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Energy | Renewable Energy in Indonesia – A Sleeping Giant

Indonesia has been slow out of the blocks in developing renewable sources of energy, but the country’s natural potential is enormous. What is more, energy demand in Southeast Asia’s largest economy is quickly rising. Electricity consumption is forecast to more than double by 2025 (See Indonesia’s Electricity and Power Generation Sector); fuel consumption is set to rise even faster. Renewables could bring off-grid power to the tens of millions of Indonesians who currently have no access to electricity or rely on costly power from diesel generators.

Renewable Energy in Indonesia – A Sleeping Giant
In the past, fuel subsidies and low electricity tariffs, logistical challenges, complex regulations, legal uncertainties and not least the abundance of cheap coal deterred potential investors
 

In the past, fuel subsidies and low electricity tariffs, logistical challenges, complex regulations, legal uncertainties and not least the abundance of cheap coal deterred potential investors (See The Coal Sector in Indonesia). Following years of under-investment, only a very small portion of the country’s energy is green today. This leaves a lot of catching-up to do as Indonesia seeks to diversify its energy sources. The government’s “fast track programme” to boost national power output now puts the focus on renewables after relying mainly on coal in its initial phase.

In an effort to reduce costly oil imports and bolster energy security, the government has begun to raise fuel and power prices and has devised financial incentives to promote the development of alternative sources of energy. Soft loans from development banks and multilateral investment funds such as the Clean Technology Fund mitigate risks for early investors. In addition, tender regulations have been simplified, and improving infrastructure is making projects in remote regions viable. The result is an altogether brighter environment for renewable energy investment and technology partnerships.

The National Energy Policy, adopted by the House of Representatives in January 2014, foresees that renewable sources shall supply at least 23% of Indonesia’s energy needs in 2025 and 31% by 2050, up from around 6%. In a country of 240 million people spread out over thousands of islands, this is an ambitious undertaking – and one that calls for significant private-sector participation. Independent power producers (IPPs) are expected to gain a stronger foothold in power generation, since private capital is seen as indispensible to meet the country’s urgent energy needs.

Incentives

Recent years have seen a number of measures and legal changes aimed at attracting more investment into renewable energy projects.

Feed-in tariffs require state-controlled utility Perusahaan Listrik Negara (PLN) to purchase electricity from renewable energy producers at predictable prices (which vary from one area to another). This is vital in the current setup of Indonesia’s energy market, where both the upstream and downstream are still heavily regulated and controlled by state-owned companies. It is also preferable to case-by-case negotiations on power purchase agreements, as it makes long-term planning easier for investors aiming to engage in multiple projects.

Government guarantees further reduce the financial risks for developers and IPPs. The Indonesia Infrastructure Guarantee Fund (IIGF) provides guarantees for the construction and operation of power plants in public-private partnerships (PPPs) (See Indonesian Infrastructure: Tremendous PPP Opportunities). The Business Viability Guarantee Letter (BVGL) pertains to the sale of electricity to PLN and helps producers attract long-term bank funding. The Geothermal Fund Facility (GFF) provides support for data acquisition and exploration activities, which is seen as particularly important to justify the high upfront costs for this type of energy.

Tax holidays and income tax reductions are also available for renewable energy projects, though these have been criticized for lacking clarity by not conforming to a consistent policy that is implemented in a coherent way across the country. Certain exemptions are also available for VAT and duties levied on the import of capital goods for renewable energy projects.

Biofuel blending mandates require a minimum portion of locally sourced biodiesel and ethanol to be mixed into diesel and petrol. Ministry of Energy and Mineral Resources Regulation No. 32 of 2008 mandates a gradual increase in the bio ratio of fuel used in transportation, for industrial purposes and in the generation of power. By 2025, at least 15% of ethanol in petrol and 20% of biodiesel in diesel are required.

Sources of potential

Indonesia’s renewable energy potential is particularly large in geothermal energy, hydropower, solar energy and biofuels.

Geothermal power is one of the most exciting opportunities in Indonesia and unlike most other forms of electricity generation it is dominated by IPPs (See Investing in Geothermal Energy in Indonesia). A country of exceptional volcanic activity, Indonesia is believed to harbour around 40% of the planet’s geothermal potential, with estimated resources and reserves totalling 28,000 megawatts (MW). Sumatra holds most of these, followed by Java. Current government planning is to boost installed capacity to 6500 MW by 2025, up from some 1340 MW that were on stream in early 2014 (with projects for another 1500 MW in development). Several new projects were to be tendered in the course of 2014, but exploration and development needs to speed up if the country is to meet its targets. Permit problems and local opposition are blamed for holding up projects in some areas.

