In the third iteration of its annual report published in December 2019, Indonesia’s Institute for Essential Services Reform (IESR) did not pull any punches when it observed that:
“The findings in this report should be used as a wake-up call for President Joko Widodo, that he needs to consolidate his best efforts to reach the RUEN [Rencana Umum Energi Nasional (National Energy Masterplan)] target in 2025. To stay on track, not less than 35GW of renewable energy capacity have to be added by 2025, translating into $70 to 90 billion investments in the sector.”1
The same report also noted that:
“The renewable generation mix has been stagnant since 2011, ranging around 11% to 13% of electricity mix with hydropower and geothermal the main contributors to the mix.”
The key findings of the report included that:
- of 75 renewable energy power purchase agreements (PPAs) inked between 2017 and 2018, 27 were still to reach financial close; and
- the bankability of PPAs due to the negative impact of Ministry of Energy and Mineral Resources (MEMR) Regulation 10/2017 on the basic provisions of power purchase agreements and MEMR Regulation 50/2017 on the tariff framework applicable to renewable energy projects (MEMR Reg 50/17) remained a significant impediment to renewable energy projects in 2019.
The above findings are illustrative of the widely held view that further regulatory change is needed (and soon) if Indonesia is to address the stagnation in the sector and to make significant headway towards its 2025 target. In addition to the issues identified above, other regulatory obstacles to investment in the Indonesian renewable sector commonly cited by investors and developers include:
- continued difficulties with the process of land acquisition for projects despite reforms introduced in 2012;
- the foreign ownership limits applicable to small scale renewable projects as imposed by Presidential Regulation No. 44 of 2016; and
- the requirements of Indonesia’s currency law, which technically mandates all pricing to be in Indonesian rupiah.
What does appear clear, however, is that capital is available to fuel renewable energy projects if Jakarta can fine-tune the regulatory engine in a manner that makes them more attractive to both domestic and foreign investors. For example, according to a recent report on trends in global renewable energy investment, the emerging economies of Asia attracted significant investment in the renewable energy sector in 2019 with Taiwan, Pakistan, Kazakhstan and Vietnam leading the way. Indeed, in Southeast Asia, Vietnam saw investment of US$2.6 billion in the renewable energy sector in 2019 despite falling 64 per cent on the previous year, whereas Indonesia received only US$0.4 billion of investment in the same period – less than Cambodia, a country with a fraction of Indonesia’s population.2 In a further demonstration of investor appetite for the region’s renewable energy sector, Singapore fund manager Clime Capital Management and the South East Asia Clean Energy Facility (SEACEF) (a group of global climate change foundations) recently announced the launch of a high-risk philanthropic fund to invest in clean energy projects across South-east Asia. The fund has reportedly raised an initial US$10 million and aims to build a portfolio of over US$2.5 billion of assets.3
Against this backdrop, there was some optimism that meaningful change was on the way in 2020 – which appeared to have been well placed when, in February 2020, the MEMR announced proposed reforms in the following areas:
- changes to the build, own, operate, transfer (BOOT) regime mandated under MEMR Reg 50/17 for all on-grid renewable energy projects in Indonesia that sell power to the state electricity provider, PT Perusahaan Listrik Negara (PLN); and
- amendments to the feed in tariff (FIT) for small scale projects, which is currently calculated by reference to PLN’s cost of generation as required pursuant to MEMR Reg 50/17.
In March 2020, the Government of Indonesia (GOI) duly delivered on the first of these promises with the passing of MEMR Regulation No. 4 of 2020 regarding the second amendment to MEMR Regulation No. 50 of 2017 (MEMR Reg 04/20). #
As anticipated, MEMR Reg 04/20 revoked the BOOT model requirement. The new regulation also introduced a new direct appointment model to the procurement mix for renewable projects and introduced guarantees for government-backed renewable projects by authorising the Energy Minister to order PLN to buy electricity from:
- hydropower plants attached to government-built reservoirs;
- state-funded waste-to-energy plants; and
- state-funded renewable energy plants.
