Indonesia’s Energy Transition Stumbles

Indonesia is scaling back its renewable energy ambitions, putting in doubt key emissions reductions goals.

The Indonesian government ratified the Paris Agreement in 2016, promising to cut 29% of carbon emissions unconditionally and 41% conditionally from business as usual by 2030. In September 2022, Indonesia went further, increasing its climate action pledge – its Nationally Determined Contribution (NDC) – to include emissions reductions of 32% unconditionally and 43% conditionally by the end of the decade.

The energy sector contributes to 40% of national Greenhouse Gas (GHG) emissions. Therefore, one mitigation action came from a promised increase in the use of renewables, which was envisioned to account for 23% of the primary energy mix by 2025 and 25% by 2030, as stipulated in the 2014 National Energy Policy. But since the target was set, progress has been painfully slow.

Early this year, the Ministry of Energy and Mineral Resources (MEMR) announced that the renewable energy mix had reached only 13.1%, far below the pathway necessary to meet the target set for 2025. Low performance raises concerns about meeting the original renewable energy target.

The public was shocked to learn that the National Energy Council's draft revision of the National Energy Policy, submitted to the House of Representatives, intends to abandon the original renewable energy mix target and reduce it to between 17 and 19 percent by 2025. The council believes the new target is more realistic given the lack of progress. Instead of finding ways to increase the deployment level, the council chooses to lower the target. Interestingly, the Minister of Energy and Mineral Resources, who is the executive chair of the council, stated that the renewable energy mix target for 2025 remains unchanged.

According to the IESR's Deep Decarbonisation Model, emissions from the energy sector should peak by 2030 at the latest and gradually decline to net zero by 2050 to align with the goal of limiting the global temperature increase to 1.5°C. Another IESR and University of Maryland (UMD) study found that Indonesia's power sector needed to retire 9 Gigawatts (GW) of coal-fired plants by 2030 and the entire unabated coal fleet by 2045 to be consistent with the Paris Agreement temperature goal. Renewable energy must account for 40 to 45 percent of total power generation by 2030, rising to more than 95% by 2050.

The National Energy Council's new target also is at odds with the benchmark set by the Just Energy Transition Partnership (JETP) to achieve peak power sector emissions by 2030, which would require 44% of renewables in energy mix by that date. Because JETP's target is included in the upcoming 20-year National Electricity Plan (RUKN), a discrepancy in target could confuse utilities and other stakeholders, disrupting JETP implementation.

As a result, if approved by parliament and the President, the new renewable energy target could derail Indonesia's ambition to achieve net-zero emissions by 2060 or sooner and jeopardize the fulfillment of the NDC commitment in 2030. More importantly, it would send a mixed signal to developers, investors, and the international community about the Indonesian commitment to energy transition.

Since 2014, renewable energy has grown slowly. There are three underlying causes for this. First, dominant fossil fuel commercial interests influence energy policy and sector planning, prioritizing fossil fuels in the country. Fossil fuels are viewed as strategic commodities that drive economic development. When Jokowi launched a 35 GW program to address an anticipated electricity supply deficit, coal and natural gas dominated the projects proposed by the utility. In addition, since the government pursued a policy of industrial development in the metals industry, most new smelters built to process mineral ores have been powered by coal plants, and the government appears hesitant to encourage miners and smelter owners to use renewable energy despite the renewable energy target set in 2014.

Second, policy and regulatory frameworks must align to increase renewable energy adoption. However, some key regulations favour coal-fuelled electricity, forcing renewable energy economics to compete with subsidized coal prices. For example, a domestic market obligation requires miners to sell coal to state-owned power monopoly PLN at a maximum of USD 70 a tonne if the international coal price exceeds that amount. The Minister of Energy's Regulation No. 50/2017 urged renewable electricity prices to compete with coal-generated electricity. As a result, renewable energy projects must compete against heavily subsidized coal prices and become unprofitable and challenging to finance.

Third, PLN plays a vital role in the adoption of renewable energy. Because the utility provides 90% of the country's electricity and is the sole buyer of power from private generators, renewable capacity expansion must be factored into PLN's electricity supply strategy. As a result, the addition of new capacity must adhere to a supply-demand balance, and the system cost of having a mix of power plants must be kept as low as possible to avoid an increase in the government's electricity tariff. Historically, renewable energy produced more electricity than fossil fuels. This makes PLN hesitant to add more renewables to its system without government subsidies. The COVID pandemic in 2020 also slowed electricity growth and created overcapacity in the PLN system. As a result, since 2020, the planned procurement of new renewable energy capacity has been postponed or cancelled altogether.

Renewable energy deployment can be ramped up to meet the 2025 and 2030 targets. However, the rapid deployment of renewable energy necessitates immediate action by the government to reform some key policies, and PLN's electricity plan and procurement mechanism will have to provide incentives to mitigate the impact of high interest rate financing costs. Those are short-term goals that can be accomplished this year and next year. Aside from that, the government must reform the power sector market and PLN's structure to allow access to the grid by independent power producers employing renewables, while reducing the burden on PLN as a ‘single buyer’ of electricity.

The COP28 called for a tripling of global renewable energy capacity, reaching 11,000 GW by 2030. Indonesia did not sign the pledge. However, if Indonesia can increase renewable electricity capacity from less than 14 GW to more than 60 GW, it will significantly contribute to this goal.

Fabby Tumiwa is Executive Director Institute for Essential Services Reform (IESR) in Jakarta, Indonesia.