Will Jokowi open up Indonesia?

Indonesia has all the ingredients for solar PV development. The country was an oil exporter in the past but since 2004 has became a net importer, with oil revenues dwindling. Reserves of fossil fuels are estimated to have only 20 years left based on today’s consumption levels. Natural gas and coal are more abundant, with the country a major international supplier of liquefied natural gas (LNG) and the world’s top exporter of steam coal.
But while Indonesia is rich in hydrocarbons, and fossil fuel exports contribute significantly to the economy, the sector’s impact on real growth, state revenues and local development outcomes is limited compared to the past, according to a World Bank report published in mid-April. Indonesia’s fast-paced economic growth means an increasing share of its natural resources is diverted to the domestic energy market, eating into foreign capital and trade earnings. Just as is the case with the Middle East’s oil giants, investing in renewable energy could increase exports of fossil fuels.
Indonesia’s thirst for electricity will only go in one direction. The country had an annual GDP growth rate of 5.6% in 2013 and 5% last year and, according to the World Bank’s baseline scenario in its recent report, that figure is projected to be 5.2% this year and 5.5% in 2016. The nation’s economic transition from the natural resources sector into manufacturing and services has offered high growth coupled with skyrocketing energy needs.
The more people are lifted out of poverty, the higher the electricity demand. According to the International Energy Agency (IEA), of Indonesia’s population of 250 million, 82 million – around a third of the population – have no access to electricity and 124 million – almost half – rely on the traditional use of biomass for cooking.

Archipelago = DG

Indonesia’s geography is an additional factor in favor of distributed renewableenergy systems. The country consists of more than 17,500 islands, of which 6,000 are inhabited and 1,000 are permanently settled. The dispersed, mountainous and seismically-active geography of the Indonesian archipelago offers opportunities for the development of microgrids and off-grid installations, especially PV.
Solar irradiation in the equatorial state is good, at 4.8 kWh per m² per day, according to the IEA.
The potential for wind energy is low, due to wind speeds ranging from 3 – 6 m/sec but hydropower and biomass offer significant opportunities and all are dwarfed by Indonesia’s geothermal promise with the country’s position on the ‘Ring of Fire’ volcanic belt offering it an estimated 40% of the world’s geothermal reserves, the IEA estimates.
At the end of last year, Indonesia had installed only 43 MW of PV capacity, outxAdvertisementpacing the 2 MW of installed wind capacity but trailing far behind the 7.6 GW, 1.72 GW and 1.34 GW of hydro, biomass and geothermal generating power, respectively.
President Widodo’s election in July offers, perhaps, the most significant reason for hope for renewables. Widodo, who until that point was an outsider from the country’s political elite, was elected on the back of a manifesto pledge to slash Indonesia’s costly fuel subsidies and provide better social welfare for the poor.
Thus far he has kept his promise. Since January 1, the government has removed the subsidy for widely-used premium gasoline – which accounted for about 65% of the nation’s total fuel subsidies – while maintaining small subsidies for diesel fuel and kerosene. The World Bank says that was a decisive policy, which “paved the way for the government’s first budget, passed in February, to shift spending towards development priorities, especially infrastructure, the allocation for which is double the 2014 outturn.” Another glimmer of hope has come from the National Energy Policy legislated last year. The national target for Indonesia’s energy mix envisages 23% of power coming from renewable energy by 2025, up from just 5.7% today. Oil would be the biggest loser in this scenario, its share of power generation falling from 49.7% today to 25% in 10 years’ time. The share of gas in the mix would rise slightly, from 20.1% today to 22% in 2025 and, even more alarmingly for environmentalists, coal’s share would also rise, from 24.5% today to 30%, reflecting Indonesia’s abundant coal reserves. In its 2015 report on Indonesia, the IEA says meeting rising demand for power with sustainable energy must remain a key pillar of the country’s economic and investment policies and strategies.
However, that goal, the IEA notes, requires “improvements to Indonesia’s institutional setup, alongside stronger policy planning and implementation, more investment in critical energy infrastructure, and continued movement towards regulated energy markets and cost-reflective pricing.”

