Analysis on Indonesia’s Renewable Energy Landscape, Opportunities, and How to Enter the Sector
Under the Paris Agreement, Indonesia’s Nationally Determined Contribution (NDC) recognizes the increasing importance of the energy sector to climate change mitigation targets. Indonesia’s total 834 MT CO2e emissions reduction target will come from the energy sector for about 38%. While renewable energy has been relatively underutilized, its potential is quite large.
Recently, PT Pertamina (Persero), has developed renewable technology and innovation, which utilizes electrical energy, making electric vehicles charging, called the Green Energy Station. To meet the target with continuous programs, it is important to unlock private investments in the clean energy sector. Thus, in this article, we discuss the landscape, investment opportunities, challenges, prospects, and how to enter the renewable energy industry.
Pertamina Green Energy Program
PT Pertamina (Persero) continues to ensure that the development of the Green Energy program goes according to the government’s vision to create national energy security and independence while responding to the challenges of the energy transition in the future. Various innovations by utilizing the latest technology have been carried out by Pertamina in exploiting the abundant potential of renewable energy (EBT) in Indonesia.
In July 2020, Pertamina successfully tested 1,000 barrels of Green Diesel (D100) production at the Dumai Refinery. Previously in March 2020, a co-processing trial of Green Gasoline was conducted at the Cilacap Refinery. Trials will also continue for Green Avtur co-processing which is targeted at the end of 2020.
Pertamina’s Vice President for Corporate Communication, Fajriyah Usman, said that 100% Green Diesel D100 and Green Gasoline / Green Avtur are processed from palm oil as the basic ingredient. This product is also reacted using a red and white catalyst produced by Pertamina’s Research & Technology Center (RTC) in collaboration with the Bandung Institute of Technology (ITB) (Pertamina, 2020).
Indonesia’s Renewable Energy Goal
Indonesia’s government is aiming to have 23% of Indonesia’s energy coming from renewable sources by 2025, up from around 9% in July, Based on National Energy Policy, the target of New Renewable Energy (NRE) will include bioenergy at 10%, hydro 3%, geothermal 7% and other NRE of 3%.
The development of renewable energy projects, on the other hand, has been slow. Only 2,500 megawatts of additional renewable power capacity are needed by 2025, while about 10,000 megawatts are needed between 2019 and 2025 to meet the energy mix goal (Reuters, 2020).
The New and Renewable Energy Development and Utilization Strategy in Indonesia include:
- Improvement of the national electricity supply through the development of
Geothermal and Hydro Power Plant;
- Improvement of the electricity access in remote areas, small islands and
border areas with Micro Hydro and Solar Power Plant;
- Development of Bioenergy Power Plant including agricultural waste and
municipal solid waste to provide electricity as well as to improve the
- Development of wind power and ocean energy plant pilot project in order to
prepare the stage of commercialization;
- Utilization of Biofuel for substitution of fuel oil; and Development of new energy (Coal Bed Methane and gasified coal);
Indonesia’s Renewable Energy
In terms of energy consumption, Indonesia is one of the world’s fastest-growing nations. Indonesia is also the largest energy consumer in the Association of Southeast Asian Nations (ASEAN) with nearly 40% of total energy consumption. This is fueled by strong economic growth, increased urbanization, and stable population growth. Indonesia’s energy consumption rose by nearly 65% between 2000 and 2014. By 2030, it is expected to increase by another 80% (IRENA, 2017). As a result, Indonesia is critical to the region’s renewable energy transition.
Indonesia’s archipelago’s position and topography allow it to produce 28,000MW from geothermal energy stores, 75,000MW from tidal, 1,013MW from micro and mini hydropower, 4.80kWh/m2/day from solar, 32,654MW from biomass, and 3-6m/s from wind, which can meet 40% of its total energy demand (Enlit, 2020).
Moreover, about 40% of the world’s geothermal reserves are regulated by Indonesia and Independent Power Producers (IPP) are expected to spend USD 11.11 billion in the private sector (Cekindo, 2018). Given the country’s many agricultural areas, Indonesia also has abundant resources for solar, ocean, wind, and bioenergy production, such as biomass/bio-residues. Another benefit is that Indonesia has a constant supply of sunlight throughout the year. Indonesia will be able to produce solar photovoltaic and solar thermal power as a result of this.
Renewable energy, in contrast to traditional energy sources, avoids air pollution such as carbon dioxide emissions while also lowering prices. This cost reduction would allow Indonesia to save up to USD 53 billion per year by 2030, equivalent to 1.7% of the country’s GDP. To achieve this cost-saving initiative by 2030, an investment of at least USD 16 billion is required to harness the potential of Indonesia’s renewable energy sector.
Construction of several renewable energy projects (EBT PLT) has been delayed due to COVID-19. Indonesia’s Ministry of Energy and Mineral Resources stated that several EBT PLT projects that were in the works will be postponed. Originally scheduled to be completed in 2020, they are now expected to be completed in 2021. For instance, the 5 MW Sokoria Geothermal Power Plant (PLTP) in Ende Regency, East Nusa Tenggara (NTT), is one of the projects facing delays. This project was supposed to be operational in February 2020, but it’s now expected to be in 2021 (Richter, 2021).
On a global scale, the COVID-19 outbreak has disrupted China’s manufacturing industries sector including renewable energy. This has created uncertainty in the renewable energy supply chain, especially in wind and solar. The raw materials for solar panels, such as back sheets and junction boxes, are still sourced from China, even though many manufacturers are located outside of China, including Indonesia. As a result, Indonesia will likely struggle to meet the 2030 capacity goal.