Hydroelectric power boasts even greater potential than geothermal energy, estimated at around 75,000 MW. It is also the most utilized source of renewable energy at present, with total installed capacity of around 6,000 MW. Potential hydropower sites are spread out across the country, with lots of potential for large-scale projects seen in the under-served eastern regions of the country, such as Maluku and Papua. Hydropower developers face the geographic challenge that many of the sites for large-scale projects lie in isolated and usually forested regions with little or no infrastructure. Small-scale hydropower projects (defined as generating less than 10 MW), on the other hand, are less bankable and face their own technical challenges, such as bringing in equipment from across the country or even from abroad – which seems overly burdensome for just a couple of megawatts. However, micro and mini-hydropower projects enjoy support from the government and development agencies, and in some cases microfinance credit. Hydropower offers opportunities for suppliers and consultants working in tandem with public backers and local stakeholders.

Photovoltaic solar energy (PV) is one of the most neglected forms of renewable energy in Indonesia, though it, too, could contribute significantly to quenching the country’s thirst for electricity. Located on the equator, Indonesia is blessed with strong solar radiation, especially in eastern and southern regions, including East Java. Solar power is well suited for electrifying rural regions. The challenge with off-grid rural PV projects is that they are unfeasible on a purely commercial basis, while appropriate government programmes to subsidise PV installations are lacking. Grid-connected projects to sell PV electricity to PLN, meanwhile, are still largely untested in Indonesia, though interest is growing. November 2013 saw the launch of a tender for 80 sites totalling 140 MW, which foreign companies could participate in jointly with local entities. The government is trying to boost the local production of PV systems; using locally made equipment (at least 40%) and is rewarding with higher feed-in tariffs.

Biofuels are gaining traction as Indonesia seeks to reduce oil imports and improve its ecological credentials, while securing the country’s future transportation needs. Both ethanol and biodiesel are produced in Indonesia. Crude palm oil provides an abundant feedstock, albeit one that is vulnerable to changeable global prices. Domestic demand for biofuels is increasing as vehicles and infrastructure facilities are adapted and blending requirements tightened, even if the mandated targets may not always be met on time. The Indonesian Biofuel Producers Association (APROBI) expected domestic biodiesel sales to almost triple in 2014. Exports were forecast to rise by more than 20%, thanks to stronger demand from China, India, Australia, South Korea and the US, APROBI chairman Paulus Tjakrawan told Reuters news agency in March 2014. Sales to Europe are hampered by anti-dumping duties for what EU authorities see as illegal subsidies for Indonesian biofuel producers. If the issue can be resolved, the EU market could add greatly to Indonesia’s biofuel exports.

Biomass is a further untapped area of Indonesia’s renewable energy portfolio with the potential to generate 49,500 MW of power and with a current installed capacity of only 1,600 MW (Frost & Sullivan). Rice husk, coconut husk and not to mention empty fruit bunches (EFB) from CPO production offer intriguing opportunities for renewable energy in Indonesia. State owned plantations have only recently forayed into this area in partnership with international supporting organisations NEDO of Japan which has undertaken projects with PTPN III for biomass production from CPO waste and PTPN X for bioethanol production using liquid waste from sugar cane processing. Recent hikes in electricity tariffs for businesses as well as frequent electricity cuts are leading more agribusiness firms to seek out sustainable and self-reliant energy solutions that utilise bio-based waste effectively. State as well as private owned large scale plantations that have entered into downstream processing or are planning to do so are a good starting point for companies offering suitable technology in the field of biomass power generation. Agricultural cooperatives for crops such as tea and cocoa as they strive to move up the value chain also offer potential provided expertise can also be provided in supporting logistics for centralising waste material collection across numerous small holdings.

Global Business Guide Indonesia - 2014

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Indonesia Energy Snapshot

Contribution to GDP: 11% (Q3 2015)
Oil & Gas Imports: $22.8 billion USD (Jan-Nov 2015)
Proven Oil Reserves: 3.7 billion barrels (2015)
Proven Gas Reserves: 101 trillion cubic feet (2015)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 29 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).