM) to support early coal power retirement and renewable development and the $21 billion Just Energy Transition Partnership (JETP)

This plan aims to decarbonize Indonesia’s energy system through targeted investments and policy reforms. If implemented effectively, JETP could lay the groundwork for a comprehensive energy transformation.

Indonesia must address key barriers through targeted reforms to accelerate renewable energy deployment. Under the JETP scenario, to reach the emission peak of the state electricity company PT PLN’s power system by 2030, 43 percent of electricity must come from 14.2 percent variable renewable energy and 29.4 percent baseload renewables, with a total capacity of 62 GW. PLN needs to build 8 to 12 GW annually from 2025 onward. 

First, managing coal phase-out by retiring old and inefficient coal power plants (CPP) should be pursued to create demand for renewables and reduce economic and environmental burdens from coal plant operations. A study by the Institute for Essential Services Reform (IESR) and the Center for Global Sustainability (CGS) at the University of Maryland, the United States, identified 12 CPPs with a 4.5 GW capacity as potential retirement targets by 2025. These plants are retired since they have reached their economic lifetime, and some others due to causing air pollution and public health issues.

The study indicated that phasing out coal gradually until 2040 or 2045, aligned with President Prabowo’s statement, is technically feasible in three phases: 9.2 GW by 2030, 21.7 GW by 2040 and 12.5 GW by 2045. Some plants require early retirement at 20 years old, 5 to 10 years earlier than their contract with PLN. The total cost to retire all coal plants by 2045 is $27.5 billion.

However, this cost can be easily repaid by savings from avoiding coal subsidies, as well as health costs amounting to $34.8 billion and $61.3 billion, respectively. From a public policy perspective, coal phase-out is financially feasible. 

Second, the policy that subsidizes fossil fuels should be reformed. As coal plants increased, coal demands from PLN and independent power plants have also rapidly increased. To protect PLN from the volatility of coal prices and secure domestic coal supply, the government instituted domestic market obligations that require coal miners to sell 25 percent of their production to the domestic market at the maximum price of $70 per tonne to prevent an increase in generation costs.

This policy has helped PLN manage electricity prices and reduce government subsidies to PLN. However, as PLN factored this price into its system planning, coal became the cheapest electricity, which effected the decision to prioritize coal over renewables for system expansion. Coal price caps impact power dispatch decisions by encouraging PLN to produce more coal-fired electricity than at its economic cost, creating a lock-in effect.

Renewable energy suffers the most because its price must compete with subsidized coal and natural gas plants. It only wins when it competes with diesel power plants. Removing this subsidy will change the economics of operating the power system. It could even lead to the condition that running coal plants is no longer economically competitive in the long run, which may force PLN to retire them at some point in the future, thus creating more demand for renewable energy.

Third, procurement is key to adding new generation capacity for PLN. To date, PLN’s renewable energy procurement has fallen short of expectations, leading to a slow uptake of renewable energy. IESR’s Indonesia Energy Transition Outlook (IETO) 2025 found that 9.5 GW of the 10.5 GW of total renewable energy capacity planned to be commissioned in 2025 will not be delivered on time due to procurement issues. No single factor causes this, as it is the combination of an enabling environment and the internal PLN procurement process.

In the short term, some measures can be taken to address procurement issues, such as developing simplified tariff structures and power purchase agreements for renewable energy, standardizing tender documents and processes, expanding grid studies for projects and system planning, facilitating projects through the provision of land and renewable energy data and enforcing flexibility of PLN’s thermal assets.

Indonesia's energy transition is about sustainable economic growth, not just the environment. Strong renewable energy sectors create jobs, improve health, reduce dependence on volatile fossil fuel markets and boost energy security. Indonesia's climate change leadership is also strengthened by the transition's alignment with global emission reduction goals.

However, time is critical. If current challenges aren't addressed, Indonesia risks missing its environmental and economic goals. A turning point comes in 2025. Bold, immediate action could change the nation's energy future and inspire other developing economies.

Indonesia's energy transition faces many challenges but has great potential. The nation has every reason to fully commit to this journey under Prabowo's strong leadership and direction, given its rich renewable resources, growing global support and prerequisites to achieve the Golden Indonesia 2045 vision.

A green energy future is possible and necessary for Indonesia.

***

The writer is executive director of the Institute for Essential Services Reform (IESR), a Jakarta-based energy and climate policy think tank. He can be reached at fabby@iesr.or.id.

 

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