The Republic of Indonesia has officially launched its Energy Compact, joining a global community of Member States and non-state actors who have made commitments towards Sustainable Development Goal 7 (SDG7) and net-zero goals. This marks a significant milestone in the nation''s energy transition trajectory and aligns with the country''s Roadmap for Sustainable Development Goals.
Indonesia''s overall ambition for sustainable development goes beyond SDG7 and includes cross-cutting indicators such as strengthening economic resilience for equitable growth and climate mitigation, requiring substantial financial investments of up to US $272 billion by 2030. The Government has already identified US $5 billion worth of investments to expand renewable energy capacity by 2030.
The Compact commitment is complimented by Indonesia''s Joint Energy Transition Plan (JETP), which focuses on community preparation and addressing challenges such as the creation of equitable green jobs. The Government is actively engaging with financial authorities and pushing regulatory efforts to create roadmaps for sustainable finance, utilizing instruments like green bonds and SDG-linked bonds.
Dr. Vivi Yulaswati, Deputy Minister for Natural Resources and Maritime Affairs and Head of SDG Secretariat at the National Development Agency (BAPPENAS), speaking of Indonesia''s commitment at COP28 said, "We seek to share achievements and accelerate conversations, considering the green economy as a game-changer. Through the Energy Compacts, Indonesia is focusing on massive development for renewable energy, including floating solar panels, mandatory biomass, and transitioning from diesel to renewable energy power plants."
The UN in Indonesia, under the coordination of the United Nations Resident Coordinator''s Office, along with Sustainable Energy for All, recently developed a One UN Strategy through which ten UN agencies will provide policy advice, capacity building, access to finance, knowledge sharing, and technical assistance.
Valerie Julliand, UN Resident Coordinator for Indonesia, commenting on the country''s Energy Compact said, "Supporting the Government of Indonesia towards a sustainable energy future has been a key focus area for the UN in Indonesia. We are pleased at the launch of this Energy Compact, which has ambitious targets on renewable energy, grid connectivity and energy conservation, among others. We will also continue to support the government on the Just Energy Transition Partnership."
Energy Compacts are voluntary, trackable commitments launched at the High-Level Dialogue on Energy convened by the UN Secretary-General in September 2021. They are designed to spur action towards SDG7 in line with net-zero goals and were named a High-Impact Initiative for achieving the SDGs by the Secretary-General in 2023.
Indonesia''s Just Energy Transition Partnership (JETP) is a fund of up to US $20 billion earmarked for investment in clean energy over the next three to five years. Indonesia signed onto the deal with the International Partners Group – led by the US and Japan – at the G20 summit in 2022.
As part of its obligations under this framework, Indonesia released a Comprehensive Investment and Policy Plan (CIPP) that details a roadmap for reaching peak emissions in 2030 and becoming net zero by 2050.
Under the scenario modelled in the CIPP, solar is expected to be the major new source of electricity in Indonesia. It needs to grow rapidly from 0.1% of energy generation in 2022 to 8% by 2030. Geothermal, hydropower and bioenergy also need to grow rapidly. Electricity generated by all forms of renewable energy is expected to increase from 13% in 2022 to 44% in 2030.
To meet these ambitious goals, the private sector will play a leading role in project finance and development. Indonesia and its state-owned electricity utility, PLN, do not have a great track record when it comes to inducing private sector development of renewable energy, especially wind and solar. The CIPP recommends a number of market-oriented reforms to accelerate this process and ensure that this time, things will be different.
One key reform involves the price of coal. Because Indonesia has large coal reserves, the government caps the price at which coal can be sold to domestic power plants, generally at below market rates. As coal is Indonesia''s primary source of electricity generation, controlling the price of this fuel input reduces generating costs and helps keep the retail cost of electricity low.
The CIPP is pushing hard for this price cap to be removed, and for coal to be bought and sold domestically at its true market price. The reasoning here is that the more expensive coal is, the less attractive it becomes as a source of electricity generation.
A second reform targets PLN''s business model. In Indonesia the price consumers pay per kWh of electricity is fixed depending on the type of customer and the service, and it usually does not change even if PLN''s expenditures increase. This means PLN often operates at a large annual loss, and the government covers these losses through various means, including subsidies.
This is by design. Much like the cap on coal prices, the goal is to ensure that higher costs are not passed onto consumers. The CIPP calls for PLN to do away with this system and adopt a "forward-looking revenue model" that better accounts for the true cost of generating electricity. Such a reform would almost certainly require consumers to pay higher prices.
A third reform involves PLN''s role in private investment and the development of renewable energy. PLN owns and operates Indonesia''s national transmission and distribution system, and when private developers enter the Indonesian market, they have to sell their power to PLN. There are no other buyers because PLN has a monopoly over distribution. Therefore, before a financial institution will agree to finance such a project, the developer usually must reach a Power Purchase Agreement (PPA) with PLN that establishes the terms on which the utility will buy the power.
The CIPP makes numerous recommendations for how PLN can make these agreements (and the procurement process in general) more "bankable" – meaning, more attractive to commercial financial institutions and private developers. The main theme of these recommendations is to shift a greater share of the risk from the seller (the project developer) onto the buyer (PLN and, ultimately, the government of Indonesia), through various mechanisms.
The CIPP also recommends that PLN handle many of the more challenging steps in project development, such as feasibility studies and land acquisition, and then offer a project for tender to developers once much of the legwork has already been done. This, along with the ''de-risking'' provisions, would certainly make projects more attractive to private investors and developers. But whether it is something PLN is able and willing to do, and what they might expect to receive in return, is another question.
The CIPP envisions mobilising private finance to develop renewable energy at scale using a mix of conventional market tools. The state is being asked to ''de-risk'' a portion of these investments, and PLN is expected to evolve into something resembling a conventional commercial enterprise. The CIPP estimates that Indonesia will need $96 billion of investment in renewable energy and grid improvements between now and 2030, and increased tariffs on consumers will help pay for this accelerated development.
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