Global Business Guide Indonesia

Energy in Indonesia Energy in Indonesia Energy in Indonesia Energy in Indonesia Energy in Indonesia
Sign up for the GBG Indonesia Quarterly Business Intelligence Report for the latest news on your sector.
Sign Up
Energy | Overview of Renewable Energy in Indonesia: Progress, Albeit Slow

After many years of neglect, Indonesia’s new and renewable energy (NRE) sector has gained momentum. This is partly attributed to the Indonesian government paying closer attention to the industry after recent studies revealed that the country’s fossil energy resources will run out by 2025. Investor interest from both domestic and international investors has also been piqued by the Jokowi administration’s commitment to improving the country’s rate of electrification and the ongoing infrastructure drive (See High Stakes for Indonesia's New Infrastructure Push). Constraints, however, remain, particularly in terms of pricing and funding, which need to be immediately resolved if the country wants to achieve the NRE consumption target of 23% in its energy mix by 2025.

Overview of Renewable Energy in Indonesia: Progress, Albeit Slow
Indonesia’s abundant oil and gas resources in the past have made renewable energy development an option, not a priority

Moving Goalposts

British Petroleum (BP) forecasts that renewables will become the fastest growing resource in the world as renewable energy consumption will increase fourfold to 7.6% per year until 2035. According to BP Energy Outlook, the growth of renewable energy is higher than other energy sources such as oil, natural gas, and coal.

Indonesia is considered late in developing its new and renewable energy resources compared to other countries (See Renewable Energy in Indonesia – A Sleeping Giant). The country’s abundant oil and gas resources in the past have made NRE development an option, not a priority.

That is why it is only recently that the Indonesian government began to pay serious attention to the NRE sector when Indonesian oil and gas reserves began to show signs of depletion and the country became a net oil importer for the first time in 2005.

Based on data from the Ministry of Energy and Mineral Resources in 2015, Indonesia has immense renewable energy resources. Unfortunately, much of this potential remains untapped due to the lack of investment and incentives. Currently, new and renewable energy consumption in Indonesia is still low at 6.8%. Meanwhile, the government has set a seemingly ambitious target to boost its consumption to 23% by 2025.

One way to achieve this is by increasing the share of renewable energy in the Electricity Supply Business Plan (RUPTL) for 2017 – 2026 to 22.6% (See Investment in Indonesia's Electricity Sector; Sparks of Life). This figure is higher than the previous target of 19.6%, but still below the target set in the General Plan of National Energy (RUEN) of 23%.

Going forward, power plant construction must be based on existing infrastructure and resources that are in place. For outlying islands and regions that are not connected to a national grid or have direct access to a primary energy resource such as coal (See Indonesia’s Coal Mining Sector: A Silver Lining Behind Dark Clouds), the focus must be on the development of their renewable energy potential. Currently, NRE only accounts for 12% or 6,000 megawatts (MW) of total electricity installed capacity of 51,000 MW throughout Indonesia.

National electricity provider, PLN, has set the target to increase the share of renewable energy sources to 22% or 22,000 MW out of 78,000 MW by 2026. To achieve this, the company has constructed a number of NRE-based power plants which consist of hydro energy accounting for 1.514 MW, geothermal energy for 470 MW, solar power for 212 MW, biomass for 10 MW, and wind power for 70 MW; with a total capacity of 2,200 MW.

Geothermal

One of the country’s largest new and renewable energy resources is geothermal with reserves of 29,544 MW yet with only 1,643.5 MW or 5.5% having been utilised (See Indonesia's Geothermal Energy Sector; Latest Advancements).

PLN has been relying on geothermal to increase the share of renewables in its energy use in recent years, yet the increase is from a tiny base. In 2016, three geothermal power plant infrastructure projects of Pertamina worth 6.18 trillion IDR have commenced operations. These power plants are PLTP Lahendong unit 5 and 6 that have a capacity of 2 x 20 MW in Tompaso, North Sulawesi, and PLTP Ulubelu unit 3 with a capacity of 1 x 55 MW.

