Indonesia is the world’s fourth-most populous country and is set to become the world’s fourth-largest economy by mid-century. The key contributor to this growth has been the export of coal and natural gas, which has helped it maintain a positive trade balance. As a result, the country’s energy sector emissions have more than doubled over the last two decades leading to a substantial increase in the emissions intensity of its energy mix.
To address this issue, the country set a very ambitious target to achieve net zero emissions (NZE) by 2060 during the UN Climate Change Conference (COP 26) in 2021. This transition is also an integral part of its overarching development goal to become an advanced economy by 2045. The country also recently signed the Just Energy Transition Partnership (JETP) agreement with International Partners Group (IPG), with the US and Japan as joint leads, along with the United Kingdom (UK), Germany, France, the European Union (EU), Canada, Italy, Norway and Denmark. JETP will help Indonesia in developing a comprehensive investment and policy plan that reflects targeted greenhouse gas (GHG) emissions reductions and support to impacted communities as well as in arranging concessional loans, market-based loans, grants, guarantees, and private investments from public and private entities. To achieve its objectives, an initial USD20 billion in public and private financing over a three- to five-year period will be mobilised and deployed through the coordination of the JETP Secretariat.
In March 2023, Indonesia’s state-owned PT Perusahaan Listrik Negara (PT PLN) signed a Memorandum of Understanding (MOU) with Germany’s development bank Kreditanstalt für Wiederaufbau (KfW) to expedite the energy transition in Indonesia. This signing was taken as a form of financial support to encourage the transformation of the energy sector, which is worth IDR10.7 trillion. The agreement entails projects and programmes with the objective to improve the capacity of renewable energy such as solar, wind, hydro and geothermal, to improve transmission and distribution networks, besides providing institutional support to PLN. Through this agreement, PLN aims to reduce GHG emissions by 29 per cent in 2030.
Among the key focus areas identified for the same is the penetration of renewables in the generation mix. The country aims to increase the share of renewables in the generation mix to 23 per cent by 2025 and further to 32 per cent by 2030 and 69 per cent by 2060. To reduce reliance on coal, capitalise on the renewable energy potential and move towards decarbonisation, the Government of Indonesia and the national power utility PLN have devised an electricity business plan known as Rencana Usaha Penyediaan Tenaga Listrik (RUPTL) 2021-30, which sets out Indonesia’s power capacity and network development plans over the next 10 years. As per RUPTL, the planned generation addition for the period 2023-2030 is 27,571 MW, with expected additions in hydro, thermal and renewable energy. Of this, hydro accounts for 35 per cent, thermal for 29 per cent and the rest is accounted for by renewable-based generation, which is expected to add close to 9.9 GW of capacity between 2023 and 2030.
Aligned with these targets, Indonesia’s PLN is strengthening and reinforcing the existing transmission network to integrate the upcoming capacity and improve energy efficiency. The existing transmission system is regarded as one of the barriers to flexibility due to the archipelago and volcanic characteristics of the islands. Reinforcements to existing grids could deliver significant flexibility improvements. According to RUPTL, the country is expected to add close to 32,237 circuit km of line length and 55,800 MVA of transformer capacity between 2023 and 2030 with an investment of IDR164 trillion. PLN will focus on developing transmission systems at the 500 kV and 150 kV voltage levels in the Java-Bali system and 500 kV, 275 kV, 150 kV and 70 kV lines in the East Indonesia and Sumatra systems. It is also focusing on setting up major interconnectors under the ASEAN power grid project, which aims to link 10 Southeast Asian countries (Laos, Vietnam, Cambodia, Philippines, Brunei, Malaysia, Indonesia, Singapore, Thailand and Myanmar).
Presently, the transmission projects are developed by PLN, while the interconnections related to independent power producer (IPP)-owned power plants can be carried out by the relevant IPPs depending on the projects and PLN’s requirements. The new RUPTL marks a change in this approach and chalks out options for transmission projects to be carried out by the private sector under certain business schemes, such as build-operate-transfer (BOT), build-lease-transfer (BLT), or power wheeling.
