Decentralized Energy Supply

Indonesia, the fourth largest country in the world with around 275 million inhabitants, has been experiencing continuous economic growth of around 5% per year for several years. Thanks to this positive economic development, the poverty rate has been more than halved within the last 20 years. The driving force behind this economic growth is the growing population of young, consumer-loving middle class in Indonesia; the consumer sector is responsible for 58.2% of GDP use. In 2018, GD per capita was us$3,951. This rapid economic development and sustained population growth of most recently 0.83% (2018) lead to a significant increase in energy demand in the most politically-stable country within the ASEAN. So far, around 90% of this has been covered by fossil fuels, a trend supported by the country's considerable reserves of coal, gas and crude oil. The use of renewable energy sources, on the other hand, is mostly still on a small scale and independent of the grid.

On the other hand, Indonesia contains many remote and sparsely populated islands, which, due to the fragmented geography of the country, are often insufficiently or not at all supplied with electricity. For example, the island of Papua has an electrification rate of only 55.99%. Many private households and companies therefore make do with diesel generators. This expensive and environmentally harmful technology could be combined with or replaced by renewable energies, which would make both economic and ecological sense.  

Therefore, the government has been pursuing ambitious goals in terms of expanding the country's renewable energy capacities. According to the prevailing national energy policy, 23% of the primary energy mix should come from renewable energy sources by 2025. In addition, the Jokowi administration has committed itself to reducing greenhouse gas emissions as part of the Paris Climate Protection Agreement. In addition, an expansion of renewable energies would reduce the dependency on oil imports from abroad. In order to meet all goals and obligations as much as possible, a significant expansion of renewable energies is necessary, which opens up opportunities for German companies. Looking at the natural conditions in Indonesia, it becomes clear that solar and wind energy in particular offer great potential. The average global horizontal solar irradiation is 4.80 kWh / m² / day, the average wind speed between 3 and 7 m / s. The total potential of energy from wind and solar energy is almost 270,000 MW, of which only a fraction has been used so far.

The Indonesian government has been promoting the liberalization of the energy market for several years. For example, since 2009 it has been allowed for private actors to generate and sell electricity. There are also other incentive systems and liberalizations, e.g. the establishment of so-called "one-stop shops" for faster handling of licensing processes or tax incentives. Basically, the expansion of the national infrastructure is a focus of the current government.

HIGHLIGHT

Forecast of primary energy generation up to 2050

Source: (Center for Energy Resources Development / Agency for the Assessment and Application of Technology (BPPT), 2015)

There is a strong increase in energy generation, triggered by increasing energy demand, which has taken place in recent years at the same time as the advancing economic development. The Indonesian Agency for the Evaluation and Application of Technology (BPPT) predicts in its Energy Outlook a five-fold increase in the TPES to 7,207 MBOE by 2050.

Status of the Indonesian power grid
(as of December 2017)

Source: PWC (PriceWaterhouseCoopers, 2018)

The inadequate power grid in many areas and the growing demand represent an enormous challenge for the country's energy supply. This is one of the reasons why the Indonesian government is striving to significantly increase the share of renewable energies in power generation and is pushing for more efficient use of the existing power supply. The previous expansion of capacities was mainly achieved through the construction of new coal and gas power plants.

Installed capacities of new and renewable energies 

Source: Own illustration based on (MoEMR - Ministry of Energy and Mineral Resources, 2018-b) & (PWC - PriceWaterhouseCoopers, 2018-a). * Prototype of the BPPT; ** in the form of a research facility

National Energy Policy (KEN) objectives

Source: PWC (PriceWaterhouseCoopers, 2018)

KEN expects the electrification rate to reach 100% by 2025. By then, the nationwide installed capacity should be 115,000 MW and grow to 430,000 MW by 2050. At the same time, primary energy consumption per capita is expected to increase almost fivefold between 2017 (0.67 toe) and 2050 (3.2 toe) and per capita electricity consumption by almost sevenfold.

Electricity generation costs by Indonesian provinces
in USD cents per kWh

Source: PWC (PriceWaterhouseCoopers, 2018)

DKI = Greater Jakarta; JABAR = West Java; JATENG = Central Java; JATIM = East Java; S2JB = South Sumatra, Jambi and Bengkulu; SUMBAR = West Sumatra; SULSELRABAR = North, South and West Sulawesi; KALSELTENG = Central and South Kalimantan; SUMUT = North Sumatra; KALTIMRA = North and East Kalimantan; KALBAR = West-Kalimantan; SULUTTENGGO = North, Central Sulawesi and Gorontalo; NTB = West Nusa Tenggara; BABEL = Bangka Belitung; NTT = East Nusa Tenggara

CHALLENGES

There is great market potential in Indonesia in the field of decentralized energy supply with photovoltaics and wind energy. However, since both the photovoltaic and wind energy markets are regulated by Regulation No. 50/2017 of the Ministry of Energy, the individual projects are mostly dependent on the national energy supplier PLN and other institutions.

