Indonesia is the fourth most populated nation in the world and has the largest fossil fuel-dependent economy in Southeast Asia, with over 270 million people living on more than 17,500 islands. Recent decades have seen a decline in poverty as a result of rapid economic expansion, which also aided socio-economic advancement. However, in recent years, economic vulnerability has been exacerbated by slower global growth, the COVID-19 epidemic, inflation, and geopolitical shocks. Indonesia is extremely vulnerable to climate change due to its geographic location and extensive economic reliance on natural ecosystems.
Indonesia has promised to attain carbon neutrality by 2050 in an effort to solve some of these issues. Current economic challenges, both globally and for Indonesia, add to the challenge of climate change. Indonesia faces a very significant threat from climate change because to its high population density in hazard-prone areas and its archipelago-like geography. The Indonesian government has recognised the necessity of combating climate change and has started to develop several national objectives and action plans focused on energy efficiency, greenhouse gas (GHG) emissions, and the deployment of renewable energy sources. The nation announced the goal of decreasing GHG emissions unconditionally to 29% and conditionally to 41% compared to the business-as-usual (BAU) scenario by the year of 2030 in its first Nationally Determined Contribution (NDC) made under the Paris Agreement in 2016.
Published in January 2023, this paper “Socio-economic footprint of the energy transition: Indonesia” by IRENA investigates the probable socioeconomic effects of Indonesia’s energy transition. REGlobal presents an extract from the paper
Key Energy Trends
Indonesia is a country with significant natural resources, including oil, coal, natural gas, and renewable energy sources. These resources have been successfully utilised by the nation, greatly boosting its GDP. Indonesia’s total primary energy supply (TPES) rose by 26.2% between 2010 and 2020, reaching 9,137 petajoules in that year.
Fossil fuels dominate the TPES with a share of 85.6% as of 2020, which was a slight decrease from 86.0% in 2010. Coal is the biggest source of energy; its share of TPES actually grew over the past decade, from 23.9% in 2010 to 37.1% in 2020. On the other hand, the share of oil and natural gas decreased over the same time period, from 39.3% and 22.8% to 31.7% and 16.8%, respectively. The availability of fossil fuels at a comparably low cost has played a key role in the historical evolution of the country’s energy mix.
Indonesia is the largest consumer of energy in the ASEAN region, accounting for 36% of the region’s total final energy consumption (TFEC). The transport and industry sectors dominated TFEC, with shares of 43.1% and 34.1%, respectively. Households and commercial sectors accounted for around 16.8% and 4.8%, respectively, in 2020. Other sectors such as forestry, fishing and agriculture represented around 1.2%. The transport sector features large shares of bioenergy because of the establishment of biofuel mandates.
Despite being smaller in comparison to other sources of energy, renewable capacity expanded by more than 50% from 6.9 GW in 2010 to 10.6 GW in 2020. This is mostly due to the nearly doubled installed capacity of geothermal and hydropower. Given that it has not yet fully used economies of scale, Indonesia confronts higher renewable generation costs than the world average, particularly for geothermal, solar, and wind energy. These costs are anticipated to decrease and approach worldwide levels if Indonesian renewable energy adoption continues. Further, it is evident that the overall cost of new coal projects is higher than renewable energy generation from new wind, solar, geothermal, and hydropower projects.
Over the last five years, investment in renewables and energy efficiency has remained constant, reflecting the poor investment attractiveness of renewable energy in Indonesia. Renewable energy and energy efficiency investments combined to achieve USD 1.4 billion in 2020, or 60% of the investment goal under the Ministry of Energy and Mineral Resources’ (MEMR) Renstra programme. The electricity industry is where more than half of the investments in renewables are made. Prior to 2019 and 2020, investment goals for geothermal and bioenergy were consistently fulfilled or exceeded. Only 1% of the intended amount was actually invested in bioenergy in 2020. It is crucial to acknowledge that there has not been a substantial shift in the nation’s regulatory environment, which is thought to be the biggest barrier to development in renewables.
Energy Transition Challenges and Initiatives
While transitioning its economy, its use of natural resources, and its energy mix towards a model that is sustainable over the long term, Indonesia faces several hurdles in enabling socioeconomic progress. The nation has been seeing economic growth rates of about 5% overall, which was below the national average of 5-8%. Due to the pandemic, Indonesia’s GDP decreased by 2.1% in 2020, which was its lowest performance since the Asian financial crisis in 1997.
Cross-sectorally, the nation appears to have few resources for de-risking and financing renewable energy projects, especially in the private sector. The government has made efforts to support innovation and research in sustainable energy. However, these initiatives have not yielded the intended results.
There are several challenges facing the energy sector. First, despite the fact that more than 15% of the population still lacks access to clean cooking, the country’s energy law’s guiding concept of energy fairness and justice has not yet been completely realised. In 2020, 3% of people living in rural places were without access to power. Second, because fossil fuels are available at a low price, they will always be the predominant source of energy. The country currently has a sizable coal fleet, which the 2021–2030 RUPTL predicts would reach 44 GW in total by 2030. It will take a lot of effort to achieve the climate objective, including retiring outdated fossil fuel infrastructure and giving up coal.
There are a variety of fiscal incentives available for projects generating renewable energy, including tax exemptions, import tariff facilities, tax holidays, and additional incentives due to the COVID-19 effect. However, due to the difficult economic climate and the incentives’ overall lack of emphasis on the requirements of renewable energy, their efficacy has been compromised.
