Indonesia's electricity market is moving from a monopoly fossil-fuel generation base to a more competitive structure with an increasing share of renewable energy. Or rather that is the transition the government seeks to promote, while the reality is somewhat different.

As with some other fast developing economies, Indonesia is characterized by economic growth and a widening middle class as social prosperity grows. But unless there is significant investment in its aging generation and transmission infrastructure the country could face an electricity crisis in this decade. Current conventional energy resources are unable to meet full base load supply, leading to daily blackouts in some parts of the country, and the government's target for 90 percent electrification by 2020 is woefully behind schedule and unlikely to be met. With annual electricity demand growth estimated at between 7 percent and 9 percent through the remainder of this decade the supply-demand imbalance will only widen further without investment in additional generation capacity. 

The irony of this situation is that Indonesia can, and should, be self-sufficient in energy supply, being blessed with abundant energy resources, both fossil and renewable, and once the transmission link with Malaysia is completed (scheduled by 2020) it will also have the potential to generate significant electricity export revenues. 

Renewable Potential

The energy potential is significant, as are the economic rewards, but policy-wise the government has been lethargic in harnessing these renewable resources, with energy policy still coal-centric. Since passing an energy law in 2007 with the goal of diversifying the country's energy supply, and increasing the use of renewable energy to reduce dependency on fossil fuels, the government mandated investment in 20 GW of new coal-fired capacity, supported by a new mining law in 2009, and is now looking to implement coal export quality thresholds to protect its domestic coal-fired market - both generation and extraction industry. 

It is important to understand the government's coal policy in order to fully appreciate the opportunities and challenges faced by renewable energy in Indonesia. Through significant investment, and a more attractive regulatory regime for foreign investors, Indonesia now boasts the world's largest thermal coal market. And with 40 percent of the world's geothermal reserves Indonesia could, and arguably should, replicate its coal success with renewable energy.

But while identifying and quantifying the country's abundant renewable energy opportunity is relatively easy, developing it is not and the figures speak for themselves. In 2010 Indonesia's Ministry for Energy and Mineral Resources (MEMR) revised the country's geothermal potential to 28.1 GW from 27 GW a decade earlier, which is equivalent to 12 billion barrels of oil and almost twice the country's current oil reserves of 6.4 billion barrels. Yet as of 2010, the latest year for which full data is available, Indonesia had installed geothermal capacity of just 1.2 GW, leaving it with an undeveloped potential of 96 per cent. This undeveloped renewable potential is similar for hydropower (94 percent), biomass (99 percent) and wind (99 percent). Overall, Indonesia has an undeveloped renewable potential of 96 per cent with an on-grid installed capacity of 2.9 GW and an off-grid capacity of 3.2 GW, against a total resource potential estimated at 163.3 GW.

In 2010, according to the Indonesia Infrastructure Report, coal accounted for 40 percent of installed capacity, followed by oil (29 percent), gas (21 percent), hydropower (8 per cent) and geothermal at just 2 percent. Under the 2006 Presidential Regulation No. 5, Indonesia plans to reduce oil use by 20 percent (compared with 2005) by 2025 and increase the share of renewable/low-carbon energy as a share of consumption to 15 percent (also by 2025) based on 5 percent biofuel, 5 percent geothermal and 5 percent biomass, nuclear, hydro and solar. Last year the government produced its latest energy policy draft, known as “Vision 25/25”, which proposes a 25 percent renewable share by 2025.

A geothermal superpower

Addressing the Asia Pacific Summit for the Climate Project in Jakarta last year, former US vice president Al Gore said Indonesia has the potential to become the world's geothermal energy superpower, telling delegates: “Scientists and engineers are now saying confidently that certain forms of enhanced geothermal electricity production may represent one of the largest resources of carbon-free electricity available in the world today... And Indonesia could be a superpower of geothermal electricity. With the new regional supergrids that are being proposed on every continent, it can be a significant advance for Indonesia's economy.”

Gore is not alone in identifying Indonesia's geothermal potential but in order for this energy potential to be realized the government has to address three main challenges; technology knowledge, environmental impact and foreign investment.

While a number of U.S. companies have already invested in Indonesia's geothermal power sector, with this trend expected to continue if there are sufficient financial returns, the key determinant of geothermal success will be cooperation with other countries that have successfully developed this technology. Encouragingly, in April 2012 the governments of Indonesia and New Zealand signed a cooperation agreement on geothermal energy, with New Zealand already active in the geothermal development with this resource contributing 70 percent of its renewable energy share. 

According to the MEMR statement, the cooperation includes sharing developments in exploration, development and regulation with the intention that it assists with the Indonesian government's policy development to support geothermal growth through to 2025. Accordingly MEMR sees the cooperation agreement as being pivotal to developing a strategic plan together with an education and training program on geothermal technology to improve the quality of geothermal production and to improve the role of the private sector in developing the country's geothermal resources. 

While the government seems to be addressing the technology issues associated with geothermal development, the environmental impact of this development could prove more challenging. With around 80 per cent of Indonesia's geothermal reserves located in conserved forests, any development of this land requires a presidential decree. Yet in May 2011 the government committed to a two-year moratorium on forestry development under a $1 billion climate deal with Norway aimed at reducing emissions from deforestation, and the government is still deliberating on its long-term forestry policy when the moratorium expires next year.