December 15, 2023
JAKARTA – Indonesia is expected to see the lowest investment realization in renewable energy projects in six years, despite the country’s aim to decarbonize its electricity sector, which experts suggest it is partly because of a lack of discussion to resolve structural and financial barriers in the sector.
Indonesia has only attracted US$1.17 billion in new and renewable energy investment as of November, just 65 percent of the $1.8 billion target set for this year, according to Energy and Mineral Resources Ministry data.
The desired figure is projected to remain unattainable until the end of this year despite the government slashing the target from last year’s $3.91 billion, which it also fell short of achieving after realizing only 40 percent of the total.
Fabby Tumiwa, the executive director of the Institute for Essential Services and Reform (IESR), said that this year’s figure would be the lowest since 2017, partly because of a lack of renewable energy projects auctioned in the last two years, while deployment has seen contraction as far back as 2020.
“Rising interest rates in the past year have led projects to face reevaluation for their feasibility even though they have reached a power purchase agreement (PPA),” Fabby said on Wednesday.
Fabby projects the country would only add 0.97 gigawatts (GW) of renewable energy capacity out of the targeted 3.4 GW until the end of this year, putting Indonesia at risk of missing its peak emission target because of stagnant decarbonization of the power sector.
Indonesia has also tried to boost rooftop solar panel users to increase its renewable energy mix, aiming to get as much as 2.14 GW by 2030, but it could only realize 95 megawatts (MW) as of May 2023.
Fabby added that the move to push for rooftop solar panel adoption has not been optimal because of regulatory constraints such as stalled revision progress of the Energy and Mineral Resources Ministry’s Ministerial (MEMR) Regulation No. 26/2021 and licensing policy implemented by state-owned electricity company PLN.
Ahmad Zuhdi Dwi Kusuma, an industry and area analyst at state-owned lender Bank Mandiri, said that increased interest rates would affect the internal rate of return (IRR) of renewable energy investments.
Some may opt to delay final investment decisions (FID) purely by a financial decision to look for higher yield assets for a short-term gain, he said.
“Renewable [energy] projects require medium- to long-term investment, which also means that the return on the investment is unpredictable, citing the possibility that the world could still turn away from pursuing renewables,” he said on Thursday.
Alternatively, experts have pointed to other barriers, such as electricity oversupply in the Java-Madura-Bali grid, which makes it harder to sell renewable energy in the region, as well as unfavorable power purchase agreement terms, which reduces the bankability of projects.
Gilles Pascual, a partner at consultancy Ernst & Young Singapore, added that investors also faced challenges from local content requirements (TKDN) and a lack of domestic manufacturing capacity, both of which significantly increase project costs.
“Indonesia does not have a mature domestic supply chain. Panels, inverters and a lot of other equipment need to be imported. For now, it is difficult to meet local content requirements,” Pascual said during a webinar hosted by clean energy advocacy group Yayasan Indonesia Cerah on Wednesday.
Pascual suggested that the government speed up the power purchase agreement negotiation process for wind and solar projects, while implementing local content requirements on a more gradual basis.
“When Indonesia procures gigawatts of renewables, naturally the production facility will come to the country, but we cannot implement a high TKDN right now because it makes the projects slightly more expensive,” he said.
House Commission VII overseeing energy and industry deputy chairman Eddy Soeparno said Indonesia has a huge potential in solar and wind power generation but the implementation of local content requirements for renewable projects often does not meet expectations.
He cited the 192 MW Cirata floating solar power plant, which also happened to be the largest in Southeast Asia, and only meets 23 percent of the local content requirement.
The realized local content of the project was far lower than an initially planned 60 or 40 percent, he said, explaining that both figures would have rendered the project economically unviable.
“Our plan to develop renewables while developing a green economy comes with challenges. Competitiveness in our industry is low. It’s cheaper to import, but that also requires money,” Eddy said during the same discussion on Wednesday.
Hariyanto, the energy ministry’s head of research and electrical technology development, maintained that the country could still meet its aim of pushing renewable energy.
He pointed out the declining levelized cost of electricity (LCOE) as an opportunity to encourage renewable energy development in Indonesia.
The global-weighted average LCOE for solar power projects in 2022, for example, declined by 3 percent from 2021 to $0.05 per kilowatt-hour (kWh).
“Solar and wind projects saw a significant decline in costs,” Hariyanto said.