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Key Findings

Given the rapid move toward solar in countries like India, it is surprising that the installed base of solar PV in Indonesia totals a mere 80 MW, lagging far behind neighbouring South East Asian countries such as Thailand (2.6 GW) and Philippines (868 MW).

Rather than benefitting from lessons learned from early missteps, it appears that DGNREEC continues to struggle with the policy learning curve. The most notable characteristic of the policy roadmap has been the lack of consistency and the number of course corrections.

The erratic regulatory roadmap for Indonesia’s aspiring solar developers is made even more challenging by two pillars of power sector regulation that are particularly ill-suited to this nascent sector - the Build Own Operate Transfer (BOOT) rules and local content regulations.

Executive Summary

Consistent and market-relevant enabling policies are key to building affordable solar power. Unfortunately, this basic principle has been overlooked as Indonesia has cycled through a patchwork of solar policies that have driven many experienced investors and developers to the sidelines.

The proof is in the numbers. Despite having substantial solar resources, Indonesia’s solar policy framework has failed to deliver cost-effective renewables to the grid. According to Institute for Energy Economics and Financial Analysis (IEEFA) estimates, only 24 MW of solar, including solar rooftop units, are currently installed and dispatchable to the grid. At the same time, Perusahaan Listrik Negara (PLN), Indonesia’s dominant state power company—is plagued by an inflexible and highcost coal independent power producers (IPP) program that is burdening the system with grid development challenges.

The string of policy missteps has persisted even as public and commercial interest in developing solar continues to rise. The most recent setback took place in November 2018, as the government released a much-anticipated guideline for rooftop solar power. The new Ministerial Regulation No. 49/2018 was advertised as a policy that would enable owners of residential, commercial and industrial rooftop PV systems to “sell” excess power to the grid. Based on IEEFA’s analysis, however, the headlines do not match the reality. Our modelling shows that many will find the policy hard to assess and difficult to realize financial benefits from installing rooftop solar systems.

This is symptomatic of a sector which faces a range of policy-based barriers to scale:

  • Problems associated with the Ministry of Energy and Mineral Resources’ (MEMR) Build Own Operate Transfer (BOOT) policy undermine the economics of many solar projects. Despite industry pushback over the past two years, there is no sign the MEMR will address this policy in order to unlock the pipeline of high-quality projects.
  • The local content requirements have created a vicious cycle for the whole solar industry. Projects are stalled because IPPs are obligated to use more expensive local panels, while at the same time they are forced to match the cost profile of baseload coal power units which are heavily subsidized. This has made it impossible for local manufacturers to scale up and match the competitive pricing that other countries enjoy.
  • PLN’s opaque grid management practices are another major hurdle. The single-minded focus on large baseload suppliers comes at the expense of more flexible technologies. This robs PLN of the opportunity to learn from what forward-thinking utility companies have done in other countries and deters investments in the solar sector.
  • Quite surprisingly, IEEFA found that financing is rarely seen as a crucial barrier for solar projects in Indonesia. There are indeed enough local and foreign banks lining up to finance utility-scale solar projects. The barrier, however, lies in the lack of scalable projects of sufficient size and quality to meet bankability standards.

The recently launched Indonesia Electricity Supply Business Plan (RUPTL) 2019- 2028 pretty much confirmed PLN’s lack of willingness to support the solar sector. Instead of following global trends on solar escalation, PLN decreases its solar plan by 137MW or 13% less compared to the previous RUPTL. In addition, the system is still to a large extent dominated by the coal base-load scenario, indicating no innovative design to accelerate renewable implementation nor grid flexibility.

Despite these policy and implementation challenges, Indonesia still has the opportunity to be a smart laggard. The cost of industrial-scale solar technology continues to fall and the flexible grid strategies needed to deliver affordable solar are now market-tested. This means that the pay-back for a solar policy redesign will be even higher. But for Indonesian consumers to get the long-term benefits of solar power, this work needs to start soon before coal lock-in makes it impossible for PLN to diversify its generating mix without stranding over-priced coal IPPs on the crowded Java-Bali grid.

The opportunity is there, but political will and leadership will need to be mobilized in order to address the PLN’s implementation challenges. If not, Indonesians will face significant economic, environmental and social costs unless a new consensus can be reached about the future of the country’s power sector.

Press release: Widespread adoption of carbon capture, utilization and storage technologies in South East Asia remains highly unlikely

Please view full report PDF for references and sources.

Elrika Hamdi

Elrika Hamdi is an energy finance analyst at IEEFA covering the nexus of energy transition, economics, finance and politics in the South East Asian region. She has covered the Indonesian power and energy market extensively over the years, and built her reputation as a trusted analyst by industry players, investors, and government officials.

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