To invest in the new renewable energy, PT Pertamina (Persero) estimates that it needs funds up to USD 18 billion or IDR 253.8 trillion. This investment will be carried out by the company to encourage the energy transition process from fossil-based to new and renewable energy. Hence, the investment funding will come from internal and external parties, such as project financing, green bonds, eco financing, and equity by inviting partners. Hence, these are investment opportunities for Indonesia’s renewable energy.
Growing Electricity Demand
Since 2010, it is estimated that around 100 million people have obtained access to electricity. According to International Energy Agency (IEA) estimates from the World Energy Investment report, annual investment grew by almost 50% since the early 2010s, compared with 15-20% in all developing economies overall. However, capital spending slowed in 2019 at below USD 12 billion and is set to decrease again in 2020 due to the Covid-19 pandemic.
Compared with 2018, investment in electricity grids remained flat. The key to ensuring full electricity access, connecting islands, and interconnect with neighboring countries Indonesia needs higher grid investment. Around a third of the funds for plants in Indonesia commissioned between 2016 and 2019 came from private sources. Private actors are likely to be key to scaling up capital, especially for renewables, to align with a more sustainable investment pathway since there are constraints on public budgets.
Potential Renewables Energy
Indonesia’s government plans through a national energy policy to increase its use of renewable sources from 11% in 2019 to 23% by 2025. Traditionally, Indonesia’s energy strategy focused on building the lowest-cost production facilities. Indonesia is one of the top five countries with the highest share of renewables in total final energy consumption in the Asia-Pacific region. Indonesia has great potential for geothermal energy, solar, wind, and hydropower. Mainly the renewable share in the power mix comes from hydropower plants (around 8%) and geothermal plants (5 %).
Experts project that the country will have over three million four-wheel and 42.5 million two and three-wheel electric vehicles by 2030. However, experts estimate that the country would need approximately $16 billion worth of investments per year until 2030 for these forecasts to be accurate.
Exploration of Bioenergy Programme
Biomass energy is produced using the biological material from living or recently living organisms
both from plant and animal. Biomass consists of a variety of different components, including firewood, agriculture waste, urban solid waste, and industrial waste. The government is targeting that biomass will contribute more than 20% by 2025, of electricity emanated from all new and renewable sources. The category “New and renewable energy” refers to energy sources including solar energy, geothermal energy, wind power, biomass, hydropower, and others.
Biomass is forecast to equate to 5.1% of the total national energy mix in 2025, compared to its current contribution of 2%. According to ESDM, the industrial and household sectors registered the highest consumption of biomass energy among all sectors in Indonesia. Within the total energy consumed in the industrial sector in 2014, 8.5% (or 45,188 thousand BOE) was energy obtained from biomass whereas, in the household sector, 71.2% (or 263,495 thousand BOE) of total consumed energy was derived from biomass. (TPSA, 2017)
Compared to the other sectors, the energy sector has been slower to draw value from modern technologies such as advanced analytics, the Internet of Things, automation, and mobile apps globally. Several major players such as BHP, Chevron, Saudi Aramco, and others have invested heavily in digital technologies and are enjoying significant benefits to catch up in the digital era. Moreover, as the pandemic has accelerated digitization in energy many companies adjust to increases in online activity.
Indonesian companies have also recognized the potential of digital technologies on a local level. Many of them have started pilot programs and in some cases capturing real value in increasing production by 30 to 40 percent and cutting costs by 15 to 20 percent. The digital sector also takes part in the growth opportunities in the renewable energy sector.
How to Enter?
Currently, investment in renewable power faces challenges, which has slowed progress in growing the sector and making renewables more affordable in Indonesia. For Indonesia to accelerate its uptake of renewable energy, several challenges have to be addressed. There are three main types of perceived risks, which are country risk, policy and regulatory risk, and revenue risk.
- Country risks include the issues around the country’s macroeconomic situation, high benchmark interest rates, though this group of risks has been declining in recent years due in part to prudent fiscal policy and strong economic growth.
- Policy and regulatory risks. There are still permitting and project preparation barriers in local manufacturing capacity, which are still in early stages to meet local content requirements in an evolving regulatory landscape which makes long-term planning difficult, complex tariff design, etc.
- Lastly, revenue risks or uncertainty of payment, which adds the largest premium to financing costs, arising from PLN’s financial situation and high exploration risk in the case of geothermal projects.
Investment in renewables has been held back by an uncertain regulatory environment, the IEA report stated, amid government renewable energy targets dominated by hydropower and geothermal energy. The Indonesian government released a decree in early 2020 (regulation 4/2020) that included changes such as removing the requirement to develop projects on a build, own, operate, and transfer (BOOT) basis, which caused difficulties for developers in terms of land ownership and ability to obtain financing, and allows projects on a build, own and operate basis.
Indonesia’s Energy and Mineral Resources Ministry electrification announced a proposed regulatory reform in the green energy sector to introduce feed-in-tariff (FIT) pricing and allow arrangements other than build-own-operate-transfer (BOOT) contract schemes in February. The former guarantees fixed electricity rates for small renewable power plants, seeking to ensure predictable financial returns. The second proposal eliminates a scheme that has been criticized as an impediment to financing renewable energy.
These factors are expected to be included in an awaited presidential decree to be published later this year, which will set a higher feed-in-tariff for renewable projects below 20 MW and competitive auctions for larger projects (this would apply to solar PV, wind, hydropower, biomass, and biogas). With the improvement in the pricing formula, the government hopes that investment in new and renewable energy will reach US$20 billion by 2024.
Bright Indonesia as Your Local Partner
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This article is co-written with Gianina Amira Zahra