In 2017, Sarulla Unit I, the first unit of one of the largest geothermal power plants in the world with a total capacity of 3 x 110 MW has commenced commercial operation. In Gunung Sibual-buali working area, Tapanuli Utara Regency, North Sumatra Province. The second and third units are expected to start producing in September 2017 and March 2018.

Another major geothermal power plant project that is currently in progress is Gunung Talang-Bukit Kili geothermal working area which is operated by Hitay consortium. Besides the private sector, the French government is also interested in geothermal development. The country established the French Renewable Energy Group (FREG) on 28th February 2017, which will facilitate French companies that are interested in investing in Indonesia’s new and renewable energy sector, including geothermal.

Hydropower

Another major renewable energy source in Indonesia is hydropower with a potential of 75,000 MW and only around 5,383 MW currently being utilised. PLN is in the midst of constructing a hydropower plant (PLTA) in Jatigede, Sumedang, with a capacity of 2 x 55 MW.

Moreover, the hydro energy sector has also successfully attracted the interest of the private sector. In 2017, PT Terregra Asia Energy Tbk announced its plan to construct four mini-hydropower plants (PLTMH) in North Sumatra with a total capacity of 36 MW with total investment equating to 1 trillion IDR. Going forward, the company will construct four more PLTMHs until 2021 and three hydropower plants with a total capacity of 300 MW.

Solar Energy

Solar energy is another area of untapped potential within Indonesia’s renewable energy portfolio. As a tropical country, the sun offers huge energy potential of 532,579 MW but to date, Indonesia only derives 16 MW from solar power (See Solar Panels in Indonesia: A Bright Future?).

In 2016, PLN signed a power purchase agreement (PPA) with PT Global Karya Mandiri for the construction of a solar power plant with a capacity of 1 Megawatt peak (MWp) in Atambua and with PT Indo Solusi Utama for the construction of solar power plant with a capacity of 2 x 1 MWp in Ende-Ropa-Maumere.

A year later in 2017, PLN also signed PPAs for six solar power plant (PLTS) construction projects with a total capacity of 45 MW. They are PLTS Gorontalo (10 MW) by PT Quantum Energi; PLTS Pringgabaya, Lombok (5 MW) by PT Infrastruktur Terbarukan Adhiguna; PLTS Sengkol, Lombok (5 MW) by PT Infrastruktur Terbarukan Cemerlang, PLTS Selong, Lombok (5 MW) by PT Infrastruktur Terbarukan Buana; PLTS Kuta, Lombok (5 MW) by PT Delapan Menit Energi and PLTS Likupang, Minahasa (15 MW) by PT Infrastruktur Terbarukan Lestari.

In addition, there are also two other PPAs for solar power plant construction projects combined with diesel and gas engines in Lombok, Bangka, Karimun Islands, Kupang, Minahasa & Gorontalo with PT Arsari Enviro Industri and Sunpower Systems Sarl and in Sumbawa, Bima/Sape, Lombok, Ambon, Madura/Ketapang/Bawean, Waena, Bombana, Bangka/Belitung, Nias under PT Sumberdaya Sewatama.

In addition to working with Indonesian investors, PLN is also due to conduct a feasibility study with Masdar, a United Arab Emirates company, which will partner with PLN’s subsidiary, PT Pembangkitan Jawa Bali, to construct a solar power plant in Cirata, West Java.

Bioenergy

Based on data from the Ministry of Energy and Mineral Resources, Indonesia holds the potential for 32,654 MW of bioenergy, yet to date it has only generated 86.23 MW. In 2017, PLN signed a PPA for biomass power plant construction in Siberut, Mentawai Islands with PT Charta Putra Indonesia and PT Inti Karya Persada Teknik.

In addition, the state electricity company also signed a power purchase agreement with PT Rezeki Perkasa Sejahtera to construct a biomass power plant in West Kalimantan. The power plant will utilise palm kernel shells as its fuel, with the project involving 250 billion IDR of investment.

