Jeremy Wilcox, Contributor
September 14, 2012 | 5 Comments
The problem faced by the government is that it cannot meet its full geothermal potential and also commit to a longer-term deforestation policy that will be pivotal to meeting the government's voluntary emission reduction target of 26 percent by 2020.
Ever since Indonesia made its emission reduction pledge at the 2009 Copenhagen U.N. climate summit, its environmental policy has been uncertain. The government has an opportunity to meet its emission reduction objectives through increased renewable energy use, but to achieve this it will have to provide a forestry policy that supports renewable development while restricting deforestation for carbon-rich project development, such as coal mining. But economically, at least in the medium-term, such a forestry policy could be disadvantageous if it limited coal export revenues. Consequently the government has to carefully consider the environmental and economic risk-reward scenarios associated with deforestation.
The third challenge to geothermal development, financial incentives, is applicable to all renewable energy development in Indonesia. The lack of sufficient financial incentives and the heavy energy price subsidies have been major constraints on renewable development, while the Negative Investment List under the 2007 Investment Law prevents foreign investment in power plants with an installed capacity below 10 MW.
The primary financial support scheme for renewable energy is a feed-in tariff (FiT) program that has been in place since 2002, with all technologies being eligible for the tariff that has a 15-year maturity. But the problem with this financial incentive is not the level of support provided but the regulated end user energy prices, with a growing concern that unless the government increases these prices the FiT system will become economically unsustainable.
In 2010, the average end user price was 7 cents/kWh, while the average FiT rate, that is, the price for which state utility PLN (Perusahaan Listrik Negara) purchased the electricity, was 10 cents/kWh. This provides the government with a problem. To incentivise more renewable investment it will have to keep the feed in tariff high, yet unless it also increases the end user prices it will have to provide increasing subsidies to PLN to cover the loss between electricity costs (both its own production costs and the price it pays to offtake electricity from independent power producers) and revenues. In 2011 the subsidy paid to PLN was estimated at just over $8 billion.
The obvious solution would be to increase end user prices, yet to just break even on production costs would require a near 80 percent price hike and a recent attempt to increase prices by 20 percent was defeated by mass public demonstrations and strike threats. With a public used to cheap energy any attempt to increase prices could be political suicide, yet the economic cost of bailing out PLN with annual subsidies makes no sense.
And there is another potential risk afforded by the disparity between renewable energy costs and end user prices: an increase in fossil fuel generation. Coal-fired generation costs just over half that of renewable resources, and for PLN coal is a far more economically attractive generation source. And while PLN is obligated to offtake renewable generation from independent power producers (IPPs) the disparity between renewable generation costs and end user prices could well force the utility to switch its own production to coal in order to reduce losses, which would ultimately undermine the government's renewable and emission objectives.
Indonesia has both significant renewable resource potential and a government committed to its development, but the country's renewable realization is seriously lacking. As with other fast-developing countries it needs to support its strong economic growth with energy supply, with its abundant coal reserves providing an obvious solution, at least in the medium term. But unlike other fast developing economies, Indonesia has a strong environmental conscience with the government keen to present itself as a regional climate action leader.
The current renewable outlook is not promising, but it need not be that way. From an electrification perspective, off-grid renewable plants can provide the rural electrification required and improve grid reliability, which in turn will benefit overall economic output. And from an environment perspective, the replacement of largely diesel-powered off-grid generation with small-scale renewable plants will reduce greenhouse gas emissions. But in order for this off-grid capacity to be developed, the government must be able to provide sufficient financial support to developers and relax restrictions on foreign investors.
But the major challenge, and the constraint on renewable market development, is PLN. While the state utility may not exercise its historical market dominance following recent reforms, it still has a “right of first refusal”, with IPPs only able to service areas that have been declined by PLN or that are not included in PLN plans. And IPPs have to enter into a PPA with PLN if they want to use the grid, which is operated by PLN.
If the government is to accelerate renewable development and realise the economic and environmental benefits it will afford, it has to introduce more competition into the market by reducing the dominance of PLN. If it does not, it is likely Indonesia will continue on the slow development path and may never fully realise the potential of its renewable wealth.
Indonesia's renewable potential
As with geothermal, Indonesia's biomass potential is significant at just under 50 GW. But again, as with geothermal, the resource is significantly under-developed with barely 1 percent of this potential currently commercially developed. With its extensive biomass reserves, including rice residues, sugar, rubber and palm oil, Indonesia could be a major centre of biofuel production, but its potential is constrained by most biofuel resources being exported due to the higher value placed in food, or used in domestic food production. Additionally, a lack of biofuel processing capacity and infrastructure to support large-scale biomass projects will severely restrict the development potential, as will land ownership issues, with an incomplete central database on land ownership leading to disputes that prevent economic development.
Indonesia's greatest renewable energy potential is from hydro and marine power, with MEMR estimating 75.6 GW of large hydropower potential and marine potential of 10-35 MW per km of a coastline that is 54,700 km in length. But, as with other renewable resources, only 4.3 GW of large hydropower capacity has been developed and only one demonstration marine project in the Lombok Strait has been developed. Of the two renewable resources, the greater potential lies with marine energy.
Indonesia's onshore wind power potential is severely limited by the lack of wind along the equator and limited transmission infrastructure to support large-scale wind farms in the less populated eastern islands where the wind is more favorable for generation. Consequently wind power development has been limited to small projects with an installed capacity of just over 1 MW.
But Indonesia's lengthy coastline will provide opportunities for offshore wind development, although this development will be contingent on transmission infrastructure investment. If the government wants to develop its offshore potential — and to date there are no indications that this will be a policy priority — it will have to consider issuing tenders for offshore operation licenses similar to those offered in the U.K., for example.
However, the protectionist nature of the government suggests this is unlikely, at least until after the next general election which is currently scheduled to take place in September 2014.
Finally, Indonesia has significant solar power potential, estimated at 4.8 kWh/m2/day. But as with the country's other renewable resources this potential is underdeveloped, with current installed solar capacity of just 12 MW, mainly through rooftop photovoltaic (PV) systems in urban areas. The main restrictions on solar market development are the lack of domestic solar cell producers, limited solar maintenance expertise and the inability to sell excess solar capacity back to the grid.
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