Barriers to Renewable Energy Investment in the Indonesian Power Sector

Abstract

Indonesia has set ambitious targets of increasing the share of renewable energy in electricity supply and reducing greenhouse gas emissions relative to a baseline. But despite abundant renewable energy resources and policies to promote renewable energy, the country has experienced only slow additions in renewable electricity supply. Future expansions in generation capacity are planned to rely heavily on coal-based power supply. This thesis examines the barriers to renewable energy in Indonesia, provides a detailed case study on the effectiveness of specific renewable energy policy instruments in a developing economy context and applies mean variance portfolio (MVP) theory to analyse power supply outcomes. This thesis provides a historical analysis of the effectiveness of policies to incentivise renewable energy supply in the Indonesian electricity sector. Empirical analysis of supply trends covers the period 1990–2015, while perceptions of the effectiveness of regulatory incentives are based on stakeholder interviews conducted in 2011 and 2012. The main finding is that a combination of regulatory uncertainty in the Indonesian power sector, financial weakness of the national electricity utility Perusahaan Listrik Negara (PLN) and ineffective feed-in tariffs have had a dampening effect on renewable energy investment. In the absence of credible, mandatory renewable energy targets for PLN, the utility has prioritised coal and gas over renewables. An important reason being that renewable power projects carry higher upfront investment costs and, until now, have been more expensive per unit of power output. Feed-in tariffs have been rendered ineffective as they were set at levels too low to act as premium prices, with PLN and independent power producers locked into lengthy negotiations over contracts, thus slowing project implementation. Taking the long view, the thesis uses MVP theory to analyse the risk-mitigation potential of renewables in PLN’s future electricity supply mix. This analysis identifies the cost risk trade-off of various electricity mix scenarios and provides a quantitative measure to assess the potential benefits from diversifying energy production. The findings are that the average system costs for various future technologies are in a narrow range, with renewables cheaper than conventional generation technologies, especially when carbon costs are included. The risk of investing in the power sector, defined as cost risk and measured by the standard deviation of past cost streams, differs significantly across generation technologies and is lower for renewables. Energy portfolios containing a large share of renewables combined with energy efficiency measures are now preferable in cost and risk terms, although at higher discount rates the cost advantage is less pronounced. This thesis concludes that policy reforms need to focus on continuing to move towards cost-reflective tariffs to improve PLN’s financial footing. Combined with continued declining costs of renewables, feed-in tariffs could become more effective when set at levels that truly act as premium prices. They could be combined with quantitative instruments such as renewable portfolio standards to help overcome institutional bias against renewables within PLN, especially in a period of transiting towards a cost-effective tariff system and phasing out of subsidies.