Addressing regulatory barriers will boost renewable energy investment in Indonesia

With a goal of attracting US$146 billion in private investment by 2030, Indonesia needs to reassess its planning, procurement and investment processes

Nlong-term private sector renewable energy investments worth $146 billion are essential to achieving Indonesia’s 2030 climate target, which requires urgent policy action reform aimed at increasing investor confidence, according to a new report from the Institute for Energy Economics and Financial Analysis (IEEFA).

Despite numerous untapped renewable energy sources and strong economic growth, renewable energy investment in Indonesia has stagnated for seven years. It is expected to attract just $1.5 billion in 2023, or just 574 megawatts (MW) of additional renewable energy capacity. It lags far behind its Southeast Asian neighbors, which have installed significant solar and wind capacity. Vietnam, for example, has 13,035 MW of solar capacity and 6,466 MW of wind capacity.

The government has issued several regulations to promote renewable energy investments from the private sector or independent power producers (IPPs). However, they have did not attract new investors due to unfavorable policies and weak control implementation. Requiring contractual requirements for solar and wind energy raises costs and discourages private investment.

The report identifies barriers that reduce investor willingness to finance Indonesia’s renewable energy sector, including a mandatory partnership system, restrictions on transfer of ownership rights, an unfavourable deliver-or-pay scheme, unattractive cap tariffs, stringent local content requirements (LCR), a lack of incentives to use carbon credits and complex public procurement procedures.

“Private investors would be encouraged to enter the Indonesian renewable energy market if there were clear and concise public procurement procedures, as well as consistent and reliable implementation of existing regulations” says Mutya Yustika, author of the report and energy sector financing specialist at IEEFA.

Challenges hindering investment

The government’s renewable energy asset ownership strategy includes PT Perusahaan Listrik Negara (PLN), the Indonesian national electricity supplier, and its subsidiaries are leaders in renewable energy development through a mandatory partner program and 51% majority shareholder ownership.

This equity co-ownership discourages private investors, as PLN becomes the de facto owner of each project. As the sole recipient of renewable energy, PLN’s dual role as equity shareholder and recipient creates a conflict of interest.

Since 2017, the Indonesian government has restricted the transfer ownership of the project prior to the commercial operation date. This restriction limits the ability of the private sector to obtain additional capital and technical expertise during the project implementation.

To ease the financial burden on PLN, Indonesia replaced the take-or-pay system with a new deliver-or-pay system, with an annual energy contract for renewable energy projects. This system further penalizes the private sector if IPPs do not meet availability or capacity requirements.

Despite the push for a feed-in tariff for renewable energy projects, the Indonesian government has introduced a new maximum tariff. The tariff is spread over two periods, with a higher maximum tariff in the first period (years 1–10) to allow IPPs to recover costs and repay debts, and a lower maximum tariff in the second period (years 11–30). As a result of the auction process, where IPPs are selected based on the lowest tariffs offered, it is difficult for investors to achieve profit targets. Auctions for new projects become unattractive.

Although they were intended to strengthen the local industry, stringent LCRs have prevented the acceleration of renewable energy development. The local sector lacks sufficient production capacity and relies heavily on imported materials to manufacture equipment. Domestically produced solar modules are 30%-45% more expensive than imported products. LCRs increased investment costs and caused the initial system expenditure to be significantly higher than the global market average.