Making Energy Transition Work in Indonesia: Bridging the gap between policy and practice is a policy briefing paper produced by the Energy Transition Policy Development Forum as part of the ASEAN Indonesian Chairmanship 2023. The brief summarises and reflects on discussions during the ASEAN Energy Business Forum’s Side Event on 25 August 2023. Download the paper here or read on below.
Financing and investment are proving to be a complex challenge for ASEAN as it pursues its target of 23 percent renewable share in the Total Primary Energy Supply (TPES) by 2025. Despite having policies, frameworks, mechanisms, and socio-economic potential in place there remains a significant gap between financing needs and realization. In this context, Indonesia presents a useful analytical case study on how this problem persists and can be overcome.
In the case of Indonesia, the main challenges of financing and investment lie in the mis-alignment betweengovernment’s policies, regulations, and frameworks with the concerns of the business sector. E.g. Given thecondition of renewable energy price is not competitive with fossil fuel, local content policy become challenge forinvestor (KataData, 2023).
Indonesia’s energy transition is crucial to mitigate climate change impacts, ensure energy security, and boost GDP, as outlined in multiple evidence-based reports. According to ADB (2021), climate change will destabilize economic conditions in Indonesia and Southeast Asia. IEA (2022) suggests diversifying the energy mix to meet rapidly growing demand for energy. IRENA (2023) reports that transition in the 1.5% scenario would contribute to 3.4% higher GDP over 2021-2050 than the Planned Energy Scenario.
The country is a prime example of the challenges of renewable energy transition in ASEAN. It has a lot of strengths: the largest territory, substantial natural renewable resources of around 3.686 GW (MEMR, 2023), relatively high GDP (World Economics, n.d.), but also faces challenges such as diverse and disparate islands, and growing energy consumption of 1.185,56 BOE, (MEMR, 2023).
Indonesia’s transition is also crucial for its development and economic growth. The government expects GDP to increase from Rp 15,400 trillion (USD$ 1 trillion) to Rp 24,000 trillion ($ 1.56 trillion) by 2030, with energy consumption increasing from 123 million tonne of oil equivalent (TOE) to 243 million TOE (Setgab, 2021; & National Energy Council, 2021). The main consumer of energy is expected to shift from transportation to industry according to the National Energy Council’s Energy Outlook (2022).
Based on Investment Realisation for Renewable Energy ($ 0.58 billion) and Fossil Fuel ($ 22 billion) in 2022 (IESR,2022), Indonesia needs a more effective financing mechanism, increase the business valuation of the RE transition projects, and build a more competitive market for renewable energy. The country has only achieved 20.2% of its renewable energy target for 2025, which requires $8 billion (IESR, 2022). Achieving 23% RE by 2025 is essential for Indonesia to meet its climate goals immediately by 2025 and also its longer-term targets.
Obstacles faced by Indonesia are common in many other ASEAN countries, such as unequal power infrastructure distribution, ineffective policy frameworks, high production costs for renewable energies and subsidized fossil fuel. These challenges have been highlighted by studies by Perdana (2022) and IESR (2023).
Financing the transition to renewable energy is a major challenge in Indonesia and the ASEAN region. In 2023, the Indonesia Financial Sustainability Index (ISFO) suggested that Indonesia faces a $6.38 billion deficit to achieve its 23% renewable energy target by 2025, and ASEAN as a whole lacks $95.5 billion for the regional transition program between 2021 and 2030 (Abdullah et al.). Both Indonesia and ASEAN heavily depend on limited public and government funding for their transitions.
Considering Indonesia’s substantial energy consumption, population, GDP, and resources, greater investment is required to scale up transition efforts. As role model in ASEAN, improvements to Indonesia’s renewable energy financing framework would have knock-on effects in the region.
Indonesia’s Government Regulation (PP) NO.79 year 2014 obligates the 23% renewable energy share of total domestic energy, and is supported with the Presidential Regulation No.112 year 2022 and Kebijakan Energi Nasional as the framework. Indonesia also has diverse financing supports such as the Just Energy Transition Partnership (JETP), Accelerating Coal Transition Program, Energy Transition Mechanism Country Platform, and Green Taxonomy 1.0 2022 (ADB, 2019; & OJK, 2022). Some provinces have also made ambitious pledges, such as the Governor of Bali’s recent commitment to achieving Net Zero by 2045, including reaching 100% renewable energy on Nusa Penida by 2030.
