Global Courant 2023-04-12 14:27:48
At first glance, Indonesia’s long-awaited presidential decree on accelerating the development of renewable energy for electricity generation appears to be a step towards a clean energy transition.
It includes pricing for renewable energy projects within a broader roadmap for the early retirement of coal-fired power plants. But there are doubts about its effectiveness because of underlying structural barriers in the energy sector.
The regulation prescribes new pricing and purchasing mechanisms whereby the state-owned Perusahaan Listrik Negara (PLN) buys renewable electricity from independent power producers. Under previous regulations, prices were limited to about 85% of the regional average generation cost of PLN.
The new regulation no longer uses generation costs as a ceiling reference, but sets annual ceiling prices multiplied by location factors. Independent power producers are expected to bid for lower prices as part of PLN’s procurement process through direct selection or nomination.
It remains unclear whether these ceiling prices are attractive enough for independent energy producers to develop projects and avoid lengthy, complicated negotiations with PLN. A quick look at current generation cost levels and the price caps announced under the regulation show that the latter are generally higher than the average national generation costs for smaller projects below 20 megawatts.
Prices seem attractive enough outside the main grid of Java and Bali, where PLN has a strong incentive to replace expensive diesel-powered electric generators with photovoltaics.
But even if there is a clear case for PLN to invest, local content regulations make it more expensive to develop solar energy projects – most of the components still have to be imported. Despite the existence of local content regulations since 2017, the local solar energy industry is lagging behind with an annual production capacity of 1.6 gigawatts in 2022.
This makes the 300 gigawatts of solar power generation capacity needed to achieve Indonesia targets for net zero in 2050 a challenge. The ordinance does not relax rules on local content, only stating that the Ministry of Industry must support companies to strategically prioritize local inputs.
Global warming is taking its toll on Jakarta. Photo: AFP/Donal Husni/NurPhoto
In order for Indonesia to meet its nationally determined contribution and net-zero climate change targets, replacing coal with renewable energy sources on the main grids is imperative. The mix of power generation is still dominated by coal, with a share of 60%. By itself, the pricing under the presidential regulation will not provide sufficient incentives for PLN to invest in renewable energy sources.
Given PLN’s constitutionally guaranteed monopoly position, price regulation should ideally operate as premium prices or feed-in tariffs where the utility pays above existing electricity supply costs to attract more independent power producers.
But PLN is not in the financial position to do so, as it needs subsidies to close its deficits. It too suffers from an oversupply on the main grids and is tied to long-term coal-based electricity supply contracts. These structural barriers mean there is little incentive for PLN to divest from coal despite the falling global costs of renewable energy sources.
Achieving the climate targets will depend on PLN’s willingness to replace existing and planned coal-based generation with renewable energy sources. This is where the presidential ordinance comes in: it creates a legal basis to create a roadmap for the early retirement of coal plants.
The roadmap specifies the reduction of greenhouse gas emissions from coal-fired power plants. Led by the Ministry of Energy and Mineral Resources, the Ministry of Finance and the Ministry of State Enterprises, the roadmap will implement strategies to accelerate the early retirement of power plants, taking into account technical aspects such as the balance between electricity supply and demand.
But it’s unclear how realistic these coal retirement plans are under the presidential ordinance. Much depends on securing financial support and credible funding commitments from outside sources.
During the G20 summit in Bali in November 2022. The aim is to mobilize $20 billion to support the retirement of coal-fired power stations and massively increase the share of renewable energy in electricity generation.
Said targets include a peak emissions of 290 million tonnes of carbon dioxide, a 34% share of renewable energy by 2030 and reaching net-zero emissions by 2050. A previous financing scheme, the Energy Transition Mechanism under Indonesia’s state-owned infrastructure financing company, offers another funding channel.
The coal-fired power plant Celukan Bawang 2 in Singaraja on Bali, the Indonesian holiday island. Photo: AFP/Sonny Tumbelaka
But the funds committed under the Just Energy Transition Partnership seem far below what is needed. Previous studies suggest that $35 billion per year until 2030 is needed to keep Indonesia consistent with the 1.5 degrees Celsius target.
The targets recommended in this study seem even more credible given the currents gigawatts of coal-based generation in different stages of development in Indonesia.
The Presidential Ordinance still allows coal plants to be built if they are registered in PLNs Business Plan 2021–30 before the regulation. Proprietary energy plans in industrial parks and coal-fired energy projects listed as national strategic projects are also exempt.
Indonesia’s new renewable energy regulation is a missed opportunity to start a rapid energy transformation.
Kurnya Roesad is a senior economist at the Indonesia program of the Global Green Growth Institute.
This article was originally published by East Asia Forum and is being republished by Global Courant under a Creative Commons license.
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