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The importance of renewable energy in Indonesia

With many people currently staying at home most of the time to prevent the spread of the coronavirus, Jakarta has reported a slight improvement in air quality. However, according to AirVisual, an air quality monitoring app, Jakarta had the worst air quality in the world last year. With an Air Quality Index (AQI) of 210, Indonesia’s capital easily ranked above other notoriously polluted cities, such as Beijing, Dubai, and New Delhi.

In fact, almost a quarter of a million people in Indonesia die every year because of exposure to toxic air, water or soil or other forms of pollution, making it the country with the fourth-highest number of premature pollution-related deaths in the world. The Pollution and Health Metrics report, released in December 2019 by the Global Alliance on Health and Pollution, revealed that of the 232,974 recorded pollution-related deaths in Indonesia, more than 50% were attributed to air pollution and around 25% to water pollution.

While air pollution is worsening in Jakarta and West Java, tens of millions of people experienced a day-long blackout earlier on August last year after gas-powered electricity generators failed and significant proportions of eastern Indonesia have do not have reliable power supplies. So why does Indonesia remain so reliant on fossil fuels?

Food vendors serve customers by lantern light during an electricity blackout last year in West Java (Source: Lowy Institute).

Abundant Supply of Renewable Energy

With a strategic location along the equator and on top of a ring of active volcanoes, you wouldn’t be wrong in thinking the country could become one of the world’s leaders in renewable energy. Indonesia has the potential to generate 788,000 MW of power from renewable energy sources such as wind, solar, tidal, and geothermal. This is more than 14 times the country’s current electricity consumption. In fact, with an abundant supply of magma, hot rocks, and hot water beneath its surface, Indonesia has 40% of the world’s geothermal energy stores, enough for 29,000 MW of energy.

Yet in 2018, of the approximately 60,000 MW of electricity used every year in Indonesia, only 12% of this came from renewable energy sources based on Lowy Institute. The rest is sourced from coal (55%), gas (26%), and oil (7%). These fossil fuels, including coal plants in Banten and West Java and blackout caused by failures at gas plants in Cilegon, are responsible for Jakarta’s air pollution woes.

Indonesia’s electricity needs are predicted to grow by around 7% every year until 2027. As this is averaged out across the whole country, it is important to note that somewhere between 10 and 20 million Indonesians still do not have access to electricity. For example, while only 60% of people in East Nusa Tenggara have electricity, the rate is just 50% in Papua. In many areas, power is also not available 24 hours a day and is instead only accessible for a few hours at night. In addition, even if just half of the country’s potential wind energy was captured, it would meet current energy needs. Indonesia’s first wind farm was only built in 2018 in Sidrap, South Sulawesi where its 30 turbines provide 75 MW of energy to 70,000 households and cover 100 hectares of land, making it Southeast Asia’s largest wind farm.

The inauguration of first Indonesia's wind farm in South Sulawesi (Source: Jakarta Post).

Challenges in harnessing renewable energy sources

The ongoing struggle for Indonesia is in balancing three key energy objectives: energy access, security and sustainability. Although the country can provide the most affordable source of energy through the availability of cheap coal, it does not make it the most secure or sustainable for electricity generation. Since coal reserves have been rapidly diminished combined with declining oil production, there are increasing concerns over energy security in Indonesia.

At the same time, Indonesia is attempting to fulfil commitments for carbon emission reductions of 29% (or 41% with international support) in its effort to mitigate climate change. Both the national government and state energy provider, PLN, are eager to increase the use of renewable energy, with a target of 23% renewable energy by 2025. Indonesia is also committed to meet the 2015 Paris Agreement, although it has been threatening to quit the agreement over European Union plans to phase out its use of palm oil for transportation fuel.

However, one of the challenges lies in regulation. The Constitutional Court ruled in 2003 that electricity is an important state product and must be managed by the government through either state-owned enterprises or public-private partnerships. This means that no independent power companies can sell electricity directly to consumers; instead, they must sell their electricity to PLN first. In fact, multiple new energy policies are issued every year – 20 policies were released in 2017 alone, some of which were later withdrawn. One policy requires private investors to transfer their projects to PLN at the end of agreement periods, which, combined with the fact that the Minister for Energy and Mineral Resources sets the consumer price of energy, has led to concern about return on investment.

Another challenge is financing. Indonesia needs an investment of Rp 2,000 Trillion (US$154 Billion) to achieve the 23% target of renewable energy by 2025. Since the state is unable to allocate this huge amount, private financing is necessary, yet regulatory uncertainty and clashing policies are seeing significant reluctance from both potential investors and lending banks to get involved. With smaller-scale energy projects rely on a limited range of domestic financial sources, the Indonesian financial market is still relatively small, with a banking sector that typically relies on short-term deposits to fund lending operations. The average loan tenor of Indonesian banks also stands at only eight years long but renewable energy investments generally require funding over much longer terms. Local banks also have limited capacity and experience in projects of this nature, causing perceptions of risk and additional reluctance.

A third issue lies in the ability to challenge the status quo. With massive coal reserves offered at a much lower coal price than the global market price – the domestic price is capped at US$70 per tonne based on Coaltrans Blog, the global market price which peaked at US$100 in January, it is difficult for renewable energy to compete, especially when considering how embedded and powerful the fossil fuel industry is. The success of changing the attitudes toward the use of fossil fuel can be imitated from Vietnam, where hydropower meets 38% of national energy needs in 2016, ahead of coal at 33% according to GreenID's report.

As the renewable energy projects race against time to catch up with the green energy commitments, the government aims to jumpstart stalled it through a recently issued regulation last month. With lofty targets, strengthening user demand, and significant natural resources, Indonesia has the potential to become a leading nation in renewable energy. Although there are many challenges, harnessing the sources of renewable energy should be considered as one of the solutions to deal with the fact that Indonesia suffered from blackouts at its busiest cities, hasn't improved its air quality and is one the world's biggest greenhouse gas emitters.

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