Existing electricity market
Indonesia liberalised its electricity market in 2009 in an effort to break state-owned utility PLN’s monopoly by allowing IPPs to generate and sell electricity to end-users. In 2012, the government issued a decree on Electrical Power Provision Business Activities to promote competition among electricity supply businesses. Despite the reforms, the state-owned PLN continues to dominate Indonesia’s power sector with PLN and its subsidiaries operating about 70 per cent of the country’s total installed capacity. PLN is the sole purchaser of electricity as the electricity law gives it the right of first refusal and IPPs can only serve areas that have been declined by PLN and are not included in its plans for electrification. PLN holds a monopoly over the transmission sector and also functions as a system operator.
The country relies heavily on coal to meet its electricity demand. In 2022, the country faced an energy crunch due to a shortage of coal. Coal mining companies prefer to export rather than sell their product domestically. This strong dependence on coal has serious implications for Indonesia’s energy security as well as the rising cost of power.
Approximately 62.4 per cent of Indonesia’s installed electricity capacity of 64.55 GW in 2021 was generated from fossil fuels, mainly coal, 31.1 per cent was contributed by IPPs and rented diesel, while the remaining was based on hydro and renewable sources. During 2017–21, the generation capacity grew at a compound annual growth rate (CAGR) of 3.65 per cent mainly with the expansion of thermal- and rented diesel-based capacity.
The Indonesian transmission system has eight interconnected networks and 600 isolated grids. The grids of Java, Bali and Madura are interconnected via 500 kV and 150 kV lines; the Sumatra grid is interlinked with other regions via 275 kV and 150 kV lines; and the Central Kalimantan, South Kalimantan and East Kalimantan grids are linked via a 150 kV line. West Kalimantan’s grid remains isolated from the networks of other provinces.
As of December 2021, Indonesia’s transmission network comprised 58,826 circuit km (ckm) of alternating current (AC) lines at the 150 kV to 500 kV voltage levels. Between 2017 and 2021, transmission line length grew at a CAGR of 7.7 per cent, with a net addition of 15,061 circuit km of transmission lines. The transformer capacity stood at 153 GVA as of December 2021, increasing from 122 GVA in 2017, growing at a CAGR of 5.8 per cent. The number of transformers in the country also increased from 1,505 in 2017 to 2,088 in 2021.
Future plans and investments
Indonesia’s electricity demand is expected to increase at a CAGR of 5.53 per cent from 13,108 GWh in 2023 to 19,106 GWh in 2030, mainly driven by the country’s economic growth, increased electrification and transfer of captive power to the grid. To meet this demand, the country is focusing on harnessing its renewable energy potential.
The country is intensifying its efforts to add renewable energy capacity—particularly, to tap the significant energy potential in geothermal, hydro and solar generation. However, only a small proportion has been utilised. As of 2022, renewables accounted for only 12.8 per cent of power generation at 10.8 GW of installed capacity, with hydropower, geothermal and biofuels making up the largest share of the renewable mix. As per the International Energy Agency (IEA), about USD35 billion in investment is required in the power sector until 2030 to achieve the targets. However, the sluggish adoption of renewables is a reflection of low investment realisation. By the third quarter of 2022, the investment realised was less than 35 per cent of Indonesia’s annual investment target of USD3.97 billion.
The total planned generation addition for the period 2023-2030 is 27,571 MW, with 9,638 MW of hydro capacity, 8,049 MW of thermal capacity, and 9,884 MW of renewable capacity.
Outlook
Massive investments are essential to reach Indonesia’s energy transition goal. However, mobilising investment is a challenge. Since 2017, investment in renewable energy generation has been stagnant, and during 2020 and 2021, it has fallen short of the government’s target. The average annual investment realisation for the renewable energy sector from 2017 to 2021 was only USD1.62 billion, well below the USD8 billion annual investment required for Indonesia to meet its 23 per cent renewables target by 2025.
Hence, bilateral financing remains crucial for Indonesia’s clean transition investments. Currently, 10 countries including Germany have committed to support Indonesia’s energy transition through financial and technical assistance, grants, or collaborative projects and bilateral pledges.
Further, the Indonesian government’s initiative to expand the generation capacity to 40.6 GW by 2030 makes it crucial for PLN to develop a well-built flexible transmission infrastructure to support it. Along with financial support from multilateral development agencies, significant critical support from the government in the form of requisite policy and regulatory frameworks and an improved business environment will be crucial for achieving universal and reliable electrification.
