Indonesia’s geographical status as an archipelago makes domestic electricity coverage and power generation a particularly daunting challenge. However, stimulating economic development in the regions outside of Java is dependent on ensuring reliable electricity access to improve residents’ standard of living as well as for the establishment of industries which will in turn generate employment. As of the end of 2011, Indonesia’s total installed electricity capacity was 31 GW with electrification coverage of just 71% leaving over 80 million people without access to electricity. In 2003, the government set the target of electricity coverage of 90% while reducing greenhouse gas emissions by 26% by the year 2020. Such targets have served to highlight the need for significant investment in the country’s electricity capacity as well as the vast opportunities for investors in the sector, particularly within renewable energy.
Within Indonesia’s electricity system, state body Perusahaan Listrik Negara (PLN) is the main actor accounting for 84% of total electricity transmission while independent power producers (IPPs) make up 16%. In terms of sources, coal is the dominant fuel source for on grid electricity accounting for 40% of total power plant capacity, followed by oil with 29% and gas at 21% with renewables making up just 10% (Indonesia Infrastructure Report 2010). In off grid capacity which stood at 6.4 GW in 2010, diesel powered plants are the most relied upon form of power generation within non renewables, yet renewable energy accounts for 50% of total off grid capacity mainly via hydropower generation and Solar Home Systems (SHS) (Indonesia Infrastructure Report 2010). Domestic demand for electricity as a whole is increasing in line with the country’s macro economic growth at approximately 9% per annum which is expected to continue up to 2019. However the growth in electricity generation capacity is failing to keep pace with the rate of demand at less than 5% growth annually due to a lack of investment as well as an over reliance on costly fossil fuels.
The impending crisis in Indonesia’s electricity sector has led to various measures being taken by legislators to create a favourable investment environment in the sector. Ministerial Decree No. 2 of 2006 obliged state owned PLN to purchase electricity from renewable energy providers with a capacity of up to 10 MW. In 2009, the Energy Law No. 30 of 2009 ended PLN’s monopoly over the electricity sector thereby opening up the industry to IPPs who may also sell their electricity directly to end consumers. The Minister of Energy Regulation No. 31 of 2009 sought to set out the conditions of Power Purchasing Agreements (PPA) between IPPs and PLN followed by the Ministry of Energy Regulation No.7 of 2010 on cross subsidisation to provide electricity at reasonable prices for the public. IPPs have the freedom to operate in areas that are not earmarked for PLN’s electrification program and PLN retains a ‘right for first refusal’. IPPs wishing to sell directly to end users must construct their own transmission grid and those selling directly to the grid must enter into a PPA with PLN which are licensed by the Central Government. Decentralisation has opened up further opportunities for IPPs as regional governments can enter into PPAs provided they have a license (IUPTL). Foreign investors are being actively wooed for the electricity sector through local partnerships in projects above 1 MW to 10 MW and with up to 95% ownership in projects above 10 MW.
Indonesia holds far reaching opportunities within the renewable energy sector for electricity generation including geothermal, hydropower, solar power and biomass. Hydropower accounts for the largest source of potential energy at 76 GW followed by biomass at 50 GW, geothermal at 28 GW, wind with 1 GW and solar at 4.8 kWh/m2/day (Directorate General for Electricity and Energy Utilisation Indonesia). Yet, by 2010 only a fraction of potential renewable energy sources have actually been developed with a total of 6.13 GW from a potential 155 GW. Given the government’s target for renewables to account for 15% (or 12.5 GW) of total domestic energy use by 2025 and a planned capacity increase of 55 GW to 2019, investors are being presented with a variety of opportunities in both small and large scale power generation projects. PLN estimates that the total investment required will be $96.2 billion USD of which it can provide up to $60.5 billion USD (PLN 2011-2020 Electricity Supply Plan). IPPs are therefore being encouraged to take on up to 43% of new electricity capacity with a target of 3% of the total being supplied by small scale projects.
In terms of key areas of opportunity, Java and Bali enjoy the highest electrification rate at an average of 75.4% at the end of 2011 followed by Western Indonesia at 68.2% and East Indonesia at 59.2%. In Western Indonesia, Aceh has the highest rate of electricity coverage with South Sumatra province holding the least. East Indonesia, despite offering some of the most resource rich areas of the country, is being held back due to poor infrastructure with economic growth below the national average. West Nusa Tenggara has the highest electrification ratio of the region with 43.6% followed by East Nusa Tenggara and Papua with 37.4% and 32.7% respectively. The areas with the lowest rate of electricity coverage tend to be made up of smaller islands such as West & East Nusa Tenggara as well as Riau Islands and Maluku. Such areas are particularly well suited to small scale power generation and renewable energy initiatives as they avoid the need for distribution of fuel sources in hard to reach areas.
Within the various renewable energy types available to investors, their viability is highly reliant on the surrounding infrastructure and government regulations related to the sector (See Opportunities in Energy: Beyond Fossil Fuels). Consultancy firm Frost and Sullivan has highlighted the key short term opportunities within Indonesia’s electricity sector as geothermal energy and biomass followed by hydropower over the medium term and solar, wind as well as other sources offering potential for the long term (Investment in Indonesia – what are the upcoming opportunities? Frost and Sullivan, 2011). The current regulatory environment supports these predictions given the incentives currently in place to lure investors into the geothermal energy sector (See Investing in Geothermal Energy in Indonesia), however biomass demands greater attention to encourage further investment. Indonesia produces an estimated 146.7 million MET of biomass every year particularly from palm oil, rubber wood, coconut and rice residues yet management of this waste still presents challenges (‘Development of Waste Management Practices in Indonesia’, European Journal of Scientific Research 2010). In mid 2012, the Ministry of Energy and Mineral Resources sought to address the pricing policy by announcing plans to increase biomass generated electricity tariffs, particularly waste derived from landfills, which should boost the attractiveness of the sector to investors.
The issue of electricity pricing is now dominating public discourse on the sector as the government seeks to reduce the burden of electricity subsidies on the state budget. The plan which involves raising the electricity price by a proposed 4.3% each quarter in 2013 is designed to raise funds for further investment by PLN to increase electricity coverage and to purchase more electricity. Indonesian businesses have been particularly critical of this plan due to the burden it places on businesses; yet it is widely agreed that subsidies on electricity need to be eliminated in order to free up funds for investment in the country’s electricity capacity in order to promote even regional development. Given the continuing growth of electricity consumption by households and private industry, Indonesia’s electricity sector offers highly lucrative opportunities for investors. Recent developments in government policy serve to enhance these opportunities further such as regulations on the domestic processing of mining and mineral products which will require smelters to be constructed across the country. Now is therefore a key time to enter the market and participate to the country’s burgeoning electricity and renewable energy sector.
Global Business Guide Indonesia - 2013
Contribution to GDP: 3.44% (2016)
Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).
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