Navigating The Net Zero Transition - Chapter 2: Indonesia

Indonesia is at a critical juncture in shaping its energy future. The archipelago nation faces the challenge of boosting energy supply by ensuring universal electricity access for its people by 2040, while cutting carbon emissions to reach its net zero target by 2060.

Among the fastest-growing economies globally, Indonesia has experienced rapid economic growth since the 1970s, reducing poverty levels. Now, climate change threatens its diverse ecosystem. Communities are vulnerable to flooding, rising sea levels and heatwaves.

Indonesia has set an ambitious target of reaching net zero by 2060. The government’s eagerness to transition away from fossil fuels, towards renewable energy and low-carbon hydrogen, led it to ask the International Energy Agency to develop a path to net zero.  

That path – set out in the Energy Sector Roadmap released in late 2022 - is a key resource for the challenges and opportunities ahead for Indonesia – and what they might mean for business.

Indonesia leads the world in coal exports and oil imports, yet it has enviable assets to help the transition to renewables. The abundance of natural resources presents investment and innovation opportunities, including in solar, wind and geothermal power. This will have to happen: the government’s Announced Pledges Scenario projects an expansion of the total energy supply to 19k Petajoules (PJ) by 2060 – almost double the level in 2021 - and a 20% decrease in energy sector CO2 emissions by 2040.

The shift to renewables in Java and Bali highlights the path forward for Indonesia. The ‘greening’ of buildings and vehicles and the electrification of industrials are also focus areas.

The government controls and manages all natural resources, including renewable energy resources, in accordance with the Indonesian Constitution. A series of regulations and policies steer Indonesia's transition towards renewable energy. These serve as guidelines and a roadmap for government initiatives and monitoring, private sector investments and licensing in the renewable energy sector.

Navigate the opportunities and challenges in the net zero transition:

Energy Transition | Carbon Markets | Financing | Transport | Housing and Buildings | Agriculture | International Collaboration

Challenges

Indonesia’s energy transition will happen as it manages the persistent rises in electricity demand associated with its development.

The government has introduced a range of policies to address the challenge, including banning new coal-fired power stations, with certain exemptions.

Commitments to cut reliance on fossil fuels and reduce emissions are also motivated by conditions built into international support, including financial aid from the United States and Japan.

Industrials (manufacturing, food processing & construction) have higher energy demands than the global average, contributing over 40% of final energy consumption and 50% of CO2 emissions in Indonesia. The sector is expected to grow by approximately 50% by 2030 and 300% by 2060 under the Master Plan of National Industry Development, including substantial growth in the chemicals sub-sector.

Steel and ammonia production is high in Indonesia – ranking second and twentieth globally for stainless and crude steel, respectively. Ammonia production serves various industrial applications. The emissions intensity makes it a critically important candidate for decarbonisation – yet it’s among the harder to abate sectors.

Opportunities

Electrification is a key focus, with much of the energy coming from renewable sources. Hydrogen is projected to play a role too, with its production by 2060 requiring electricity approximately equal to the country's current total electricity demand.

Any renewables generators intending to develop a project in Indonesia must pay close attention to the regulations and internal procurement guidelines of the government-owned power distributor, Perusahaan Listrik Negara (PLN). Initial discussions with PLN are also imperative for the preparation of a project. PLN, as the main provider for the transmission, distribution and retail sale of electricity in Indonesia, is one of the key players in the renewables industry, acting as both supplier and purchaser of electricity.

Solar, geothermal, hydro, wind, biomass or biogas power are expected to attract investment following a new pricing system. Introduced in late 2022, it replaces the tariff regime that put a price on renewable projects based on 85-100% of the average local generation costs – competing with lower-cost fossil fuel plants. The new regime applies maximum benchmark prices based on the type and size of the power plant. In addition, the government provides fiscal incentives for renewable energy projects such as income tax facilities, import facilities, land and property facilities, geothermal development support, and/or financing support or guarantee facilities through state-owned enterprises assigned by the government.[1]

Carbon Capture Storage (CCS) / Carbon Capture Utilisation and Storage (CCUS) is expected to help reach Indonesia’s net zero emission target. The government, through the Ministry of Energy and Mineral Resources, has issued Minister of Energy and Mineral Resources Regulation Number 2 of 2023 concerning Implementation of Carbon Capture and Storage, as well as Carbon Capture, Utilization and Storage in Upstream Oil and Gas Business Activities. This regulation covers, among other things, the monetisation of CCU/CCUS projects through carbon trading. Currently, 15 CCS/CCUS projects in Indonesia are in the study or preparation phase. Most of these projects aim to be operational before 2030. The total CO2 injection potential between 2030 and 2035 is estimated to range from 25m to 68m tons.

Indonesia introduced its much-anticipated carbon exchange, known as IDXCarbon, on September 26, 2023. IDXCarbon is presently administered and operated by PT Bursa Efek Indonesia (IDX),[2] the same entity responsible for overseeing the Indonesian stock exchange, under the regulatory oversight of the Financial Services Authority (Otoritas Jasa Keuangan or OJK).

IDXCarbon currently serves as a trading platform for both emissions trading and offset trading. Indonesia is in the process of developing both the mandatory or compliance market and the voluntary market, with the compliance market initially planned for implementation in the energy sector before expanding to other sectors.

The initial phase of a mandatory carbon trading scheme for coal-fired power plants is in 2023. This aims to cut Indonesia's coal dependence and promote renewable energy. The scheme sets emissions quotas and requires power plants exceeding these quotas to buy carbon credits.

