Indonesia’s underwhelming renewable energy reform

At first glance, Indonesia’s long-awaited Presidential Regulation on the Acceleration of Renewable Energy Development for Electricity Generation looks like a step forward toward a clean energy transition. It embeds pricing regulations for renewable energy projects within a wider roadmap for the early retirement of coal-fired power plants. But there are doubts over its effectiveness due to underlying structural barriers in the energy sector.

The regulation mandates new tariff and procurement mechanisms under which state electricity company Perusahaan Listrik Negara (PLN) purchases renewable electricity from independent power producers. Under previous regulations, prices were capped at around 85 per cent of PLN’s regional average generation cost. The new regulation does not use the generation cost as a cap reference anymore, but sets annual ceiling prices multiplied by location factors. Independent power producers are expected to bid on lower prices as part of PLN’s procurement process via direct selection or appointment.

It remains unclear whether these ceiling prices are attractive enough for independent power producers to develop projects and avoid protracted, complicated negotiations with PLN. A quick glance at current generation cost levels and the ceiling prices announced under the regulation shows the latter are generally higher than the average national generation cost for smaller projects below 20 megawatts. Prices seem to be attractive enough outside the main Java–Bali grid, where PLN has a strong incentive to replace expensive diesel-fuelled electric generators with photovoltaic solar.

But even if there is a clear case for PLN to invest, local content regulations make it more costly to develop solar projects — most components still need to be imported. Despite the existence of local content regulations since 2017, the local solar industry lags behind with an annual production capacity of 1.6 gigawatt peaks in 2022.

This makes the 300 gigawatts of solar power generation capacity needed to achieve Indonesia’s net-zero targets by 2050 a challenge. The regulation does not loosen local content regulations but only states that the Ministry of Industry should support enterprises to strategically prioritise local inputs.

For Indonesia to achieve its nationally determined contribution and net-zero targets on climate change, replacing coal with renewables on the main grids is imperative. The power generation mix is still dominated by coal, with a 60 per cent share. On its own, the pricing regulations under the Presidential Regulation will not provide sufficient incentives for PLN to invest in renewables.

Learn more: EastAsiaForum