At the regional level, Indonesia has engaged with the ASEAN Plan of Action for Energy Cooperation (APAEC) Phase II and the new vehicle electrification initiative. Despite those programs and regulations, only 20.2% of the total $8 billion annual requirement is confirmed (IESR, 2022).
The Asian Development Bank (ADB)’s 2019 report shows that the government is the major financier in renewable energy transition in Indonesia, contributing 40% of total funds required. The private sector contributes 30%, followed by development finance institutions and multilateral climate funds. The government is planning to reduce its contribution in the coming years and do more to encourage the private sector to fill the gap.
In order to enhance private sector involvement in financing and investment Indonesia must consider the experience and concerns of the private sectors when designing policies. As IEA and ISFO report in 2023, there are several aspects that hinder the private sector from taking a larger role, including: high upfront fees; lack of bankability; high political risk; weak financial market as the result of low business valuation for the renewable energy market; lack of accountability and lack of clarity in the procurement process; inadequate energy infrastructure in Eastern Indonesia; heavy dependency on subsidised fossil fuels; lack of awareness or unfavorable perspective of renewable energy from the public and stakeholders.
ASEAN also faces similar problems in achieving its renewable energy targets. (Safrina, 2023). Despite the agreement on the ASEAN Plan of Action for Energy Cooperation (APAEC), establishment of various organizations such as the ASEAN Centre for Energy (ACE), Renewable Energy Sub-Sector Network, and Power Grid, ASEAN Member States still face challenges related to regulatory frameworks, finance, integrated approaches, inequality and differing priorities (AEBF, 2023; & IEA, 2023;).
ASEAN experiences a $95 billion gap in the projected $159 billion investment needed for 2021-2030 under baseline scenario (Abdullah, et al, 2023). The composition of this investment is dominated by the private sector investment with $53.4 billion according to the same report. IEA (2023) estimates that the blended finance investment is dominated by ADB with 21 commitments followed by private institutions in Asia.
For instance, at the regional level, Singapore faces potential energy crisis due to lack of renewable energy sources. Meanwhile, Laos with abundant hydro and wind power has difficulty marketing its renewable energy due to lack of integrated power grid (Soukaloun, 2023; Andres, 2023). These concerns are in line with similar findings from IESR (2023), IEA (2023), Huda (2023), Sambodo (2023), and EU-ASEAN Business Council (2023) regarding the challenges in RE transition in Indonesia and ASEAN.
The event involved two panel discussions: the first bringing business leaders together to share their challenges, and the second to hear policy-makers’ responses. From business the panels consisted of representatives from Quantum Power Asia, Suncable, PT TML Energy, and the Indonesia Biofuel Producers Association. From government we heard from representatives of PLN, the Governor of Bali, the Ministry of Energy and Mineral Resources, and the Coordinating Ministry for Maritime and Investment. Here is some insight:
Progress identified included:
Challenges include:
Indonesia needs to revolutionize their renewable energy transition financing and investment target by acknowledging the concerns from business sectors and transforming the AEBF 2023 insights into practical solutions. Otherwise, not only will the 2025 target be unachievable, but also the country’s environmental, energy, and economic future will also be in danger. In particular, we recommend:
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Climate and Energy Diplomacy Coordinator, IESR
Green Economy Program Officer, IESR
We would like thank our executive director, Fabby Tumiwa and ETP Forum Colleagues, Ruddy Gobel (Senior Policy Advisor, Center for Policy Development), Guntur Sutiyono (Country Lead – Indonesia, Climateworks Center), Moekti Handajani Soejachmoen (Executive Director, IRID), Lucky Lontoh (Country Coordinator, IISD), Caitlin McCaffrie (Program Director, CPD), and Muhammad Rizki Kresnawan (Senior Project Manager, Climateworks Center) for their support and contribution to this policy brief.
This policy brief is produced by Energy Transition Policy Development Forum for ASEAN Indonesia Chair 2023 as part of the ASEAN Energy Side Event Series under the Energy Cooperation Coordinator of ASEAN 2023 Chair Secretariat, supported by Climateworks Centre (CWC), Centre for Policy Development (CPD), International Institute for Sustainable Development (IISD), Indonesia Research Institute for Decarbonization (IRID), Institute for Essential Services Reform (IESR), and Purnomo Yusgiantoro Center (PYC). This brief summarises and reflects our discussion on ASEAN Energy Business Forum’s Side Event on 25 August 2023.
