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Year 2021: Where is Indonesia’s renewable energy?
The country believes energy transition will contribute to achieving the Paris Agreement goals and help fulfill its national aspiration to achieve energy security and affordability.
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t’s been five years since the Paris Agreement was signed by more than 190 parties globally. The world had agreed to avoid dangerous climate change by keeping global warming well below 2 degrees Celsius.
Indonesia is among countries that has signed the agreement and as one of the main contributors of global carbon dioxide emissions has expressed its commitment to transition toward cleaner energy sources. The country believes energy transition will contribute to achieving the Paris Agreement goals and help fulfill its national aspiration to achieve energy security and affordability.
Indonesia is a net importer of crude oil and petroleum products and is often impacted economically by the fluctuations of these products’ global pricing. To be self-sufficient in domestic energy provision and ensure affordable energy for all Indonesians, diversification toward renewable energy is inevitable.
Despite the country’s commitment, five years in, the realization remains far from ideal. Indonesia continues to rely and will continue to rely on fossil fuel generation in the coming years and shows poor signs of renewable energy adoption to fulfill its energy self-sufficiency and affordability aspirations. This is a result of several fundamental issues that hinder the country from realizing the energy transition plan.
First, Indonesia relies on a single entity with conventional energy generation assets to consolidate generation and transmit power within the national energy industry. This results in state electricity firm PLN being trapped into a vicious cycle of conventional energy generation to fulfill the goal of being a successful and reliable transmitter to the retail end customer.
Coal-based power plants dominate power generation in Indonesia and PLN owns 50 percent of the total capacity. In addition to that, coal is a reliable source of energy to ensure energy provision and grid stability. Disastrous grid failures, such as the 2019 blackouts in Jakarta and West Java impacting 22 million customers, could have been easily avoided. PLN established conventional assets combined with the reliability of coal-based energy provision provide PLN with little incentive to explore renewable energy as a new energy source.
Second, Indonesia partially relies on PLN to regulate and conduct national power planning. This is problematic since it poses a conflict of interest for the country. As a semi-regulator and national planner, the budget for renewable energy should probably be the priority since it will yield unquestionable benefits for the country in the long-term.
However, this will require higher substantial regulatory tweaks and investments (subsidies that would pose higher financial risks for PLN). Therefore, renewable generation is not the best decision that fits into PLN’s short to medium-term profit seeking motivation as a business. As a result, renewable energy implementation is halted to compensate for PLN’s business and financial interest.
Third, government regulations and processes discourage renewable energy project investments and encourage conventional power generation. To ensure affordability, the government has put a price cap on renewable power purchase agreements.
However, the cap is set to include the average historical cost of PLN conventional power generation, but does not include margin and does not consider the nonfinancial benefits of renewable energy. As a result, price caps are set below renewable energy generation costs, leading to renewable energy projects being viewed as unattractive investment cases.
In addition to those fundamental problems, other problems are observed, such as in tenders and negotiations for land and permits for renewable energy projects that remain complex and complicated, which further discourage investment, domestic renewable energy manpower capability that is limited (think digitalization) and a low level of public awareness on the importance of cleaner energy sources.
Nevertheless, the challenges do not signal a dead end for Indonesia’s energy transition. The government can take critical fundamental steps to solve the issue and smoothen the renewable energy transition.
Indonesia could potentially separate the role of generation consolidator and transmission from one single entity, to independently operate. This approach has been adopted by neighboring countries, including Singapore, Vietnam, and Malaysia, and has been proven to boost the adoption of renewable energy. By doing so, the generation consolidator entity will have more flexibility to explore renewable energy generation since it does not have to ensure grid provision as a transmission entity. Simultaneously, the transmission entity will have to seek more energy sources to ensure grid provision independently, which might include renewable energy sources. While this might not immediately translate into a reduction in coal use, it remains a significant first step that will provide bigger incentives for both entities to tap into the renewable energy market.
In addition, Indonesia needs to separate the regulating and planning role from the business entity. Regulation and a national plan on power should be based on the public benefits and national interest, instead of business interests. Detaching the role of regulator from a profit-seeking entity allows the country to execute more renewable energy supporting regulations, translating into more renewable energy adoptions.
The government also needs to develop a robust set of policies to increase renewable energy development’s bankability. This could be done by adopting a more reasonable economic measure to determine pricing cap and provide subsidies to compensate the players with the higher cost of renewable energy generation. By doing this, renewable energy projects will have higher levels of return attractiveness and thus encourage investment.
The year 2020 has exposed the world to the power of nature in posing an existential threat to human beings. This is a year to spearhead renewable energy, put the environment, human health and peace first to avoid the repeat of a disastrous year like 2020, in the future.
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The writers are management consultants at global strategy consulting firms. The views expressed are their own.