Another notable investment in the bioenergy sector came from a consortium of South Korean companies. They will work on the country’s first-ever waste-to-energy project in Bekasi with an investment value of $120 million USD. The consortium consists of three companies, namely Korea Development Bank/KDB, KORBI and GS E&C.

Besides its use for generating electricity, bioenergy can also be used for fuel. In 2016, biodiesel consumption in the country reached 2.7 million kilolitres. Under the B20 programme, the government requires the blending of diesel with 20% palm oil which has successfully boosted the sales of palm oil (See Indonesian Palm Oil Industry Overview – Biodiesel as a New Source of Revenue Growth).

Wind Energy

Wind-based energy holds up to 950 MW of potential energy in Indonesia. In 2017, PLN signed a power purchase agreement for the construction of a wind power farms combined with a solar and mini-hydro power plant in Selayar, Kei Kecil, Ambon, and Buru Islands with PT UPC Renewable Indonesia and PT Binatek Energi Terbarukan.

In addition to the private sector, the development of wind energy is also being supported by international governments and organisations. Denmark, for example, will assist Indonesia in developing wind power for power generation, which was marked by the launch of wind energy maps and studies which will locate cities in Indonesia that have the potential to host wind power farms.

Significant Challenges Remain

The development of the new and renewable energy sector in Indonesia still faces a number of constraints. These challenges range from the complex pricing mechanism, lack of research funding, land procurement issues (See Indonesia’s Land Acquisition Laws; On Paper Only?), lack of lending by financial institutions, the slow permitting process, overlapping spatial planning, to the limited availability of data and information.

Mr Mugi Rahardjo
DEN Indonesia
Mr Mugi Rahardjo
Boiler Manufacture & Engineering Services
The land acquisition process still poses problems, particularly because there is a limited amount of land suitable for large-scale power plant facilities.
See Interview Learn more about DEN Indonesia

Pricing has been one of key hurdles for NRE development in Indonesia with investors complaining that the set selling price given the initial investments required is too low, while the buyer, in this case PLN, complains that the selling price is too high to be viable. In Indonesia, the power generated by new or renewable energy power plants is sold at $10 cent USD per kWh. Meanwhile, in the United Arab Emirates and the United States, it is sold at $2.29 cent USD per kWh and $2.5 cent USD per kWh, respectively.

In order to make the price fairer for PLN and the independent power producers, the Ministry of Energy and Mineral Resources recently issued Regulations No. 10 of 2017 on Power Purchase Agreement and No. 12 of 2017 on Utilisation of Renewable Energy Sources for Electricity Supply, which set the tariff formula of NRE-based electricity that refers to the Basic Production Cost (BPP).

The regulations stipulate that if the BPP in the local electricity system is higher than the national BPP, PLN will buy it at 85% of the local BPP. Meanwhile, if the local BPP is less than or equal to the National BPP, then PLN will buy it at 100% of BPP. This scheme applies to solar, wind, hydro, biomass, and biogas power generation. Thus, the selling electricity price of NRE will vary by region. The area-based pricing is expected to make the electricity tariff more competitive in Indonesia.

Furthermore, to attract additional investors, the Indonesian government has simplified the process for renewable energy permits by reducing the time needed to apply for a license. Previously, the procedure took two months or 75 days to be able to apply for a permit in the geothermal sector.

The reluctance of the banking sector to support renewable energy development through longer term financing schemes has also held back investment. To overcome this issue, many geothermal business players seek overseas loans and financing which offer lower interest rates of 2% to 4% for green energy projects. A number of foreign banks have expressed their interest to fund NRE projects such as Enel Bank from Italy and Asian Development Bank. In addition, developers can also propose funding through the Clean Technology Fund from Multilateral Development Banks.

The scope for investment opportunities in new and renewable energy sources in Indonesia is extensive. The country’s future growth and sustainability through regional development outside of Java rely on an evening out of the electrification rate throughout the country. Renewable energy has a key role to play in this, provided that the Indonesian government continues to play a role in simplifying the process for investment and investors maintain the necessary resolve to deal with local governments to ensure that their vitally important projects are able to progress.

Global Business Guide Indonesia - 2017

icone share