• In the first phase, 99 coal-fired plants owned by 42 different business entities connected to the state-owned power grids are covered, with a potential reduction of 36m tonnes of CO2 emissions by 2030. Based on publicly available information, 55 of these are owned by PLN group, with the others owned by independent power producers. This initiative aligns with Indonesia's policy objectives and contributes to the broader development of carbon markets in Southeast Asia and internationally.

Other sectors can participate in carbon trading.

• Energy, waste, industrial process and product usage, agriculture forestry and other land usage (AFOLU) are among project sectors listed in the Carbon Economic Value Regulation[3] as being capable of generating carbon credits, and/or such other sectors as may be applicable with the development of science and technology.
  • Emissions reductions generated from these projects can be registered and verified through a national certification referred to as Sertifikat Pengurangan Emisi Gas Emisi Rumah Kaca or SPE-GRK for offset trading, or they can secure technical approval for emissions ceiling for business actors (Persetujuan Teknis Batas Atas Emisi bagi Pelaku Usaha or PTBAE-PU) for emissions trading.
  • Whether a project can obtain SPE-GRK or PTBAU-PU will depend on whether there is a maximum emission ceiling determined by the relevant government authority; PTBAU-PU is applicable for projects that have a maximum emission ceiling, for example emission reduction from coal-fired power plants.

The government’s pledges anticipate that renewable energy and networks will account for approximately one quarter of annual investment. Private funds could finance more than half of total energy investment, with debt and off-balance sheet financing tripling to support significant investments in solar PV and wind generation. Accelerating the energy transition in Indonesia requires investment of up to US$1t by 2060 for renewable energy generation and transmission.

Public finance to mobilise private funding

Public finance plays a strategic role in mobilising private funds for investments in the government’s pledges. Public finance is used to attract higher levels of private investment by responding to market signals and government policies.

Public financial institutions play a crucial role in attracting investments in high-risk areas, mitigating risks and encouraging private sector participation in sustainable development.

State-owned enterprises contribute by funding infrastructure and supporting clean energy transitions, addressing technological and social implications.

Development finance institutions give vital support to improving financial performance of state-owned enterprises like PLN, facilitating the phase-out of coal, and enabling the transition to clean energy.

Government actions that could boost private funding

The IEA has identified government actions that could attract more funds:

1. Clarify tariffs: Provide clear / predictable revenue streams for renewable electricity projects. Transparent tariff structures enhance private capital appeal by reducing risk.
2. Implement multi-stage procurement programs: Introduce procurement programs offering long-term visibility for investors and financiers. This is to be combined with concessional funds and technical assistance from development finance institutions (DFIs) to mitigate risks.
3. Introduce competitive mechanisms: Competitive mechanisms (e.g. auctions to assign generation capacity) to encourage competition and reduce renewable project costs.
4. Create an investment-friendly environment: Implement supportive policies, regulations, and incentives to attract international investment in the renewable energy market.

Transport accounts for a third of Indonesia’s final energy consumption and 40% of CO2 emissions. Most – 90% - comes from road transport (cars and trucks).

The nation’s growth in prosperity has seen transportation energy consumption increase by 70% since 2010 (currently app. 2,150 PJ). Government incentives aim to increase the share of EVs by 2060 across two/three-wheeler motorbikes, buses and light commercial vehicles.

Electrification of Transport & Low Emissions Fuel Switching

Biofuels and electrification will accelerate the decarbonisation of transport, bringing down the sector’s use of oil from nearly 90% to 20% by 2060. Biofuels initially displace oil in the existing vehicle fleet, with electricity gaining prominence and accounting for 50% of road transport energy demand by 2060. EV adoption improves fuel economy by 14% in 2030 and 76% in 2060.

• For heavy transport, incentives encourage biodiesel blending and fuel efficiency improvements.
• In aviation, Indonesia aims to reduce oil reliance via sustainable aviation fuels.
• In maritime shipping, alternative energy sources such as clean hydrogen, ammonia and biodiesel blending diversifies fuel consumption.

Electromobility Policies: A focus on Electric Vehicles (EVs)

...on the road by 2030 under Indonesia's National Energy Grand Strategy, currently being prepared[4]

To accelerate electromobility, the Presidential Regulation on the Acceleration of the Battery Electric Vehicle Program sets targets for low-carbon emission vehicles in local production. Two/three-wheeler motorbikes and buses are expected to electrify rapidly.

• Low-carbon emission vehicles: aimed to comprise 20% of domestic car production by 2025 and 30% by 2035.
• Charging infrastructure: PLN must collaborate with state-owned and private enterprises to develop EV charging infrastructure. The Provision of Electric Charging Infrastructure for Battery-Based Electric Motor Vehicles establishes regulations for charging infrastructure types and electricity charging tariffs.
• Batteries: The government established the Indonesia Battery Corporation (partnership between four state-owned companies) to support the development of the domestic EV battery industry. Indonesia has the largest reserves of nickel, a lithium-ion battery component. This presents export opportunities.

Enhancing building envelopes and implementing zero carbon-ready building energy codes, to reduce energy demand and emissions, are among measures the government plans to implement.

Retrofitting existing buildings and reforming building energy codes are essential for enhancing energy efficiency.

Green buildings. The government and the Ministry of Public Works and Public Housing have enacted regulations governing the technical standards applicable for green building, which will be mandatory for buildings within the criteria set out under Ministry of Public Works and Public Housing Regulation on Green Building Performance Assessment.[5] These standards focus on:

• achieving significant, measurable improvements in saving energy, water and other resources…
• through the application of green building principles at each stage of implementation…
• in accordance with their respective functions and classifications.

The green building principles include reducing the use of land, materials, water, natural resources and human resources, reusing resources and using recycled resources. The green building concept is currently being applied to the development of the National Capital City, Indonesia’s new capital, located in East Kalimantan.