INDONESIAN President Joko “Jokowi” Widodo inaugurated the 75-megawatt Sidrap Wind Farm in South Sulawesi in July 2018. Built by the foreign firm UPC Renewables at a cost of US$150 million, Sidrap is the first grid-connected wind farm of any meaningful scale in Indonesia and is expected to generate power for up to 70,000 households.
This was welcome news for those wondering how Indonesia was going to achieve its ambitious goal of sourcing 23 percent of its energy from renewable sources by 2025. But does this mean Indonesia is on the cusp of a clean energy revolution?
If history is any indication, there is reason to be sceptical. According to state-owned utility company PLN, installed capacity of grid-connected solar in 2017 was just 7.98 megawatts, while wind power stood at a negligible .88 megawatts.
This is a tiny fraction of Indonesia’s total installed capacity in 2017 of 55,925 megawatts. PLN-operated geothermal and hydropower plants accounted for a larger share at 4,134 megawatts, almost all of which was added decades ago. Power purchased from independent developers has not been much better. Coal continues to dominate, with PLN consuming over 54 million tons to run its plants in 2017.
In early 2018, the government capped the price of domestic coal at US$70 per ton, well below the global market price. Indonesia has large coal reserves and this ensures that coal-fired plants will have access to a steady supply of cheap fuel at least through the 2019 election season. While this may be politically expedient, it makes it very difficult for renewable technologies to compete with fossil fuels.
These disappointing numbers are compounded by the fact that, according to the International Energy Agency, Indonesia is endowed with a wealth of potential renewable energy sources. They estimate the country has the potential to develop 75,000 megawatts of hydropower, 4.80-kilowatt hours per square meter per day of solar, 32,654 megawatts of biomass and holds 40 percent of the world’s geothermal reserves at around 28,000 megawatts.
So why is the sector stagnant?
There are a number of reasons, the first being cost. While the levelised cost of renewables has dropped dramatically in the last few years, inducing investment at scale in Indonesia is still a more expensive proposition than in places that have seen faster growth, such as China and India. This is because regulatory uncertainty and a cumbersome bureaucracy tend to inhibit investor interest unless PLN is willing to pay above market prices. This adds to the cost, even in an era of increasingly inexpensive renewables.
But PLN is not flush with cash. Indonesia has a constitutional mandate to provide affordable electricity to its people, putting the utility in a tough spot when it comes to developing a sustainable financial model.
The Ministry of Energy, not PLN, sets the consumer price of electricity. These rates have been frozen through the build-up to the election. With its ability to raise revenue constrained, PLN must keep costs down in order to remain solvent.
With access to cheap domestic coal and no political appetite for passing the high initial costs of renewable technologies onto the public, the most prudent way to keep costs in check is to lean into inexpensive fossil fuels.
Even when the government has shown a willingness to shoulder the cost of developing renewables, the policies put forward have been badly designed and poorly implemented. Since 2011, Indonesia has experimented with a number of pricing mechanisms and feed-in tariff schemes — PLN entered into private agreements to off-take power generated by independent renewable developers at fixed prices.
The problem is that the regulatory frameworks governing these agreements have frequently changed and bureaucratic red tape and ministerial communication breakdowns have driven down investor confidence.
For instance, the pricing mechanism for geothermal power was initially pegged to oil prices, which then changed to a ceiling price for all of Indonesia and finally ended up as a feed-in tariff that was rolled out by the Ministry of Energy without consulting the Ministry of Finance. The regulatory uncertainty and coordination breakdowns go a long way in explaining the lack of growth in the sector.
Ultimately, developing clean energy in the country is more of a want than a need at the moment. Indonesia has large coal reserves and is one of the world’s largest net exporters of coal. It is somewhat insulated from fluctuations in global coal prices. It is not as motivated to develop alternate energy sources as other countries that depend on coal imports, such as the neighbouring Philippines where renewable energy development has exploded in the last few years.
The fossil fuel industry in Indonesia is immensely powerful — it is the primary source of fuel for energy throughout the archipelago and has played a dominant role in the country’s economy for decades. In an energy market where fossil fuel interests are so powerful, it is not surprising that renewables have struggled to find a foothold.
There have been a few promising signs recently, including Sidrap and a few small-scale wind and solar plants in Eastern Indonesia that have reached financial close. But until PLN and the Ministry of Energy can work out how to address some fundamental challenges — keeping generating costs down while financing renewables at scale, improving poor policy design and drumming up real political momentum to challenge the powerful extractive industry lobby — it is unlikely that renewables will pose a serious challenge to fossil fuels in Indonesia in the near future.
James Guild is a PhD candidate in Political Economy at the S. Rajaratnam School of International Studies in Singapore. You can follow him on Twitter at @jamesjguild.
This article is republished from the East Asia Forum under a Creative Commons licence.