Indonesia is estimated to possess 40% of the world’s geothermal power potential, and its biomass and hydro resources are abundant. Support mechanisms for renewables are also in place and the installation targets are ambitious, but a lack of stability in support policy and subsidy dispute between the government and the national utility is holding back progress.
Indonesia aims to generate 23% of its primary energy consumption from renewables by 2025, up from around 5-6% now. There is also a 2019 interim target of 19%, which looks at the very least challenging, given the low levels of finance committed to the sector recently.
The vertically integrated utility PLN owns the majority of generation assets as well as all transmission and distribution. In 2015, the government launched a 35GW programme to meet future power demand growth which has since been scaled on lower than expected economic growth. The 2017 update of the programme foresees that 4.4GW of geothermal, 4.6GW of hydro and 1.65GW of mini-hydro are developed between 2017 and 2026. It also scales down the coal build out with the development of 9GW of coal generation projects put on hold until at least 2020. The projects are all located in the power system of Java, the island home to most of Indonesia’s economic activity, which is still expected to have a surplus of 5GW of power by 2020. Instead, PLN is to focus its efforts on the islands of Sumatra and Kalimatan where the government has launch programmes to increase economic activity.
The government also plans to meet at least some of its electrification goals through distributed renewable energy with the aim to achieve full access to power by 2024, from a 2016 estimate of around 91%. Remote islands are expected to be electrified through grid expansion and off-grid small-scale solar installations combined with either storage facilities or diesel power.
In January 2017, the government introduced a new renewable energy licensing decree which states that projects should primarily be developed in regions where PLN’s power procurement costs are higher than its national average, and that they need to supply power for 85% or less of PLN’s reference power procurement for the region where the project is being developed. Solar, the technology most likely to undercut production costs, and wind projects will be awarded contracts through tenders. The Ministry of Energy said it is aiming to capitalize on the cost reductions in renewables to improve the financial situation of PLN.
The government identified 11 priority regions with discounted reference tariffs in the range of $7.7 cents to $14.4 cents per kWh at the time of the decrees publication. Just over 1.2GW of projects had qualified for contracts under the new regulation as of February. The new rules provide a clear economic framework for renewables developers but confidence in the sector is still recovering from years of policy uncertainty. Project development costs are also higher than in many other markets due to challenging local content rules, inconsistent tax incentives and high property prices reducing the chances of renewable projects developer undercutting the costs of existing generation.
Geothermal project development is also supported through a dedicated regulation enacted in August 2014, removing the label of ‘mining activity’ for geothermal exploration drilling. This law will open up the possibility for geothermal plants to be located in protected forest areas, and benefit from expedited permitting, once the technical regulations have been published. Recent drilling attempts have not been particularly encouraging, leading to renegotiation of power purchase agreements (PPAs) and concern among developers. A major challenge to geothermal development in Indonesia remains the lack of reliable mapping information on exploitable resources.
In November 2016 Indonesia submitted its first Nationally Determined Contribution under the Paris Agreement in which it agrees to reduce its greenhouse gases emissions by 29% unconditionally against a business as usual emission projection of 2.869 gigatons of CO2 by 2030. The forestry and energy sector are the ones expected to contribute to reductions the most.