For a nation rich in natural sources for renewable power generation and with aggressive targets to decarbonise, Indonesia currently exploits just a fraction of its potential renewable power – could it accelerate the transition?

Indonesia harnesses just 0.3 per cent of an estimated 3.7 TW of potential renewable electricity. Yet the Southeast Asian nation has ambitions to slash its use of coal by 2040 – well ahead of a previous 2056 target. By then, the government aims to generate 75 GW of renewable energy, reaching climate neutrality by 2050 – a decade earlier than previously pledged.

These are highly ambitious targets for a nation reliant on coal for 67 per cent of power generation, compared to 12 per cent from renewables. Indonesia is the world’s fifth largest operator of coal fuelled electricity and seventh largest emitter of greenhouse gases.

But if the region’s largest economy can overcome barriers to adopting clean energy, could it become a trailblazer for other emerging economies in balancing energy security, economic growth and climate action?

Today, Indonesia’s energy sector requires not only hefty investment, but also radical reform.

These climate targets require an estimated 1.2 trillion USD by 2050 for clean energy generation, storage and transmission as per the Institute for Energy Economics and Financial Analysis.

But despite its vast potential, investment in renewables in Southeast Asia has been scant to date. Funds have poured into Vietnam, with Indonesia lagging, despite its huge potential. For every USD invested in Southeast Asian renewables, another goes into fossil fuels – well above levels of Latin America at 0.2 USD and China at 0.3 USD.

Huge investment is also required to modernise distribution grids and energy storage across the islands to meet growing demand. Many islands and remote communities would benefit from the creation of local microgrids

What are the barriers to renewable investment?

Spread across a huge archipelago of some 17,000 islands, Indonesia faces logistical and political hurdles as well as financial. Renewable energy is often far from where it’s most required by industry.

State owned energy utility Perusahaan Listrik Negara (PLN) holds a monopoly over energy generation, transmission and distribution. While the grid – currently designed around central coal fired stations - needs to modernise, private investment is hampered by PLN’s control of licences even in locations where it doesn’t currently operate, but might do so in the future.

There is also a shortage of renewable procurement possibilities. Industrial consumers could potentially generate their own green power from localised renewables rather than relying upon the centralised grid. But such projects might be dispersed far across the archipelago, and investors are often deterred by small scale, distant projects.

While renewable energy technology has improved and prices have fallen, the cost of financing remains high, partly down to uncertainty over energy policy. This reluctance will continue as long as Indonesia’s existing subsidies on coal and gas continue to influence energy prices.

Huge investment is also required to modernise distribution grids and energy storage across the islands to meet growing demand. Many islands and remote communities would benefit from the creation of local microgrids, but again this is constrained by PLN’s control of operations.

Progress has also been slow from Indonesia’s Just Energy Transition Plan (JETP), unveiled in 2022, which targets 20 billion USD to help Indonesia cut emissions. Although the US has withdrawn as a partner, the remaining nine international partners maintain this won’t hinder commitment, although only a fraction of funds pledged have been disbursed to date.  

Policy priorities – how to unlock Indonesia’s renewable energy

Indonesia’s existing subsidies for fossil fuels should be addressed to create a level playing field for renewable energy. Contracts with fossil fuel power plants are too inflexible and could be renegotiated to accelerate the move away from coal.

More efficient and transparent costing for renewables, assisted by improved clean energy auctions would benefit the market. New feasibility studies and the acquisition of land would help improve the pipeline of new renewables projects.

Better mechanisms for international finance and a healthy domestic finance market would help drive investment.

State utility PLN could press ahead with ‘power wheeling’ – allowing private companies to sell renewable electricity directly to corporate customers using state-owned transmission and distribution infrastructure. This could unlock private investment for renewables and accelerate their development, as well as generating income for PLN – access to renewable energy can help attract investment from major global firms.

Positive steps towards innovation

An innovative ‘de-dieselisation’ (or diesel replacement) programme is underway to help Indonesia’s islands shift to renewables - some 2,000 islands currently rely upon diesel or have no energy supply. Since 2022, PLN has begun replacing more than 5,000 diesel power plants with renewable energy with the aim of bringing reliable cheap and clean power to communities. A first wave saw solar power installed in 94 locations, enabled by private investment, and future sites will also use biomass and mini-hydro generation. Ultimately the project aims to deliver 265 MW of renewable energy and provide 1.1 million new and improved connections, as well as creating some 350,000 jobs.

Further positive steps have been identified in our Imperial Business School and IEA ASEAN renewables report, including a JETP supported pledge to accelerate the closure of coal power plants and the announced early closure of a plant in West Java scheduled for this year. New policy initiatives in motion such as the New and Renewable Energy Bill could pave the way for more private investment.

Collaboration among international investors, the Indonesian government and the private sector is critical – but this can’t happen without policies to open Indonesia’s energy sector to competition and level the playing field for renewables, ultimately creating a more diversified energy market.