Racing for Renewables

Indonesia is far from prioritizing new and renewable energy (NRE) as a source of energy, but housing the world’s second largest supply of NRE also means that the sector’s potential is undeniable. For foreign investors, having firsthand knowledge of situation-on-the-ground offers clear advantages in the inevitable rise of this important sector.

Indonesia’s dynamic economic development has led to a surge in energy demand. According to data from the Indonesian Ministry of Energy and Mineral Resources (MEMR), energy consumption rose by 30% from 2007-2017. Further data from the MEMR showed that Indonesians consume 1,021 kWh per capita in 2017, up from 812 kWh in 2014 or 26% of the world’s average.

To support this demand for energy, Indonesia has substantial reserves of fossil fuels. However, assuming no other reserves are discovered and also with the assumption that current production capacities are maintained, the oil will run out in 12 years. The supply of coal and gas is larger, with each resource estimated to last by 70 and 37 years, respectively.

Within the global market, Indonesia has been a net oil importer since 2004. Only Japan is currently importing more oil than Indonesia. In 2014, Indonesia was the largest exporter of coal with 409,000 tones, and with 34 billion cubic meters in gas exports, the country is listed among the top ten of the world’s largest gas exporters by various associations and publications.

Under these circumstances, it is perhaps not strange that coal is expected to occupy the position of petroleum as the most important energy source in the national energy mix. Fossil fuels and in particular coal are only to be replaced by alternative energy sources as the dominant energy suppliers by 2050, as mandated by the National Energy Policy (KEN) launched by the previous administration of former president Susilo Bambang Yudhoyono in 2014. By 2050, the share of renewable energies should have increased by at least 12%. This relatively small share is the result of a current strong focus on the rapid expansion of coal energy as the use of renewable energy sources in Indonesia is usually still small and off grid.

So where does that put new and renewable energies? The answer to that question is: at the back of the line. While Indonesia has recognized the importance of new and renewable energies, the country has not shown much enthusiasm in developing a clear and suitable framework for the transition into solar, wind, hydro or biomass. This is evident even in the latest Electricity Business Plan 2019 announced by the Ministry of Energy and Mineral Resources (MEMR) just this February. While the plan announced an increase in installed renewable power capacity within the next ten years, it also saw cutbacks in planned grid expenditures for transmission and distribution while continuing to rely on coal to generate electricity. Experts, such as Melissa Brown and Elrika Hamdi from the Institute for Energy Economics and Financial Analysis, criticize the plan for having “little ambition for adding greener alternatives”.

But to denounce the sector as being “unbankable” would be a mistake. Renewable energy continues to rise. By the end of 2018, a third of the global power capacity are based on renewable energies, according to a report from the International Renewable Energy Agency (IRENA). Their report indicated growth in all regions of the world. Nearly two-thirds of all new power generation capacity added in 2018 was from renewables, led by emerging and developing economies. While Asia accounted for 61% of total new renewable energy installations and grew installed renewables capacity by 11.4%, growth was fastest in Oceania, which saw a 17.7% rise in 2018. Africa’s 8.4% growth put it in third place just behind Asia.

In that regard, it’s important to note that Indonesia houses the world’s second largest supply of renewable energy, at least according to the World Bioenergy Association. At 34.3%, Indonesia is just below Brazil at 39% and above India at 25.4%. This numbers are largely contributed by the massive forest resources owned by each country, but it also take into account estimates for solar, wind, hydro and biomass potential.

Indeed, it is not that Indonesia has little to no desire to switch to cheaper, more sustainable alternatives to fossil fuels. On the contrary, the nation is taking steps to ensure that it is moving with the rest of the world in that regard. The overarching national energy policy has already set an ambitious plan to increase renewables in the energy mix to 23% in 2025 from just 8% in 2013. And while there is plenty to criticize in Indonesia’s approach towards reaching that goal, more beneficial results can be gained by gaining an understanding of the situation on the ground of the world’s largest archipelago.

There are already expansions in the area of renewable energies, In December 2015, President "Jokowi" opened the largest photovoltaic power plant in Indonesia with a capacity of 5 MW. The plant, located in Kupang in the far east of the country and owned by the state company PT LEN Industri (Persero), feeds the generated electricity into the network of state-owned electricity company, PLN. More recently, on April 2018, PLN, in cooperation with PT Rezeki Perkasa Sejahtera Lestari, inaugurated its first biomass power plant (PLTBm) in West Kalimantan with a capacity of 15 megawatts (MW). The plant, which uses agricultural waste as its fuel, is projected to supply 74 million kilowatt per hour (kWh) annually.

A little further in the west of the archipelago, the island of Sumba was chosen as a model project for the development of renewable energies. Initiated by the development organizations Hivos International and Winrock International, a project is being implemented in which the island’s energy supply is to be based 100% on renewable energies. In East Indonesia, in the Larantuka Strait in the island of Flores in East Nusa Tenggara, plans are being drawn up to build the largest tidal power plant in the world, which is expected to have an installed capacity of 18 to 23 MW by the expected time of completion of 2020.

The future of energy in Indonesia

Comprehensive energy concepts are still rare in Indonesia. Optimization and improvement of the efficient use of renewables are tasks that are still to be mastered. Since the development in their utilization in Indonesia is not yet highly advanced, manifold business opportunities open up for German companies. German technologies and know-how could contribute to a large extent to a more efficient power production from renewable energy resources.

This opens up good market opportunities for new providers of energy-efficient technologies, also because the Asian competition mainly offers cost-effective standard solutions. German companies benefit from the good reputation of German technology and German expertise.

A particular obstacle is the reluctance of local banks to finance renewable energy projects. Above all, inadequate knowledge of the technology and the possibilities of commercialization play an important role. Other aspects that are perceived as critical are the reliability of raw material availability, inadequate infrastructure and a low level of experience among local companies. In addition, fossil fuels are still subsidized and the purchase of bioenergy for PLN is, in many cases, not economically viable. The profitability of bioenergy projects is decisively influenced by the presence of coal energy.

Although coal is generally the most favorable resource for the production of electricity for PLN, it is often not available in remote locations. At such sites, more expensive diesel has so far often been the only alternative. If, for example, biomass in a sufficient amount is generated at these sites, the use of biomass for generating energy would be a more cost-effective option. A win-win solution in this regard could promote the use of biomass for energy production at other locations whilst maintaining efficiency in energy usage and production.

Decisive for a successful engagement are a comprehensive preparation and the existence of a reliable partner in Indonesia. The permanent presence on the ground is indispensable when hunting for and during the implementation of projects.

The market for energy generation from renewables is still at an early stage of development. However, in the light of the manifold government efforts, rising energy costs and the threat of an energy shortage in Indonesia, it is only a matter of time before the market develops dynamically.