Power policy

Indonesia aims to generate 23% of its total electricity from new and renewable energy sources by 2025, up from 7% in 2019. Such sources, however, also include technologies like nuclear, hydrogen, coal bed methane, gasified coal, and liquefied coal. Nevertheless, this target is ambitious, given the low levels of finance committed to renewables in the recent past. Indonesia’s existing renewable energy capacity is comprised mostly of geothermal and hydro plants. Solar and wind accounted for less than 1% of installed capacity as of 2020.

A draft of the 2021 electricity supply plan (RUPTL) shared in May 2021 suggests the Indonesian government is gradually shifting its focus away from coal and toward renewables. The plan cut 50% of coal and 40% of gas power capacity additions proposed under the previous plan. The draft also raised the solar target to 6 gigawatts of new capacity by 2030, up from 907 megawatts in the 2019 plan. Wind receives less attention with only 595 megawatts of planned capacity additions.

Power prices and costs

Indonesia has one of the lowest power prices in the region at $75-85 per megawatt-hour for commercial and industrial users in 2020, and $68 per megawatt-hour for households. The government subsidizes retail electricity tariffs. A subsidy is given directly to the national utility PLN to cover its electricity supply costs.

Power market

Fossil fuels dominate Indonesia’s current power mix, accounting for 86% of installed capacity in 2020. Coal generation capacity has more than doubled from 2011 and makes up 50% of installed capacity at 36.7 gigawatts. The availability of cheap, domestic coal resources made it the technology of choice for new capacity additions over the last decade.

Doing business and barriers

Renewable energy development is hindered by a challenging regulatory environment. The current framework requires that new solar and wind projects be awarded through a limited tender process with a minimum of two bidders. Under this process, only pre-qualified bidders included in the ‘list of selected providers’ (locally known as the Daftar Penyedia Terseleksi, or DPT) are invited to participate. It is unclear if all pre-selected bidders are invited to participate. The frequency of when a pre-qualification round will be issued is also unclear, creating additional uncertainties.

Renewable energy tariffs are restricted to 85% of the regional generation cost if it exceeds the national average. If the regional cost is less than the national average, tariffs can be negotiated between PLN and the developer. This forces renewables to compete with subsidized coal generation. The process to participate in the tender is not clear, and there is little clarity on the template of the power purchase agreement. These policies have increased risks and have rendered renewable energy projects less attractive to investors.

Over the last year, the government made several changes benefiting renewable energy developments such as awarding all RE projects with “must-run” status. The government also lifted foreign ownership restrictions on power projects above 1 megawatt. A presidential regulation on renewable energy is reportedly under consideration by the government to spur development. Discussions on additional incentives include the re-introduction of a feed-in tariff scheme. As of August 2021, the regulation is not yet finalized.

Consistently overly optimistic demand projections under previous RUPTLs resulted in a substantial over-build of new coal-fired power plants. This resulted in an overcapacity issue, with reserve margins exceeding 30% on many of its power grids. If the overcapacity situation is left unaddressed, renewables will face significant grid integration challenges

EV market

Electric vehicle (EV) adoption in Indonesia is still insignificant due to the lack of available models and affordability. While the Indonesian government offers a reduction on the luxury sales tax and registration fees for EVs, there is no purchase grant. Comparatively, EVs are still more costly upfront than internal combustion engine equivalents. In 2020, Indonesia’s vehicle fleet had just 179 passenger EVs and 8,136 electric two-wheelers.

EV policy

Under the National Energy General Plan issued in 2017, Indonesia targets 2,200 electric cars and 2.1 million electric motorbikes by 2025. Another set of targets by the Ministry of Industry aims for 20% of vehicles produced in 2025 and 30% by 2035 to be electrified.

The government aims to build up its domestic EV and battery manufacturing industry. Indonesia has about a quarter of the world’s nickel reserves which the government wants to leverage to take a strategic position in the global EV supply chain. In August 2019, Indonesia announced Presidential Regulation 55/2019, an umbrella policy that lays out the guidelines for electric vehicle policies and rules. The regulation also outlined the local content requirements for vehicles manufactured in Indonesia to qualify for incentives. However, several challenges stand in the way of Indonesia’s EV ambitions including a lack of domestic and regional demand and a highly carbon-intensive electricity grid.

The lack of charging infrastructure is a barrier for EV adoption too. Indonesia targets to have 7,146 public charging stations and 15,625 battery swapping stations by 2030.

Buildings market

The government has yet to implement any substantive policy support in this sector and the low-carbon heat market remains at an early stage.

Buildings policy

Indonesia issued a government regulation in 2009 on energy conservation. The National Master Plan for Energy Conservation calls for a 1% reduction of energy intensity annually until 2025. In 2015, The Ministry of Public Works and Housing issued a regulation on green building requirements to reduce the environmental impact from the construction sector. Several provinces such as Jakarta also issued their respective governor regulations on Green Buildings regulating energy efficiency, water efficiency, indoor air quality and land and waste management.