Thus, business in the Indonesian energy sector is fundamentally dependent on political and legal framework conditions and must be secured against possible risks and planned sustainably. If projects with public participation are to be implemented, companies report responsibility and decision-making difficulties on the part of decision-makers in state and local companies and authorities. Negotiations with PLN are also considered to be very lengthy. For example, a network access report must be available before network release, which can take a long time. A lengthy process can also be assumed when signing contracts.

Certain challenges can also be expected in direct contact with potential buyers of technical equipment. Buyers in Indonesia tend to find operating costs and plant and equipment efficiency inadequate to consider. In addition, already established technologies are preferred to lesser-known technologies, often due to a lack of information about the lesser-known technology. It is therefore necessary to persuade buyers of technical equipment. As a result, it is essential for German companies to have sufficient local expertise and to network in the market.  

For system manufacturers, knowledge of local conditions and needs is important in order to be able to offer the right products and services. For example, it is important to understand local perceptions of company sizes in order to find Indonesian partners with adequate purchasing power and quality standards. The exceptional climatic or geological conditions can also make product modifications necessary. Another aspect that should not be neglected is the review of the infrastructural conditions at project locations, which often do not meet European standards. This is necessary in order to get a precise picture of the need for logistics and possible additional costs.

A general challenge is to convince Indonesian companies to make long-term investments in expensive but high-quality systems. Lower investments in systems of poor quality are preferred for a quick return on investment. Long-term factors such as the service life of the components or maintenance costs are often neglected.

CONCLUSION

The prosperous economy and the increasing prosperity of many private households in Indonesia lead to an increasing demand for electricity. The state electricity supplier PLN assumes that the demand for electricity will increase by an average of 6.42% per year in the coming years. So far, fossil fuels have primarily been used to cover electricity requirements, but renewable energies must also be expanded in the future, after all, the Indonesian government has the goal of achieving a share of renewable energies in the primary energy mix of 23% by 2025.

In fact, renewable energies are particularly suitable for off-grid operation away from the densely populated islands of Java and Bali. The large number of inhabited islands, the often inadequate supply situation of remote areas by the state electricity supplier PLN and the high demand for electricity from remote households and companies offer an opportunity for private players in the field of renewable energies. Wind and solar energy in particular are potential energy sources due to their enormous resource potential. They can supplement or replace the frequently used diesel generators and thus contribute to a more economical and ecological power supply.

As far as the political and legal framework of the Indonesian energy market is concerned, reference should first be made to the generally stable political situation in Indonesia. This political stability, the progressive liberalization of the energy market and the tax incentives make a decisive contribution to a continually improving investment climate. In addition, the legislature tries to respond to the needs of market participants, for example by developing new and better regulations.  

Despite everything, there is still a certain need for improvement in the area of the legal framework. So far there are no direct subsidies for renewable energies, which, in connection with the feed-in tariffs linked to average prices, means that renewable energy sources are in direct competition with conventional energy sources. In addition, there is a complex and extensive bureaucracy as well as lengthy approval procedures. In addition, the legal framework is subject to regular changes, which leads to a lack of planning security.

The “Classic” problems in emerging countries, such as corruption and nepotism are also still to be found in Indonesia, although the Indonesian anti-corruption authority KPK is fighting against it. There are also some other country-specific problems. Due to its location on the Pacific Ring of Fire, Indonesia is very often affected by earthquakes and volcanic eruptions. In addition, the Indonesian rupiah is subject to regular exchange rate fluctuations, although its intensity has decreased in recent years. There is also often a lack of the necessary specialists in the field of renewable energies.

Funding renewable energy projects in Indonesia is also a little tricky. The main reason for this is that Indonesian commercial banks shy away from the mostly long-term amortization periods of projects in this area, which is based on experiences from the Asian crisis at the end of the 1990s. In addition, there is often a lack of experience with corresponding projects, which is why financing with local banks is difficult. Alternatively, financing with the help of international organizations and development banks is an option. There are a multitude of possibilities, for example the ADB or the World Bank, which already have sufficient experience in the financing of renewable energies. The German KfW also offers a large number of financing options through the German Investment and Development Company.

The market potential for photovoltaics and wind power in Indonesia is very promising despite the above-mentioned obstacles. There are already some examples of foreign (including German) companies that are successfully active in this industry in Indonesia. Since the market is not yet saturated and the development of these technologies has not yet been completed, newcomers who are already successfully establishing themselves can secure long-term competitive advantages. In particular, the establishment of a network and the targeted selection of suitable cooperation partners are decisive for a successful engagement in Indonesia.

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