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Indonesia Is Failing to Provide a Green Track for Industry

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Pacific Money | Economy | Southeast Asia

Indonesia Is Failing to Provide a Green Track for Industry

Industry is racing to get green, but Indonesia has paved the road with unsupportive regulation.

Indonesia Is Failing to Provide a Green Track for Industry

Greenpeace Indonesia activists unfurl banners saying ‘Quit Coal’ from cranes at the Cirebon Coal Power Plant in Cirebon, West Java, Indonesia, on May 15, 2016.

Credit: Flickr/Break Free Indonesia

Indonesia’s dreams of a green economy align with the growing industry commitment to initiate a transition to green energy. However, a recent RE100 report shows that Indonesia is one of the ten most countries that face the most challenges in achieving this transition. RE100 is a group of companies that have pledged to reach 100 percent of renewable energy by the average target date of 2028. Currently, at least 48 RE100 companies operate in Indonesia, among them Nike, IKEA, Coca-Cola, and P&G. Their report points to the limited options for industry to access green energy as the primary challenge of achieving its “net zero” goal in the Indonesian market.

In contrast, Thailand offers a corporate power purchase agreement (CPPA) scheme that allows private companies to purchase renewable energy directly from producers rather than from utility companies. Private customers find this attractive as the scheme allows the company to avoid the initial investment costs. Vietnam is also currently piloting a virtual CPPA scheme that allows private customers to purchase clean energy in a spot market without connecting to the same electricity grid as the producers.

Meanwhile, in Indonesia, the available options open to private firms are either purchasing energy from the state utility company, PLN, or installing their own onsite captive power generation capacity, such as rooftop solar panels. In the first option, the company’s renewable energy level is limited by PLN’s generation mix, which is still dominated by coal power plants. In the second option, the company bears the initial investment cost of renewable power generation, while the scale of power generation is limited by the size of the available sites or rooftop areas.

The problem is not just the limited options available. Indonesia is also struggling to improve its renewable energy capacity. Indonesia’s renewable capacity is currently 10 gigawatts, lower than Thailand and only one-third of Vietnam’s capacity. Vietnam’s progressive regulatory and political shifts have boosted investment in renewable energy in the country. Failing to catch up with the neighboring countries will degrade Indonesia’s attractiveness as a destination for green industrial investment.

Indonesia has built its own barrier to green energy by regulating a renewable energy price cap. Tariffs for renewable energy are capped based on the regional costs of generation. In regions dominated by low-cost coal generation, particularly on Java island, the regulation also keeps renewable energy prices low, making them uneconomic for would-be investors. Since Java is the center of the country’s economy and the home of most of its industry, the regulation makes renewable power plants less competitive and inhibits the uptake of green energy in the country’s industrial heart.

Indonesia needs to lure green investment by serving the growing industrial demand for clean energy. Otherwise, such foreign investment will flee to neighboring countries like Thailand and Vietnam. Last year, Sony warned the Japanese that they could relocate their manufacturing site if they did not improve the clean energy landscape. The same warning goes to Indonesia’s government if they fail to improve the energy policy.

Indonesia’s vast renewable energy potential gives it the chance to lure investment. However, regulation changes will be needed in order to tap the benefit.

First, Indonesia’s government should adopt a new mindset toward renewable energy. It should realize that renewable power potential will not only help the country reduce carbon emissions but will also provide a competitive advantage in luring investment that will drive economic growth. If the government fails to recognize these benefits, the slow progress in renewable energy will make Indonesia suffer from both environmental and economic loss.

Second, the government needs to reopen discussions about power wheeling. Power wheeling is a scheme that allows a company to rent a utility’s network to source from off-site renewable generation. This scheme allows the company to circumvent the scale limitations of onsite power generation. The existing ministerial regulation on power wheeling lacks important details such as a detailed scheme and tariff structure, and this needs to be rectified.

Third, Indonesia needs to revise the problematic regulation on renewable energy cap prices. On one side, the regulation is aimed at keeping electricity prices affordable. But on the other side, the regulation has slowed down the energy transition progress. Indonesia should speed up its revision of these regulations. If Indonesia sits on its hands, neighboring countries will reap most of the economic benefits of speeding a transition to renewable.