An advantageous geographic position on the equator has long afforded Indonesia with immense potential for solar energy. Often touted in tandem with geothermal energy and hydroelectric power as the next wave of energy sources to boost national power output (See Renewable Energy in Indonesia – A Sleeping Giant), the country’s solar energy industry now appears ready to begin realising its potential. Following state electricity firm PLN’s announcement of a long-term plan to develop new solar power plant projects adding 620 megawatts (MW) by 2020; demand for components and equipment used in these projects is projected to boom. This is expected to create greater opportunities for local manufacturers of solar panels, particularly given incentives put in place by the government to utilize local content.
At the heart of this drive to increase national power output through solar energy is the government’s initiative to attract Independent Power Producer (IPP) participation for on-grid systems. The first phase of IPP involvement, more specifically is to encourage IPP involvement in more than 60 projects (ranging between 1 MW to 10 MW) in existing isolated, on-grid systems currently powered by diesel.
The movement towards solar energy and its boost to the domestic manufacture of solar panels is also taking place on a regional scale. In an analysis of South East Asia’s photovoltaic (PV) market, IMS Research forecasted a rise of approximately 5 gigawatts (GW) in installed PV capacity across the region between 2012 and 2016, led by Indonesia as the market most likely to challenge Thailand as ASEAN’s dominant player.
The impending emergence of new solar power plant projects to be made available by PLN has brought to the forefront the present preparedness of local solar panel manufacturers to meet demand. From a historical standpoint, firms based in China and Japan have dominated the market, with the presence of Indonesian firms largely limited to the six companies comprising the Indonesian Solar Module Manufacturer Association (APAMSI): PT. Len Indonesia (Persero), PT. Adyawinsa Electrical & Power, PT. Surya Utama Putra, PT. Swadaya Prima Utama, PT. Azet Surya Lestari, and PT. Wijaya Karya Inatrade Energi. With a combined production capacity of 90 megawatts (MW) per annum (APAMSI), these six companies alone will not be able to curb the need for imported components such as solar cells (often the most expensive component of a solar panel) amidst growing market demand.
To encourage the development of the domestic manufacturing industry, Indonesia in 2013 introduced new regulations to provide companies with an incentive to use locally sourced components. The Ministry of Energy and Mineral Resources Regulation No.17 of 2013 introduced a solar power feed-in-tariff with different ceilings depending upon the project’s use of local content. Feed-in-tariffs for solar power projects obtaining at least 40% of components from domestic manufacturers are capped at $0.30 USD per kilowatt hour (kWh). Projects using less local content than this are subject to a lower feed-in-tariff ceiling from PLN at $0.25 USD per kWh. This follows on from the Ministry of Industry’s regulations on the use of domestic products in the construction of electric power infrastructure (No. 48/2010 and No. 54/2012) that requires centralised and communal solar power plants to use at least 43.85% local goods and services (See Going Local: Understanding Indonesia’s Local Content Requirements).
It should be noted that Regulation No.17 of 2013 also puts in place a new procedure for the purchase of power from solar PV projects by PLN. Replacing the direct appointment of companies to undertake solar power projects are mandatory capacity quota tenders, conducted by the Directorate General of Renewable Energy and Energy Conservation with a representative from PLN serving as a member of the tender committee. This, coupled with the introduction of feed-in-tariffs should facilitate easier long term planning for investors and build towards greater interest in the industry as a result of a more transparent and consistent purchase process.
Crucially however, tenders are to be awarded in part based on the lowest bid tariff submitted. Given that bidders will be driven to offer as low a tariff as possible to win the tender, it remains to be seen whether projects using more than 40% local content will in fact be able to take advantage of the higher feed-in-tariff ceiling. As highlighted in a Baker & McKenzie report, early discussions with the Directorate General of Renewable Energy and Energy Conservation suggest that tariffs will be adjusted by up to $0.05 USD per kWh in circumstances where competing tender bids are submitted by a bidder who meets local content requirements and another who does not. As an example, a bid tariff submitted by the former at the ceiling of $0.30 USD per kWh is to be viewed as equivalent to a $0.25 USD per kWh tariff when competing against lower bids from companies not meeting local content requirements.
In any case, the uncertainty surrounding the formal implementation of this policy hints at the untested nature of programs governing the sale of PV power to PLN and could see a delay of any boon to local manufacturers hoping to supply new solar power projects.
Solar panel manufacture in Indonesia appears primed to thrive with the increase in solar power projects. In addition to serving IPPs developing new on-grid systems to replace diesel power generation facilities, the many off-grid and PV Stand Alone system projects undertaken by PLN in remote, outlying islands presents another area of opportunity. Moreover, PLN’s plan to integrate PV technology into hybrid power plants with either existing diesel systems or other renewable energy sources opens up further avenues to supply a state owned enterprise attuned to the government’s move towards locally sourced components.
Local solar panel manufacturers, however, must still contend with limitations to production capabilities attributed to the still nascent state of the industry and their relatively new proficiency in carrying out the many processes to create solar modules. Having first developed expertise in manufacturing modules suited for small PV power generation systems and home installation (as dictated by demand from sparsely populated and remote communities in outlying islands), the local industry requires investment and the involvement of experienced foreign players to accelerate its growth.
Interest in opening new manufacturing facilities through a joint venture with Indonesian companies has in the past been expressed by global industry leaders such as Canadian Solar Inc, who signed a memorandum of understanding with PT. Swadaya Prima Utama to build a 60 MW solar module factory. This factory, if completed, would be among the largest of its kind in Indonesia, and alone would match two-thirds of the local industry’s present production capacity as last reported by APAMSI.
Other opportunities for joint ventures include developing solar cell production capabilities to directly address the current reliance on imports for this main component. In 2012, state owned oil and gas company Pertamina set the precedent for this type of cooperation in working with PT. Len Indonesia to boost the manufacture of solar cells needed to build solar power plants.
Improving solar panel quality will be one of the areas where the guidance of an experienced partner will prove most beneficial, as the prevalence of low quality components has impinged upon the reliability of solar power generation in the market. Without a formally established certification institute for solar panels in Indonesia to provide quality assurance, demonstrating high product quality to consumers disillusioned with local panels can prove difficult. A foreign partner with a history of adhering to international solar panel production standards and a proven track record in more mature renewable energy markets can go a long way to providing this assurance; thereby placing Indonesian manufacturers on a more level pegging with overseas competition.
Global Business Guide Indonesia - 21st July 2014
Population: 255 million (estimated, 2015)
Currency: Indonesian Rupiah
Nominal GDP: $895 billion USD (IMF, 2015)
GDP per capita: $3,415 USD at Current Prices (IMF, 2015)
GDP Growth: 4.7% (2015)
External Debt: 34.77% of GDP (BI, Q3 2015)
Ease of Doing Business: 109/189 (WB, 2015)
Corruption Index: 107/175 (TI, 2014)