Jakarta – The Institute for Energy Economics and Financial Analysis (IEEFA) highlights the stagnation of renewable energy investment in Indonesia and urges the government to improve regulations to attract more investors. Although the government has issued several policies to encourage investment of up to USD 146 billion in the renewable energy sector, these policies are considered unfavourable to investors and lack effective implementation.
According to a recent IEEFA report titled “Unlocking Indonesia’s Renewable Energy Investment Potential,” Indonesia urgently needs financing from the private sector to achieve its 2030 climate targets. However, onerous contract terms, especially for solar and wind energy, are driving up investment costs and discouraging private investors.
“Private investors will be attracted to Indonesia’s renewable energy market if there are clear and concise procurement procedures, as well as consistent and reliable regulatory enforcement,” said Mutya Yustika, author and IEEFA Energy Finance Analyst, Tuesday, July 23.
IEEFA recommends the Indonesian government establish transparent and clear procurement procedures for renewable energy projects, supported by commercially balanced terms and conditions. This step is expected to provide certainty for private investors and ensure Indonesia can achieve its decarbonization targets.
Over the past seven years, renewable energy investment in Indonesia has tended to stagnate, despite its vast resources and strong economic growth. By 2023, Indonesia will only see an investment of USD 1.5 billion with an additional 574 megawatts (MW) of renewable energy capacity. In comparison, Vietnam already has 13,035 MW of solar and 6,466 MW of wind capacity.
The IEEFA report identified a number of barriers that discourage investors from financing renewable energy projects in Indonesia. One of the main barriers is the obligation to cooperate with PT PLN (Persero) and its subsidiaries with a majority shareholding of 51 per cent. This policy makes PLN the de-facto owner of the project, discouraging private investors. As the sole purchaser of renewable electricity, PLN’s dual role as shareholder and purchaser creates a conflict of interest.
Since 2017, the Indonesian government has prohibited the transfer of shareholdings in renewable energy projects prior to commercial operation (COD). This policy limits the ability of private investors to acquire additional capital and technical expertise during the project development process. In addition, the government’s ‘delivery-or-pay’ scheme, with contracted volumes of energy that renewable energy projects must produce each year, adds to the burden on investors.
“Under this scheme, private investors will be penalized if they fail to meet the requirements of energy availability or capacity,” Mutya explained.
Despite many calls for the implementation of feed-in tariffs, the government has instead set a ceiling tariff scheme for renewable energy. As a result, the auction process favors private power producers (IPPs) that offer the lowest tariffs, making it difficult for investors to achieve profit targets.
This makes new project auctions unattractive. The lack of transparency in the auction process for renewable energy projects held by PLN, through direct appointment and direct selection, is also another obstacle.
Referring to Presidential Regulation No 112 of 2022, the auction process should last for 90 days for direct appointment and 180 days for direct selection. However, there is no guarantee that the auction process will take place according to the provisions, and it can even be postponed or cancelled without explanation.
“One-on-one negotiations, unclear timelines, and unapproved projects weaken the procurement process, leading to lower investor interest,” Yustika explained.
With these challenges, IEEFA encourages the Indonesian government to immediately improve regulations and create a more conducive investment environment so that the renewable energy sector can develop more rapidly and achieve the set decarbonization targets. (Hartatik)