MEMR Reg 04/20 is a welcome move and one that hopefully signals a more flexible approach to business models for renewable energy projects going forward.
Unfortunately, at the time of writing, the advertised changes to the FIT regime have not been implemented and nor have any other specific reforms been proposed for the second half of 2020.
Like many other governments faced with the consequences of COVID-19, the GOI has implemented a suite of rescue measures to prop up the Indonesian economy and will need to fund these commitments from a national budget that is almost certain to shrink in light of the contraction in the economy caused by the pandemic.
In its 2020 energy investment report published in May 2020, the Paris-based International Energy Agency (IEA) estimated that, as a result of COVID-19, global energy spending could fall by as much as 20 per cent from 2019 levels, or almost US$400 billion.4 In the context of Indonesia, where GOI is already playing catch up on its existing targets for renewable energy investment, this did not augur well.
It was therefore not surprising when, at the end of June 2020, the Jakarta Post reported on comments made by Energy Minister Arifin Tasrif at a meeting with lawmakers that the MEMR’s 2020 budget was being cut by a third to Rp 6.2 trillion5 (approximately US$430 million) as a result of the GOI’s attempts to fund COVID-19 related measures. These cuts apparently include a 42 per cent cut in renewables spending.
Needless to say this will seriously compromise Indonesia’s ability to meet what increasingly seems like an optimistic energy-mix target. But budget cuts are not the only issue arising from COVID-19.
The interruption caused by lock-down has delayed construction across the nation. As such, even those projects that are well advanced may now be delayed. One notable victim of this delay is the 5 MW Sokoria geothermal power plant in Ende, East Nusa Tenggara, which was originally targeted to be operational by February 2020. The current estimate is that this will now shift to 2021.6
In a more worrying development, it has been suggested in some quarters that the pressure on governments to drive economic recovery may lead to a short term return to fossil fuels. As a nation with vast coal resources, Indonesia may well be tempted down this road even though, according to a recent report by Rocky Mountain Institute, Carbon Tracker Initiative and Sierra Club, 90 per cent of global coal capacity is only viable due to non-market financial support.7
2020 was always going to be a tough year for Indonesia’s renewable energy sector even before COVID-19. The ground to be made up against the GOI’s 23 per cent renewable energy target for 2025 was already considerable before the pandemic hit. In the wake of the social and economic turmoil that is now unfolding, it is highly unlikely that the domestic budget in 2020 and beyond will put Jakarta in a position to overspend in order to bridge the gap.
However, all is not lost. Despite the COVID-19 pandemic, there remains a significant amount of capital available for investment in renewable energy projects in the region generally and Indonesia specifically. In recent years much of this capital has been flowing into other jurisdictions, such as Vietnam, Taiwan and India, where the investment landscape is seen as more favourable to foreign investors. As such, if Indonesia can implement further reforms and address some of the key deficiencies identified by IESR and others, it should be well placed to attract much-needed investment in the renewable energy sector from external capital providers who can plug the gap caused by the COVID-19 pandemic.
Client Alert 2020-453
- Indonesia Clean Energy Outlook: Tracking Progress and Review of Clean Energy Development in Indonesia, Institute for Essential Services Reform (2019).
- Global Trends in Renewable Energy Investment 2020, Frankfurt School – UNEP Collaborating Centre for Climate & Sustainable Energy Finance.
- “Singapore’s Clime Capital, SEACEF launch world’s first high-risk philanthropic fund,” Asia Asset Management (2 July 2020).
- World Energy Investment 2020, International Energy Agency.
- “Energy ministry’s budget cut by a third to Rp 6.2 trillion,” Jakarta Post (25 June 2020).
- “Covid-19 situation delaying renewable energy development in Indonesia,” Intellasia (28 April 2020).
- Rocky Mountain Institute, Carbon Tracker Initiative and Sierra Club 2020: “How to Retire Early: Making Accelerated Coal Phase-Out Feasible and Just”