Indonesia could become world leader in clean energy with more investment reforms

The biggest nation in Southeast Asia could become a world leader in clean energy with further reforms to mobilize investment in renewables and energy efficiency, according to an OECD review.

07, Jul. 2021

Clean energy investment still remains far below the level needed to realize Indonesia’s ambitious clean energy goals, said OECD. (Photo: OECD)
Clean energy investment still remains far below the level needed to realize Indonesia’s ambitious clean energy goals, said OECD. (Photo: OECD)

JAKARTA, NNA - Indonesia has abundant untapped potential for finance and investment in renewable energy and energy efficiency, areas key to accelerating the country’s green energy transition and supporting a sustainable recovery from the COVID-19 crisis.

Thanks to the tremendous potential and a stable, dynamic economy, Indonesia has become a coveted destination for investors in the clean energy sector.

However, clean energy investment still remains far below the level needed to realize Indonesia’s ambitious clean energy and sustainable finance goals, said the Organisation for Economic Co-operation and Development (OECD) in its review released on June 28, 2021.

Reforms to create a clear and consistent regulatory environment for renewables, for example, by using competitive tenders to foster competition and cost reductions, could help to address this investment shortfall, said OECD.

The recent introduction of the country’s first energy performance standards should drive further uptake of efficiency solutions.

“The clean energy sector will play a crucial role in supporting Indonesia’s green recovery,” OECD Secretary-General Mathias Cormann said, while presenting the report alongside Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto at a virtual launch event recently.

“Creating a sound, transparent and predictable regulatory environment is key to attracting the hundreds of billions of dollars of private investment needed to drive Indonesia’s clean energy transition, and the country’s green recovery more broadly,” said Cormann.

With its sprawling volcanic geography, Indonesia’s potential to generate geothermal and hydropower ranks among the largest in the world. Opportunities for tidal and solar energy are also substantial.

However, investment in renewable energy has so far fallen short of the level Indonesia needs to reach its 2025 clean energy targets, due in part to regulatory bottlenecks. As of 2019, Indonesia had utilized less than 2 percent of its total renewable energy potential.

Indonesia’s energy services market is largely limited to small engineering firms, the OECD report said.

Fossil fuels continue to dominate power investment. For every dollar invested in renewable electricity generation in 2019, three dollars went to coal power.

This is despite the fact that the cost of renewable technologies is generally competitive, particularly compared to the diesel generators that are ubiquitous outside the Java region.

The review has recommended that Indonesia uses the period of post-pandemic recovery as an opportunity to shift away from fossil fuels and embark on a low-carbon path.

Widening corporate access to renewables would also help to make Indonesia a more competitive investment destination, as companies continue to pledge more climate action.

However, further incentives are needed. The public authorities can lead by example by building upon recent efforts to procure high-efficiency street lighting, for instance.

Assistance from the international community can also play a key role in helping Indonesia accelerate its clean energy transition.

International partners can help develop a robust pipeline of energy efficiency and renewable energy projects. Among other things, they could provide technical assistance for training and capacity building aimed at certified investment-grade energy audits.

Leveraging blended finance mechanisms such as the SDG Indonesia One Fund can also help to mobilize private capital for clean energy projects in Indonesia, said OECD.

It noted that the government has put forward a number of important energy efficiency and renewable energy regulations, including measures such as the country’s first energy performance standards and the forthcoming presidential regulation on renewable energy.

Reforms such as the Omnibus Law on Job Creation help to provide a clearer policy framework that should improve the business environment for renewable electricity, which to date could be difficult to navigate.

Corporate sourcing offers an important opportunity to accelerate renewables development, but it is hindered by a number of barriers such as lack of clear regulation on power wheeling, said OECD.

It said, "There remain other important gaps in energy efficiency policies, including low coverage of energy performance requirements. Work on standards for 10 new appliance categories is very encouraging, and effort should focus on strengthening existing regulations to reflect market realities."

While Indonesia’s job creation and industry development goals are commendable, the level of local content requirements also tend to stifle solar and wind markets, as local manufacturers often produce at higher costs than international competitors. This affects the profitability of projects and hinders overall investment, said OECD.

To continue the momentum in promoting investment, perceived risks such as lack of transparency in power purchase agreement (PPA) pricing and uncertainties around force majeure should also be addressed.

Government support and incentives equally do not sufficiently target energy efficiency development. Low capacity in the market to propose bankable projects creates a critical barrier to finance and investment. Hence, more targeted support to stakeholders involved in preparing energy efficiency projects is required.

OECD also noted that Indonesia’s financial institutions face a number of challenges in expanding their sustainable finance portfolios, such as a lack of familiarity with clean energy projects, insufficient information, high-perceived risks, and lack of suitable financing instruments and funds.

"The creation of a dedicated green finance facility could help to overcome a number of these barriers, helping to improve access to long-term debt, reduce high transaction costs and lower high interest rates," said OECD.

Its review was undertaken within the OECD Clean Energy Finance and Investment Mobilization (CEFIM) program, which supports governments in emerging economies to unlock finance and investment in clean energy.