The most recent presidential order, issued in September 2022, intends to boost the percentage of renewable energy to 23% by 2025. Other policies and incentives have also been implemented to assist Indonesia’s climate objectives (Presidential Regulation No. 112 of 2022). In order to facilitate the deployment of renewable energy sources and localise socioeconomic advantages, the nation has implemented legislative tools in the electrical sector, including feed-in tariffs, auctions, and net metering. Initiatives include distributing clean biomass stoves and giving electric stoves to millions of homes in the heating and cooling industry. There is a mandate for the mixing of biofuels in the transportation sector.
Socio-Economic Footprint of the Energy Transition
A fair and inclusive energy transition makes sure that the majority of people benefit from it. This implies that in order to maintain the environment, which is a major foundation for much of modern-day Indonesia’s growth, appropriate laws must be implemented in tandem with the technical advancements inherent in the energy sector’s shift.
Energy transformation must be supported by Indonesia’s fiscal policies. Indonesia will be able to address many of its social, economic, and environmental problems with the aid of a more ambitious energy transformation road. The energy transition has a tremendous deal of potential to help Indonesia perform better on more general socioeconomic metrics and to lessen some of the current difficulties.
This is demonstrated by an analysis which contrasts a reference Planned Energy Scenario (PES) with an ambitious 1.5-degree compatible route in terms of CO2 emission reductions, local air pollution reductions, welfare, jobs, and GDP. A more ambitious scenario for the energy transition benefits the nation’s economy. Indonesia’s GDP is anticipated to grow from its present level of USD 4,189 to more than USD 22,535 per person by the year 2050. The nation’s economy will do considerably better over the first decade under the 1.5°C Scenario. The GDP under the 1.5°C Scenario and PES are comparable in the first decade of the transition period, but in the last decade the GDP under the 1.5°C Scenario is lower than under the PES. Nevertheless, the GDP produced by the 1.5°C Scenario is 0.5% greater on average between 2021 and 2050 than that predicted by the PES.
Indirect and induced impacts, investment, and trade all have a significant role in the difference in GDP growth between the PES and 1.5°C Scenario. Investment has the greatest impact on the first half of the transition period (i.e., 2021–2035), whereas induced and indirect impacts have the greatest impact on the second. Through indirect and induced impacts, such as those brought on by increases in labour income, Indonesia gains economically from the investment stimulus.
The beneficial contribution of net trade in fuels subsequently marginally outweighs the negative effects of trade changes that were detrimental during the first half of the transition era. Indonesia is able to offset the loss of revenue from fossil fuels, finance investments relevant to the transition, and provide support for just transition programmes thanks to extra revenues from carbon pricing and receipts from international cooperation. One of the countries benefiting from the global transition flows is Indonesia, which anticipates a rise in government social expenditure of almost USD 7 billion by 2050 compared to the PES. Because of this, the government is able to spend more on social services, primarily in the areas of public administration, healthcare, and education, which leads to a rise in welfare.
On a closer look, it can be understood that policy measures would be required to raise Indonesia’s human wellbeing metrics. The environmental and social components have the most potential for improvement, which might be attained primarily by lowering material consumption and enacting laws that more effectively allocate funds for social programmes. Finally, further policy initiatives are required to improve access in order to achieve consumption levels above the point at which access to energy is sufficient.
Conclusion and the Way Ahead
Since the turn of the millennium, poverty rates in Indonesia have decreased by half, and the country has seen the rise of a vibrant middle class that makes up around 19% of the population. As a result of national fast-track programmes for power infrastructure as well as rural electrification programmes, there has been a significant increase in access to energy, with the electrification rate rising dramatically from just 53% in 2000 to 99% in 2020.
The research conducted by IRENA has demonstrated that a more thorough and ambitious energy transition will result in better socioeconomic results. Indonesia’s GDP is anticipated to increase by 0.5% between 2021 and 2050 under the 1.5°C Scenario compared to the PES. The study also explores the crucial role that international cooperation plays in increasing the socioeconomic impact of the transition in developing nations while having little to no negative impact on industrialised economies. In the instance of Indonesia, the more progressive policy basket results in superior GDP, overall employment, and welfare outcomes on average throughout the 2021–2050 decade.
To help Indonesia in its transformation, both domestically and from foreign partners, coordinated effort is needed. An important first step will be the Indonesian government’s political commitment at all levels. This should be supported by improved collaboration across various line ministries, governmental entities, and implementing agencies, especially at the regional and local levels, as well as capacity building in these organisations.
A portion of the workforce will need to transfer to green jobs as part of the energy transition, and coordination in cross-cutting areas including gender, vulnerable groups, and local and indigenous communities will be necessary. The current international legal and political framework for trade and investment in such technologies has to be reviewed in order to foster the development of an ecosystem that is supportive of the promotion of ecologically sound technology.
The nation will need to implement long-term integrated energy planning strategies, occasionally putting short-term well-being ahead of long-term welfare. Because the energy transition is a gradual process, national policymakers must make sure that energy policy is in line with all other areas of the plan.
To conclude, the Indonesian society will gain from a more ambitious energy transition (1.5°C Scenario). The nation will need to diversify its economy and lessen its reliance on exports of fossil fuels in order to achieve the advantages entailed. Indonesia would need to make the shift away from its existing structural reliance on all natural resources in order to pursue a sustainable economic growth path.
The complete report can be accessed here