Indonesia, the fourth-most populous country in the world, is poised to become the fourth-largest economy by mid-century. The key driver of this growth has been the export of coal and natural gas, which has helped the country maintain a positive trade balance. However, as a result, its energy sector emissions have more than doubled over the past two decades, resulting in a significant increase in the emissions intensity of its energy mix.
To address this issue, the country set an ambitious target to achieve net zero emissions by 2060 during the UN Climate Change Conference (COP26) in 2021. This transition is an integral part of its main development goal of becoming an advanced economy by 2045. The country also recently signed the Just Energy Transition Partnership (JETP) agreement with the International Partners Group, with the US and Japan as joint leads, along with the UK, Germany, France, the European Union, Canada, Italy, Norway and Denmark. The JETP will assist Indonesia in developing a comprehensive investment and policy plan that reflects targeted greenhouse gas (GHG) emission reductions and support for affected communities. It will also help arrange concessional loans, market-based loans, grants, guarantees and private investments from public and private entities. To achieve its objectives, an initial $20 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 an MoU with Germany’s development bank KfW to expedite the energy transition in Indonesia. This agreement will provide financial support to facilitate the transformation of Indonesia’s energy sector, which is worth IDR 10.7 trillion. It encompasses projects and programmes aimed at enhancing the capacity of renewable energy sources such as solar, wind, hydro and geothermal, as well as improving transmission and distribution networks while also providing institutional support to PLN. Through this collaboration, PLN aims to reduce its GHG emissions by 29 per cent by 2030.
One of the key focus areas for Indonesia’s energy transition is increasing the share 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 the reliance on coal, capitalise on the renewable energy potential and move towards decarbonisation, the Government of Indonesia and national power utility PLN have devised an electricity business plan known as Rencana Usaha Penyediaan Tenaga Listrik (RUPTL) 2021-30, which outlines Indonesia’s power capacity and network development plans for the next 10 years. According to the RUPTL, the planned generation addition for the period 2023-30 amounts to 27,571 MW, with expected additions in hydro, thermal and renewable energy. Of this, hydropower accounts for 35 per cent, thermal for 29 per cent and the remaining capacity is generated from renewable energy sources, which is expected to add around 9.9 GW of capacity annually between 2023 and 2030.
In line with these targets, Indonesia’s PLN is strengthening and reinforcing its existing transmission network to integrate the upcoming capacity and improve its energy efficiency. The existing transmission system is one of the barriers to flexibility given the archipelagic and volcanic characteristics of the islands. Improvements to existing grids could yield significant flexibility gains. According to the RUPTL, the country is expected to add around 32,237 ckt. km of line length and 55,800 MVA of transformer capacity between 2023 and 2030, at an investment of IDR 164 trillion. PLN will focus on developing transmission systems at the 500 kV and 150 kV 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, the Philippines, Brunei, Malaysia, Indonesia, Singapore, Thailand and Myanmar.
The transmission projects are currently developed by PLN, while the interconnections related to private power plants can be carried out by the relevant independent power producers (IPPs) depending on the projects and PLN’s requirements. The new RUPTL marks a shift in strategy and outlines possibilities for private sector transmission projects to be carried out under certain business models, such as build-operate-transfer, build-lease-transfer and power wheeling.
Current electricity market
Indonesia liberalised its electricity market in 2009 in order 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 promoting competition among electricity supply businesses, named the Electrical Power Provision Business Activities. 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 electrification plans. PLN holds a monopoly on the transmission sector and also functions as a system operator.
The country relies heavily on coal to meet its electricity demand. In 2022, it faced an energy crisis 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 energy sources. During 2017-21, the generation capacity grew at a compound an-nual 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 ckt. km of alternating current (AC) lines at the 150-500 kV levels. Between 2017 and 2021, the transmission line length grew at a CAGR of 7.7 per cent, with a net addition of 15,061 ckt km of transmission lines. The transformer capacity stood at 153 GVA as of December 2021, increasing from 122 GVA in 2017, 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 the installed capacity, with hydropower, geothermal and biofuels making up the largest share of the renewables mix. As per the International Energy Agency, about $35 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 $3.97 billion.
The total planned generation addition for the period 2023-30 is 27,571 MW, with 9,638 MW of hydro capacity, 8,049 MW of thermal capacity and 9,884 MW of renewables capacity.
Outlook
Massive investments are necessary to reach Indonesia’s energy transition goal. However, mobilising investments is challenging. Since 2017, investments in renewable energy generation have been stagnant, and have fallen short of the target in 2020 and 2021. The average annual investment realisation for the renewable energy sector from 2017 to 2021 was only $1.62 billion, well below the $8 billion annual investment required for Indonesia to achieve 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 supporting Indonesia’s energy transition through financial and technical assistance, grants, 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 robust and flexible transmission infrastructure. 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 is needed for achieving universal and reliable electrification.
