Indonesia faces a significant challenge in meeting its climate targets for 2030, with a new report from the Institute for Energy Economics and Financial Analysis (IEEFA) highlighting the urgent need for policy and procedural reforms. To achieve its climate goal, the country requires $146 billion in private investment for renewable energy over the next decade. However, investment in this sector has stagnated, with only $1.5 billion attracted in 2023, translating to just 574 megawatts (MW) of additional capacity.
Despite its vast renewable energy potential and strong economic growth, Indonesia lags behind its Southeast Asian peers in renewable energy development. Countries like Vietnam have made substantial advancements, boasting 13,035 MW of solar capacity and 6,466 MW of wind generation, while Indonesia’s progress remains minimal.
The report identifies several barriers to private investment, including complex procurement procedures, stringent local content requirements, and unfavorable policies. These issues are compounded by a mandatory partner system that places national utility PT Perusahaan Listrik Negara (PLN) in a dominant position, potentially deterring private investors due to conflicts of interest and restrictive ownership transfer rules.
Additionally, Indonesia’s recent shift from a ‘take-or-pay’ system to a ‘deliver-or-pay’ scheme further penalizes investors and complicates project financing. The introduction of a tiered ceiling tariff structure has also made it challenging for independent power producers (IPPs) to achieve profitable returns.
Local content requirements have increased investment costs, as domestically produced solar modules are significantly more expensive than their imported counterparts. Furthermore, recent regulations that allocate carbon credits solely to PLN have deprived investors of potential revenue streams.
The IEEFA report underscores the need for transparent and well-defined procurement processes to restore investor confidence. It calls for commercially balanced contractual terms and conditions to facilitate private sector engagement and support Indonesia’s renewable energy goals.
“Private investors would be encouraged to enter the Indonesian renewable energy market if there were clear and concise procurement procedures, along with consistent and reliable implementation of current regulations,” says Mutya Yustika, Energy Finance Specialist at IEEFA.
To address these challenges and secure the necessary investment, the report advocates for comprehensive reforms in Indonesia’s renewable energy sector, aiming to enhance transparency, reduce costs, and create a more attractive environment for private investment.
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