Investing: a protectionist story

A key piece of legislation characterizing investment in Indonesia is the number 25/2007 investment law, enacted in April 2007. It specifies foreign investment must be in the form of limited liability ‘foreign investment companies’ – or PMAs – incorporated in Indonesia, in which an investor goes into partnership with an Indonesian person or entity as shareholders. Foreign investors can have full ownership, except in certain industries where 45 to 95% ownership is permitted, and the ownership model will vary within sectors and business fields, according to Mika Purra, former research fellow at the Lee Kuan Yew School of Public Policy at the National University of Singapore.
“Whether this is the case in the energy sector, as regards oil, gas, electricity – downstream and upstream – and so on, is questionable,” Purra told pv magazine . “I believe there are stricter limitations to investment in this sector, regardless of the investment law. The energy sector is also highly centralized, whereby the president himself chairs the Energy Executive Committee. It is a highly protected sector.” Purra’s comments are in line with a report by the PwC consultancy which stated that last year, “the government of Indonesia issued Presidential Regulation No 39/2014, concerning the list of business fields closed to investment and business fields that are conditionally open for investment (PR 39/2014), otherwise known as the 2014 Negative Investment List.” The list deals with sectors including energy and mineral resources. Within energy, for example, foreign investment is barred in power generation of less than 1 MW capacity, electrical installation and testing and analysis of electrical installation. Foreign participation is limited to 95% in projects of power generation, transmission and distribution of greater than 10 MW capacity, except via public-private partnerships, in which full foreign ownership is permitted.
PwC has cast doubt over whether Indonesian investors can provide enough cash and expertise to get projects tendered under a PV power bid round early last year given the foreign investment restrictions, and said mini hydro projects are also suffering from a lack of domestic financing. A report into the PV bidding, where all projects are under 10 MW in scale, stated: “One wonders if there will be continued sufficient investment dollars and technical experience from domestic investors for the balance of the projects to be built.” However, an IEA report said Indonesian laws are written in general terms, leaving matters to be interpreted by the implementing organizations. Based on his experience, Purra told pv magazine , the Indonesian government tries to protect the interests of local finance institutions and prevent foreign ownership from gaining too much traction in the country.

Electricity generation – complex

Public policies governing the electricity sector are defined in the Electricity 30/2009 Law, which set the legal foundation for a planned restructuring of the sector. But the state still controls electricity supply and utility PT Perusahaan Listrik Negara (PT PLN) remains the sole electricity supplier, as stipulated in the constitution.
A positive measure introduced by the 2009 law empowers provincial governments to issue permits for the supply of electricity to independent power producers (IPPs) and also gives a relative degree of freedom to independently set tariffs. But, Purra remarks, the only way to fix the recurring problems in the Indonesian electricity sector is to allow IPPs to enter the market without notable obstacles from the PLN regarding pricing or the sale of electricity.
The protectionist nature of the Indonesian parliament represents a significant obstacle to foreign investment, as it is a subsidy regime that keeps electricity prices at an artificially low level. “The electricity sector, at least, has been an unprofitable investment target for foreign businesses,” added Purra. “The government subsidies help [keep] electricity prices artificially low for citizens and small businesses who can’t afford to pay high electricity prices.” The incentive for PV in Indonesia is in the form of feed-in tariffs (FITs) set through an online bidding process based on a certain quota per annum with the total quota of 140 MW. The quota for the years 2013-2014 was 140 MW and the government has determined 80 remote locations where these quotas should be developed. The PV capacities to be installed in each location are determined by the state, while the ministry has said it is assessing the potential for rooftop PV system in urban areas for future quotas.The scheme, according to the ministry of energy and mineral resources, aims to encourage investment in PV plants via IPPs and the FIT is based on a ceiling price of $0.25/kWh for the use of imported modules and $0.30/kWh when using modules with a domestic content component of at least 40% of the final project.

The market quest

Despite the hurdles to foreign investment, the IEA has applauded Indonesia’s efforts to introduce a market-driven energy environment in recent years. “Indonesia has continued to reform the end-user tariff structure in the electricity sector and introduced staged price increases in 2013 and 2014,” said the IEA, which also backed the removal of the premium gasoline subsidy. The organization has called on the government in Jakarta to continue the effort to wind down energy subsidies and use the resulting savings to fund critical energy infrastructure and other programs.
It says Indonesia needs to establish a strategy that includes the introduction of cost-reflective market pricing for all energy products and a gradual phase-out of subsidies – rather than a piecemeal response to short-term budgetary and debt pressures – while designing compensatory measures to support the poorest hit by subsidy cuts. The transparent usage of the saved expenditure, says the IEA, would increase renewable energy production and overall energy in turn.
The question now is whether president Widodo, or Jokowi as he is widely known, will decide to correct deficiencies in energy policy and fight protec- tionism and the vested interests of the electricity sector in favor of a market-driven environment that promotes green energy and energy efficiency. Should he squander that historic opportunity, the goodwill that drove this bold outsider to the top seat of government could quickly dissipate.