Indonesia has ambitious renewable energy and rural electrification targets. It aims to boost renewables’ share of the total primary energy mix to 23% by 2025, compared to 15% previously. The government also plans to encourage distributed renewable energy with an eye toward achieving 100% electrification by 2020 (up from 84.5% today).
To date, Indonesia has been relatively ambitious in introducing clean energy-friendly policies. It has conducted reverse auction programs for power contracts with geothermal and solar projects. Meanwhile, biomass & waste and small hydro projects have been offered feed-in tariffs. The country also has biofuel consumption mandates for the transport, commercial and power generation sectors.
Furthermore, the government makes available a broad range of tax incentives, including income tax rebates, accelerated depreciation and exemptions on import VAT. The government has offered still other supporting mechanisms, including business viability guarantees to back power purchase obligations between the state utility and private generators and a geothermal fund supporting early-stage resource exploration activities.
All of this would suggest a regulatory climate highly conducive to clean energy development. However, project development has been slower than expected largely because these policies have not delivered. The reverse auctions have not been conducted successfully, and the feed-in tariff rates were not sufficiently high to generate excitement among private developers.
Furthermore, regulatory barriers have significantly slowed the rate of project approval, and financing difficulties have caused a halt in project development. In 2014 only 100MW of renewable capacity was built.
Still, some policy milestones achieved in 2014 are expected to improve the situation in the coming years.
A geothermal law was enacted in August 2014 to enable exploration drilling in protected forest areas and provide expedited permitting. Fossil-fuel subsidies were mostly removed to make renewable energy cost-competitive. The small-hydro feed-in tariff was increased.
On the financing front, Indonesian financial services authority OJK launched a ‘Roadmap for Sustainable Finance’ in late 2014 to improve financing mechanisms for the industry. A regulatory framework for green finance was set to emerge after 2016. Some export credit agencies have started to offer political risk products to international investors.
Score Summary
Indonesia scored 1.614 overall in Climatescope 2015, placing it 11th on the list of countries. The country’s ranking slipped two places from 2014, largely due to a lower score on Parameter I Enabling Framework. A delayed implementation of geothermal and solar policies dragged down its performance on that indicator.
Indonesia’s score on Parameter II Clean Energy Investment & Climate Financing, 0.88, improved significantly from last year’s 0.44. Total clean energy investment surged from $0.4bn in 2013 to $1.9bn in 2014, largely due to a consortium’s investment of $1.6bn in the Sarulla geothermal project.
The country in 2015 matched its 8th-place 2014 ranking on Parameter III Low-Carbon Business & Clean Energy Value Chains. Its 2015 score was 3.77 versus 3.64 in 2014. The gain was due to a slight increase in the number of service providers entering the renewable energy sector.
Indonesia scored 2.43 in Parameter IV Greenhouse Gas Management Activities, which was good for a 10th-place ranking. Its 2014 metrics were 2.41 and 11th position. The government updated its national energy policy with a more ambitious renewable energy target for 2025.